After MSME, Govt will flag real-estate sector stress to RBIhttps://indianexpress.com/article/business/banking-and-finance/after-msme-govt-will-flag-real-estate-sector-stress-to-rbi-5458233/

After MSME, Govt will flag real-estate sector stress to RBI

After red-flagging shrinking credit to MSMEs, the government is likely to underline — at the RBI’s Central Board meeting on December 14 — the stress in the real estate sector.

After MSME, Govt will flag real-estate sector stress to RBI
The RBI data on sectoral deployment of funds shows that while the commercial real estate (CRE) witnessed significant slowdown in bank credit availability post-demonetisation. (Express Photo/Pradip Das)

After red-flagging shrinking credit to Medium, Small and Micro Enterprises (MSME), the government is likely to underline — at the RBI’s Central Board meeting on December 14 — the stress in the real estate sector that threatens job losses. And make a strong pitch for providing liquidity to non-banking financial companies (NBFCs).

Over the last 3-4 years, as banks exercised extreme caution in lending, it was NBFCs that stepped in to provide loans not just to retail home buyers but also housing firms. Several real estate companies have knocked on the government’s door with the RBI refusing to entertain any special dispensation for a particular sector.  “The real estate sector is in a mess with developers finding it tough to raise funds and being forced to stall development and cut their workforce. RBI can always find ways beyond opening a special window, which it feels creates a moral hazard,” said a government official.

The RBI data on sectoral deployment of funds shows that while the commercial real estate (CRE) witnessed significant slowdown in bank credit availability post-demonetisation, the credit outstanding for CRE witnessed a contraction for the first time in 13 months. In September, it contracted 0.8 per cent over the same period last year. CRE comprises loans extended to builders for construction of housing buildings, hotels, shopping malls, industrial parks, office blocks and hospitals — classified as commercial real estate by RBI.
Getamber Anand, chairman, Confederation of Real Estate Developers’ Associations of India (CREDAI) and CMD ATS Infrastructure, said that the key issue facing developers is of last-mile funding and if it is not solved it will have a domino effect on the economy and on home buyers. He said that RBI needs to push banks to start lending to the real estate sector.

The September figure holds relevance as it coincides with the IL&FS default that created a liquidity crisis in the financial market. In July and August, however, bank credit outstanding to CRE grew by 2.4 per cent and 6.3 per cent respectively. It is important to note that the bank credit outstanding to CRE in the calendar years 2013 and 2014 grew in excess of 15 per cent every month. Since demonetisation, the credit outstanding to CRE has not witnessed a double-digit growth in any month.

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Heads of leading companies met Finance Minister Arun Jaitley in recent weeks as well as top government officials to press for expansion in the liquidity and credit availability in the markets. “Even large builders that have lot of ready inventory are finding it difficult to secure funding. As NBFCs are caught in repaying their earlier debt obligations, fresh lending has come to a standstill. This has caused enormous stress in the realty sector,” said a government official aware of the discussions.

Jaxay Shah, president, CREDAI, said the sector was stressed. “It was getting funding from NBFCs and over the last two months even that has dried leading to a severe issue of fund availability for developers.” He added that industry players have had meetings with senior officials of the finance ministry and the PMO. “They are fully aware of the situation. Even as the situation remains grim, we are hopeful and think that we are at the end of the tunnel now, said Shah. If liquidity problems are creating issues for the builder fraternity, the industry is also hit by slowdown in buyer demand on account of rising interest rates, banks’ reluctance to lend and housing finance companies nearly halting fresh disbursements.