Lenders Pressure Indian Property Firms Amidst Market Downturn
Financial institutions are adopting a stern approach with Indian real estate developers regarding loan repayments. Some major lenders are urging developers to sell assets before the situation worsens, while certain international funds are resorting to arbitration to withdraw from equity investment commitments.
Rising Default Risks
While most builders maintained consistent interest payments until September 30, lenders now apprehend widespread defaults in the December quarter, or potentially even sooner. One prominent developer has already defaulted on interest payments to a foreign fund, which had acquired structured securities during the property market's peak. Banks and institutions have collectively lent over Rs 75,000 crore to Indian developers, excluding approximately Rs 25,000 crore in bonds and debt instruments held by mutual funds. Though the collateral value of land and properties surpasses the outstanding loan amount, it provides limited reassurance given the declining property prices.
Lenders' Strategies and Concerns
Lenders have indicated that certain loans maturing in October and November will not be rolled over. This tactic is intended to compel developers to sell properties, even at reduced prices, to meet their interest obligations. Some loans adhere to a rental discounting model, where developers utilize rental proceeds from commercial properties to cover interest payments. Construction finance loans are usually repaid in quarterly installments comprising interest and principal components, similar to individual home loans. A more complex scenario arises when properties are partially constructed or nearing completion, yet potential tenants, particularly brokers and finance firms, have retreated due to the market slump. Lenders recognize the need for a measured approach. "We are targeting to meet the borrowers separately to assess their respective cash flow positions. We have to take a case-by-case approach," a banker commented. The substantial leverage prevalent in the real estate sector is a key concern, with many developers relying heavily on borrowed capital against their land holdings.