Dear Dr Reddy, have you ever read—I mean really read— the contracts builders hand out to ordinary homebuyers to sign for a transaction worth lakhs and even crores?
A typical contract runs something like this: While the buyer will have to pay a penal interest of 18% per annum for a delay of even 15 days on his instalments to the builder, the builder has no such obligation for delaying the completion of the work by any length. The instalments may be demanded every three months or upon each stage of completion, whichever is earlier, upon threat of penal interest. This means, even if the builder has not completed a stage of construction, he can still demand the instalment and if we do not pay up, slap penal interest as per the contract. He is not obliged to complete any of the promised facilities that he is supposed to provide at the time of handing over the house or even any time thereafter. It depends upon his goodwill to do so. They cannot be contractually demanded, though we are obliged to pay for them. We, the property buyers, have no say in the quality of construction promised. The buyers cannot have any claim to warranty on defective construction even for one full season. And we aren’t yet talking of all the small print, under which the builder may encroach upon the buyer’s property, privacy, or peace at will. And the most unfortunate thing is that most buyers do not (and others cannot) even read what they are signing on, thinking the process to be a mere formality. In any case, they have no choice. They either sign up, or they do not get to buy a house. Or they pay up tens of lakhs or even a few crores—often their entire life’s savings—and then suffer inordinate delays or shoddy construction.
In other countries, builders associations prescribe standard proformas of contracts that are a little more balanced in order to reasonably protect the interests of homebuyers. In India, we have no such luck.
You may wonder where you come into all this. Sir, as you know, banks are the major funders of housing loans. Could the Reserve Bank of India (RBI), as a regulator and supervisor of the financial system, promoting fair practices in banks, ask all the scheduled banks to route their housing loans through an escrow mechanism?
Often, the agreements with the builder are linked to the loan contracts, so that the loan disbursals go directly to the builder. So it should be possible for banks providing the housing loan to require all payments from buyers to the builders to be made through an escrow account. The bank could also hold a limited power of attorney from the homebuyer (borrower) to ensure that the builders have met their obligations and once so satisfied, clears the escrow. Even if the borrower has to pay a small charge for the bank’s service, this charge is mitigated by the fact that his money in the escrow account earns interest in the meanwhile. If the builder’s cost of the project goes up in the process, that cost can be passed on to the homebuyers against this hugely enhanced security, who are otherwise at the mercy of the one-sided contracts of the often unscrupulous builders. The bank could also help develop a proforma contract along the lines of the more developed countries, thus offering further protection to the homebuyers-cum-borrowers. In fact, such a service may encourage home loans and minimize cash transactions so prevalent in the building industry.
An enlightened bank could do this proactively, but that is highly unlikely. If RBI mandates every bank to follow such a practice, it will raise standards of the building industry, through greater transparency and accountability, and protect homebuyers from unscrupulous builders.
V. Raghunathan is CEO, GMR Varalakshmi Foundation. These are his personal views. Comment at firstname.lastname@example.org