MUMBAI: Away from high-street banks, fund houses and finance companies, ultra high net worth lenders in the opaque private loan market are imposing tricky conditions on distressed developers, manufacturers and businessmen desperately looking for a lifeline.Apart from charging a higher interest rate of 20-21% on such loans , lenders, among other things, are demanding post-dated cheques from bank accounts in which the borrower’s wife or daughter is a joint account holder.It’s a ploy to compel borrowers to somehow service the loan and save family members from being summoned to the police station or getting embroiled in criminal cases that inevitably follow when cheques are dishonoured.Most of these borrowers relied on funding from non-banking financial companies ( NBFCs ), which have been forced to shed assets and shrink books with banks. These borrowers are now turning to private lenders who are tempted by higher returns but are cautious enough to take measures to secure their exposure.“Many lenders want the loan amount to be deposited in a separate account, a kind of escrow account, to take care of the specific purpose or project or for which money has been borrowed. This is to avoid diversion and minimise the use of funds borrowed from one lender to pay off another,” said senior chartered accountant Dilip Lakhani.Indeed, in order to gain some extra leverage on borrowers, some lenders also ask them to execute promissory notes (like hundies) which can be invoked like a legally binding contract in a court of law. “This kind of private lending has a role. But lenders and borrowers have to be careful not to infringe on any law and make the deal viable,” said advocate Anil Harish, partner at DM Harish & Co.Money lent in the private loan market can vary from Rs 10 crore to Rs 300 crore, with interest paid every three months. According to a large proprietary stock investor, who selectively lends to promoters, the rates have gone up from 15-17% (a year or two ago), but there are fewer lenders due to the risks involved.For instance, he said the promoter of one of the non-banking companies which has been in news, has been defaulting on interest payments to private lenders since March.However, how onerous the terms are depends on the condition of the market where liquidity is only confined to the banking system while small NBFCs are starved of funds, large NBFCs are finding margins under pressure, and mutual funds are refusing to bankroll realtors and unrated or poorly rated borrowers.Real estate developers who tap the private loan market have to not only offer letters of allotment (of properties) in favour of lenders but also accept other terms. “As one of the conditions, lenders lay down that these properties (against which allotment letters are given) are the first to be sold,” said Lakhani. Lenders also push developers to agree that they would stick to the original construction timeline and not approach the state Real Estate Regulatory Authority to push back the completion deadline.In some cases, the properties are mortgages and stamp duty is paid to fulfil the requirement that if a buyer pays 10% or more of the property value, then the agreement has to be registered.‘Pledging’ listed shares in favour of private lenders through structured deals (that are not routinely disclosed) was a common till recently. However, it would be far more difficult now with Securities and Exchange Board of India (Sebi) asking promoters of companies to reveal all direct and indirect lien on shares. “It may still be possible to an extent if there are benami holders, such as relatives and associates not identified as promoters, holding some shares on behalf of promoters,” said a loan broker.According to the person, people borrow at 21-22% with the hope that the market will improve and liquidity will flow back. “Borrowers grudgingly accept structured products featuring safety nets, higher yields, and enabling provision for enforcing securities by lenders. They have no option...One really doesn’t know whether it would land them in a bigger debt trap than they can come out from,” he said.