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.
Impact on property prices
With banks being extra cautious
and literally pulling out of the property
market, private equity players and
other financial institutions have
come to the rescue of several Indian
developers. The current numbers
indicate that nearly 75% of the
funding in real estate is via the PE
route. These options are eventually
expensive for developers who, in turn,
pass the buck to property buyers
by increasing property prices. If
banks proactively extended credit
to developers at subsidized rates, it
would eventually help keep a check
on property prices as well.
Property cycle stagnation
With banks shying away from
lending to developers, the property
cycle may grind to a halt across cities.
There are several under-construction
projects that need funding for
completion. For instance, NCR has
maximum project delays due to the
severe cash crunch. With banks
refusing to give funding to many
developers there, these players are
unable to complete their projects.
If banks offered them credit, their
projects would be completed and
the development cycle could resume
- which would ultimately lead to a
faster revival of the sector.
On the Positive Side
The recent crisis is paving the
way for several structural changes
within the Indian banking system.
For instance, the RBI unveiled a
new charter of rules early this year
for recognizing defaulting loans and
way s to resolve the crisis. More so,
the passing of the NPA ordinance in
2017 empowered the RBI to directly
intervene in bad loans and thereby
go some ways in resolving the NPA
deadlock. An overall reduction in bad
loans will eventually encourage banks
to issue fresh loans to credible players.
With a healthier banking system, the
economy can also begin firing on all
cylinders again.
25 | May 2018 | www.smartgovernance.in