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."
"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."