Builders in trouble as banks tighten lending rules

Builders in trouble as banks tighten lending rules

Builders in trouble as banks tighten lending rules

The real estate sector, accounting for the maximum number of new projects — 53 of 173, each above Rs 250 crore, in April-September this fiscal — is facing difficulties in achieving financial closure for these projects.

This is because banks are asking builders to bring in more equity before loans can be disbursed.

The 53 projects that banks have received from the sector have a total investment of Rs 61,819 crore envisaged, but lenders have sanctioned Rs 6,990 crore and disbursed just Rs 919 crore so far.

A public sector bank chief said most real estate projects are still in the initial stages and the financial closure will take some time as builders are approaching many banks to tie up funds.

Subdued demand and lesser cash flow are the main problems affecting the sector, he said. "We have asked them to either bring in more equity upfront or reduce the prices of units," he added.

"Bankers are seeking greater control in the way the sale happens. They also want money to be put in an escrow account and expect the completion of the projects without delay," a private sector banker said.

According to senior analysts and consultants, bank loan disbursals have slowed down due to the mandatory equity participation, delays in statutory clearances, liquidity crunch and in some cases, the same promoter seeking loans for various projects.

Vishwas Udgirkar, senior director, Deloitte in India said, "Earlier, the debt-equity ratio on an average in the projects used to be 7:3, but now banks have started demanding the developer to bring in the equity first before they disburse the loans."

"Besides, in many cases, banks themselves are also facing liquidity crunch because of which they have put a lot of sanctions on the back burner. Banks have also started checking the stress on a particular company, which means they are going slow on disbursals to promoters who have many projects in the pipeline and are facing troubles in servicing debt or delaying construction."

Anuj Puri, chairman and country head, Jones Lang LaSalle India, said, "Banks are reluctant to disburse loans to the retail real estate sector given the poor future projections of the sector. The imbalance of demand and supply in the retail real estate sector is making them (banks) think twice on their debt sanctions."

"There are cases where even the banks have started asking for more skin in the game by the developers by demanding equity participation to the tune of 4:6 and 5:5, depending on the risk involved in the project," he added.

Other fund sources are also drying up. Foreign Direct Investment (FDI) has been falling steadily in the recent years. Government data shows that FDI in the 'construction development sector (townships, housing and built-up infrastructure)' has fallen from $3.1 billion in 2011-12 to $1.3 billion in 2012-13. FDI inflows to sector was $592 million during April-August this fiscal.

There is also an enormous pressure on the developers to reduce prices/ offer discounts even as they are holding on to unsold units at a huge cost hoping against hope to sell it to elite buyers. Several developers have sold portions of their land bank to reduce their debt, sources said.

Gross bank credit to the commercial real estate sector as on September 20 was Rs 1,35,800 crore (a 17.5% year-on-year growth, but lesser than the over 30% growth in credit to sectors such as retail and consumer durables).

Gross bank credit to housing (including priority sector housing) as on September 20 was worth Rs 5,05,600 crore (a 20% y-o-y growth). Meanwhile, the market seems to be correcting itself with residential housing prices showing a decline in 22 cities (including the four metros) of the 26 cities covered in the April-June 2013 quarter over the previous quarter, according to the National Housing Bank Residential Housing Price Index.

Source: Financial Express

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