RBI's Tougher Stance on Loan Restructuring Pressures Real Estate Developers
India's real estate sector is bracing for further challenges as the Reserve Bank of India (RBI) implements stricter loan restructuring regulations. These new norms will compel builders to reduce housing prices or risk losing access to crucial bank funding. Banks frequently employ loan restructuring, a mechanism designed to prevent loans from being classified as non-performing assets (NPAs), when borrowers encounter repayment difficulties. Typically, restructuring involves extending the loan tenure and sometimes reducing interest rates, providing borrowers with more time to repay.
This practice allows banks to maintain healthy NPA ratios and avoid the negative implications of bad loans. However, a recent RBI directive mandates that any restructured loan to a builder be immediately classified as an NPA. This differs from other sectors where restructured loans can still be considered 'standard assets', shielding banks from hefty provisions in their profit and loss accounts. The restricted ability to restructure loans is prompting banks to pressure builders into reducing prices, selling properties, and servicing their loans. Builders are often left with limited options, as an NPA classification hinders their ability to secure funds from other banks.
Builders Face Pressure to Reduce Property Prices
"We are putting pressure on the real estate sector to reduce property prices. In such times, even if they are able to keep their head above water, it would be fine. They have all had a good innings so far. Now, they have to learn to live with thin margins," stated TS Narayanasami, Chairman & Managing Director of Bank of India and chief of the Indian Banks’ Association. He further added, "Just banks reducing interest rates will not help in reviving sentiments; builders will have to bring down prices for buyers."
Bankers observe a decline in home loan demand as buyers anticipate falling property prices. “Banks have taken the initiative by cutting home loan rates. Prices of cement and steel too have fallen, but builders have not reduced property prices,” commented MV Nair, CMD of Union Bank of India. While the RBI recently relaxed some lending norms for the building sector, it has remained silent on the issue of restructured builder loans.
Analysts Express Concerns Over Real Estate Sector's Financial Health
Analysts have voiced concerns regarding the financial stability of the real estate sector. India Infoline, a retail broking firm, anticipates a worsening liquidity situation for developers if banks refuse to refinance maturing debts and maintain the credit freeze. "We reckon that debt maturing over the next 12 months for developers like Unitech, Sobha, and Puravankara is higher than our estimate of these companies’ revenues over the corresponding period. The situation with Omaxe, Parsvnath, and Ansals also remains precarious owing to large land advances and high receivables," the firm noted in a research report.
The building sector has experienced numerous credit downgrades due to refinancing concerns, and bankers believe that price reductions are inevitable. “If a builder does not pay, banks would either initiate a recovery proceeding or restructure the loan. A recovery proceeding often results in lower realization. This, hopefully, should indirectly put pressure on builders to bring down price and go for negotiated sales,” said SA Bhat, CMD of Indian Overseas Bank.