Track2Realty Exclusive-Yearly Analysis: Indian banks lending to real estate sector grew by 10.4% in the fiscal year ended March 2010 to Rs.5.8 trillion, contributing nearly 17% of their loan book, according to RBI data. Since then it has nosedived and now the government also wants public sector banks to focus more on home loans and to streamline lending norms to the real estate sector.
According to a senior official with a public sector bank, the Finance Ministry is of the view that real estate players should get more bank financing that could reduce their dependence on other sources and bring down down the prices of homes. These views were expressed when the Finance Minister recently met with public sector bank heads. Banks want the Reserve Bank of India (RBI) to relax the norms on asset classification in the real estate sector to facilitate credit flow.
“We have noted that a developer starts the project by availing finance from non-banking sources, mainly non-banking housing companies, at a high interest. Later, they realise that servicing such loans become unviable,” says a senior executive of a public sector bank.
In September, Indian Banks’ Association (IBA) and Confederation of Real Estate Developers Association of India (CREDAI) had met to narrow down on a number of recommendations for the Finance Ministry and RBI, which will make home loans and real estate safer avenues for bank lending.
“We would not any more entertain intermediaries. They will have to come directly,” a senior executive of a leading state-run bank says requesting anonymity.
Banks exposure to real estate has been significant less this year, more so to commercial real estate, where it falls from 23.2 per cent in June 2011 to just 4 per cent in June 2012. Realtors crib the number of new projects has virtually halved in the year 2012 due to lack of availability of bank funding and adverse demand scenario.
The high inventory pile up, sluggish demand, rising input cost and ever increasing interest has severely dented the financial position of the developers. A companies’ interest coverage ratio (ICR) indicates its ability to pay interest on its debt. The deteriorating ICR is an indication of worsening financial situation.
The sharp decline in the interest coverage ratio of real estate companies from 4.76 in Dec 2010 to nearly 2.4 by the end of 2012 indicates their standing to service the debt. Debt servicing will continue to remain the bête noire of the sector in 2013, especially as billions of PE investments are likely to attain maturity and they may not look at the sector yet again.
The big question today is whether shades of the 2008 crisis playing out with some failures in the industry yet again. Some analysts assert with a record number of unsold housing units in some of the leading markets, if developers remain rigid not to slash prices then revival of fortunes would be a far cry.
Analysts maintain looking at the major land deals, or distress deals of the year 2012, if land values have declined by as much as 40 percent from peak rates, why not ready inventories. Isn’t it a better option than defaulting on servicing the debt?
