Over 40 percent of loans to real estate sector under some form of stress: report

Last Updated: Mon, Dec 02, 2019 22:05 hrs
Real Estate (Reuters image)

Mumbai: A latest finding by Anarock Capital has spelt the warning signal for banks and financial institutions lending to the real estate sector.

On Monday, the agency came up with a report saying that the total real estate sector loan equalled $93 billion. Of this only 62 percent were reported as "stress-free".

The report states further that of the remainder, 22 percent were under some form of stress but "there was a huge scope for resolution and certainty on principal recovery". The report does not state the whereabouts of interest recovery.

Assets that were under severe stress have been estimated at a whopping $ 14 billion. The major exposure of the stressed assets is likely to be borne by NBFCs and HFCs (housing finance companies), with the report stating that NBFCs & HFCs accounted for 66% of total loans while banks comprised of 34%.

The report quotes Shobhit Agarwal, MD & CEO at ANAROCK Capital as saying, "The 'stress' loan amount in real estate is not as bad as seen in other major sectors like telecom and steel."

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"For instance, the entire 'severe stressed' loan value in real estate is spread across more than 50 developers. In the telecom or steel industries, default by a single company alone equals a sizable portion of the overall stress in the real estate sector. Also, every real estate loan is backed by hard security, which is anywhere between 1.5 times to 2 times."

"Even if the loan is NPA, there is enough security for the lenders to get a significant portion of their money back. Even if defaulting developers decide to sell their real estate at a discount, there is enough margin for them to pay back," he adds.

"The report also suggests that HFCs accounted for the largest share of total realty loans equalling 38% followed by banks which comprised nearly 34% share while NBFCs had 28% (including loans given under trusteeships). Of these, banks and HFCs are much better placed with 70% and 65% of their lending book in a comfortable position. However, it also comes as no surprise that nearly 58% of the total NBFC lending is on a watchlist," adds the report.

Agarwal is further quoted as saying, "In retrospect, there has been continuous shrinkage of lending to Indian real estate in recent years by both banks and NBFCs/HFCs amidst non-repayment of some loan dues and NBFC crisis post the IL&FS default."

"One prime reason was that sluggish residential sales over the last few years completely dried up cash flows for many developers, resulting in unsold inventory pile-up and, thus, their inability to service their loans. Moreover, some developers have even filed for bankruptcy in the backdrop of stricter regulatory norms under RERA."