Builders must make a public disclosure of the land mortgaged to banks, RBI said. This is expected to bring greater transparency in the construction industry and create awareness among potential flat buyers.

Developers generally mortgage their land to banks to get construction loans. Many consumers are not aware of this when they book flats in such projects. A public disclosure will help the purchaser make an informed choice before he takes a decision to buy the flat.

According to RBI, till May 2009, the total loans taken by builders from banks in India amounted to Rs 94,499 crore. The total outstanding home loans till May-end was over Rs 2.75 lakh crore. In a circular dated August 27, 2009, to all scheduled commercial banks and another dated September 14, 2009, to regional rural banks, the RBI said builders should reveal land mortgaged to banks in advertisements, brochures and pamphlets of their housing projects.

''The Bombay high court observed that the bank granting finance to housing development projects should insist on disclosure of the charge or any other liability on the plot, in the brochure, pamphlets etc, which may be published by developer/owner inviting public at large to purchase flats and properties,'' said the circular.

The court added that this obviously would be part of the terms and conditions on which the loan may be sanctioned by the bank. The circular said the builder should append the information relating to mortgage while publishing the advertisement of a particular scheme and disclose the name of the bank or banks to which the property is mortgaged.

The RBI further advised banks to ensure compliance of these terms and conditions and said funds should not be released unless the builder fulfils these requirements. ''This will strengthen rights of flat purchasers and protect the bank which gives out the loan. The idea is to make sure that the loose ends are tied up,'' said SC advocate H P Ranina.

"The flat purchaser generally does not know the status of the land. If the builder defaults in repaying the loan to the bank after the flats are sold and building occupied, the bank could take over a portion of, say a garden plot, in the housing society. The society may also find it difficult to get the land conveyed in its name. However, the bank is not entitled to attach a flat already sold by the builder," says a source.

The source added that Reserve Bank of India circular enable a consumer to make an informed decision before buying a flat. Developer Sunil Mantri said the circular will help streamline the processes. ''For instance, say, a developer has taken a construction loan from SBI and a flat purchaser books a flat in this developer's project and applies for a home loan from LIC.

LIC will make a cheque in favour of State Bank of India account of the builder,'' he said, adding that this way it will be easier for the lending bank to monitor all the receivables.

Source: TNN