A quiet but significant change is creeping into the bank finance of real estate projects with the twin objective of liquidating the huge cloud of unsold inventory in the sector and realising sticky loans that have tarnished the books of banks for years.
The Economic Times has reported that in order to help the real estate industry liquidate unsold apartments – a phenomenon that can help the banks realise their money stuck in most of these stalled projects – some banks have got together to explore whether they can surrender their first claim on the cash flow and the assets of the builders if new financiers come into the picture to help the builder with finance to complete the projects.
As the real estate sector picks up, some bankers think this is the opportunity to adopt a flexible approach, soften their stand and pave the way for completion and sellout of the assets and take the advantage of realising their lent out money.
The report claimed that about a week ago senior officials of banks and CEOs got together to discuss the matter and several of them expressed willingness to give up their first right if new financiers come forward to help developers complete projects that are stuck. It also said that the thorny issue has also been discussed with the government.
The central idea is to allow the housing projects to be completed. Since the developers need more money to finish the projects – which banks are reluctant to fund since their money is already stuck in these – they have to turn to new financiers.
New financiers, on their part, are reluctant to lend if the banks claim first right on the assets and the cash flow when old buyers pick up these flats or settle the remaining part of their money to take possession of their assets. Before committing their money, new financiers put forward the condition that they will have the first right on the flow of cash when the apartments get sold.
“That’s the precondition the new creditor insists on. Without that there is no deal. With the money stuck for years and project cost escalating, banks are beginning to realise that holding on to the first right is not helping… In surrendering their first claim banks would probably agree on projects where the cash flow is expected to be more,” said a bank representative, explaining the logic behind the move.
Quoting a senior bank official, the report said, “We have little to lose with loan exposures to most of these half-done real estate projects categorised as NPAs. Banks have been typically reluctant to surrender their first right over cash flow. That is changing. We may miss the bus is we delay now. It’s the right time as the real estate market is picking up.”
The total value of real estate projects stuck amount to a humongous Rs 5 lakh crore. Innumerable buyers in both the National Capital Region (NCR) and the Mumbai Metropolitan Region (MMR) were the most severely impacted. The situation turned so grim that in 2019 the supreme court urged the government to urgently address the issue.
In 2022, MMR and NCR accounted for as much as 77% of the housing projects in the country. A supreme court ruling on July 23, 2019 is said to set the ball rolling that has culminated in the realisation of the need for flexibility among the banks to untangle the knots in the real estate sector. In the Amrapali Case where the developer was stuck jeopardising the future and fortunes of about 40,000 home buyers, the court said that the real estate industry operated on the money from the purchasers and in that particular case both the banks and the authorities failed in playing out their roles. The apex court directed both the Centre and state governments to address the imperilled buyers who were cheated.
Following the court directive SWAMIH Fund was set up that provides fresh capital to complete stuck projects. This fund is managed by SBICAP Ventures.
The unsold inventory of the real estate sector tells a grim tale. A report by Anarock, a front ranking real estate consultancy, said just in the top seven cities, about 4.8 lakh dwelling units that were launched in 2014 or earlier were stuck even in May 2022. These were valued at Rs 5.5 lakh crore. The inventory declined from 42 months in Q1 of 2018 to 20 months in Q1 in 2023.
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