After the RBI guidelines associated increased risk with lending to developers, most of the banks have discontinued this practice. RBI has also made it more expensive for banks to lend to NBFCs.
TEXT: SREYASI MAITY
Funding has become a major concern for the developer fraternity. Apart from the sales being stagnant over the last few years, investors have also lost their interest in this sector. RBI’s move comes amid the shortage of liquidity in the money markets and asset-liability mismatches and corporate governance failures at some of the NBFCs and HFCs. However, the National Housing Bank had increased the refinance limits for HFCs to ease the situation. Evidently, the central bank tightened risk-weight rules for loans to NBFCs are an effort to bring them at par with other companies. But, real estate financiers, who had borrowed short term money from mutual funds, have been affected the most, partly due to redemptions from liquid schemes and debt schemes.
Rohit Gera, MD, Gera Developments talking about the severe liquidity crunch explained, “Lending institutions are sitting on a significant amount of NPA’s which they will need to remedy. The severe liquidity crunch in the market though primarily resulting from a drying up of funds is getting aggravated because of inflationary input costs and weak consumer demand. With the RBI tightening policies around lending to the real estate sector, NBFCs and HFCs lending rates have become as high as 18% - 21%. Financially prudent developers with a proven track record are a safe bet for lenders. Also, lending decisions should be based on a careful assessment of both, the product and geographic risk of a project. “A shift to structured funding from the older model of vanilla funding will enable investors, to mitigate risk in the current market situation. Basing funding decisions on visible cash flows will stand lenders in good stead. Engaging in short-term lending against long-term assets is what they must be cautious about,” said Rohit Gera.
There is also mounting pressure on developers to clear debts which is further impacting deliveries. With sales down 20% compared to last year, prices are under pressure. The sector woes are also due to the lack of industry status to the sector. Rajesh Goyal, Vice President (CREDAI) NCR remarked that the Government should look into this aspect if it wants to fulfil the deadline of ‘Housing for All by 2022’.
There are already signs that the stressed NBFCs lending for mortgages are also being forced to cut back on their lending. The result of a reduction in the financing available for home buyers would lead to further slowdown in the demand for housing which will impact jobs and the economy. As Rajesh Goyal warns, “If liquidity crunch stretches for a long time then we might see many projects getting staled creating a mistrust for developers stuck leading up to the loss of trust in developers. This might boomerang into a situation where the country will face severe housing problem.”
Currently, all unrated claims on corporates, asset finance companies (AFCs), and NBFC-Infrastructure finance companies which are indebted to the banking system with payments above Rs 200 crore create a risk weight of 150 per cent. Also, companies which took loans of over Rs100 crore, rated earlier, but were unrated later also generate a risk weight of 150 per cent, according to RBI report.
RELIEF FOR HOME BORROWERS
- RBI has now come up with a guideline for banks to peg their floating rate loans to an external benchmark. Borrowers, would be able to track any rise or fall in their interest rate more easily.
- With the RBI cutting the repo rate, home loan EMIs are likely to go down for retail borrowers presuming that banks pass on the benefit.
- FinTech companies are reaching out to home buyers through digital lending. The emergence of new fintech products are poised to take the short-term credit market by storm.
