CRISIL SME Tracker: With RERA, only disciplined builders stand a chance

Setting up of the Real Estate Regulatory Authority (RERA) has improved financial, legal and operational discipline in the sector, a survey of small builders rated by CRISIL has revealed.

Builders have become cautious and are taking up a handful projects for execution at any given point of time. They now have dedicated staff focused on ensuring compliance with RERA rules, and have become more transparent on disclosures and communication to customers through brochures or their websites. Besides, they have introduced various clauses in agreements with customers — including unit carpet area, possession date, defect liability, default and delay implications, etc.

But the changeover to the RERA regime has also created its own share of challenges for these players.

For one, given the requirement of maintaining 70 per cent of customer advances in an escrow account, managing cash-flow and liquidity has become critical. 

The time-honoured practice of generating idle funds (as projects do not require large funds in the initial development stage) during a soft launch and concept selling is not possible in the current environment. 

Even withdrawal of funds from an escrow account requires certification from various consultants — architects, engineers and chartered accountants — which is a tedious task for small builders who would sometimes even design their projects in-house. 

This has led to increased dependence on banks and NBFCs for construction finance. Yet, lack of established financial discipline and a track record limits their ability to raise formal capital. 

Even a less capital-intensive model — such as a joint venture with landowners — has become tricky, as the owners are also liable for defaults in such projects. 

CRISIL believes these changes mean that only serious players with dedication and expertise would be able to sustain themselves.