Lenders want a senior, secured charge on the assets they fund under the recently proposed ₹25,000-crore real estate fund that aims to revive stalled projects, said the head of a large public sector bank.
Speaking on condition of anonymity, the banker said lenders want to ensure that if these projects fail to take off despite the intervention, and the assets have to be monetized to recover dues, their money will have priority status. In other words, the fund is expected to have a priority charge as compared to existing investors.
“In informal conversations with banks, the government has already said that the promised infusion of ₹10,000 crore into the fund is ready and we can draw it as and when required," he said.
This demand for the first right of recovery is not surprising for Indian banks reeling under the burden of bad loans over ₹8 trillion. To be sure, these are for loans to builders who have not been able to complete their projects.
The Reserve Bank of India (RBI) has always seen commercial real estate exposure by banks as a riskier affair compared to other segments. It has therefore mandated banks to set aside more money as standard asset provisions between 0.75-1% for these loans. Typically, banks have to set aside 0.4% of a loan as provisions for most other loans.
Total commercial real estate loans by banks stood at ₹2.18 trillion as on 27 September, 16.6% higher than a year ago. India’s largest lender State Bank of India (SBI) has an exposure of ₹31,935 crore to commercial real estate, 1.66% of its total loan book of ₹19.28 trillion as on 30 September.
On 6 November, the Union cabinet approved the creation of a ‘special window’ fund to provide priority debt financing for the completion of stalled housing projects in the affordable and mid-income housing sector.
According to the proposal, the government will act as the sponsor and has committed to infuse ₹10,000 crore into the fund. Banks and Life Insurance Corp. of India (LIC) will also invest in the fund. Other private investors, including cash-rich financial institutions, sovereign wealth funds, public and private banks, domestic pension and provident funds are expected to co-invest.
The fund will be set up as a Category-II AIF (Alternative Investment Fund) debt fund registered with markets regulator Securities and Exchange Board of India (Sebi). SBICAP Ventures Ltd will be appointed as the investment manager of the fund. This fund can also be utilized for projects that have turned non-performing or are undergoing insolvency proceedings.
According to data from real estate consultant firm Anarock, 218 real estate projects worth ₹1.77 trillion across large cities is undergoing resolution under the Insolvency and Bankruptcy Code (IBC).
Anarock data showed that these stalled projects have over 170,000 units, with the most being in the National Capital Region (NCR) at over 100,000 units, followed by 38,060 unites in the Mumbai Metropolitan Region.