Banks seek higher cover on loans to realtors as prices fall

Pressure on developers to offer discounts is the main trigger

Banks, especially private ones, are asking for higher collateral from real estate companies while sanctioning loans, in view of softening property prices. Banks are now asking for three times the cover for their advances to developers, against two times earlier, executives in real estate companies said.

“I have heard they are asking for a cover of 2.5 times to three times in some cases,” said Lalit Kumar Jain, chairman, Confederation of Real Estate Developers Associations of India, and chairman of Pune-based Kumar Builders. “During these tough times, they should not have resorted to such a move.”

Axis Bank, for instance, has increased its cover on loans to developers from two times to 2.25 times this quarter. “It is just a safety margin,” said an Axis executive, who did not want to be named.

Such a move by lenders comes as developers are trying to boost absorption by giving discounts.

A senior executive in a Mumbai-based bank said developers have no option but to cut prices as sales are dipping. “In such a situation, we are better off asking them for higher collateral,” he said.

According to Amit Goenka, managing director and chief executive of Essel Financial Services, the financial services arm of Essel Group, banks which took a cover of 1.2 times or 1.3 times on the sale price are the ones who are asking for higher collateral. “As sale prices are soft, they (banks) have begun to feel that they need higher cover. There is no problem with those who took the same cover on construction costs,” Goenka said.

Public sector banks usually lend on land and construction costs, while private banks give loans on the sale value, he said. Essel Finance takes cover on the average sales price for the past one year.

The decrease in realty stocks in the past couple of months has also played a part in banks demanding higher collateral. Sales are indeed slackening. The recent launches in cities such as Mumbai have happened at a 15 to 20 per cent discount to market prices “Bankers are getting a little edgy since prices are stagnant in some pockets of metros such as Mumbai,” said Revati Kasture, head-research and grading, CARE Ratings.

According to realty research firm PropEquity, the Mumbai Metropolitan Region (MMR) — Mumbai, Thane and Navi Mumbai — saw a decline of 22 per cent in absorption. Chennai and Hyderabad have seen a drop of eight per cent and one per cent, respectively. Bangalore saw an increase of 17 per cent in FY2013. The Delhi-National Capital Region (NCR) area saw a marginal rise of two per cent in sales in FY2013.

The inventory pile-ups across NCR, MMR and Hyderabad have almost doubled in three years, said a recent report from realty research firm Liases Foras.

Financial firms such as Xander Finance have not increased collateral requirement due to stagnancy in sales. Amar Merani, CEO of Xander Finance, said: “We evaluate transactions on a case-by-case basis. In transactions which merit higher collateral, we get that and the commercial terms and security structure are adjusted according to the risk profile.”

STRUCTURAL PROBLEM

• The cover on loans to developers has gone up three times from two times
   
• Sagging property sales, likelihood of price cuts promoted the move
   
• New residential launches 15 to 20 per cent below market price
   
• Those who took 1.2 times or 1.3 times cover on sale price are asking for higher cover
   
• The drop in realty stocks has also changed perception towards realty loans