subject: Banks want extra checks on loans to real estate sector [print this page] Banks want extra checks on loans to real estate sector
The ongoing bribes-for-corporate loans scam being probed by the Central Bureau of Investigation (CBI) and other agencies could lead to banks revamping their internal processes while giving loans to the real estate sector.
While many banks have in-built mechanisms to ensure that any loan given to property developers is cleared by headquarters because such debt is treated as exposure to a sensitive sector, an extra sanctioning mechanism may be put in place, a senior Mumbai-based banker said.
The so-called nexus between a few bankers and realty firms doesn't appear to be new, particularly in the wake of cheap and easy loans that developers have been raising, often to buy land or even for undefined "general corporate purposes" in recent times, said bankers and property analysts.
In the offing could be tighter scrutiny mechanisms, said the first banker, who didn't want to be identified.
"Developers almost never default on their loans," said the chairman of a public sector bank, who too didn't want to be named. "Their books are clean and serviced regularly. We cannot do much against our good customers..., but we can heighten our vigil on what happens to the money."
According to Reserve Bank of India (RBI) data, Indian banks' exposure to the real estate sector in the year ended March rose 10.4% to '5.8 trillion from the previous year--17% of total advances. For new generation private sector banks, this is higher at 26.1%. Public sector banks, which account for at least 70% of the industry, have lent 14.3% of their total advances to this sector.
RBI recently capped the loan to value ratio for housing loans at 80%. It also upped the risk weight to 125% for loans of '75 lakh and above.
Housing finance companies, under National Housing Bank norms, are allowed to apportion 80% of their loan portfolio to retail mortgages or home finance, and 20% to institutional lending to developers, which doesn't include buying land.
Malpractices within the real estate sector, involving banks--that occur while availing of loans for projects, but are diverted to buying land parcels--would be strictly monitored, said bankers.
There are instances in which loans are sought for "project finance" at 11-12% by reputed developers for a housing project where the payment is linked to construction and disbursed on a piecemeal basis.
The developer typically brings in 10% of the value, with a bank loan sanction for the entire amount. The developer avails of the money upfront or in two tranches though the disbursement should be made in multiple parts, based on the project completion schedule.
Various banks are now in the process of checking such accounts, and may take action against officials involved if malpractices are found.
Bulk purchases can also be a source of bad practice. If 100 apartments are sold to a set of investors who haven't taken loans or conveyed the property titles in their own names because they are looking at quick exits, the developer can get home loans against them, said one of analysts mentioned above.
Another route by which corporate loans can be obtained to buy land is when a developer securitizes his sold stock or inventory, against which the bank offers a home loan for the full amount.
Among the names of real estate and infrastructure firms that have been named by CBI are DB Realty Ltd, Sunil Mantri Realty Ltd and Lavasa Corp. Ltd, the ambitious township project of Hindustan Construction Co. Ltd (HCC).
Lavasa has a consortium of 10 bankers that facilitated debt syndication, including Money Matters Financial Services Ltd, which closed three deals for them, said its president Rajgopal Nogja. Money Matters has been accused of brokering loans in exchange for bribes.
The company is associated with Lavasa on commission or brokerage basis, to the tune of 1-2% of the transaction value, HCC said in a statement.
Money Matters was also an adviser during the sale of HCC's 247 Park at Vikhroli, Mumbai, in which IL&FS Milestone Fund acquired a 74% stake.
Sunil Mantri, chairman of the eponymous realty company, said Money Matters facilitated a '115 crore loan from LIC Housing Finance Ltd this year. Besides paying the brokerage fee, he also provided 300% collateral for the loan.
"Most landlords in outright land transactions ask for the entire amount upfront, which is when many developers resort to debt syndication. When banks evaluate a project, they decide on the kind of money that they would lend depending on its status," said a Bangalore-based property consultant. "This is where most of the cost escalation happens, where a bit of the money goes for construction finance while the bigger chunk goes in to buying land."
Banks and housing finance companies are, however, not worried about the asset quality of loans they have given to the developers.
SBI holds the largest mortgage portfolio of about '87,125.16 crore, or 13.79% of its total asset base, as of March. In this, commercial real estate exposure stood at '13,440 crore, as per the bank's annual report. A senior official from the bank said this exposure is healthy and there is no cause for concern.
A Housing Development Finance Corp. Ltd spokesperson said, typically, 10-14% of its loans are given to developers and the company has "never had to write off a loan given to a developer".
