Banks not ready to finance projects with problems

  • Vandana Ramnani, New Delhi
  • Updated: Apr 23, 2016 19:46 IST
Most projects that do not have a completion certificate due to some violations by builder, are often not financed by banks. (Shutterstock)

Most projects that do not have basic facilities in place, are not completed on time or do not receive a completion certificate due to some violations by builder, are often not financed by banks. What this means is that buyers who want to invest in these projects might not get financed by lenders and depend entirely on their savings to pay for the properties.

Banks carry out legal and technical due-diligence on each project they finance. “If something goes wrong with the project mid way, we may stop funding the project but will never advertise that we have stopped financing it. But if a customer were to approach us, we will inform him that we are not extending loans for that particular project because of some technical issue,” says a senior banker.

“For example, if towers 5, 6 and 7, are located on disputed land, we may send out an internal communication that these towers should not be funded but will continue to fund towers 1, 2 and 3 that are permissible,” he says.

In India, there is a large delivery risk associated with projects. Completion of a project is dependent on the developer and the local competent authority. Lending is dependent on the track record of a developer and banks can stop disbursement even mid way.

Customers should, therefore, check the delivery record of a developer, the marketability of a project (whether it can be completed on time and whether the buyer can sell it). Buyers should check with the bank whether the project is approved and take time to arrive at a decision. “Don’t simply look for discounts and subvention schemes. Spend enough time to do due- diligence,” advises another banker.

The state government should also get a public notice published stating the names of developers who may not have paid the land dues, he says.

There have been cases of banks sanctioning loans for a housing block with 10 floors authorised by the housing board. In case a developer adds more floors to the tower, most banks will not disburse loans to customers for those floors, says another banker.

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