Realty heads for crisis as banks refuse more loans
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No more bank loans to crisis-hit realty

Banks and other financial institutions are refusing to lend to the sector leading to increase in pressure on loan repayments by the realty sector.

  • New Delhi,  April 22, 2011  
  • |  
  • UPDATED   09:15 IST

India's realty sector , which is yet to completely recover from the effects of the global economic slowdown, seems to be heading towards another financial crisis. Banks and other financial institutions are refusing to lend to the sector leading to increase in pressure on loan repayments by the sector.

According to global property consultancy firm Knight Frank, the realty sector has to repay an overall Rs 1.8 lakh crore of debt to various banks and other financial institutions.

"Their cash flow may also be under pressure as creditors seek early repayments," Amit Goenka, national director of capital transactions at the Indian unit of Knight Frank said.

The situation is just getting worse, as all major banks and other financial institutions have stopped financing the sector over uncertainties looming over the sector, bad debt repayment history and poor stock valuations have added to their woes.

A leading official at the State Bank of India (SBI) said that the realty sector is one of the major defaulters, so banks are very reluctant to lend to the sector.

"This year the realty sector is among the top defaulters. And we are not talking of the small developers. The list includes all the top players who have defaulted on repaying loans. This year they will add to the list of NPAs (non-performing assets) of many public sector as well as private sector banks," the official told Mail Today. Besides banks, private equity (PE) firms are also shying away from investing in realty projects, thanks to the involvement of the sector in the recent scams.

"No one wants to put money By Anuradha Shukla in New Delhi Realty heads for crisis as banks refuse more loans into realty projects. The sector is involved in every other scam and no one wants to be involved in any controversy," a senior official at PE firm Red Fort Capital, said.

"Also, developers have failed to learn from the past slowdown. There are just a few projects that are on schedule, even when money started flowing in. This current crisis is self created by the developers. There will be fresh project delays," he added. According to experts, developers will find it difficult to complete their projects on time.

Already more than half a dozen projects in Noida and Noida Extension have been delayed due to lack of cash flows. And as the big players are struggling to get fresh loans, the small one are trying to sell their projects by offering assured returns of 10 to 15 per cent on both residential as well as the commercial projects.

"They are already on the verge of stress sale. The cost of finance has gone up to as high as 25 to 30 per cent, almost as high as during the period of slowdown," Sanjay Dutt of Jones Lang LaSalle Meghraj (JLLM) had said last month. Sam Chopra, India head of Remax, a global property consultancy, said the sector will witness a steep correction and distress sales before prices stabilise.

"There is certainly a price bubble in the market. Home prices have gone up exceptionally high and have touched unrealistic levels," Chopra said.

"A flat selling in Mumbai at Rs 1.07 lakh per square feet is by no means realistic. The price needs a severe correction and I expect this bubble to burst in another six to eight months," Chopra had said a few months back.

Courtesy: Mail Today