Many high-street banks will be giving up their first claims over assets and income in favor of new investors who step in to relaunch stuck housing projects that have left millions of home buyers throughout the country in the lurch. Banks CEOs and senior industry officials discussed the matter a week ago, with several of them willing to relinquish their rights to new lenders offering priority funding. At the end of May 2022, around 4.80 lakh units (launched in 2014 or before), worth over Rs 4.48 lakh crore, were stuck in various construction stages in the top 7 cities, a leading real estate services company. The value of stalled projects in the country would cross Rs 5.5 lakh, said a banker. "We have little to lose with loan exposures to most of these half-done real estate projects categorized as NPAs (non-performing assets). Banks have been typically reluctant to surrender their first right over cash flow. That is changing. We may miss the bus if we delay now.
It's the right time as the real estate market is picking up," a senior bank aware of the discussions. The subject has also been discussed with the government. The housing inventory overhang across the top 7 cities dropped to just 20 months by the end of Q1 2023, the lowest in the last five years from 42 months in Q1 2018, according to ANAROCK. Inventory (measured in months) indicates the time it would take for the current unsold housing stock on the market to sell at the current absorption rate. An inventory overhang of 18-24 months is normally considered healthy.
Since most banks with outstanding sticky loans to stalled projects are reluctant to lend more, the completion of such projects is largely dependent on new money from new lenders. Such providers of fresh capital, like the SWAMIH Fund, managed by SBICAP Ventures, would understandably demand the first right over the cash flow once the home buyers start paying the balance money.
"In fact, that's the precondition the new creditor insists on. Without that, there is no deal. With the money stuck for years and project cost escalating, banks are beginning to realize that holding on to the first right is not helping," said another person. "In surrendering their first claim, banks would probably agree on projects where the cash flow is expected to be more," he said.
Of the stuck projects, the Mumbai Metropolitan Region and the National Capital Region accounted for 77% of the stock or delayed units in 2022. The southern cities (Bengaluru, Chennai & Hyderabad) have just 9% of the overall share.
The moves to restart stuck projects, to a great extent, owes their origin to the Supreme Court ruling on the Amrapali case, where the unfinished job of the builder had put 40,000 residential home buyers in a spot. In a historic judgment delivered on July 23, 2019, the apex court had said that the real estate industry ran on money from buyers, and in the case of Amrapali, the authorities, as well as banks, had failed to discharge their duties. The court directed the central and state governments to take appropriate steps to help home buyers who have been similarly cheated. The SWAMIH Fund was announced four months after the Supreme Court ruling.
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