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Banks want higher promoter equity in real estate projects

Banks want higher promoter equity in real estate projects
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First Published: Tue, Mar 01 2011. 10 23 PM IST
Updated: Tue, Mar 01 2011. 10 23 PM IST
Mumbai/Bangalore: Indian banks, which are going slow in giving fresh loans to realty firms in the aftermath of the bribe-for-loan scam unearthed in November, have made lending norms stricter for property developers.
Banks are now demanding higher equity contribution and even personal guarantees from real estate promoters, bank officials said.
Banks have also made it mandatory that intermediaries are not involved in transactions with developers, to avert any possible irregularities, and that clear land titles are in place prior to the sanction, they said.
Till recently, most real estate developers used to employ intermediaries to negotiate with banks for loans.
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Typically, for project-focused construction finance, developers form special purpose vehicles (SPV) to undertake large real estate projects such as townships. They require equity contribution from the promoter or developer and advance payments from buyers or investors, while the rest is funded by banks.
Banks weigh the quality of such projects based on the commitment from the developer and the demand from investors.
While the developer normally has 25-30% of equity contribution in a project, banks typically fund 40% of the value.
Apart from demanding higher equity from developers, banks are also not keen to consider too many prospective buyers’ interest in such properties as a credible security against big-ticket loans as there have been instances of buyers backing out.
State-run bank officials said they are asking for promoter equity in real estate projects as high as 50-60% compared with 25-30% till a few months back.
“Banks now have to doubly make sure slightly higher equity contribution in the projects. One may like to have 30-60% (of promoter equity in the project). We would like to be very sure about the credentials of the people,” said R.K. Bakshi, executive director of Bank of Baroda.
“They (banks) used to ask for promoters quota of 25-30%, which they have now increased to 45% and above,” said Anand Gupta, honorary general treasurer of the Builders Association of India, an association that claims membership from nearly 5,000 property developers.
With the realty sector seeing a turnaround, property prices in large markets such as Mumbai and Delhi and the national capital region (NCR) shot up by up to 30% in the last six months. Rising prices have dampened sales.
In a residential project, if the flats remain unsold, the risk for the banker shoots up as the possibility of defaults rises. Under existing norms, banks are required to set aside more money for such loans.
Ram Yadav, head of finance and strategy at Mumbai-based developer Orbit Corp. Ltd, said banks are now asking developers to chip in for the buyer’s portion in a loan transaction.
“With sales having dried up, there isn’t much money coming in from the buyers’ side and so, developers are expected to contribute that portion,” said Yadav.
At least four firms—Ansal Properties and Infrastructure Ltd (Ansal API), Emaar MGF Land Ltd, Kumar Urban Development Ltd and Paranjape Schemes Constructions Ltd— have received fresh sanctions from banks, although overall lending to the sector remains subdued.
Ansal API recently received commitments from State Bank of India for Rs 1,000 crore, according to two company officials who did not want to be named. State Bank officials declined to talk on this.
The company plans to deploy the money in its township project in NCR, an Ansal official said. Kumar Urban has received Rs 100 crore and Paranjape Schemes received Rs crore, said officials of these firms. The officials, requesting anonymity, declined to divulge the terms of fresh loans.
Amit Goenka, national director of capital transactions at realty consultancy Knight Frank India, said cash-strapped developers may find it difficult to get bank loans.
“There are new banking norms that checks how much equity is there to make sure that the loans are absolutely construction-linked,” Goenka said. “There are no ad-hoc loan disbursals.”
Bank lending is the single largest source of funding for developers, who require funds primarily for construction finance but also to service debt.
Traditionally, the Reserve Bank of India (RBI) has taken a cautious approach towards banks’ exposure to the segment, classifying it as sensitive sector along with capital market and commodities in view of the higher risk involved due to price fluctuations.
Loan flow to realtors took a hit following the corporate loan scam in November when central bureau of investigation (CBI) arrested eight senior officials from banks and financial institutions for violating prudential norms or leaking vital information. Besides, the recent controversy over the allocation of second generation airwaves, which involved a few real estate firms, also made banks more risk-averse.
“We would not any more entertain intermediaries. They will have to come directly,” a senior executive of a leading state-run bank said. He did not want to be named as he is not authorized to talk to the media. Indian banks lending to real estate sector grew by 10.4% in the fiscal year ended March 2010 to Rs 5.8 trillion, contributing nearly 17% of their loan book, according to RBI data.
Latest RBI numbers showed growth in banks’ exposure to commercial real estate in first 10 months of fiscal 2011 was 14.9%, against a 4.4 % decline a year ago. Officials of the real estate industry said the number of new projects have virtually halved in the last three months due to lack of availability of bank funding and adverse demand scenario.
Graphic by Yogesh Kumar/MintPhoto by Harikrishna Katragadda/Mint
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First Published: Tue, Mar 01 2011. 10 23 PM IST
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