Why India's builders need better liquidity support from govt

India's real estate sector has been continuously reeling under the impact of liquidity starvation, much before the coronavirus pandemic came upon the sector like a bolt from the blue, further exacerbating the situation. 

While a multi-year demand slowdown and over-leveraging has begun to scare even the top players in the market, the imminent non-banking finance sector crisis that started in 2019 has made borrowing absolutely difficult for developers, particularly the small and mid-range ones.

Recall here that the annual requirement for construction finance is Rs 60,000 to Rs 70,000 crore. But after the NBFC crisis, not many builders have the option to borrow. The pandemic has only worsened the situation.

With the looming virus threat in 2021, chances of any recovery from all those multiple shocks might have gone downhill had it not been for the various support measures announced by the centre and the reserve bank in the aftermath of the pandemic throughout 2020.

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Aside from keeping interest rates stable by maintaining the repo rate at 4%, the RBI has also allowed loan structuring opportunities for small and medium businesses under its restructuring 2.0 announced in May 2021.

But one must also take note of the fact that the banking regulator has also been issuing clear directives to lenders to steer clear of risky investments, by putting in place more stringent lending norms. Consequently, not much has changed for small and medium scale builders on the ground.

In view of the ongoing crisis, industry body CREDAI has written an open letter to Prime Minister Narendra Modi, demanding urgent measures to revive the ailing real estate sector, the second-largest employment generating sector in India after agriculture. Note that over 52 million people are employed by realty in India.

While stating that the current situation is much like the global meltdown of 2008, the CREDAI has urged the government to offer a one-time restructuring of loans to help builders weather the storm, something that the banking regulator has done to help industries deal with the havoc wrecked by the global economic crisis in 2008.  

The industry is also of the view that such restructuring be allowed for all accounts that were standard as on December 31, 2019.

Additional help for the sector in the form of institutional funding would also be an important way to revive a sector that has the potential to drag the economy out of the woods. Recall here that SBI Emergency Credit Line is already there to help builders tide over the crisis. CREDAI is of the opinion that more banks and NBFC be allowed to offer this facility.

Enabling the sector through improved liquidity support is extremely important at this juncture since buyer sentiment with regard to residential housing is quite positive, a phenomenon that has taken a severe beating between 2014 and 2019 because of numerous instances of developer insolvency and project delays, especially in the NCR market.

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In a consumer survey by Housing.com in the September-December 2020 period, 43% respondents voted for real estate as their preferred asset class. Fixed deposits and stocks were the second and third most popular investment choice among the respondents, respectively.
 
On renewed support, the sector might indeed come out of the woods sooner than later. Early signs of this are already visible in the fact that a total of 21,839 new units were launched in the eight housing markets of India during Q2CY21, showing an increase of 74% year-on-year, data available with PropTiger.com shows.
 
This is also indicative of the fact that builders in India are ready to go the extra mile to tap on the positive buyer sentiment and are taking up new projects despite the hard time at hand. 

This may be the time for the government, which has on numerous occasions iterated the significant role real estate plays in shaping the overall economy, to come forward and walk the talk by offering more funding avenues to cash-hit builders in India.

(The views are expressed by Mr. Vikas Wadhawan, Group CFO, Housing.com, Makaan.com & PropTiger.com)