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Can you trust your lender?

realestate Updated: Jan 03, 2014 13:23 IST

The response to a query filed by Ashish Kaul, vice-president, Federation of Apartment Owners’ Association, Greater Faridabad, under the Right to Information Act is a damning verdict on the safety checks carried out by banks before disbursing loans. Home loans had been sanctioned for about 80% units in a society with 10,000 apartments, but HT Estates understands from the RTI reply that the building plan had not been approved by the district town planner, Faridabad.

Similarly, another RTI query on unauthorised construction in a ready-to-move-in luxury apartment in Indirapuram reveals that out of 326 flats in the project, building norms had been flouted for 80. Loans were given out by banks for about 90% of these ‘illegal’ flats.

In yet another case, banks disbursed loans for apartments in which the Noida development authority’s sanctioned building plans had been flouted.

Going by what RTI activists and RWA representatives allege, if the development authorities would consider taking serious action against developers flouting construction norms, more than half of the group housing projects in Delhi NCR would come under their scanner. “One can imagine what will then happen to the bank loans extended to the homebuyers of such apartments,” says Kaul.

“It’s a housing finance bubble waiting to explode, all thanks to the development authorities. They are not paying heed to complaints of illegal construction and are quietly regularising unauthorised constructions by charging compensation from the developers,” he alleges.

Kaul has not only complained to the Reserve Bank of India against the banks’ lack of due diligence in the Greater Faridabad case, but has also filed a PIL in the Punjab and Haryana High Court against what he calls the massive violation of the Punjab Scheduled Roads and Controlled Areas Restriction of Unregulated Development Act, 1963, which regulates building plans in plotted colonies.

Real estate experts say there are various reasons why banks fail to carry out checks. “One reason is the nexus between a developer and a bank agent. Banks are in a dominant position to bully gullible homebuyers and so overlook safety norms knowing that the vulnerable buyers will bear the brunt of any problem,” alleges Kaul.

There have been numerous cases in which loans have been sanctioned for projects for which the builders did not have licences to develop residential colonies. In another type of case, loans were disbursed by banks and private housing financial institutions to builders who had the licences but failed to get the requisite approvals from the authorities for building plans.

A senior official from a housing finance company says, “The three reports which financial institutions require before approving a loan for an apartment are (i)legal search report to establish the clear title of the property, (ii)technical search report to find out layout plans, quality of construction etc and (iii)the borrowers’ profile. Though it is a foolproof process, sometimes agents overlook certain important checks in their hurry to achieve loan disbursal targets. Also, financial institutions at times approve loans for housing projects, hoping these will get the required sanctions in the future. But this might not happen,” says the officer.

Buyers should not depend on banks

Senior banker and former chief general manager of the State Bank of India, Bhaskar Niyogi, says that the onus is on the buyer to thoroughly investigate a project he or she plans to invest in, except in cases where the project has been approved by banks.

“Irrespective of the fact that banks have to do the due diligence, the first touch point is between the buyer and the builder. Just like bankers have certain responsibilities, so does the buyer. The problem stems from the inadequacies in the land records and the ease with which so-called duplicates can be obtained, including title deeds. In such cases, the culpability of the land record personnel, legal and related functionaries cannot be ruled out. That does not mean that bank officials are not responsible,” he adds

Niyogi, who is currently head, consultant, risk at Ratnakar Bank Ltd, says the problem is also because bankers depend to a large extent on the legal advice outsourced to legal firms. “Banks should develop domain experts. This will happen over time within the ambit of banks’ policies. The lacunae can be removed once all land records are computerised, like in Tamil Nadu,” he adds.