RBI asks NBFCs to insist on disclosures by developers

 Source:Moneylife:May19,2010

Before sanctioning a loan, NBFCs should make sure that the developer should publicly disclose the name of the entity to whom the property is mortgaged. The rule is to create awareness among flat buyers

The Reserve Bank of India (RBI) has asked non-banking finance companies (NBFCs) to insist on disclosures by developers, builders, owners and companies while granting loan for housing or development projects. This is expected to bring greater transparency in the construction industry and create awareness among potential flat buyers.

Before sanctioning the loan, NBFCs should make sure that the developer, builder, owners and company should disclose the name of the entity to which the property is mortgaged, in all pamphlets, brochures and advertisements. Similarly, these entities should also indicate that if required they would provide a no-objection certificate (NOC) or permission of the mortgagee for sale of flats or property.

RBI's new guidelines for NBFCs are similar to those followed by banks. Earlier, in a case, the Bombay High Court observed that the bank granting finance for housing projects should insist on disclosure of the charge or any other liability on the plot in question or development project being duly made in the brochure or pamphlet etc which may be published by the developer or owner inviting the public at large to purchase flats and properties. The Court also added that this obviously would be part of the terms and conditions on which the loan may be sanctioned by the bank.

Many times, a buyer has found out that the property on which he bought his residential apartment is in fact mortgaged to some financial institution and he was kept in the dark by the developer. Although the RBI has made it mandatory for banks to make sure that the bank's name is mentioned as the mortgagee in the publicity material issued by the developer, the same rule was not applicable for NBFCs.