NEW DELHI/BANGALORE: Builders are tapping domestic private equity funds and non-banking finance companies (NBFCs) to raise cash by pledging their receivables as banks turn wary of financing construction projects.

Over the last few months, several developers, including Parsvnath, Emaar-MGF, Adarsh and Ansal Properties, have struck such deals. The latest to take this route is Paras Buildtech, which has raised .`40 crore from Xander's NBFC arm to fasttrack its 'Paras Tierea' project in Noida, which is already 70% sold. "We needed to bridge the gap between customer advances and our construction requirement," said Harindra Nagar, director of national capital region-based Paras Buildtech.

Under a receivable financing deal, which is generally for 12-18 months, money generated through installments paid by homebuyers is put in an escrow account by the builder and used only for repayment to the lender and for construction work. Payment from customers is construction-linked. Funding through this route, which was earlier provided by banks, is seeing new players in the form of NBFCs, such as Xander, Piramal Enterprises and Religare Finvest, and domestic funds, such as ICICI Venture, Kotak Realty Fund and HDFC PMS.

"Most receivable financing happens when a developer has a cash crunch and can't continue the development of a project," said Prashant Kaura, director at GenReal Property Advisers. Supertech is another developer looking to get its receivables financed. "Banks are not funding adequately, so to bridge the gap, we are looking at raising money by pledging our receivables," said managing director RK Arora.

The developer is in talks with domestic funds and nonbanking finance companies to raise Rs 200-300 crore for the first phase of its Noida project, called Capetown. "Typically, this financing instrument is construction-linked and meant for cash-strapped developers whose projects are 60% sold," said Ambar Maheshwari, managing director, corporate finance at property consultancy Jones Lang LaSalle. Religare Finvest chief executive Kavi Arora said, "This instrument helps monitor the end use of money through an escrow account and cash received from clients goes towards repayment to the lender."

However, risk for developers lurks in the form of poor market sentiment, like the one that followed Lehman's crash, when many customers withheld their installments. "Developers can get trapped in capital inadequacy if sales fall. Sometimes, a large project can get stuck in such financing schemes," says Amit Goenka, national director, capital transactions at property consultancy Knight Frank India.
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