Attract new loans to revive stressed real estate projects with easier NPA rules, but only if existing promoters are eased out.
The government has been working on initiatives to resuscitate the real estate sector. It has proposed a Rs 20,000 crore fund that would be used to complete projects that have not turned into NPAs yet and where 60% of the construction is complete. This sounds good, but can’t help beyond a point because sound projects don’t really need help. The real problem lies in the hundreds of stressed projects—and the bankrupt developers—many of which have been funded by non-banking financial companies (NBFCs) and banks. It is these projects that need assistance. Indeed, we are already seeing collateral damage.
That is because, with limited liquidity and in the absence of refinancing options, many more developers could go bust, and many more projects remain incomplete; the fallout of developer defaults on lenders could be significant.
There could be a solution: Ask banks to fund stalled projects under certain strict conditions. In fact, some banks are believed to have indicated that they are willing to do so if they are allowed forbearance for their share of the exposure. In other words, they don’t want their new exposure to be classified as a non-performing asset. They point out that if they have, say, just a tenth of the exposure, it is unfair to ask them to label it as an NPA. That is a perfectly valid demand. Indeed, the idea is a good one, and RBI could consider relaxing the rules, but only if there is a change in the ownership of the project, with new developers being roped in to complete it.
A project where just 20-25% of the work remains, but has been languishing for lack of funds—working capital perhaps—could easily be revived with a new lender joining the consortium, and new ownership. The idea could go a long way if banks are able to rope in strong corporate builders to take over stalled projects, and lending to these companies would be less risky. While forbearance for any reason is to be avoided because it sets a bad precedent, this time around, given how the real estate sector is in terrible shape and how it can catalyse growth, RBI may want to consider it.
However, it is important that this kind of last mile funding doesn’t turn into a bailout for existing lenders. The projects need to be screened thoroughly to ensure they are viable and are only in trouble because of a shortage of a small quantity of funds. RBI could review an independent assessment of the requirement of funds and put a cap. Also, the existing promoters need to be sent packing. They can’t be, in any way, linked to the project. The lenders with previous exposure to the project must continue to classify the account as an NPA. They can’t get away from that; the forbearance should only be given to the new lenders.
Critically, the government must make sure the process by which a new promoter takes over doesn’t get mired in litigation. For instance, the investigative agencies should not stall the process as it has happened in the NCLT, where the corporate insolvency resolution process has been short-circuited by the SFIO, EoW, and so on. Such disruptions will put off the prospective buyer as also the lenders. Banks today are sitting on funds—the surplus liquidity is more than Rs 2 lakh crore—but are unwilling to lend to poorly-rated companies for fear of further loan losses. That is understandable; so, they do need some support from the regulator and the government.
The total exposure—across banks, NBFCs, and HFCs—to the developer segment is estimated at around Rs 6 lakh crore, with NBFCs and HFCs having an estimated 30%. Of this total exposure to developers, 40% comprises lease rental discounting (LRD), which carries less of a risk. The core developer book (net of LRD), is split more or less equally between banks and NBFCs. Some NBFCs, in their quest for high yields—17-18%—appear to have abandoned quality altogether; now, that money is stuck because the builders are broke, or going broke since they are unable to sell their stock. The total unsold residential inventory, at the end of September, was six lakh units. How much of this was complete at the time is not known.
Strapped for liquidity, some NBFCs are now trying to camouflage the bad loans by converting them into equity; at times, these are being converted into non-convertible debentures(NCD), and sold down to retail or even institutional investors, locally and overseas, in what are often junk bonds.
That is one reason an AQR or an asset quality review for NBFCs—of all shapes and sizes—needs to be carried out immediately. That will tell us the true quality of the real estate book at a time when it is becoming harder for them to access liquidity at an affordable cost. The other problem with real estate is that valuations, which are inflated to begin with, will soon start to fall as banks attempts to monetise their collateral. That, then, will drive down the value of collateral held by other lenders. It will, however, be good in the sense that prices will become real again.