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 | www.smartgovernance.in