May 2018 smartGOV_eMagazine_May2018 - Page 24

Smart Governance Banking Will the Banking Mess impact the Real Estate Sector? Author Shobhit Agarwal MD & CEO - ANAROCK Capital 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. T o 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 property-cycle. Much to the dismay of developers, the recent events in the banking industry have caused commercial banks as well as Non-Banking Financial Companies (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% of the 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 RERA, 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 setback for affordable housing Despite being accorded infrastructure status by the Government, affordable housing 24 | May 2018 |