Will the bank­ing sec­tor mess af­fect realty?

IM­PACT The cri­sis in the bank­ing sec­tor has had sev­eral con­se­quences for de­vel­op­ers who are fac­ing the heat

Hindustan Times (Chandigarh) - Estates - - FRONT PAGE - The au­thor is MD & CEO ­ ANAROCK Cap­i­tal Shob­hit Agar­wal let­ters@hin­dus­tan­times.com n

From bad loans to loan de­fault­ers to fi­nan­cial frauds and em­bez­zle­ment, the In­dian bank­ing sys­tem seems to be in a cri­sis mode. And, need­less to say, it will have a cas­cad­ing ef­fect on most sec­tors - in­clud­ing real es­tate.

To build a project, de­vel­op­ers largely rely on banks for their cap­i­tal needs. Al­ter­nately, they seek cus­tomer ad­vances to pro­ceed with con­struc­tion. If they are not ad­e­quately funded, their projects either go belly-up or are de­layed ex­ten­sively, caus­ing dis­rup­tion in the en­tire prop­er­ty­cy­cle.

Much to the dis­may of de­vel­op­ers, the re­cent events in the bank­ing in­dus­try have caused com­mer­cial banks as well as Non-Bank­ing Fi­nan­cial Compa- nies (NBFCs) to be­come more cau­tious about dis­burs­ing heavy loans to real es­tate de­vel­op­ers.

Num­bers sug­gest that bank lend­ing to the real es­tate sec­tor came down from 68% in 2013 to a mere 17% in 2016 due to mount­ing NPAs.

De­spite the con­tin­u­ous ef­forts by the Cen­tral Gov­ern­ment to strengthen pub­lic sec­tor banks by in­fus­ing bonds and launch­ing reg­u­la­tory re­forms (re­cap­i­tal­iza­tion), the pil­ing up of bad loans and NPAs is hurt­ing pub­lic sec­tors banks.

In June 2017, the share of bad loans was around 10% ofthe to­tal loans dis­bursed by the bank­ing sys­tem.

Si­mul­ta­ne­ously, the gross non-per­form­ing as­sets had grown by nearly 190% (~8 lakh crore) in De­cem­ber 2017 from ~3 lakh crore in March 2015. As a re­sult, banks’ credit growth is now at an all-time low since 1951. This will have reper­cus­sions on the real es­tate sec­tor in the short to mid-term. CASH-STARVED DE­VEL­OP­ERS FACE FUR­THER HEAT The cur­rent bank­ing cri­sis has pushed sev­eral banks into hy­per-vig­i­lance about dis­burs­ing loans. The few lead­ing de­vel­op­ers who have good pre­vi­ous track records are un­ruf­fled, but banks are re­frain­ing from lend­ing to smaller de­vel­op­ers.

This in­evitably puts pres­sure on such de­vel­op­ers, who are al­ready cash-starved and un­der im­mense pres­sure to com­plete their on­go­ing projects.

Un­der RE RA, builders need to com­plete their project on time to avoid penal­ties.

As a re­sult, they are either be­ing wiped out or seek­ing al­ter­nate fund­ing via pri­vate eq­uity or other NBFCs which of­fer to fund at sig­nif­i­cantly higher in­ter­est rates (nearly 18%-21%, as op­posed to bank loans which come at 11%-13%). This ex­tra bur­den will in­evitably be passed on to prospec­tive home­buy­ers in the form of in­creased prop­erty prices. A SET BACK FOR AF­FORD­ABLE HOUS­ING De­spite be­ing ac­corded in­fra­struc­ture sta­tus by the Gov­ern­ment, af­ford­able hous­ing projects are likely to suf­fer due to the on­go­ing bank­ing mess.

To avoid a fur­ther cri­sis, most banks have laid down strin­gent lend­ing norms; as such, banks are re­fus­ing to fund even projects that fall un­der the af­ford­able hous­ing cat­e­gory due to the mount­ing NPAs in pre­vi­ous years. This could se­ri­ously de­rail the Gov­ern­ment’s am­bi­tious project ‘Hous­ing for All by 2022’ mis­sion. IMPACTON PROP­ERTY PRICES With banks be­ing ex­tra cau­tious and lit­er­ally pulling out of the jects. prop­erty mar­ket, pri­vate eq­uity If banks of­fered them credit, play­ers and other fi­nan­cial in­sti- their projects would be com­tu­tions have come to the res­cue pleted and the devel­op­ment of sev­eral In­dian de­vel­op­ers. cy­cle could re­sume - which The cur­rent num­bers in­di­cate would ul­ti­mately lead to a faster that nearly 75% of the fund­ing in re­vival of the sec­tor. real es­tate is via the PE route. Th­ese op­tions are even­tu­ally ON THE POS­I­TIVE SIDE ex­pen­sive for de­vel­op­ers who, in The re­cent cri­sis is paving the turn, pass the buck to prop­erty way for sev­eral struc­tural buy­ers by in­creas­ing prop­erty changes within the In­dian bankprices. If banks proac­tively ing sys­tem. For in­stance, the RBI ex­tended credit to de­vel­op­ers at un­veiled a new char­ter of rules sub­si­dized rates, it would even- early this year for rec­og­niz­ing tu­ally help keep a check on prop- de­fault­ing loans and ways to erty prices as well. re­solve the cri­sis.

More so, the pass­ing of the PROP­ERTY CY­CLE STAG- NPA or­di­nance in 2017 em­powNATION ered the RBI to di­rectly in­ter­with banks shy­ing away from vene in bad loans and thereby go lend­ing to de­vel­op­ers, the prop- some ways in re­solv­ing the NPA erty cy­cle may grind to a halt dead­lock. across cities. There are sev­eral An over­all re­duc­tion in bad un­der-con­struc­tion projects loans will even­tu­ally en­cour­age that need fund­ing for com­ple- banks to is­sue fresh loans to tion. For in­stance, NCR has max-cred­i­ble play­ers. With a health­i­mum project de­lays due tot hei er bank­ing sys­tem, the econ­omy se­vere cash crunch. With banks can also be­gin fir­ing on all cylin­re­fus­ing to give fund­ing to many ders again. de­vel­op­ers there, th­ese play­ers are un­able to com­plete their pro----


Un­der RERA, builders need to com­plete their project on time to avoid penal­ties. n

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