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Cut prices, banks tell realtors
Niladri Bhattacharya in Mumbai
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March 13, 2009 09:54 IST

With the real estate sector showing little signs of revival despite several steps taken by the government and the central bank so far, banks are now asking developers to lower prices to clear their piled-up inventory.

In fact, clearing of inventories is a key pre-condition for loan restructuring when the realtors approach lenders, executives at various banks said. Public sector banks, in particular, are asking the builders to justify the offer price of projects as there are apprehensions that real estate companies are holding on to stocks after the payment of instalments is rescheduled.

The strategy is being adopted especially with realtors with annual sales of up to Rs 200 crore (Rs 2 billion), bankers said.

"Smaller builders have less capacity to hold on to prices. We are advising them to reduce prices before taking up the account for restructuring. This will also help them to clear inventories, which is necessary for the survival of the unit," said a senior executive at a public sector bank.

Given that banks cannot direct a builder on how to transact business and lower prices, they are asking them to justify their expected cash flow based on the prices quoted at present, another executive said.

"Before restructuring, we have to take into account whether a particular project can be sold at the prices quoted by the developers. If that's not the case, then there is no point of going ahead with the restructuring process unless the prices are reduced," he added.

Additionally, banks are reducing the moratorium period on loan repayment from 9-12 months earlier to just three months now. This is also being seen as a move to push sales by reducing prices.

"This puts an indirect pressure on the builders to sell off their projects quickly to start repaying," Ramashrya Yadav, head -- finance and strategies, at Orbit Corporation [Get Quote], a Mumbai-based real estate company, said.

"Since customers have adopted a wait-and-watch policy, the demand is low. Builders faced with mounting debt are reluctantly going for lower prices to avail of the restructuring process so that repayment can be deferred," Lalit C Gandhi, chairman and managing director of Lok Housing, said.

In December, as a one-time measure, the Reserve Bank of India [Get Quote] had allowed banks to restructure loans given to the real estate sector, so that developers could tide over the current crisis. To encourage banks to restructure till June this year, RBI has allowed banks to treat these accounts as standard assets, and not as a non-performing asset.

Bankers said another reason why they were pushing banks to cut prices was the lukewarm response to the special home loan package introduced by public sector banks in December. Under the package, the interest rate on home loans was reduced by 200-300 basis points if the total loan availed of was less than Rs 20 lakh (Rs 2 million).

Between December 17 and February 12, public sector banks have cleared only 28,000 proposals and disbursed Rs 1,550 crore (Rs 15.5 billion) through the special scheme.

"No bank has been able to meet their disbursal target in the home loan segment over the last two months as demand is yet to pick up on expectation of a further correction in real estate prices. Hence, even if prices dropped by around 30 per cent in certain pockets, developers will have to reduce prices even more substantially to clear their inventories. Only then will the demand for home loans pick up," said a banking analyst at a rating agency.

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