Disbursement blues

Though the Reserve Bank of India has gone in for several rounds of rates cuts in the last few months,lending rates have not come down significantly.

Though the Reserve Bank of India RBI has gone in for several rounds of rates cuts in the last few months,lending rates have not come down significantly. Public sector banks PSBs have cut home loan rates by around 300 basis points in the last six months. On the one hand,bankers claim that RBIs moves have failed to stimulate consumer demand; on the other,data shows that banks have themselves not been too keen to disburse loans in the recent past.

According to the economic survey released by the RBI,total home loan disbursement was Rs 19,012 crore during the year up to February 27,2009,down from Rs 26,930 crore disbursed during this period a year ago. Banks are turning risk-averse regarding expanding the size of their retail portfolios. According to data put out by the finance ministry,the banking sector has witnessed credit growth of only 2.49 per cent between November 2008 and January 2009. In particular,the level of bank lending to the realty sector has declined substantially from the level witnessed during the boom.

THE OBSTACLES

The realty sector has hit a trough,with sales declining precipitously. Hence,banks have turned cautious as the risk of lending to this sector is very high currently. According to realty experts,as the number of defaults rises,banks are restructuring home loans,especially in the case of those hit by job losses and pay cuts. And at the same time,they are taking extra precautions before approving fresh loans.

Devinder Gupta,CMD,Century 21,a property consulting firm,says that earlier customers used to get 90-95 per cent of the value of the property as loan from banks; customers only had to pay the balance 5-10 per cent out of their own pocket. Currently,banks are unwilling to finance more than 75-80 per cent of property value as prices have declined across the board. The practice of lumpsum upfront payment to builders to get a discount on purchase price is also not in vogue anymore, says Gupta. Bankers today prefer the construction-linked payment option.

In banks perception,there is a big question mark on developers ability to complete projects. Banks have turned cautious about issuing loans to customers in such projects. Fresh loans are now being issued only in case of projects that are at least 80 per cent complete. Till a year ago,they were willing to issue loans covering 100 per cent of the cost of apartment in projects that were in the initial stages of development, he says.

In the past,realty developers managed to virtually get their entire projects financed by investors who booked flats by paying a substantial part of the total purchase price. Under the advance disbursement category,banks paid the total loan amount to the client at the very beginning. The investor in turn gave the loan amount to the builder. Thus,builders got an almost cost-free loan,and hence agreed to offer a discount to investors. Now with banks becoming strict regarding advance disbursements,realty players are being forced to look at other options for raising liquidity to complete their projects.

Ashutosh Limaye,associate director-strategic consulting,Jones Lang LaSalle Meghraj JLLM,says,Paying lumpsum amount was witnessed only among investors. Genuine buyers,in most cases,possess less spectacular spending power.

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Limaye also says that it is not only the price of the flat that causes it to sell; the size of the EMI also matters. Though these are logically two sides of the same coin,it is the EMI that decides whether or not a home is affordable to an individual buyer. In other words,both pricing and reduced affordability have affected the sale of flats.

RBIS DIRECTIVES

In a recent move,RBI asked banks to increase the risk profile of home loans above Rs 20 lakh. So banks have had to increase the provisioning for all residential housing loans above Rs 20 lakh from 0.4 per cent earlier to 1 per cent. RBI has also raised the risk weight on exposure to commercial real estate to 150 per cent. Experts believe that these measures will dent banks profitability,and will prevent loan rates from coming down.

DEVELOPERS HOPEFUL

In order to meet the requirements of banks and to prevent the sale of flats from plummeting further,developers are going along with the construction-linked payment option.

Responding to last weeks cuts by RBI in the repo and reverse repo rate,Rohtas Goel,CMD,Omaxe,says,We are hopeful that this step will make an impact on lending and borrowing rates and we see a reduction in interest rates on various loans,particularly home loans. This will bring relief to the realty sector. RBI has sought to create conditions conducive to consumption and investment,taking into account global developments and their impact on India.

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However,Goel is also hoping that the cost of loans comes down further. Says he: Since the cost of credit is still very high,we hope that RBI will cut the repo and reverse repo rate further.

According to him,for both investors and end-users,this is the best time to buy a house,since recent price cuts by developers who have reduced their margins and interest rate cuts by banks favour them.

However,according to Navin M Raheja,CMD,Raheja Developers,the low level of sales is the result of a crisis of confidence,instability in the market,and doubts about the financial health of developers. All this should get resolved over the next six to eight months as the economy revives over time. Because of these reasons banks have become reluctant to finance the real-estate sector and lumpsum upfront payments to builders have been abandoned, he says.

Commenting on the demand-supply gap,Limaye of JLLM says,There is an oversupply in residential stock caused by over-enthusiastic project launches during the boom. The slowdown is now delaying the absorption of these projects.

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But he believes that there is still huge demand for housing in the right project categories and price ranges. As before,banks are doing their business of lending to aspiring buyers. And considering the current market scenario,they are justified in lending only to secured assets, he says.

RISING NUMBER OF DEFAULTS

Not just home buyers,even real-estate companies are defaulting on their debt repayment obligations. According to Ajay Dwivedi,director-ratings,Crisil,the companies that defaulted in 2008-09 faced a severe strain on their working capital due to the economic slowdown. Of the 13 defaults in 2008-09,three are from the real-estate industry, he informs.

Dwivedi believes that the credit pressure on the realty sector would continue,leading to delayed payments and defaults. Several real-estate companies are today stuck with large land banks and high debt. Banks are not lending to real-estate companies except for construction purposes. Other avenues for raising funds have also disappeared: the equity market is in doldrums,foreign private equity investors are not too keen,and advances from home buyers are difficult to come by.

Though the RBI has cut rates several times and along with the government has urged banks to lend more liberally,the latter are worried. They believe that lending too much money now could cause loans to go bad in future,given the feeble state of both home buyers and real-estate developers. l

praveen.singhexpressindia.com