Bank’s exposure on real estate
The Banks may stand to lose heavily as scores of home loans may be sticky. Already demonetisation has hit hard the real estate sector that had flourished on black money.
Over a long period RBI has been discouraging Banks to take exposure in the real estate sector. The discouragement was effected by way of higher provisioning norms. Nevertheless Banks did take exposure in this sector either directly or indirectly by facilitating the promoters to get PE funds. In the newspapers of late, disturbing news have appeared that big Realtors have taken huge amounts from prospective buyers by way of booking money and installments but have defaulted in handing over possession. These companies are evidently neck deep in debts. Some of them are on the verge of insolvency. Liquidation proceedings have been initiated. Meanwhile the buyers are in despair. The long delayed over decades act has now been enacted to protect the buyers in the form of Real Estate (Regulation and Development) Act, 2016 (RERA)
Where do banks stand?
The Banks may stand to lose heavily as scores of home loan may be sticky. Already demonitisation has hit hard the real estate sector which flourished on black money. There is huge inventory of unsold housing units. A crash in real estate prices may land Banks in tight spot. In the 2007-0809 in the US there was subprime crisis. Huge number of home loans securitized, bundled in tradable slices and packaged and then sold by the mortgagee institutions to investment bankers and hedge funds.
These were even certified by international rating agencies. But when the real estate sector crashed the eventual holders of the securities plunged into grave crisis as the value of the asset fell far below the value of underlying security. The result was known to everyone. Banks like Citi Bank, Amex Barclays Bank etc took big hits. Lehman brothers and a few more went bankrupt. The
A fallout of the NPA problem is, banks are less willing to lend as they work on cleaning up balance sheets and finding funds to recapitalise themselves. This has hit even the housing sector, where defaults have been far less than in areas like construction. Here too, while credit and demand for housing are still growing, they are fast losing momentum.
question is whether a similar situation is developing here in our country?
A fallout of the NPA problem is, banks are less willing to lend as they work on cleaning up balance sheets and finding funds to recapitalise themselves.
This has hit even the housing sector, where defaults have been far less than in areas like construction. Here too, while credit and demand for housing are still growing, they are fast losing momentum. Thus, trapped between rising interest and other costs and faltering demand that affects prices, the real estate sector is experiencing a severe version of the crisis stemming from the inability of the system to sustain growth-driven by private debt-financed spending.
Problem of fake documents
The Reserve Bank of India’s decision to push banks to clean their balance sheets by recognising nonperforming assets, resolving bad debts of large defaulters and, failing that, taking them to bankruptcy court for liquidation, has focused attention on the crisis in a few sectors. Among those, besides power, steel and textiles, is real estate, consisting of housing, commercial real estate and hospitality assets. But the problem faced by the bankers was that a single property was mortgaged to different banks with fake documents, which appeared to be original on the face of the document.
The real estate story is of special interest because the post-liberalisation evolution of this sector reveals quite starkly the characteristics and contradictions of postreform growth. An overriding objective of neoliberal reform is to get private investment to drive economic growth by providing it the right environment and offering it the appropriate incentives. But in a market economy, while supply side initiatives may help nudge into activity a private sector afflicted with inertia, those initiatives would work only if the fruits of such activity find a market. So even if it is not among the stated objectives of reform, a parallel thrust of policy must be that of stimulating demand.
Fortunately in our country mortgagee institutions and loan portfolio holder are the same and remain the same during long period of home loan. In many countries the loans ownership change a number of times as it is unprofitable to service the loan for such a long period. Real estate sector had definitely been prospective to all stakeholders, but lack of other employment opportunities, huge cash transactions, easy credit flow lured and paved way real estate’s loot and swallowed every bit away leaving homebuyers to look at. Frauds is another story perpetrated at the behest of above with buttering cut money. In all real estate faced litmus test and the buyers think twice before entering into an agreement with big builders. Banks are also forced to go through all formalities before sanctioning a loan. Thus Bank's exposure is limited to real estate sector.
Demonitisation announced in the year 2016 has hit hard the real estate sector.