Budget 2021

Re-instill confidence in lending to real estate

Renu Sud Karnad | Updated on January 23, 2020

The trust deficit is clogging the flow of liquidity to where it is needed the most. Re-instilling confidence in lending to the real estate sector is the need of the hour. There is no denying that there are pressing issues facing the real estate market and timeliness of action is key to prevent further damage. There are developers who genuinely need last-mile funding. Many are being denied funding in an environment that has become wary of lending to the sector and it would be unfair to pin all the blame on developers only.

The Government has already taken the first step of setting up a ₹25,000-cr AIF fund for stressed projects. What is important is disbursing the funds quickly to the projects that meet all the conditions.

To overcome the crisis of confidence, lenders should be allowed a one-time restructuring of certain real estate loans — particularly for stuck projects where building approvals have been delayed. This exceptional regulatory treatment was permitted by the RBI in 2008, which helped revive sentiment. This in itself would enable last mile funding even to assets that have slipped owing to tight funding conditions. Some of the projects where the unit value of above ₹2 crore in Mumbai or above ₹1.5 crore in other metros is common, will not qualify under the above mentioned AIF and so this special dispensation can help.

Securitisation market

In the current environment, no lender is going to touch an account that is already an NPA unless there is a special dispensation. We also need to look for financing options for housing. We have always talked about the need to develop a strong and liquid securitisation market. This helps in recycling of funds without the originator having to provide capital against the assets.

Over the past one year, securitisation transactions under the PTC structure have increased sharply post the NBFC crisis. In the present times, securitisation is being used as a tool to meet maturing liabilities, and in many cases, fresh assets are not being created which is essential if a mature securitisation market is to develop. We need to explore options of cross border securitisation. Mortgage assets have historically had low NPAs and there are so many international investors craving for long-term, safe but higher yielding assets.

Clearly, the sweet spot today is the affordable housing segment, and this segment has also been hugely incentivised by the government. On the tax front, the Centre should consider a higher exemption limit (on principal and interest) of say ₹7.5 lakh for all buyers who buy a house during FY 20-21. Such a bold step could spur unfulfilled demand and sales could see a robust jump. This would materially incentivise homebuyers looking at buying units up to ₹1.5 crore to ₹2 crore.

Cuts in individual tax rates will enhance the disposable income and in turn augment individual spending, positively impacting the middle class whose major source of income is from employment. To boost rental housing, 100 per cent interest on home loans, as was prevalent a couple of years ago, should be allowed as a deduction, for the second and third home, provided that (except for the self-occupied home), others are rented for a period of nine months during the year.

The Finance Minister must be lauded for actively addressing the supply side issues through a series of positive announcements across various sectors such as infrastructure, automobile, real estate, etc. India largely being a domestic economy will require consumption and investments to pick up for economic growth. And I am sure the upcoming Budget will focus on these two aspects.

The writer is Managing Director, HDFC Ltd

Published on January 23, 2020

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