The improvement in the World Bank Doing business rank is just a statistic, but sounds good in the global context. But what has been remarkable about NDA-2 is that there has been a continuous attempt to address specific issues periodically so as to provide the right cure. This is important because the problems are often at the ‘micro level’ which requires directed steps where ‘macro policies’ are not quite potent. The decision taken to create an Alternative Investment Fund for Rs 25,000 crore to address the requirements of the real estate sector is commendable as it strikes at the core.
What the announcement made by the Finance Minister Nirmala Sitharaman is that there will be a fund set up where the government puts in Rs 10,000 crore which is supplemented by the State Bank of India (SBI), Life Insurance Corporation (LIC) and other institutions to add up to Rs 25,000 crore. This fund will be used to finance incomplete real estate projects which are around 1600 in number involving around 4.6 lakh units. The difference is that even where the builder is considered to be a non performing asset (NPA) or has been taken to the National Company Law Tribunal (NCLT) will also qualify for such loans which will help to complete the projects. This will have a dual benefit of helping the builder as well as the consumer, i.e. the buyer of the unit as these many units have been held back due to the funding issue.
The problem really started last year when the non banking finance crisis (NBFC) crisis blew up and became a contagion. Real estate is considered to be a sensitive sector for banks which are hence constrained in growing this loan book. This opportunity was leveraged by the NBFCs including also the housing finance companies (HFCs) in the form of builder finance.
It worked both ways as the real estate sector held promise with a lot of emphasis being put on affordable housing by the government as well as the boom expected in the commercial real estate segment on the back of the explosion in retail prophesised. However, with this scenario not materializing and the NBFC model of financing getting exposed, there was a problem of funding for these projects which got stalled as the builders were not able to procure finance.
With Real Estate (Regulation and Development) Act 2016 or RERA and goods and services tax (GST) being two big reforms affecting this segment which brought in more discipline, the issue of servicing of debt also became a problem.
The present decision to open a new window for finance is hence quite timely and should address to a large extent the woes of this segment. The issues which do remain to be asked are the following:
First, when would this fund become operative as it would take time to set up a new institution that has to also have the expertise in choosing the projects to lend to? This will be equivalent to the issue of credit evaluation of projects which requires expertise.
Second, would all the projects that are stalled be provided with finance or would it be only those that are higher up the pecking order which will qualify for the same.
Third, relates to the cost of such loans that will be provided to the builders. This is important in terms of the viability of such loans from both the sides.
The AIF would need to finally earn a positive return on capital at the end of the day as it involves LIC, SBI and other investors which would be looking at positive commercial returns. The borrower, too, would have not only have access to the loan but also weigh the cost given that these stalled projects have the overhang of debt that has to be repaid to the banks/financial institutions (FIs) as well as support completion of the projects.
Therefore, this would have to carefully designed to ensure that both sides of the deal find the exercise compelling. Ideally, support from a private equity (PE) investor would be welcome as that would also bring in some degree of expertise required to handle such lending. Intuitively one can see that there will also be strong backward linkages to the related sectors like steel, cement, electric equipment, power etc. where demand is generated as these projects get completed. However, this would be over a period of time and the number of 4.6 lakhs units may not be very significant in the broader scheme of things.
The important thing about this measure is that if this does work out well—and there is no reason to suspect that it will not, a similar model can be used for other sectors too which will be beneficial in terms of providing relief.
Such schemes which are similar in concept have been used also for sugar where mills have been enabled to pay the farmers for over dues on cane procurement. In fact, wherever such links exist between three fully involved parties—like farmer, mill and bank in case of sugar or builder bank and developer for real estate any break in the chain will lead to complications.
This initiative of the government will take time to fully work out which can be between 6-12 months. But it will definitely be positive for all related parties and hence also encourage other builders in this segment. For buyers of property this will be a relief. So far, the focus has been on lowering the interest cost on home loans to make them more affordable. By ensuring completion of projects that have been stalled due to absence of funding a major cog has been sought to be addressed. This approach is indicative of the fact that the government would henceforth be getting into the micros to remove impediments and revive growth, which is a practical way to go about.
(The writer is chief economist, CARE Ratings)
Updated Date: Nov 08, 2019 19:17:56 IST