While the government is trying to get banks to begin lending after their liquidity concerns have been addressed by the slew of monetary measures by the central bank, most banks have nearly doubled the proportion of home loans granted on a construction-linked basis. Instead of a lump- sum disbursement to builders, banks give such loans mainly on the basis of progress made on construction of the property.
But in doing so, they may just be moving towards what they want to avoid?losing money. Given the high prices of houses ? which lead to lower demand, construction-linked disbursement of loans and the miniscule developer?s equity?chances are that the developer may not be able to take the project forward.
Under construction-linked plans, banks disburse loans in parts, based on the development of the housing project, although the ratio between loan disbursement and construction varies between banks. The bank installments become due after the buyers has paid his corresponding share. Such disbursements have increased to 40-45% of the total loans, against 28-30% six months ago, Ernst &Young national industry leader (financial services), Ashvin Parekh, said. E&Y is involved in product development of some leading domestic banks that have significant exposure in home loans.
Suppose a project has 100 houses, each costing Rs 35-40 lakh, and the bank gives 10% of the sanctioned loan on foundation laying, 10% on the construction of the first floor and so on. At the given price, the project generates a demand for, say, 5 houses before the foundation is laid. The builder would then receive just Rs 25-30 lakh, including the initial share of the bank and the buyers, on laying the foundation stone. With the low investment by developers, such demand would not make the project viable and chances of stalling it would increase.
?There is a vicious circle comprising home prices, demand for homes and construction-linked bank funding. In case of construction-linked funding, there are higher chances of a project being stalled for want of funds,? a senior official of a public sector lender said, on the condition of anonymity. He added that home prices are not going to come down by more than 10% in the next one year.
He said many developers are not getting down payment approval from banks. ?The reason being that liquidity has recently been tight and banks don?t want to part with big amounts of money at once,? the official said. Repeated attempts attempts to contact real estate developers did not fructify.
While not refuting the possibility of stalling of projects, Parekh said, ?Banks are just trying to pare the risk of non-completion of houses through construction-linked disbursement of loans. As the buyers also pays a part of his share, banks are assured that in case the project is stalled they would have some cushion.?
Home alone
• Given the high prices of houses, which leads to a lower demand, chances are the developer may not be able to take the project forward
• Instead of a lump-sum disbursement to builders, banks give such loans mainly on the basis of progress made on construction of the property
• Under construction-linked plans, banks disburse loans in parts, although the ratio between loan disbursement and construction varies between banks
