RBI asks banks to set Escrow Mechanism to keep a watch on real estate loans

Banks in the country have been asked to implement an escrow mechanism by the Reserve Bank of India in order to safeguard the loans provided to real estate firms and also to keep watch on actual use of those funds. This tightening of lending norms particularly for the real estate sector by the RBI has been done following the bribery-for-loan scam which surfaced last year. LIC Housing Finance and some public sector banks were involved in this infamous scam that brought to light the fact that several unethical practices were being followed like for example, diversion of funds. Lenders have been advised by the central bank to ensure that end use of funds is closely monitored.

Under an escrow mechanism an escrow account is opened in the name of the borrower which is actually a trust account. This account protects the lender’s interests in the form of repayment risk and also helps keep a tab on end use of funds. When a customer of the borrower makes payments the same is deposited in the escrow account of the borrower. These funds are used to fulfill loan obligations of the borrower like loan servicing. Mr. Anuj Puri, chairman and country head of realty consultancy Jones Lang LaSalle Meghraj while appreciating this move commented that it will ensure that projects are completed on time because there will be transparency in fund utilization.