Developers looking towards RBI to revise lending amenities’
The severe liquidity crunch in the market though primarily resulting from a drying up of funds, is getting aggravated because of inflationary input costs and weak consumer demand.
With the RBI tightening policies around lending to the real estate sector, NBFCs and HNIs have been a source of funds for developers. With lending at rates as high as 18% – 21% these sources though available, have been expensive. In the light of the NBFC debacle, however, fresh funding is getting severely impacted. There is also mounting pressure on developers to clear debts. Both these factors are impacting deliveries.
With sales down 20% compared to last year, unsold inventory is mounting, prices are under pressure. This demand side dynamic is compounding the liquidity crunch situation.
With steel and cement prices on the rise, relief by way of controlling costs of construction, is also not available to developers. Delays in clearances and sanctions on plans – mean a ticking interest meter on borrowings for land purchase. All this, is pushing up the total project cost.
Government interventions to improve the liquidity situation by way of boosting demand and providing relief on mounting costs for developers, is the need of the hour
Steps to eradicate or reduce the risk factors associated with lending to developers
Financially prudent developers with a proven track record will be a safe bet for lenders. Making decisions based on a careful assessment of both, the product and geographic risk of a project, will lead to good investments. A shift to structured funding from the older model of vanilla funding will enable PE’s and investors, to mitigate risk in the current market situation. Basing funding decisions on visible cash flows will stand lenders in good stead. Engaging in short-term lending against long-term assets is what they must be cautious about.
The intensity of impact this problem can cause in the long run
The liquidity crunch in the market, the high input costs and the slow consumer demand is putting developers either under severe stress or out of business. In this scenario, there are already visible signs that the market is headed for a consolidation. Fewer large players with the financial might and expertise will bring more financial discipline to the sector and renewed consumer confidence.
In the current liquidity crunch situation, lenders are headed to be sitting on a significant amount of NPA’s which they will need to remedy. Multiple sources of lending will get streamlined to pave the way for a stronger private equity play.
There are already signs that the stressed NBFCs lending for mortgages are also being forced to cut back on their lending. The result of a reduction in the financing available for home buyers would be a further slowdown in the demand for housing which will impact jobs and the economy.