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COVID-19 aftermath: Get real about bailing out realtors

Most developers don’t deserve the consideration on loans they are pleading for; they squandered sops given earlier.

Real estate prices in this country have always been highly inflated—and we all know why.
Real estate prices in this country have always been highly inflated—and we all know why. (Representative image)

By now, we all understand that the COVID-19 pandemic is going to ravage the economy—Nomura chief economist Sonal Varma’s GDP growth estimate of –0.5% for 2020 versus 5.3% for 2019 pretty much tells you the story. What businesses need today, in terms of support, is some liquidity because their cash flows are drying up, and meaningful revenues, for most, aren’t likely to come in for another six months at the very least. Given this, they also need some extra time to pay back their dues without being declared defaulters.

The second ask has been addressed. The Reserve Bank of India (RBI) has asked banks to allow borrowers with a term loan a three-month repayment holiday—and spared banks from treating the non-payment as a default. As a practice, a moratorium is a bad idea, but these are unprecedented times, and given the dire straits industry is in, some forbearance is justified. The better way to have done this, though, would have been to allow banks to use their discretion to decide which companies really need the break, because not everyone does. At the end of the day, banks, too, are running a business. Now there is a clamour for a six-month repayment holiday, and it is no doubt a valid ask. But, again, not every company needs to delay repayments, many can afford to pay on time.

The demand for more liquidity is more difficult for RBI to fulfil because although there is a good amount of money—some Rs 4.5 lakh crore—in the system, it is not going into loans.

Given how shabbily corporate India has treated banks over the past two decades, lenders have every right to be risk-averse—especially, when there are, on average, 16 ratings downgrades a day. Indeed, given the track record of ratings agencies, banks are justified in not buying anything but top-quality paper; if mutual funds, and other investors have bought junk, that is their funeral.

Banks are not charitable institutions, and cannot be expected to pay for the sins of others. Certainly, not for the sins of real estate developers. Financial sector veteran Deepak Parekh believes real estate developers need some assistance. The fact is that most developers have dug their graves by over-paying for land and holding on to inventory for years, rather than dropping the prices. They must pay for their greed, and do not deserve any special dispensation. The few developers that played by the rules, and cut their coats according to the cloth, have done well for themselves; there are some fine specimens in the listed space.

Real estate prices in this country have always been highly inflated—and we all know why. The many spreadsheets on how affordability has improved are, to say the least, meaningless. The fact is homes are unaffordable for most; it is time prices fall, and Parekh is absolutely right in suggesting that builders drop prices and push out the inventory. However, a 20% fall in prices isn’t going to be enough to convince prospective buyers at a time of massive layoffs and job cuts. If the current situation is comparable to the Great Recession of the 1930s, even a 50% drop will stimulate demand only at the margin. But, if the errant developers choose not to pare prices, it is the banks that are going to have to write off the loans. It is time, therefore, that they pushed builders to sell the land and inventory, and recover their loans. Better to take a hit, if needed, and move on than to block capital by restructuring the exposure. That capital can be used to lend to more deserving candidates.

As this paper has been suggesting for about four years now, transfer the stalled and incomplete projects to the stronger developers, and let them complete these; banks would be more than willing to lend to good promoters. Once the prices come down, the circle rates can be adjusted, and stamp duties, too, will come down. There is no need for special concessions from state governments. Parekh says the government must be helpful this time around because real estate creates thousands of jobs in the unorganised sector. That is true. But, the fact is, governments have been more than helpful—banks were told to restructure real estate loans post the financial crisis. However, despite this largesse, many of the players failed to mend their ways, and so, do not deserve a second chance. There cannot be a second restructuring. In any case, loans cannot be restructured for just one sector, that would be unfair; companies must make the best of the three-month repayment moratorium.

The fact is that banks are going to see a lot stress this year because only the toughest businesses are going to make it. And so, capital must be used sparingly, and only where chances of the unit surviving are high. RBI is already facilitating the purchase of corporate bonds by banks via the TLTRO—and may put out more than the `1 lakh crore announced. If you are a top-grade developer, you stand a good chance of getting some of this. If you are not, too bad.

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