The downward trajectory of real estate market prices is creating challenges for housing finance. Recent adjustments have seen banks raise the developers' contribution limit from 25% to 30%. With prices correcting in the real estate sector, commercial banks are now adopting a more selective approach to lending, becoming increasingly cautious about financing new residential and commercial projects. In addition to raising housing finance rates, many banks are urging real estate promoters to increase their financial stake in projects as a strategy to manage the risks associated with lending. This precarious economic landscape, along with mounting inflation, is likely to exert further pressure on property prices, and the effects are beginning to manifest in major metropolitan areas.
The decline in the real estate market suggests challenging times ahead for the industry, and this has prompted banks to be discerning with new funding proposals. The central bank has classified the immovable property sector as a sensitive area under its prudential guidelines, recognizing its association with higher risk weightage. Consequently, it has advised banks to allocate a more substantial amount of capital for real estate exposure and to closely monitor housing finance rates. However, the central bank has clarified that a complete prohibition on extending housing finance to existing clients is not warranted. If clients demonstrate a satisfactory repayment history, they should be eligible for housing finance at competitive rates.
At present, banks are requesting higher contributions from promoters and developers, a move aimed at securing their positions within the housing finance landscape. The revised contribution limit of 30%—an increase from the previous 25%—is a policy initiated by the State Bank of India. With this heightened contribution requirement, promoters are expected to assume greater responsibility for project completion and timely repayment of housing loans. This adjustment comes amid rising loan costs and the necessity for additional capital to support the more risky segments of the real estate market, leading banks to increase housing loan interest rates.
Consequently, all real estate companies must now adhere to prime lending rates (PLR), which for most public sector banks fall within the range of 12.25% to 12.75%. This marks a stark contrast to lending rates below 10% seen in the previous year. The overall Indian banking sector has disbursed Rs. 53,897 crore in housing finance, reflecting a year-on-year growth of 26.7% (Rs. 17,361 crore) compared to an impressive 79% (Rs. 18,770 crore) in 2007. Notably, the commercial real estate loan segment continues to exhibit substantial growth.
As the Indian economy grapples with a slowdown across various sectors, the immovable property market appears to be transitioning into a consolidation phase. A liquidity crunch is prompting many mid-sized and smaller real estate developers to seek smaller housing finance options. Consequently, numerous developers are opting to liquidate their land and unfinished projects, often selling to larger developers or private equity firms, even at depressed land valuations.
In the current real estate climate, there is no viable alternative to credit. With land transactions dwindling due to escalated housing finance rates and limited credit availability, the fundraising capacity of developers has shifted dramatically. Many have curtailed their expansion plans in light of these constraints, while smaller developers express concerns that their projects could stagnate due to insufficient funding. In summary, housing finance and the associated interest rates in India are navigating a phase of significant consolidation.