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CAVEAT EMPTOR

Check before investing

The RBI "Guidelines" issued on March 1, 2006, ask banks to tighten up the process of approving loans in the real estate sector

A few years ago, noticing a newspaper advertisement that offered attractive housing loans by a certain reputed bank, Rajesh Kapoor approached a property developer and sought information about a new apartment that he wanted to purchase. The builder showed Kapoor fancy brochures about the various apartment complexes his company was putting up around the city and spoke about the swimming pools, squash courts and service elevators that they contained.

Kapoor was impressed and asked about the housing loan options. The builder told him not to worry about the loan since his company's projects had been "approved" by a certain bank (as was stated in the advertisement) and that this bank would definitely offer Kapoor an attractive housing loan. A representative of the bank emerged from within the office, and provided Kapoor calculations on what the loan amount and interest were likely to be.

Significantly, neither of them spoke about the legality or otherwise of the construction. A few weeks later, the paperwork was completed and Kapoor made a down payment for the apartment and handed over post-dated cheques towards repayment of the loan.

When the construction was completed and Kapoor had just taken possession of the apartment, he received a demolition notice from the City Corporation informing him that his new apartment was in violation of the relevant building laws. Shocked, Kapoor contacted the builder who merely said that he would "look into the matter!"

Kapoor also contacted the bank and asked them if they knew about the alleged illegality of his apartment. A hundred-odd phone calls later, he spoke to an officer who said that they (the bank) did not have anything to do with the legality or illegality of an apartment. "We only provide finance sir", the officer clarified. Livid, Kapoor asked why the bank had advertised so prominently that they had "approved" the building projects. The officer did not respond.

Fortunately, Kapoor was separately able to get his complaint resolved eventually, but several other consumers were not as privileged. Till a few weeks ago, it was common to see such buildings/apartments being advertised along with promises of "easy credit" and "approved by" several banks.

This is not to say that consumers should not do their own background checks about building promoters and the legality of the property they intend to purchase. But consumers complain of the `red tape' and delays in Government offices where such information is to be obtained. Also, several argue that the presence of the "approved by so-and-so bank" tag often gives them the confidence that the seller is genuine.

And it is in response to this "confidence" consumers have (wrongly, as Kapoor discovered) in banks that the RBI has issued "Guidelines" relating to the lending of money in real estate. The Guidelines, issued on March 1, 2006, ask banks to tighten up and strengthen their process of approving loans in the real estate sector. The directive significantly puts the onus upon the banks to check and verify that the potential borrower has obtained all the approval and clearances necessary from the Government. Admonishing commercial banks for approving loans for blatantly illegal projects for short-term gains, the RBI Guidelines ask banks to play a more constructive and socially harmonious role, than that of mere moneylenders.

On hindsight, there are several cases where the implementation of these Guidelines could have saved consumers huge sums of money and property. In many cases, innocent consumers had invested money in projects that they did not know were illegal. If these Guidelines had been operative, the responsibility of verifying the legality of the structure and the area would have been that of the lending banks. Money and property might have been saved had these Guidelines been brought in 20 years ago. This is proof enough to show the usefulness and importance of these Guidelines.

(The writer works with CAG, which offers free Legal Advice on Consumer Complaints to its members. For membership details contact 24460387 / 24914358 or cag.helpdesk@gmail.com)

BHARATH JAIRAJ

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