You may need an escrow account in case of:
A large transaction (between two or more parties)
That have some legal obligations attached to them
Which need to be fulfilled before the release of the payment or an asset.
Here’s an example:
Let’s say you are a construction builder and aim to sell apartments. Now, let’s assume that you aim to get these apartments booked by customers before they are ready to move in. Naturally, there are transaction risks.
The customer may not want to pay the full amount before possession.
There is a risk of scams (money bring redirected to other avenues)
Customers may be wary if predetermined conditions are not fulfilled
Here’s where an escrow account in India steps in. It reduces the risk of fraud as it acts as the third party between the two parties. Moreover, it helps control the cash flow between the two parties.
Additionally, since September 2022, escrow accounts have become indispensable for co-lending use cases. According to the digital lending guidelines by RBI, all loan repayment and disbursement must be done directly between the bank account of lender and borrower. This means that no third party pass-through account can be used by banks, NBFCs or lending service providers (LSPs).
However, co-lending use cases are an exception to this rule. In other terms, co-lending players (like banks and NBFCs) can use escrow accounts
to pool funds before disbursing to borrowers.