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16% of realty debt exposure in severe stress, data show

Additional 22 per cent, around $21 billion, is under some pressure but has potential to get resolved with due steps.

, ET Bureau|
Last Updated: Dec 02, 2019, 08.37 AM IST|Original: Dec 02, 2019, 08.00 AM IST
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Out of the total $93 billion realty loans, grade A builders received over $65 billion loan advances, followed by $27 billion to grade B and $1billion to grade C developers.
Bengaluru | Mumbai: Indian real estate’s debt exposure that continues to be the biggest stress factor for the segment stands at $93 billion including advances by non-banking finance companies (NBFC) and housing finance companies. However, over 62 per cent or around $58 billion is currently completely stress-free, data from ANAROCK Property Consultants, showed.

Additional 22 per cent, around $21 billion, is under some pressure but has potential to get resolved with due steps. In fact, the stress on this segment of the debt is largely on recovery of interest and not on principal amount.

However, $14 billion or about 16 per cent is under severe stress. Severe stress implies that there has been high leveraging by concerned developers while they have either limited or extremely poor visibility of debt servicing due to a combination of factors.
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“This ‘stress’ loan amount in realty is not so bad after all as compared to other major sectors like telecom and steel. For instance, the entire ‘severe stressed’ loan value in real estate is spread across more than 50 developers as against telecom or steel where default by one company alone equals to the sizable portion of the overall stress,” said Shobhit Agarwal, MD & CEO – ANAROCK Capital.

According to him, every real estate loan is backed by hard security which is anywhere between 1.5 times to two times. Hence, even if the loan is NPA, there is enough security for the lenders to get material portion of their money back because even if defaulting developers decide to sell their real estate at a discount, there is enough margin for them to pay back.

Given the liquidity crunch and issues related to cash flow management, several housing projects across the country are stuck. Even as consumers have been knocking the doors of regulatory and judiciary authorities for long, solution to this mess is yet to be achieved. The government also recently announced creation of a Rs 25,000-crore stress fund to provide last mile funding to ensure completion of these projects.

According to experts, the problem may take 2-3 years to get fully resolved given the extent of malaise.

“Unless the cash flow problems are not sorted out at project level, which implies that customers pay for booked inventory and new sales are done, any financial intervention won’t be fully effective,” Rajeev Bairathi, MD & CEO, Shearwater Ventures. “Speeding up the implementation of the bailout fund and prudently prioritising lending from it to pick long hanging projects for disbursement would help.”

Sluggish residential sales over the last few years completely dried up cash flows for many developers, subsequently resulting in piled-up unsold inventory. To add to this, a few developers have even filed for bankruptcy in the backdrop of stricter regulatory norms under RERA.

Housing finance companies accounted for the largest share of total realty loans equaling 38 per cent, followed by banks which comprised nearly 34 per cent share while NBFCs have 28 per cent (including loans given under trusteeships). Of these, banks and HFCs are much better placed with 70 per cent and 65 per cent of their lending book in comfortable position. On the contrary, it is no surprise that nearly 58 per cent of the total NBFC lending is under a watchlist.

According to Agarwal, with banks, NBFCs and HFCs now doing their due diligence before giving loans to developers, the situation is gradually getting ironed out.

With improvement in residential sales led by multiple measures initiated by the government is expected to help developers in repayment of loan dues.

Out of the total $93 billion realty loans, grade A builders received over $65 billion loan advances, followed by $27 billion to grade B and $1billion to grade C developers.

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