Banks To Revisit Status Of
Real Estate Projects India's troubled realty firms may soon get a lifeline, with the Reserve Bank of India (RBI) asking banks to consider providing support to large real estate companies.
Recently, the banking regulator wrote to select banks, asking them to assess the financial support given to builders and to finalise a workable solution, a senior banker said. The realty sector has been one of the worst-hit after RBI raised interest rates last year to combat rising inflation.
The tightening of interest rates, coupled with the economic slowdown, has resulted in a slump in housing sales and development of commercial property. Earlier, realty firms would raise money from the capital markets and also through private equity, but since the start of the downturn, their funding sources have got choked. Many banks have been reluctant to lend to this sector given the risks involved. However, considering the knock-on impact that a slump in the real estate industry has on allied sectors such as cement and steel, the government is naturally worried.
Early last month, RBI had collected data from various banks relating to their funded and non-funded exposure to various real estate firms. This was followed by letters to lead banks of select real estate companies. Although the apex bank has not told banks explicitly to provide support to real estate companies, it has asked them to revisit the status of the project.
In a letter to some banks, RBI has said "the assessment should comprehensively bring out the financial vulnerability of the company and suggest possible ways to address this issue". Justifying its stance, the central bank has said the exercise is aimed at understanding the status of major real estate companies through the medium of lead banks.
RBI has requested banks to assess the financials of the company and discuss with company officials the current and prospective position of the company. The banking regulator has said the assessment should cover the
real estate company's indebtedness, exposure and commitments that are due.
Big realty cos in RBI list
More importantly, it has told banks to assess real estate companies' project funding requirements and how they can be met.
A senior banker said almost all large real estate companies are included in the RBI list, such as DLF, Unitech, Sobha, Omaxe, Parsvnath Developers and Housing Development and Infrastructure Ltd (HDIL). This is the first time the central bank has directly written to banks, asking them to assess loans given to specific companies that are facing a liquidity problem.
A number of banks have already begun discussions with real estate companies mentioned in the letter by RBI. Lenders are now in the process of submitting the report to the central bank.
According to bankers, the RBI move follows regular complaints from real estate companies that demand for homes have been sluggish due to the high interest rates charged by banks. Their grouse is that there is resistance among banks to finance the realty sector. Recently, the central bank had taken measures aimed at encouraging banks to disburse loans to this sector at a lower rate. RBI reduced the standard provisioning for real estate loans from 2% to 0.40%, thus bringing them on a par with other sectors such as cement, steel and pharma.
However, bankers say even as they have reduced interest rates on home loans in the last fortnight, they have not been witnessing any demand. They strongly feel that demand for home loans will pick up only after real estate companies slash prices. "A buyer's first consideration will be the price of the property and then only will he look at interest rates," a senior banker said.
Courtesy:- ET dtd:- 6th Dec. 2008
