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Pandemic worsens liquidity woes of India’s realty sector
Banks have set stringent conditions for real estate lending and NBFCs are lending selectively
The prolonged pandemic has exacerbated the liquidity crunch in the real estate sector, making it difficult for developers to get construction finance. Banks have set stringent conditions for real estate lending and some non-banking financial companies (NBFCs) are lending selectively.
Construction funding is crucial for developers to start projects and for working capital requirements, which amounts to about 50% of the project cost. Developers, typically, rely heavily on banks and NBFCs for debt. The delay in under-construction residential projects has made it tougher for them to procure funding, particularly for mid-sized and small developers.
Besides, builders are also seeking loans at rates that are not feasible now, a senior official at a public sector bank said, seeking anonymity.
“Banks have already burnt their fingers in commercial real estate. Places such as Mumbai and the national capital region have a large number of unfinished projects where bank funds are stuck. We have faced litigation in many projects and, therefore, are more cautious now. Following covid-19, we are being doubly sure on which builder we lend to and checking their past records on project completion,” the banker said.
Most bankers want to lend only to high-rated corporates with a good parental backing. Lenders are also not keen on providing fresh credit to everyone, as the Reserve Bank of India has projected historic highs in terms of bad loans. The focus of the banking sector has now moved to retail loans, especially in housing, where the risk is low and volumes are high.
“After the pandemic, there has been a freeze in lending. The annual requirement for construction finance is ₹60,000-70,000 crore, but there has been a huge gap in the capital available in the sector pursuant to the NBFC crisis, and now the pandemic. Our new fund is focused on construction finance because we see a tactical opportunity. However, eventually this space will belong to banks,” said Sharad Mittal, chief executive officer, Motilal Oswal Real Estate (MORE) Fund.
Recently, MORE achieved the first close of its fifth real estate fund at ₹650 crore and will focus on providing senior secured debt in post-approval projects.
Nisus Finance Services Co. Pvt. Ltd has closed three transactions where prominent developers have taken construction finance at a high cost, said the company’s CEO and managing director, Amit Goenka. “We are disbursing ₹50-70 crore every month and there is a lot of demand for construction finance. Construction timelines have gone haywire due to the lockdown. The ability to underwrite reduces because of this uncertainty. The top developers are still getting funding at low cost, but availability is a problem for most others. Liquidity remains a concern,” Goenka said.
A few NBFCs, however, have slowly started lending and giving out termsheets to developers.
The Phoenix Mills Ltd will use equity for constructing a mall in Kolkata as the conditions for getting construction finance are not viable, its MD Shishir Srivastava, said in May. “Maybe at a later stage, we may raise construction finance for the project,” he said. Phoenix and Canada’s CPP Investments had signed definitive documents for a new JV to develop a mall in Kolkata, where the latter has committed ₹560 crore for an ultimate stake of 49%.
madhurima.n@livemint.com
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First Published:9 Jun 2021, 12:14 AM IST
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