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RBI Implements Strict & Tedious Rules for Banks Lending to Property Sector

Comments Off on RBI Implements Strict & Tedious Rules for Banks Lending to Property Sector   |   July 1, 2011    07:31am   |Contributed by Indian Realty News

The Reserve Bank of India has laid out strict and tedious due diligence standards for banks in sanctioning loans to the real estate sector after inspections found that most frauds were due to document forgeries even after certified by lawyers and chartered accountants. The central bank has said banks should leave no stone unturned to verify the documents, including cross verification with the local administration, to ensure that frauds are eliminated. “In case of loan against the security of land, banks may also seek reports from local revenue authorities regarding the title deeds before sanction of loan,” RBI said in a notice to the chairmen and chief executives of banks. “Wherever documents of title are submitted as security for loans, there should be a system where documents of title are subject to verification regarding their genuineness, especially for large-value loans.”

RBI’s directive may be a fallout of the series of arrests the Central Bureau of Investigation made last year, including the top executives at the LIC Housing Finance and the Bank of India for alleged fraud. About eight executives were charged with bribery in what was called the ‘loans-for-bribes’ scandal. But that did not cause any trouble in the system. But the latest ruling by the central bank could delay loan sanctions at all levels and may lead a further blow to the real estate sector that is witnessing slowing sales and rising losses. “The additional due diligence could lead to delay in sanction of large-value loans,” a banking analyst said. RBI has also asked banks to independently verify the authenticity of chartered accountant certificate, property valuation certificate, legal certificate, guarantee/line of credit or any other third-party certification submitted by the borrower.

The reason for failure of the concurrent auditors was attributed to complex nature of financial products or transactions. Additionally RBI also observed that banks had assigned audit responsibility to their own staff without ensuring that they are suitably trained. For this, banks would have to directly communicate with the concerned authority issuing the certificate. Banks would also have to seek an indirect confirmation indicating to the issuer that in case there is no response by a certain deadline, it would be assumed that the certificate is genuine. “In cases it is established that the certification given by a chartered accountant, lawyer, registered property valuer, or such third party is wrong, the Indian Banks’ Association should put in place a process to issue a ‘Caution List’ regarding the certifier to all banks,” the central bank added. To prevent frauds, bank would also have to ensure that internal discipline, staff rotation, checks and balances are in place.

News Published Under:   Delhi, Faridabad, Gurgaon, Hyderabad, Mumbai, Noida, Pune, Real Estate Developers, Real Estate India | Comments Off on RBI Implements Strict & Tedious Rules for Banks Lending to Property Sector