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Banks wary of lending to realty sector

Banks wary of lending to realty sector
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First Published: Sun, Feb 13 2011. 11 38 PM IST
Updated: Sun, Feb 13 2011. 11 38 PM IST
Mumbai/Bangalore: Banks lending to real estate companies could grind to a halt after two major realtors were linked to ongoing investigations into the telecom spectrum scam.
“Fresh loan proposals from these companies will not be accepted until clarity emerges on their fate. These firms must improve corporate governance and stay out of trouble,” said M. Narendra, chairman and managing director of Indian Overseas Bank.
Developers DB Realty Ltd and Unitech Ltd were among the many companies that were controversially allotted second-generation (2G) telecom spectrum at a price that caused an estimated loss of up to Rs1.76 trillion to the national exchequer, as per the Comptroller and Auditor General of India report.
The Central Bureau of Investigation (CBI) on Tuesday arrested Shahid Balwa, managing director of DB Realty managing director and vice-chairman of Etisalat DB Telecom India Pvt. Ltd. The Press Trust of India, citing sources, reported on Wednesday that the federal investigating agency has questioned officials of Unitech as well. However, a company spokesperson on Friday denied that there were any CBI raids or interrogation.
Besides turning down new loan proposals, bankers said they were also likely to take a close look at the proposed end use of loans that have already been sanctioned, but not yet disbursed to real estate firms.
“No bank will dare to give loans to companies that are under CBI investigations on charges of criminal conspiracy. Also, we (banks) would be expected by the agencies to stop releasing funds that already committed,” said the executive director of a mid-size state-run bank that has exposure to DB Realty and Unitech. “In cases where the company has just been named by CBI on grounds of suspicion, we would insist on an end-user licence from a reputed third party even for work in progress,” he added.
The executive director of a large public sector bank echoed the view, saying companies under investigation by CBI would not be given loan by state-owned banks unless their names have been cleared by the investigative agencies. “There is no question of putting stricter covenants to these companies for loans. We won’t be giving them loans at all,” said the executive director.
Typically, banks lend to real estate developers at 12-13% in the form of project specific loans and short-term corporate loans. A majority of the banks have, however, stopped giving short-term corporate loans as monitoring the end use of such advances are difficult.
United Bank of India executive director S.L. Bansal said that, considering the current market scenario, his bank is already going slow on long-term projects and has stopped giving loans to realtors.
“We are very selective about real estate projects and some big-ticket projects are on hold as of now,” Bansal said.
Indian banks have stepped up lending to realty firms over the past few years.
According to Reserve Bank of India (RBI) data, Indian banks’ exposure to the real estate sector in the year ended March rose 10.4%, to Rs5.8 trillion from the previous year—to 17% of total advances.
Despite the current apprehensions about extending new loans to realtors, lenders are not too worried about recovering their existing loans.
“Real estate and project loans are secured to the extent of at least 150% of the loan value. If the borrowers default, we have the right to liquidate their properties and recover our dues,” said the one of the executive directors cited above.
Senior officials of the real estate industry said ongoing projects could get affected if banks shut them out.
Vinod Goenka, chairman of DB Realty, said on Friday that while the company doesn’t have sizeable debt, public sectors banks could pull the plug on further lending. “We would look at private banks such as HDFC Bank (Ltd) to borrow,” he said in an interview to news channel CNBC-TV18.
Goenka also said he hoped to an investment deal with a private equity fund by end of February to make a Rs800 crore payment for the project to redevelop the 100-acre Bandra Government Colony in Mumbai.
“There is no official circular from RBI, but banks are not sanctioning any new loan proposals and going slow on disbursement on old proposals,” said Sunil Mantri, chairman of Sunil Mantri Realty Ltd and president of Maharashtra Chamber of Housing Industry, an association of developers. Mantri said his own firm is also finding it hard to obtain funding.
Property analysts said the recent shock waves would hurt developers who are trying to obtain construction finance for projects that have just taken off.
“The recent developments are an additional blow to the sector which will lead to projects delays because they will find it difficult to get funding from banks in the current circumstances,” said Suranjit Pal, an analyst with Elara Securities (India) Pvt. Ltd.
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First Published: Sun, Feb 13 2011. 11 38 PM IST
More Topics: Banks | Lending | Loan | Realty Sector | Real Estate |