Banks told to assess builders’ fund needs

India’s troubled realty firms may soon be thrown a lifeline, with the Reserve Bank of India indicating that banks consider providing support to large real estate companies.

Recently, the regulator wrote to select banks telling them to assess the financial support given to builders and to finalize a workable solution, a senior banker said. The realty sector has been one of the worst hit after RBI raised interest rates last year to combat rising inflation.

The tightening of interest rates, coupled with the economic slowdown, has resulted in a slump in home sales and commercial property development. Earlier, realty firms had raised money from the capital markets and through private equity, but since the start of the downturn, their funding sources have been choked.

Many banks have been reluctant to lend to this sector, given the risks involved. However, considering the knock-on impact that a slump in the real estate industry has on allied sectors such as cement and steel, the government is worried.

Early last month, RBI had collected data from various banks relating to their funded and non-funded exposure to various real estate firms. This was followed by letters to lead banks of select real estate companies. Although RBI has not told banks explicitly to provide support to real estate companies, it has asked them to revisit the status of some of the projects.

In a letter to some banks, RBI has said that “the assessment should comprehensively bring out the financial vulnerability of the company and suggest possible ways to address this issue.” Justifying its stance, RBI has said the exercise is aimed at understanding the status of major real estate companies through the medium of lead banks.

RBI has requested banks to assess a company’s financial and discuss with the firm’s officials its current and prospective position. The regulator has said that the assessment should cover the real estate company’s indebtedness, exposure and commitments that are due.

More importantly, RBI has told banks to assess the real estate companies project funding requirements and how they can be met.

A senior banker said that almost all large real estate companies are included in the RBI list. These include DLF, Unitech, Sobha, Omaxe, Parsvnath Developers and Housing Development and Infrastructure among others. This is the first time that the central bank has directly written to banks telling them to assess loans given to specific companies which is facing a liquidity problem.

A number of banks have already began discussions with real estate companies mentioned in the letter by RBI. Lenders are now in the process of submitting the report to the central bank.

According to bankers, RBI’s move follows regular complaints from real estate companies that demand for homes have been sluggish due to the high interest rates charged by banks. Their grouse is that there is resistance among banks to finance the realty sector.

Recently, RBI had taken measures aimed at encouraging banks to disburse loans in this sector at lower rate. RBI reduced standard provisioning for real estate loans from 2% to 0.40%, bringing them on par with other sectors such as cement, steel and pharma.

However, bankers say that even as they have reduced interest rate on home loans in the last fortnight, they have not witnessed any demand. They strongly feel demand for home loans will pick up only after real estate companies slash prices. “A buyer’s first consideration will be the price of the property and then only will he look at interest rates,” a senior banker said.