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Home prices may soften as RBI acts tough on realty NPAs

Postby anuj_bansal » Thu Nov 29, 2012 5:45 pm ... tml#toptag

This is something that the Reserve Bank of India should have done much earlier. Still, better late than never. The Economic Times reports that RBI has rejected the request of banks that they be allowed to restructure real estate loans without providing for likely losses if the loans go bad. A loan is said to be restructured when the original terms of the agreement (interest rates, tenure) are diluted to enable troubled borrowers repay loans. This also helps banks recover to recover a good chunk of the funds they have lent.

This RBI move is welcome for two reasons. One, home prices could soften (or at least the steep rate of climb could be arrested) as banks put pressure on property developers to repay loans. This in turn could force builders to push up sales by dropping prices if need be. Second and more important, by bringing greedy realtors to heel, the RBI may also be able to rein in a key contributor to inflation: soaring property prices.

The RBI stance is marked contrast to that of Finance Minister P Chidambaram, who last week is said to have told banks to help out builders of residential projects, facing a cash crunch. This could also set the stage for a fresh conflict between the RBI and the Finance Ministry, which have been publicly sparring over interest rates.

When property prices crashed in 2008-09, banks should have ideally forced builders to sell property at prevailing rates and repay the loans owed to banks. Instead, with permission from RBI, banks rolled over the loans, by allowing builders to keep paying interest even if they were unable to repay the principal amount. Had the RBI not given this leeway, banks would have to set aside huge provisions for the doubtful loans, which would have then dented their profits. The central bank had little choice but to give this concession, given the backdrop of the raging global financial crisis which was hurting the Indian financial sector as well.

But the move set a bad precedent. Knowing that it was as much in the interest of banks not to let the loans go bad, developers held on to high prices, undeterred by slowing sales as they were in no hurry to repay the loans. Even now, many banks resort to ‘evergreening’ of real estate loans (giving fresh loans to repay the old loans) so that they don’t have to make provisions which would hurt their profits and thereby valuations.

There are two more things that need to be done to ensure that unrealistic real estate prices don’t create distortions in the economy.

One, there have to be rules in place to ensure that builders have a good chunk of their own funds (equity) tied up in the project. According to a presentation made by Corporation Bank to the finance ministry last week (as reported in The Economic Times), builders are showing advances collected from purchasers as their equity contribution. With the rest of the funds arranged from banks, builders have little to lose in case the project is delayed.

Second, the government needs to expedite the setting up of a regulator for the real estate sector. Stringent penalty clauses in the agreements with home buyers will put additional pressure on the builder to complete projects on time.
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Re: Home prices may soften as RBI acts tough on realty NPAs

Postby » Thu Nov 29, 2012 5:55 pm

Home prices softening up in Delhi NCR?

In no way will this RBI move impact Faridabad, Noida, NE and Gurgaon property prices. There's such a huge demand for property in these areas.

The only announcement that can soften prices a bit here is the grant of additional FSI.

I'm an investor and have turned real estate consultant. My aim is to educate investors about how builders and brokers operate. I also bring investors up-to-speed with the current trends in the Faridabad and Gurgaon real estate markets.
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Re: Home prices may soften as RBI acts tough on realty NPAs

Postby anuj_bansal » Thu Nov 29, 2012 11:45 pm

I really doubt that RBI will force the banks to do this due to the political pressure.

But if RBI is able to force this, property prices will surely decrease, be it any place in India.

Currently builders hold back the sales if the prices slump and then re negotiate the bank loans on lower interests. When the prices go up they end in win win situation since the interest rate is lesser and also that they sell the property at higher rates.

If this move is taken by RBI, banks will be forced to attach/sell the collateral's given by the builders, in case they default on payments. If builders see this risk, they will surely not hold the sales (to pay the money to the banks) and the prices will come down.

Of course I know this is like a dream, but RBI has taken investor friendly steps in the past as well. So lets hope good sense will prevail.

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