Author: Harsh Gaurav, Manager – Customer Success
An `Escrow Account` is a financial instrument in which an asset or escrow money is under the purview of a neutral third party, which is essentially a bank or a recognised lender; during the process of completion of a transaction. Being an age-old method adopted globally, the same is about efficient risk management and simplification of complex transactions for all parties.
Escrow in Tender(s)
A successful bidder needs to maintain an Escrow Account with a Scheduled Commercial Bank. Escrow Account will be a payment security mechanism to protect the interest of Issuer of the tender (Buyer). The Bank will act as an Escrow Agent and the escrow account will be maintained throughout the period specified in the tender. This account should not be utilized other than the specified purpose.
Escrow in Real Estate
RERA Act, 2016 stipulates all real estate builders to transfer 70% of the money received from their customers to an escrow account for a project under progress. This provision prevents developers from using the funds for other projects and mitigates the risk of insolvency.
As a lender you can monitor the Escrow Accounts of major borrowers involved in real estate, infrastructure projects and other state-of-the-art projects.
RBI in its Aug 2020 circular - Opening of Current Accounts by Banks - Need for Discipline proposed guidelines on how banks can and cannot open Current and Overdraft accounts depending on a given borrowing entity’s net debt exposure to the Banking System.
In case of borrowers where exposure of the banking system is ₹50 Cr or more, banks shall be required to put in place an escrow mechanism. Accordingly, current accounts of such borrowers can only be opened/maintained by the escrow managing bank.
Upon implementation, an automated solution which can help Lenders to monitor numerous such Escrow accounts and assist in auto-decisioning is of utmost importance both from the perspectives of operational efficiency and maintenance of quality of book. Catering to the demand, Perfios has launched the first of its kind State-of-the-Art solution in early 2020.
Perfios Escrow Monitoring – Salient Features