Realty revival package, not convincing

Madan Sabnavis | Updated on November 22, 2019

The AIF may revive economic activity and reduce NPAs. But it sends the wrong signals to developers guilty of malpractices

The ₹25,000-crore package for the real estate sector has been hailed as a panacea for a major part of its worries. As the package helps a select set of developers complete their projects — which were stalled primarily after being cut off from the financing channels due to slump in the sector and problems in the banking and NBFC segment — it prima facie looks positive. But this may be just a breather, not an actual cure for the challenges faced by the industry.

The scheme talks of the setting up of an Alternative Investment Fund (AIF) by the government, where ₹10,000 crore will be infused along with additional funds coming from the SBI and LIC — and probably sovereign wealth funds — which will sum up to ₹25,000 crore. The amount will be used to lend to around 1,600 projects which have approximately 4.6 lakh stalled housing units which remain incomplete.

Buyers needed

With this money, the builders can complete the projects and hence equilibrium will be reached. The AIF will include affordable and middle income group housing (where the value of a unit could be between ₹1.5-2 crore, depending on the location). The projects qualifying for the AIF would be those whose net worth, defined as the stock of sold and unsold inventory, is higher than the cost of completion of the project.

In the absence of any such measure which provided finance to projects, the situation would have been worse. Hence any help from the government is better than no assistance. The present scheme offers support even to those companies which are NPAs or have been referred to the NCLT, but not under liquidation. One can see two positive outcomes here. First, the companies will be able to complete their projects. For buyers who are in a state of limbo, this is good news, as their dwellings can be completed and handed over to them.

The second plus point is that the banks and NBFCs which have lent money to these projects will now receive their payments and thus will be better off. To this extent, the creation of new NPAs will be low.

But for this to happen, the units need to be sold to recover the dues to repay the banks. Hence, a lot depends on whether the stock is sold or unsold. If it is the latter, then the issue of demand arises, as buyers are needed to complete this ring of success. For this, it may be necessary for builders to lower the prices.

Anecdotally it has been observed that the price correction is never really significant in places like Mumbai and Delhi, which are the two main centres besides other State capitals that have been identified. Will demand increase?

Purchasing power

Most of the problems that have been afflicting our economy in the last three years are on the demand side, which has affected supply.

The measure by the government is clearly on the supply side, which assuages the problems of the builders, but there should be purchasing power in the hands of the people so that they are able to buy houses. Lower interest rates can only cushion payments, but the basic purchasing power is imperative.

Even if this does work out, there are estimates that the total amount of projects that are stuck could be valued between ₹4.3-4.5 lakh crore, and hence the amount of ₹25,000 crore may be not be adequate and could be biased towards the set of 1,600 projects that have been highlighted.

Hence, while this is a good move to the extent of covering some projects, it is definitely not a cure for all developers.

Direct involvement

In economics, there is a theoretical concept of ‘moral hazard’: once a precedent is set, there is strong reason to believe that there can be further such schemes, which make the benefiters default in their obligations.

Depending on how the scheme is restructured in terms of the lending rate and the time provided for repaying the debt, builders may pull back on their commitments to potential homeowners, hoping to get this benefit in future. This is not very different from farm-loan waivers, except that there is a cost for the borrower.

But the problem for this sector was the unavailability of finance, rather than cost, because funding became difficult after the NBFC crisis began. By opening this door, succour is provided to the sector to an extent, but given that the size of the problem is much larger, the benefits would be to the targeted section only.

The government has evidently gone about addressing specific issues of various sectors, and the measures taken for automobiles and SMEs have been at the forefront, besides banking. This move can be considered to be more direct, because rather than having the RBI change policy and regulation to enable the flow of credit, the government is putting in money directly. The issues that need to be focussed on are the take-off of the scheme and the ‘terms of lending’. Also, the sifting of recipients would be important, and it can be assumed that this not be entirely be in this year, but would play out over a period of time.

One can hope that if this is successful, such a scheme can be extended to a larger set of developers over the next few years. But this may also lead to a demand for similar schemes to be set for other sectors too, where direct action works better.

This will be a challenge, because at the end of the day there are limited funds with the government — this amount has not been provided for in a Budget which is vulnerable to several shortfalls in corporate tax collections, GST, customs collections and disinvestment.


The writer is Chief Economist, CARE Ratings. Views are personal

Published on November 22, 2019

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