Banking system ready for project financing of developers
The Bank of Russia has laid the foundations for the smooth transitioning of banks to a new scheme of equity financing for residential construction. Given the time needed to consider applications, developers will need to prepare and submit a set of documents to banks in a timely manner to obtain a loan.
Starting 1 July 2019, developers will only be able to attract funds of equity construction participants via escrow accounts under contracts submitted for state registration after the specified date (excluding projects complying with the criteria established by the Government dependent on the degree of readiness and number of concluded shared-equity contracts).
As of the beginning of March 2019, 28 banks opened more than 11.2 thousand accounts for developers to be used for banking support services. Slightly over 1,000 escrow accounts were opened across five banks. Additionally, credit institutions announced the receipt of approximately 500 applications from developers for lending via escrow accounts. At present, banks have approved loans totalling 54 billion rubles for developers across various regions as part of the new financing mechanism. Authorised banks’ capital stock makes it possible to substitute equity participants’ funds received by developers with banking lending. All Russian regions have bank branches whose business models qualify them to work with developers. All this indicates the readiness of the banking system to offer project financing to developers.
The legal base has been put in place to transition to project financing for developers. Requirements have been set for developers as well as banks, with the latter being responsible for monitoring developers’ banking operations. A Russian Government resolution establishes the requirements for authorised banks entitled to open escrow accounts for developers. As of 1 February 2019, 63 banks comply with these requirements. The List of these credit institutions is updated every month on the Bank of Russia website.
To implement the target model of equity financing for residential construction, the Bank of Russia revised the approaches to bank provisioning when issuing loans to developers via escrow accounts. The project financing will help banks determine their future provisions and offer loan rates to developers depending on the progress of the construction project in question. Respective amendments to the Bank of Russia’s regulation have taken effect. Seeking to ensure the optimal interaction between credit institutions and developers, the Bank of Russia holds regular meetings with authorised banks and developers with the involvement of representatives from the Russian Ministry of Construction, JSC DOM.RF and public organisations. Meeting participants discuss banking support servicing and lending for developers via escrow accounts.
Transitioning to project financing will ensure the protection of the rights of individual participants in equity construction. The resultant high degree of protection of their funds will increase demand for participation in this model. Developers will have a stable source of financing for their construction projects and will no longer depend on the receipt of funds from equity construction participants.