Central bank’s leeway to lenders on reclassification of project loans is expected to have a positive impact on profitability of banks
Granting relief to lenders and real estate developers, the Reserve Bank of India (RBI) on Thursday allowed a one-year extension of the date of commencement of commercial operations (DCCO) for project loans, which are delayed for reasons beyond the promoters’ control.
The DCCO is significant because repayment schedules are linked to it. RBI also said the asset classification of project loans need not be downgraded by lenders during this period. “It has been decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector,” RBI said.
The central bank’s leeway to lenders on reclassification of these loans is expected to positively impact the profitability of banks, India Ratings and Research associate director Karan Gupta said. “Till now, banks had to downgrade the classification of these loans and make a provision against them, but they won’t have to do that any more. They can restructure these loans and a lower provision amount will be required. The benefit is largely on the profitability of banks because of the lower provisioning,” Gupta told FE.
The reclassification leeway is also expected to benefit stressed housing financiers. This measure could help some housing finance companies run down their wholesale lending books sooner than anticipated. The one-year extension in the DCCO will also give a much-needed breather to real estate developers who are facing genuine delays, industry players said. The sector has been dragged down by project delays and piling inventories. “The (RBI) move will help ease out the time for maintaining and managing cash flows for developers and help them in completing many of the stuck projects,” Hiranandani Group co-founder Niranjan Hiranandani said. In September 2019, the government also announced a Rs 10,000-crore stressed asset fund as a relief for the real estate sector.
However, some analysts think the measures will only provide “marginal relief” to cash-strapped realty firms. “The real challenge is where projects are operational and residential sales aren’t happening, and developers are sitting on huge amount of inventory. There is no relaxation there,” analysts at Macquarie Capital Securities (India) said.
Industry players are also disappointed that the MPC kept the repo rate unchanged in a slowing demand scenario, Hiranandani said.