Banks reluctant to lend to realty sector

Banks reluctant to lend to realty sector
30/01/2018 , by , in News/Views

The share of bank lending to real estate sector has fallen sharply to 17 percent in 2016 from over 68 percent in 2013 as banks are reluctant to provide credit to this industry due to rising NPAs and lower profit in the property business, according to the Economic Survey.

The survey also expressed concern over rising non- performing assets (NPAs) of individual housing loan portfolios of public sector banks (PSBs) and housing finance companies (HFCs). “Rising NPAs, higher risk provisioning assigned to real estate sector and dwindling profits in the real estate sector, have made banks reluctant to lend to the sector.”

As a result, the share of bank lending for organized funding to real estate sector has dropped significantly from over 68 percent in 2013, to 17 percent in 2016,” the survey said. In funding for realty sector, the report said private equity (PE) funds and financial institutions such as pension funds and sovereign wealth funds have replaced banks as the largest source of this sector.

The share of PE funds and these institutions in real estate funding has gone up significantly from 14 per cent in 2013 to over 82 per cent in 2016. “On a cumulative basis for the 2013-16 period, PE funds have been the highest source of funding accounting for 57 per cent share, followed by bank lending with 34 per cent share, while the remaining 9 per cent is funded through FDI inflows,” it said.

Individual housing loan disbursements of PSBs and HFCs have shown an increase of nearly 11 per cent in 2016-17 over 2015-16. However, increasing nonperforming assets (NPAs) of individual housing loan portfolios of PSBs and HFCs is a cause for concern. On demand and supply, the survey said that residential launches across top 14 cities in India during the first half (H1) of 2017 fell to the lowest in past five years to about 58,000 units as per the National Real Estate Development Council (NAREDCO).

Housing sales fell to five years low of about 1,01,850 units during this period. While sales during H1 2017 were down by over 38 per cent compared with H1 2016, unit launches were down by over 56 per cent during the same period. “Though some recent reforms might have affected the residential market in the short term, these reforms helped in bringing down the unsold inventory levels from 8,88,373 units witnessed in April 2016, to about 8,07,903 units in October 2017,” the report said.

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