RBI clamps down on easy money for developershttps://indianexpress.com/article/news-archive/web/rbi-clamps-down-on-easy-money-for-developers/

RBI clamps down on easy money for developers

The 80:20 scheme had benefited developers as they were getting funds at home loan rates.

Just a day before Raghuram Rajan took over from Duvvuri Subbarao,the Reserve Bank of India restricted banks and housing finance companies from funding the 80:20 scheme floated by developers. The restriction will raise the upfront cost of a home loan but makes the banks aware of the risks in giving out loans where the collateral is often only the goodwill of the borrowers.

But the timing has made analysts note the circular. At a time when the new Governor had something to offer for almost every sector,singling out some of the practices of the real estate sector shows he is aware of the risks it poses.

RV Verma,chairman of National Housing Bank said the RBI warning was necessary. “Our data shows the first signs of correction are coming through”. He is referring to the NHB Residex which shows of the 22 cities it tracks growth has come off by one to five per cent in most of them in the first quarter of FY’14.

All this at a time when the mortgage rates continue to rule high. Major real estate markets are facing a drop in number of transactions and softening in prices and pockets in various cities facing an oversupply situation. Rajan has reason to be concerned. The size of the mortgage market accounts for 8 per cent of the GDP. So any change in the rate of growth of GDP can impact this market.


“Areas such as Yamuna Expressway,Greater Noida,Noida Extention,Gurgaon Extension,and pockets in Pune are facing a situation of oversupply,” said a real estate market expert who did not wish to be named.

But Keki Mistry,vice-chairman of HDFC is confident the demand for housing will remain strong. “Yes,luxury markets,say the demand for a second or a third house could taper,but they constitute less than 1 per cent of the total housing market”. He is confident about the holding capacity of Indian home buyers and investors but if the demand slows down further which many are predicting,not only could prices start to crack but several developers may be forced out of the market.

“Already there are cases where some smaller developers are facing the finance crunch and while they have a parcel of a land with them they don’t have the financial strength to to go ahead with their projects. In many cases they are approaching bigger developers to develop the project,” said a leading real estate expert.

A drop in demand and sale in a weakening economic environment may push many developers into financial constraint and thereby also put pressure on the banks who have lent money to them. “Debt cost for developers is high and private equity money has dried in the current market with the sharp depreciation in the rupee,” said Anshuman Magazine of CBRE.

So what does the RBI measure do? It cuts off the spigot of easy money for the developers to finance their project,in which case falling sales could prove to be just too much for them to handle. Because of the sliding rupee non-resident Indians had taken off their money from the table.

The 80:20 scheme had created a light froth of demand from another category?the relatively poorer domestic buyers since they were required to pay only the upfront 20-25 per cent with the rest after possession. While it benefited consumers,it was also benefiting the developers as they were getting funds at home loan rate. This money is now set to rise by 300-350 basis points pushing up construction costs.

Market experts like Gulam Zia,national director,research and advisory services,Knight Frank feel this will have a significant impact on sentiments in the market. “While the Residex data was already having an impact on the sentiments,this will have a multiplier effect”. Mistry of HDFC is sure the holding capacity of middle class India is strong enough to keep the market for first homes going if prices are right.

For Rajan the choice was difficult. Bearing down on some of that demand cuts out another source of growth in the economy. Construction as a percentage of GDP has dropped from 7 per cent to 2.8 per cent. But the governor was one of the first to figure out the asset bubble in the USA. With real estate prices running ahead of inflation rates by a handsome margin,it is time to take the punch bowl away.