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representative imageSeveral high-street banks will give up their first claim on assets and cash flows in favor of new financiers, who are taking steps to revive stalled housing projects that have left lakhs of home buyers in limbo across the country.
CEOs of banks and senior industry executives discussed the matter a week ago, with many willing to give up their rights to new lenders offering priority financing.
At the end of May 2022, around 4.80 lakh units (launched in 2014 or earlier), worth over ₹4.48 lakh crore, were stuck at various construction stages across the top 7 cities, said a report. Anarock, a leading real estate services company. A banker said, the value of stalled projects in the country would cross ₹5.5 lakh.
“We have nothing to lose in terms of credit risk for most of these half-completed real estate projects classified as NPA (Non-Performing Assets). Banks generally give up their first right on cash flows. We have been reluctant to do so. This is changing. We may miss out if we delay now. This is the right time as the real estate market is picking up,” a senior banker aware of the discussions told ET. This topic has also been discussed with the government.
According to ANAROCK, the number of housing inventories in the top 7 cities has come down to just 20 months by the end of Q1 2023—the lowest in the last five years—from 42 months in Q1 2018. Inventory (measured in months) indicates how long it will take to sell the current unsold housing stock in the market at the current absorption rate. An inventory overhang of 18-24 months is generally considered healthy.
Since most banks with outstanding loans for stalled projects are reluctant to lend more, the completion of such projects is largely dependent on fresh funds coming in from new lenders. Providers of fresh capital, such as owner’s fundmanaged by SBICAP VenturesOnce home buyers start paying off the balance amount, it is understandable that they would demand first right on cash flow.
“In fact, it is the precondition that the new lender insists on. Without it no deal takes place. With money stuck over the years and project costs rising, banks are beginning to realize that retaining the first right won’t help,” said another. Person “While surrendering their first claim, banks would probably agree to projects where cash flows are expected to be high,” he said.
Of the stuck projects, the Mumbai Metropolitan Region and the National Capital Region accounted for 77% of the stuck or delayed units in 2022. The southern cities (Bengaluru, Chennai and Hyderabad) account for just 9% of the total.
Steps to restart stalled projects have largely originated from this Supreme Court The judgment in the Amrapali case, where incomplete work by the builder had put 40,000 residential home buyers in jeopardy.
In a landmark judgment delivered on July 23, 2019, the apex court had said that the real estate industry runs on buyers’ money, and in the case of Amrapali, the authorities as well as banks had failed to perform their duties.
The court directed the central and state governments to take appropriate steps to help home buyers who have been similarly duped. The SWAMIH Fund was announced four months after the Supreme Court verdict.
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