Employees of State Bank of India (SBI) wait for customers to offer loans at a 'loan mela' or a loan fair, organized by various Indian banks in New Delhi. (REUTERS)
Employees of State Bank of India (SBI) wait for customers to offer loans at a 'loan mela' or a loan fair, organized by various Indian banks in New Delhi. (REUTERS)

Can India’s biggest lender pull its realty developers out of a funk?

  • For  select  projects chosen by SBI, the homebuyer will get refund of the principal amount if the builder delays possession
  • One reason for the lender’s move could be to arrest a possible slowdown in its mortgage loan portfolio

For troubled real estate developers, an unusual knight has emerged: State Bank of India (SBI).

It is unusual because SBI has traditionally been conservative in its exposure to real estate. Of course, it has gone full throttle in giving mortgages. The country’s largest lender wants to provide the missing elements of finance with a healthy dollop of trust, the absence of which has worsened the realty slowdown.

The scheme is simple. For select projects of a handful developers, chosen carefully by SBI, the homebuyer will get a refund of the principal amount if the builder delays possession.

The big question is why is SBI doing this. After all, its exposure to real estate has been largely through mortgages.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

As the chart shows, exposure has grown by 23% of its loan book from 20% two years ago, and most of this is mortgages.

One reason for the lender’s move could be to arrest a possible slowdown in its mortgage loan portfolio. Indeed, its home loans grew at 18% in the September quarter, lower than the average 22-24% seen in previous quarters.

What is surprising is that SBI has said it would charge the same interest rate as a normal home loan. “It would be interesting to see how the loan contracts are made in this scheme," said an analyst requesting anonymity.

It is clear that SBI is hoping the scheme will bring more buyers and the project will be run majorly through customers’ funding rather than debt. To start with, it has tied up with Sunteck Realty Ltd for three of its projects in the Mumbai Metropolitan Region.

For the real estate sector, however, it is unlikely to be a game changer.

For one, there is a caveat for this scheme—that SBI will be a one-stop shop for all the funding for the project. A developer won’t be able to get credit facility from its suppliers. Developers prefer to have multiple channels of funding. Tying with just one lender for a project, even if it is the largest, would seem too much for some.

“This is not a splash but it is a soother. What we need to watch is how many projects SBI is able to take up," said an analyst requesting anonymity.

The lender may not be able to pull the real estate sector out of the morass, but for now, investors don’t see any harm on its balance sheet.

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