Realty sector not heading for a meltdown

During the real estate boom period in US, there was euphoria all around and excessive, speculative investments being made in real estate, oversupply in the market, lenient lending covenants followed by banks- all of which were common practice in Indian boom period as well. While the former precipitated into a sub prime crisis what is it that prevented what could have been a major Prime crisis in India.

There are certainly some inherent strengths in the Indian system which have prevented the slowdown to convert to a meltdown.

For one, Reserve Bank of India had put in place very strict risk management practices, specially concerning lending to real estate, says Mohammad Asif, Vice President – Anand Rathi Real Estate Fund.

He adds that as opposed to US where there was oversupply of real estate, we in India have shortage of millions of housing units.

“The question is more of affordability. There is a latent demand which would translate into sales if the prices fall to realistic levels. Mortgage institutions in India too have been much more circumspect in providing loans. So, while there surely will be defaults in housing loans due to higher EMIs and banks and housing finance institutions will have higher NPAs, the crisis would not be comparable in scale and in magnitude as we are witnessing in US.”

One of the significant strengths of our situation has been the policy interventions. The RBI saw an excessive expansion in bank credit to contain credit growth, they hiked the repo rates, believing that this should have a sobering effect on demand.

Now with the current hike in interest rates, all developers are forced to build smaller and the policy measure is having its desired impact.

The other significant positive is our banking system which is conservative in determining loan eligibility.
According to Balaji Raghavan, Business Head-Home Loans, ICICI Towers, “The situation in Indian housing loan markets is significantly different from that in the US. We look at the customer’s current income and the loan eligibility is a comfortable multiplier of that. We ensure that after servicing all the obligations, the customer will have enough funds at his / her disposal. Secondly, the average loan to value ratio which we offer is conservative where we expect the customer to invest a significant amount of his own funds in buying the property unlike US where it could be more than 100%. Thirdly, we are still predominantly a vanilla home loan market where we take equal installments from the customer and do not do structuring wherein we project future income and recover small amounts in the early stage of the loan and more later.”

Raghavan says, “These kind of products are fairly prevalent abroad. Fourth, having a traditional banking system which has not followed the route of large scale portfolio securitizations, the originating entity (Home loan Company) of the loan and the holding entity are the same most of the times. This makes us more conscious of the kind of quality of portfolio that we build, hence the default risks become lower.”

One Comment

  1. Shivalay
    Posted December 16, 2008 at 6:48 am | Permalink

    Only projects like the hill station Lavasa, backed by infrastructure leader HCC, that have well managed financial inflows are able to continue development today. The economic downturn after years of buoyant growth has put real estate developers in a quandary. According to Rajgopal Nogja, President of Lavasa Corp., Lavasa is on schedule owing to funding both from external (Bank of India and Axis Bank) and internal (sales proceeds of villas and flats) sources. In fact, Lavasa has funding to cover the next six months of development, says Nogja. That means the first phase is on track for launch in 2009.

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