Credit rating model planned for residential projects

K Ram Kumar Mumbai | Updated on July 02, 2014

Cost factor Real estate project developers often depend on high-cost informal sources of financing.

To open up formal channel for financing developers; move will bring down their cost of funds

Can the price of the home you want to buy come down if the real estate developer gets a bank loan based on the credit rating of his residential project?

If the recommendations of a committee appointed by the Finance Ministry to devise rating mechanism for builders are anything to go by, this could be within the realms of possibility.

The National Housing Bank (NHB), in association with credit rating agencies Crisil and Care Ratings, plans to develop a credit rating model for housing projects based on the track record of the developer, his project execution capability, and transparency in legal approvals.

As access to bank finance is hard to come by, real estate project developers depend on high-cost informal sources of financing, according to Revati Kasture, Chief General Manager & Head of Research and Grading Services, Care Ratings.

If the proposal to grade housing projects on a scale of 1 (lowest rating) to 7 (highest rating) is accepted by the banking regulator and the Finance Ministry, then banks will have more comfort in taking exposure to such projects, she said.

The rating may not only open up a formal channel of financing for real estate developers, but will also bring down their cost of funds. Developers, in turn, could reduce the prices of the homes they sell.

Further, the rating could also help home buyers take informed decisions.

Interest rate concession

The committee headed by the former chief of National Housing Bank (now Whole-time Member of the Pension Fund Regulatory and Development Authority) RV Verma has also recommended that home buyers should get loans from banks and housing finance companies at concessional interest rates if they buy a house in a residential project that has been rated.

However, Kasture said lenders have little scope to reduce interest rates further as they currently charge home loan borrowers almost rock-bottom interest rates, either at their minimum lending rate (base rate), or at a small mark-up to the base rate.

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Published on July 02, 2014
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