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
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