How will the NPA law impact the realty sector?


With the government seeking to empower the Reserve Bank of India, to deal with non-performing assets and help banks to recover bad loans, we look at how this will affect developers’ cash flows and the impact that it will have on the completion of projects for end-users

Sluggish growth has had an adverse impact on several real estate players, resulting in many of their loans turning into non-performing assets (NPAs) for the banks and financial institutions. Recently, the government of India introduced an ordinance, giving more power to the Reserve Bank of India (RBI) to deal with the NPA problem.

 

What is the NPA ordinance all about?

“The ordinance effectively allows the RBI to direct banks to recover NPAs from defaulters, either directly or through the RBI’s oversight committees. It gives more teeth to the RBI to assume a leadership role, in the resolution of the NPA crisis. Under the new ordinance, even the union government can direct the RBI to take steps to initiate an NPA resolution process. This is a significant departure from the earlier provisions of the Banking Regulation Act, which did not allow the government to intervene. While the ordinance has come under criticism, we will have to wait and see if the RBI can resolve the NPA deadlock,” explains Sachin Sandhir, global managing director – emerging business, RICS.

 

Is the realty sector contributing to banks’ NPAs?

For banks with a high exposure to the real estate sector, it is not surprising that a sizeable portion of their NPAs are from this sector. Although real estate sales have witnessed a slowdown, we have not seen a substantial reduction in home prices, which continue to remain high. Buyers continue to wait for home prices to fall, leading to an increase in the inventory of unsold homes.

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Rohit Poddar, managing director of Poddar Housing and Development, explains, “As the real estate sector is not in good shape, many projects remain pending and their developers are unable to return the loan taken from financial institutes. Consequently, the project turns into an NPA for both, the bank and the real estate developer.”

Experts point out that developers also incurred revenue losses during the demonetisation period. Developers took a hit on their top-line and bottom line, making it difficult for them to repay loans. This was compounded by the fact that most developers already have low ability to service debt, resulting in loan defaults.

 

Impact of the new NPA law on the real estate sector

Loan defaults by developers, have forced banks to reduce their credit flow to the real estate sector. In cases where they do decide to lend to the real estate sector, banks are very careful about the company they lend to, the viability of the project and the risks associated with the company or the project. The RBI had classified the real estate sector as sensitive, for commercial banks to lend, which has made banks cautious about lending to this sector. In the past, developers have requested the RBI to ease the lending norms for developers. While this has not happened, an overall reduction in bad loans of the real estate sector, will encourage banks to issue fresh loans to credible players.

“The NPA law will provide support to banks, in the recovery of bad loans and will make the process more efficient. In the long term, this is good for the real estate sector, because it will encourage banks to lend to developers that have a strong balance sheet and track record,” concludes Sandhir.

 

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