Making the most of rent receivables

Loan on rent receivables has not caught on in a big way, as the awareness level among people about this product is poor, says an Indian Bank general manager.

These loans banks provide against rent receivables are mostly availed of by corporates "� and not individuals. Most public and private sector banks offer the product at interest rates ranging from 9.5 per cent to 12.5 per cent.

If you own a building "� rented for either commercial or residential purpose "� you can avail of this loan. The general manager points out that the building owner can avail of a maximum of Rs 10 lakh, depending upon the lease term and the title deal of the property.

The quantum of loan, which can be availed of the owner, depends on the unexpired lease term of the tenant. About 80 per cent of the unexpired lease term will be given as loan.

The loan must be repaid within seven years or 84 months. An example can illustrate the process better. Suppose one Mehra has rented his property of 25,000 sq ft to a software company for an eight-year lease.

Let us also assume four years of the lease have already been completed. In this case, a bank will give a loan of up to 80 per cent of the remaining four years of the lease tenure.

The interest rate charged on the loan may vary from bank to bank. While Indian Bank charges a floating interest rate (based on the market interest rate) of 9.5 per cent, Federal Bank levies 12.50 per cent interest.

The latter accepts future rent receivables as collateral while some banks prefer to lay emphasis on the title deed of the property. If the title deed is accepted as collateral, the name of the owner should be explicitly mentioned in the property deed, and only then can he or she avail of the loan.

Banks prefer to offer loans to owners who have given their premises for commercial space rather than residential. The reason cited for this disposition is that companies take up leased space for a minimum of three years to a maximum of eight years and there is assured flow of rent receivables.

The other major reason for banks to opt for commercial tenants is that they enter into an agreement with the owner of the property and the tenant that all the rental remittances will be made through the bank after taxes are deducted.

On the other hand, most residential tenants do not like to enter into such agreements with the bank, jointly with their owners.

However, there may be a limitation usually with the title deed of the property when it is taken as collateral against which the loan is provided.

An individual can mortgage his house and take a loan against it "� and not a rent receivables loan. People, in general, prefer to take a mortgage loan rather than a rent receivables loan as in the former case one can avail of a larger amount of credit.