CB to mandate ‘escrow accounts’ for builders
View(s):The Central Bank (CB) is in discussion with apartment builders to put in place an ‘escrow’ mechanism that can screen their loans to real estate firms and keep a closer tab on the end use of funds. This is in a bid to primarily prevent long delays in projects and use of home buyers’ money for other purposes, according to CB officials.
The CB had a discussion with the builders on this recently, they said.
The move they say would ensure transparency in fund deployment, but most builders are skeptical. “We are spending Rs.4 billion to Rs. 5 billion a complex. Our cost of finance will increase if the CB insists on using funds from an escrow account,” an apartment builder told the Business Times. For an escrow account, the bank and the builder draw up an agreement and the bank which acts as a trustee will release funds in the account. The trustee will be issued well-defined instructions on the release of funds by the CB, according to the CB officials.
But some builders say that this will wipe out the small timers and the mid-range builders as they will not be able to execute their projects to the specific time lines owing to a myriad of issues such as labour sourcing.
The escrow account only releases cash when all terms of an agreement are met as overseen by the parties and it’s not feasible for small timers, another builder told the Business Times. “The trustee will release cash based on progress made on the construction. The banks charge 15 per cent interest at times. The prices will increase and we won’t be able to sell apartments at all.”
The CB says that an escrow account reduces the risk of fraud by acting as a trusted third-party that collects, holds and only disburses funds when both parties are satisfied. They say that what works here is the fact that the builder cannot use the funds parked in this account for a purpose that is not mandated. “This helps in timely completion of the project as funds are not diverted for any other project/purpose,” a CB official told the Business Times.
So if the mandate is that the funds will be used for construction activity, they cannot be used for any other purpose. “Escrow mechanism is a ring-fenced method of controlling the cash flows, and a guarantee that funds allocated for a particular purpose will not be spent on anything else,” the official added.