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.

Alive - - Contents - by C.K. Subra­ma­niam

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.

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