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Budget moves, credit lifeline yet to fire up the realty sector
The Economic Times  |  October 15, 2019

Shilpy Sinha & Kailash Babar Mumbai

Major measures announced by the government in recent months to restore credit lifeline to non-banking finance companies (NBFCs) and pull the struggling real estate sector out of its slump have not yet had the desired effect due to delays and regulatory uncertainty, industry and finance experts have said.

 

A new fund to provide last-mile loans to complete real estate projects has not yet taken off while banks are reluctant to use the partial credit guarantee scheme announced by the finance minister in the July budget to push more loans to the beleaguered NBFC sector.

 

Realty industry insiders and executives warn that the government should move quickly to set up the Rs 20,000-crore distressed fund that will provide loans to stuck or incomplete projects to avoid large-scale failure.

 

In September, the government said it will provide Rs 10,000 crore and raise another Rs 10,000 crore from other investors including private equity and sovereign funds and the Life Insurance Corporation of India (LIC).

 

But the conditions under which the money will be utilised and the delay in raising it from the private sector could jeopardise the whole scheme and worsen the slowdown in real estate, experts said.

 

For instance, the fund is supposed to invest only in projects that are networth positive and which have not yet been referred to the bankruptcy courts.

 

Real estate consultancy Anarock estimates that this will benefit 2.5 lakh housing units out of the approximately four lakh units that are incomplete for want of cash. But since many of these projects are in dire straits, the purpose of launching the fund will be defeated if it does not start investing quickly.

 

Last mile financing normally refers to funds that are provided to projects that are more than 60 per cent complete with the aim of quick completion. Since the fund is not yet operational, many of these projects will be forced to go bankrupt defeating the government’s purpose, experts said.

 

“The projects that would get support needs to be identified based on merit and predetermined criteria. This is expected to be time consuming and therefore the government needs to set up a task force immediately as suggested by us earlier as delay would go against the idea of helping homebuyers,” said Abhay Upadhyay, president, the Forum for Peoples Collective Efforts (FPCE).

 

Rating agency ICRA estimates that the government will face challenges in raising the Rs 10,000 crore from private sector and other outside investors. “Given the prevailing macroeconomic weakness, both domestically and internationally, investor ability and appetite to contribute to the fund remains to be seen,” said Mahi Agarwal, assistant vice-president at ICRA.

 

PARTIAL GUARANTEE SCHEME

 

The government faces a different problem in implementing the partial credit guarantee scheme for NBFCs announced in the budget. The measure was supposed to ease the liquidity crunch and provide a cushion to banks who may be wary of lending.

 

Finance minister Nirmala Sitharaman said that banks would buy assets of NBFCs worth upto Rs 1lakh crore and that the government would absorb losses of up to 10 per cent of such assets purchased. It stipulated that assets purchased should at least have an ‘AA’ credit rating.

 

The scheme has had little impact as assets with credit rating of AA are easily purchased by banks without any credit guarantee. The scheme has also been affected by norms in the existing RBI guidelines on loan sell-down, rating requirement and loan origination period.

 

Another reason for the failure is that loans originated by NBFCs upto March 31, 2019 are only considered, restricting the scheme’s scope significantly. RBI’s securitisation norms require a minimum holding period of six months in case of loans with an original maturity of two years and above. With the scheme kicking in from August, loans originated upto February 2019 were eligible for direct assignment to banks. But in a tight liquidity scenario, a major chunk has already been securitised.