Relief for real estate sector a credit negative: Moody's

Moody's Investors Service said on Thursday the Reserve Bank of India's (RBI's) revised asset recognition norms are credit negative for Indian banks.

On February 7, the central bank loosened asset quality recognition norms for Indian banks by allowing them to not classify real estate loans as restructured for one year if a project is delayed for reasons beyond the real estate developer's control.

"The measure is credit negative for Indian banks because it will defer the recognition of such loans from real estate sector, and by extension appropriate loss provisioning against them," said Moody's in its latest credit outlook report.

Property developers will have an additional year to address their funding issues before the banks have to classify a loan as restructured.

"However, while this will alleviate near-term asset quality risk to the banks from the real estate sector, it will not address the credit issues facing real estate developers."

Developers are facing funding challenges because non-bank financial institutions (NBFIs), the key lenders to the sector, are facing funding challenges of their own.

Property sales have also slowed, resulting in a high stock of unsold inventory. Tight funding conditions are straining developers' ability to complete projects and by extension their solvency.

Among the banks, said Moody's, Yes Bank and IndusInd Bank have the greatest exposure to real estate sector and their asset quality is consequently vulnerable to the credit issues facing developers.

In India, principal repayment on loan to property developers typically starts two to three years after the loan has been disbursed.

In the interim period, developers are only required to pay interest on the loan. Under the new guideline, banks can extend the principal repayment period by one year if a project is delayed because of reasons beyond the developer's control.

The RBI's revised asset recognition norms will not apply to the NBFIs who are among the largest lenders to developers.

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