Builders now rely on banks for completion of projects

Real estate developers are making a beeline for bank funds, with traditional sources

of funding like private equity and the stock market
drying up in the current slowdown.
Realty, which has also taken a huge hit in the slump, accounted for the largest chunk of non-food bank credit disbursed in the previous fiscal (FY09). Developers have used most of these funds to meet working capital requirements.

“Fresh credit offtake is on account of project financing,” said an official with a large foreign multinational bank on condition of anonymity. He added that builders were facing a cash crunch, with receivables from residential projects under construction getting blocked. Demand has been slowing down and buyers are deferring payments till possession. Thus, banks are helping real estate companies complete their projects, sell them and pay back loans. Completion of projects will, in turn, help developers liquidate their inventory of unsold properties and generate cash flows to meet operating costs.

Reserve Bank of India (RBI) data shows that banks’ fresh loans to real estate companies registered a 61.4% growth to Rs 34,500 crore in the 11 months of the fiscal, compared to 26.7% growth in the corresponding period last year. Almost half of these new loans were raised between December 2008 and February 2009. Further, RBI has reduced the risk weightage on real estate loans to 100% from 150% in the latest monetary policy, supporting the banks’ initiative.