Developers allege some HFCs hiking rates, delaying loans

The tussle has escalated at a time when banks are increasingly cautious in financing real estate companies and many finance companies have cut back loans lately.

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A fresh bout of fighting erupted between property developers and select non-banking finance companies (NBFCs) with the country’s real estate trade body alleging that some lenders — mainly the Indiabulls Group — are “arbitrarily and unilaterally” raising interest rates on loans when the Reserve Bank of India is easing rates.

The Confederation of Real Estate Developers’ Associations of India (Credai), in a letter to Union Finance Minister Arun Jaitley, specifically accused Indiabulls — one of the biggest lenders to real estate projects — of delaying loan disbursements and increasing interest rates on loans. It said Indiabulls has also raised the minimum escrow account requirements for property developers, depriving them of money to finish projects.

“Indiabulls, being in a dominant position as a lender, is abusing its position and creating a situation of financially strangulating the projects,” Credai said in a letter dated April 8. No other finance company was specifically named in the communication.


The tussle has escalated at a time when banks are increasingly cautious in financing real estate companies and many finance companies have cut back loans lately. The residential real estate sector is going through one of its worst crisis in recent years due to slack demand. Credai said lack of funding will intensify the industry’s troubles.

“Escalation of construction costs and/or stopping of construction, consequent delays in completion of the project beyond the agreed and intended completion date, result in payment of interest by the developer to the buyer for the period of delay and also to unwarranted disputes between the developers on the one hand, and the buyers/customers on the other hand,” Credai’s letter said.

NBFCs —mainly housing finance companies— too are reeling after a severe liquidity crunch triggered by IL&FS’s defaults increased their cost of funding and impacted profitability. Analysts said such measures by these firms are aimed at improving their liquidity.
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“As a result of IL&FS default, banks have suffered due to losses in lending and all NBFCs have suffered due to funds drying up for the sector and costs going up simultaneously for NBFCs, as being reported by the press every week,” an Indiabulls spokesperson said in response to an email query by ET.

Indiabulls increased interest rates to 6 per cent from 4.5 per cent for all developers in the past eight months, Credai said. Analysts said most of the lending to real estate companies, happening at 12 per cent to 16 per cent early last year, have been raised to a 18 per cent- 22 per cent range.

“Since the RBI has been lowering benchmark rates, it is clear that the interest rate has been increased by Indiabulls arbitrarily and illegally,” said Credai.

RBI reduced the key policy repo rate by 50 bps in 2019 to revive a slowing economy. Economists are betting on more repo rate cuts this year.
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Credai alleged that Indiabulls has increased the escrow account percentage from 30 per cent to 100 per cent for many developers. Companies need to maintain funds in an escrow account for a real estate project.

“Such an increase in escrow percentages is totally illegal and against the norms of RERA which requires 70 per cent of the collections to be used towards construction and land cost only,” said Credai. “With 100 per cent of the collections going to Indiabulls through the escrow account, no money is available with the developers for construction of the project.”
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Indiabulls has denied property developers’ allegations that it has stopped loan disbursals to them.

“Indiabulls Housing Finance is still disbursing and did a total of Rs 11,000 crore in disbursal in the last eight months,” the spokesperson said.

The escrow mechanism with our borrowers remains absolutely the same as before, the company said.

“Developers are free to prepay or refinance if they find interest rates high and we are waiving the entire prepayment fees for such cases,” said Indiabulls. “Quite a few developers have chosen to prepay also and we have accepted the repayments without prepayment fees, although it was a part of the agreement.”
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