Realtors fail to repay bank loans5 min read . Updated: 19 Apr 2011, 12:31 AM IST
Realtors fail to repay bank loans
Realtors fail to repay bank loans
Mumbai/Bangalore: Indian real estate firms, hit by a shortage of funds and a drop in property sales, are feeling the squeeze in cash flows and consequently their ability to repay bank loans.
By a conservative estimate of the industry, at least half a dozen companies are finding it difficult to meet repayment commitments, according to four persons familiar with the situation. Two of them are senior bankers and others are real estate industry officials.
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Around Rs20,000 crore of repayments were due by real estate companies by 31 March after loans were restructured by banks following the 2008-09 slump, but at least half a dozen of them have been unable to meet this deadline.
“They are likely to default," the chairman of a large public sector bank said, adding that some of these firms already have overdue interest repayments. He declined to be named.
The loans, however, will not be immediately categorized as non-performing assets (NPAs). A loan becomes an NPA when interest is not paid for 90 days. Banks do not earn interest on such loans and are required to set aside money for NPAs. For a loan defaulter, securing fresh debt becomes difficult.
The bankers are not naming the firms that have failed to meet the 31 March deadline, citing “client confidentiality", but said quite a few firms have approached them seeking fresh loans.
A senior Bank of India official, who did not want to be named, said a few realtors have approached banks seeking relief in the form of fresh finance. “They have approached different banks for fresh loans, possibly to repay the old debt," he said.
Companies that have sought fresh loans include Lodha Developers Ltd, Unitech Ltd, DB Realty Ltd and Emaar MGF Land Ltd, according to senior bankers. These companies aren’t necessarily seeking to refinance debt.
Lodha Developers declined to respond to an email sent last week.
A Unitech spokesperson said the company will not comment on financial numbers pertaining to the fourth quarter till the results are announced.
“Unitech has been regularly getting fresh loans sanctioned from various banks because of the quality of its projects and the visibility of cash flows," the firm said in an email response. “New loans, which are project-linked and of longer maturity, have replaced the older loans of the company. Overall, the company has been reducing its debt with improved cash flows from operations."
N. Shridhar, group director (business, strategy and finance) at DB Realty, said it has neither refinanced its debt nor taken fresh loans to repay money. He declined to say whether the firm has payment overdues or whether it has sought a fresh loan.
“Fresh loans from public sector banks are anyway difficult to get right now," Shridhar said. DB Realty has total debt of Rs260 crore as of 31 March.
Another real estate firm, Emaar MGF, said it has refinanced some of its debt and has also repaid Rs1,400 crore in the last year-and-a-half.
“Non-payment or possible defaults would impact the entire lending scenario and provisioning norms in the sector," said Amit Goenka, national director (capital transactions) at property advisory firm Knight Frank India Pvt. Ltd. “Following this, the cost of borrowing would go up."
At least five to eight firms have failed to meet the deadline for repayment, said Anand Gupta, honorary treasurer at Builders’ Association of India, a national lobby of developers which says it has a membership of around 5,000 developers.
“The amount overdue to banks will be somewhere around Rs5,000-6,000 crore," he said. “There is a visible slowdown in sales due to poor demand and majority of the banks have virtually stopped fresh loan disbursals. The number of projects have nearly halved due to the difficulty in getting funds."
But even after a significant slowdown in sales, developers are reluctant to cut prices.
Traditionally, Indian banks have been reluctant to lend to the real estate sector, classified as “sensitive" by the Indian banking regulator, due to high volatility and the risk involved in such loans.
The situation worsened in October when the Central Bureau of Investigation arrested eight senior officials of various banks and financial institutions for violation of prudential norms and accepting bribes from middlemen to give loans to realtors for leaking vital information from their respective organizations.
Indian bank lending to the real estate sector grew 10.4% in the fiscal year ended March 2010 to Rs5.8 trillion, contributing nearly 17% of their loan book, according to the Reserve Bank of India data.
Due to the higher risk, banks have started demanding higher equity contribution and even personal guarantees from promoters.
Banks typically lend at 12-13% to real estate firms.
V. Hari Krishna, director (investments) at Kotak Realty Fund that invests in real estate projects, said though many developers had approached it for money specifically to repay debt, it didn’t close a single deal. “It was a business opportunity for us, but we were unable to close any transaction," he said.
Lodha, which had taken a 1,640 crore loan from Deutsche Bank AG, has to pay back the last tranche of Rs400 crore in a month or two. The firm, which was eyeing a Rs2,970 crore initial public offering in 2009-10, was trying to raise Rs400 crore from another private equity fund, which didn’t go through, said a person close to the development.
The Deutsche Bank repayment was earlier scheduled for December, but has now been pushed back to May due to poor cash flows.
“They were planning to raise this money for repayment of debt. But eventually they have applied for a fresh bank loan," a senior banker said.
While the management has maintained that sales from projects in Mumbai and Thane have been robust in recent months, the company suffered a setback when its luxury township project Casa Univis in Thane was stayed by Thane Municipal Corporation following a stop work notice in February due to alleged violations of certain construction norms.
Pankaj Kapoor, chief executive of Liases Foras, a real estate research agency, said sales have gone down in recent months. “Some of the developers are over-leveraged due to a constraint in cash flows because of slowdown in sales and difficulty in getting loans," he said. Typically, the tenure of rollover of debt repayment ranges between 12 and 24 months, Kapoor added.
Graphic by Yogesh Kumar/Mint