RBI’s new asset recognition norms for realty credit negative for banks: Moody’s

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Published: February 14, 2020 1:05:14 AM

The real estate sector has been facing challenges as NBFCs (non-banking finance companies), the key lenders to the sector, are also under stress. Further, stagnating property sales have resulted in a large stock of unsold inventory.

Ratings agency Moody’s on Thursday said the Reserve Bank of India’s move to revise asset recognition norms for bank loans to the real estate sector is credit negative for lenders as it would defer the recognition of such loans. The RBI on February 7 allowed banks to not classify real estate loans as restructured for one year if the project is delayed for reasons beyond the control of real estate developers. “While this will alleviate near-term asset quality risk to the banks from the real estate sector, it will not address the credit issues facing real estate developers,” the ratings firm said.

The real estate sector has been facing challenges as NBFCs (non-banking finance companies), the key lenders to the sector, are also under stress. Further, stagnating property sales have resulted in a large stock of unsold inventory. “Tight funding conditions are straining developers’ ability to complete projects, and by extension, their solvency,” Moody’s said.

Under the new guideline, banks can extend the principal repayment period by one year if the project is delayed because of reasons beyond the developer’s control. Typically, the principal repayment on loans to property developers starts two-three years after the disbursement. In the interim period, developers are only required to pay the interest on the loan. The RBI’s revised asset recognition norms will not apply to NBFCs, who are among the largest lenders to developers.

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