In a game of cricket, the umpire plays a crucial role; his presence ensures that there is a clear, fair game. An escrow account performs a similar function for a trade and is usually handled by banks or a legally authorised service provider.
It is an account created to ensure neither of the parties involved in a transaction is exposed to a higher risk than necessary, in terms of any malpractices in the trade; the accounts are kept active until the obligations are met.
Escrow applicability
Escrow account is gaining momentum in India and is popular in the areas of real estate, stock broking and software. In countries such as the US, the EU and Dubai, escrow accounts are well established. Their services are utilised for payment of insurance, taxes and interest of the customers.
The banks or the attorney handling the escrow account — the escrow agent — charges certain per cent of commission for due diligence and maintenance. The agreement drafted between the buyer, seller and the agent is known as escrow agreement which is required to be signed by the parties involved.
In India, prominent real estate companies transfer project funds to a separate escrow account.. Prominent banks offering escrow services in India include ICICI Bank, Axis Bank, HSBC, HDFC Bank, Union Bank, and PNB, among others.
This is how escrow works
Instead of direct dealing between the buyer and the seller, the escrow agent acts as the middleman, wherein fulfilment of certain predetermined conditions (such as inspection or repair or completion of the work or delivery) are made mandatory to conclude the deal.
Subsequently, the escrow agent releases the money or the goods to the respective parties to the transactions.
Escrow account in real estate, for instance, provides transparency in the utilisation of funds by the builders. It results in the timely delivery of projects to the buyers as the funds in the escrow accounts are used only for that particular project.
On the one hand, it protects the interest of property buyers, while on the other, for the developer, it provides an opportunity to bridge the trust deficit with the customers and establish a long-term bond.
With escrow account in place during a trade, the refund process is also made easier. Moreover, the convenience of escrow account enables the bank and the government officials to keep close tabs on the movement of funds.