You are using an older browser version. Please use a supported version for the best MSN experience.

Bank loans for builders’ under-construction projects decline in last 4 years: report

LiveMint logoLiveMint 21-09-2017 Bidya Sapam

Mumbai: Bank loans to real estate developers for projects under construction plunged in the last four years while investments from private equity funds and non-banking financial companies picked up, a report said.

Banks lent builders $1.3 billion for under-construction projects in 2016, down from $4.4 billion in 2013, research and consulting firm KPMG said in a report titled ‘Indian real estate: Decoding institutional investments’. In the same period, investments by PE funds and NBFCs shot up to $4.6 billion from $0.9 billion.

Rising non-performing assets (NPA), higher risk provisioning and mounting losses have led to significant reduction in credit offered by banks, the report said. However, with improved transparency and governance in the sector, funding from banking sector may increase on the back of reduced risk, it added.

Banks are reluctant to lend to developers partly because of their own ongoing issue of non-performing assets (NPAs) as well as the execution risks that builders are facing right now, Neeraj Bansal, partner and head (building, construction and real estate), KPMG India told Mint.

“So last six seven years, all the projects have got delayed. That has reduced the confidence from banking’s point of view,” he said.

Vaijinath M.G., chief general manager, real estate and housing business unit, at State Bank of India, said lack of transparency was a major reason why bankers were hesitant to lend to real estate developers for under-construction projects. Additionally, since builders will now have to commit a completion time under the new real estate regulations, it will resolve the issue of delay and ensure that repayments are done within the given time frame, he said on phone.

“There will be more confidence among bankers to fund real estate projects because of RERA as it will improve transparency. Builders will now have to maintain clear balance sheets, which will help assessment,” Vaijinath said.

Overall institutional investments in the sector increased from around $5.2 billion in 2013 to around $7.1 billion in 2016 supported by strong economic fundamentals, regulatory reforms and availability of large and attractive assets, especially in the commercial segment.

The report also pointed out that 71% of the total investments in under-construction projects have come through debt/structured debt route, with rising refinancing needs of the developers to repay their existing lenders.

“Unlike an equity model of funding, a structured debt model allows an investor the exit route at a pre-determined return. Investments are also backed by at least twice the asset cover received from developers,” it said.

Alekh Angre contributed to this story.

More From LiveMint

image beaconimage beaconimage beacon