One Time Restructuring Of Loans: Charting The Path For Indian Real Estate’s Revival

The outbreak of Covid-19 has triggered widespread economic and social disruptions in India, perhaps the largest economic shock the country has ever experienced. To put the impact in perspective, the International Monetary Fund (IMF) has projected a sharp contraction of 4.5 per cent for the Indian economy in 2020. This decline will be a historic low and considering that the economy was already slowing with 3.1% GDP growth before the pandemic, the revival trajectory remains an unknown path without a definitive timeline, taking note of the unpredictable nature of the circumstances.

Indian Real Estate has also felt an equal measure of the adverse effects of Covid – 19. The sector, already grappling with the impact of changing regulations, muted demand and liquidity concerns, was gearing up for a fresh start in 2020 - with affordable housing widely identified as the flagship segment to boost change in fortunes. However, the Covid – 19 crisis has only added to its existing woes - kindling changes in consumer preferences, labor shortages, plunging sales, piling inventory and worsening an already severe liquidity crisis. The situation is even more grim for small to mid-size players in the industry, who are facing major difficulties to adjust to changing business practices, managing cash flows and evolving new strategies to sustain businesses, which is now expected to lead a new wave of consolidation.

Being the second largest employer after agriculture and one of the principal contributors to India’s GDP growth, the health of the Real Estate sector has vital socio-economic implications. All the more, the industry has strong linkages and provides support to 250 other ancillary industries, including core industries such as steel and cement. Hence, Indian Real Estate today requires considerable handholding at this point of time to ensure adequate support to one of the strongest pillars of the country’s economy.

Over the past few months, the Reserve Bank of India and the Monetary Policy Committee have undertaken several measures to contain the economic fallout caused by the pandemic and infuse liquidity in the already distressed economy. The RBI on August 6, 2020, permitted one-time restructuring of loans for micro, small and medium enterprise accounts and borrowers, a move intended to ease debt strains on companies and lenders. A loan restructuring scheme helps borrowers address immediate revenue losses by giving them flexibility to delay repayment of interest or repay loans at easy terms and conditions. For the banking institutions, it will help curtail Non-Performing Assets (NPAs) which according to the RBI’s Financial Stability Report, are estimated to rise to 12.5 per cent by March, 2021, owing to the economic distress caused by the pandemic.

While the intent of the apex body is noteworthy, extending one-time restructuring of all loans to real estate is the need of the hour to revive the sector and provide much needed respite to the allied industries. According to an internal survey conducted by CREDAI MCHI, there has been an 85% decline in housing sales and 98% percent decline in new launches in MMR region, during the April to June quarter of FY 20-21, adding to the heightened liquidity crises in the ongoing period.

With stalling of construction activities due to liquidity crunch causing concerns for the sector, one-time restructuring of debt will help developers seek fresh credit for maintaining routine expenses and ensuring timely completion of projects. This calls for a win-win situation for both home-buyers, who can get their possessions on time and for the lending institutions, who can avoid clogging of funds and loan defaults.

As the entire real estate ecosystem awaits RBI’s announcement on the loan moratorium and the modalities around restructuring of loans for both corporates and individuals, it is crucial for us to see how the decisions of the apex bank will set the momentum of recovery for the Indian Real Estate sector. However, the underlying hope is that the regulatory body will consider providing further financial assistance in the form of OTR, thereafter enabling its growth and rallying in terms of spur in demand and greater liquidity by the next fiscal.