India has seen two stages of growth since year 2000, the capex led growth from 2002-2009 and the credit led growth from 2009- 2013. Post that, there has been a slowdown resulting from the fight against the cash economy brough in by demonetization and GST.
In recent times, most of the institutions have either slowed down lending, completely stopped advances to real estate or have been mired in their repayments to banks and investors. Their lending philosophy was predominantly based on the project cashflows of the borrowers and the high sales velocity in the projects hypothecated, supported by a favorable economic environment.
The current economic scenario is one wherein there is uncertainty about future and buying a house is not on the priority list of the millennials which has dried up the demand funnel. Also, the recycling of debt including the working capital requirements has stopped completely. This has created a unique situation in the Indian RE market wherein the so called good projects and developers are also facing liquidity challenges, there is a negative social impact, there is a stress on Bank/FI portfolio due to delayed or non-repayment of debt and there is an increase in customer grievances.
Classifying the credit policy of all real estate lenders as faulty and high risk is not justified. Instead of fault-finding, I strongly feel that the entire ecosystem must come together to pave the way for a smooth and comfortable journey to the growth highway.
A revised restructuring policy for real estate from the government in conjunction with the lending institutions will go a long way in bailing out the sector which accounts for the largest pie of an Indian’s income basket.
On the lender’s side, after a strong lending phase, institutional liquidity has got squeezed so much that half of the tap outflow has dried up. A one-time restructuring of real estate exposure of financial institutions will help them in maintaining the asset quality of their portfolio, give them an opportunity to tidy up their books and keep capital intact.
On the developers’ side, although it is a systemic problem, yet even the good developers are finding it difficult to either raise funds at feasible terms or even monetize their assets. The restructuring exercise will help them in project completion and meet delivery timelines. Infact I strongly advocate that the focus of a revised restructuring policy has to be project completion and not the bailing out of developers.
On the homebuyers’ front, there is nothing more important than project completion and getting the possession of the house. I understand that even if the customer repayment demand is made aggressive in those stuck projects wherein debt restructuring has been done, the homebuyers will comply.
Current situation demands a one-time restructuring of debt on a selective basis wherein projects facing stress in near future, good projects with slow sales, projects having a social impact or the ones stuck due to regulatory issues can be provided longer repayment horizon.
The entire project restructuring exercise will also have a strong social impact. There are many stuck micro-markets like Noida, Ambernath-Badlapur, extended belts of Chennai etc. where a reinforced real estate activity will help build middle-class communities and social infrastructure will also come up, improving the quality of life and unclogging the metropolises effectively.
Unless the real estate sector comes out of this conundrum, the Indian growth story will remain incomplete.