Rera: Challenges In Project Financing

Lenders including banks will now need to work carefully on their cash flow, says RAJESH NARAIN GUPT A.

- Rajesh Narain Gupt A.

The rollout of the Real Estate (Regulation and Development) Act, 2016 (RERA) has been heralded as the most comprehensive reform for the real-estate sector since Independence. With developers sourcing funds from non-institutional sources and several issues compromising the interest of consumers on multiple fronts, policymakers were prompted to formulate RERA with a view to induce accountability and transparency in an industry that has been highly opaque and capital-intensive in its functioning.

A changed scenario

To date, commercial lenders have been extending funds to real-estate players against security interest and charges created on their assets inter alia on their receivable accounts. The money, collected by the developer as project funding, was under the charge of the lenders. A key provision of RERA mandates that no charge or lien can be imposed on 70 per cent of the amount collected from a prospective homebuyer towards sale of property. The amount will have to be deposited in an account to be maintained in a scheduled bank. The funds can be specifically utilised to cover cost of land and construction cost for the specified project for which it is intended and will not be diverted to cover the expenditure of other projects of the developer. This is easier said than done, though, as banks would largely be concerned with how this bifurcation takes place and how the mechanism is put into place. As 70 per cent of the funds will be held in a separate no lien account, the funds will not be directly accessible to lenders.

The lenders’ perspective