2nd of the series
Track2Realty Exclusive
The combined net debt of India’s 11 listed developers rose 15 percent in the 12 months through June to 385 billion rupees, according to Mumbai-based Edelweiss Securities Ltd. The nation’s real-estate companies are selling assets as interest rates as high as 30 percent and a slowing economy make it harder for them to repay debt.
“This is one of the worst liquidity crises the sector has ever faced,” says Dipesh Sohani, an analyst at MF Global. “Investors are staying away from the sector as the risk associated with it is too high.”
As a matter of fact, most of the investors exited or became inactive after the global financial crisis and collapse of Lehman Brothers in 2008. Lehman itself was one of the biggest investors in the Indian realty sector.
During the economic meltdown in 2008, upon RBI directions, banks had extended generous debt restructuring support to the real estate sector. This was on the premise that the sales momentum would continue post the economic recovery and the developers would have adequate liquidity in 12 to 24 months period. However, no such wishful thinking is guiding the banks now.
Banks are increasingly getting tougher with real estate developers, asking for supporting documents in advance and increasing scrutiny while sanctioning loans to safeguard risks in such loans. Banks are asking for valuations report, chartered accountants certificate for investments and details about promoter’s background in advance. Earlier, all these documents were called at the time of disbursal. Now they are called even before the proposal is scrutinised and in principle sanction is granted.
The Reserve Bank of India, the banking regulator, has been advising banks to go slow on loans to real estate and has also increased risk weightage on loans to property developers in the past to make such loans expensive. This overcautious approach and scrutiny by the banks and housing finance companies is a result of bribe for loan scam that came to the fore late 2010, which saw the arrest of executives of LIC Housing Finance, Money Matters and other public sector banks for taking bribes for clearing loans for some property companies.
“Slowly we have started lending but we have been very selective and sanctioned loans far and few in between,” says VK Sharma, Chief Executive, LIC Housing Finance.
