Gurdeep Singh’s (name changed) residential property will be auctioned by his lender on January 24. As Singh has defaulted Rs 24.78 lakh home loan with a major private bank, the bank has seized the property in Ludhiana district of Punjab under the SARFAESI Act and put it up for auction.
Hundreds of such new defaults and auctions have started haunting borrowers and lenders alike, indicating that the housing loan segment is not immune to the general slowdown across the country and the situation could take a turn for a worse. In fact, the situation has deteriorated in the real estate segment with loans amounting to an estimated Rs 7,700 crore tied to commercial and residential properties loans are up for sale, according to data compiled by NPAsource.com, a portal that focuses on stressed assets.
Of this, there are as many as 2,200 units in the commercial category and around 11,000 units in the residential segment funded by banks and other financial institutions that have turned into non-performing assets (NPAs), which is why there are now on the block.
This comes at time when the gross NPAs in the financial system is set to rise 4.6 per cent to Rs 2.29 lakh crore by September 2014 from Rs 1.67 lakh crore or 4.2 per cent in September 2013, the Reserve Bank of India (RBI) said in its Financial Stability Report released last week.
According to the RBI, the total exposure of the banking sector to the real estate segment was Rs 9.33 lakh crore, a rise of 17.3 per cent in 2012-13. During that period, growth in credit to sensitive sectors almost doubled primarily on account of credit to real estate.
This expansion needs to be seen in light of the steep rise in housing prices in all tier I cities and several tier II cities over that year. The extent of outstanding loans in the housing segment surged by 15.4 per cent to Rs 4.75 lakh crore. Concerned over the rising loans in the realty, the RBI has already done thematic reviews of the banks’ exposure to the real estate sector.
Real estate experts blame investors — speculators who book flats in the initial stages and sell them later when building gets completed for a profit — for the surge in NPAs. The general belief is that genuine end-users rarely default on their loan repayment commitments. If figures released by the banks are any indication, luxury home buyers are not the major culprits as the average default is around Rs 55 lakh. However, industry sources said that defaults in the luxury segment in Mumbai and Delhi have started rising.
“Going by the numbers and on doing a back-of-envelope calculation, the average value per unit — either residential or office — would be less than 55 lakh. This indicates that luxury housing is not a factor here. Between end users and investors, the former category is generally averse to getting into the NPA bracket. Therefore, among the two, the investor category would have contributed more,” said Shobhit Agarwal, managing director – capital markets, Jones Lang LaSalle India.
“As NPAs in the corporate sector continue to grow, there will be more commercial and residential properties coming up for auction. The slowdown in the realty market has further added to the woes of the lenders who will not be able to generate higher returns by selling these mortgaged properties,” said DK Jain, chairman, NPAsource.com.
Banks have reported a rise in NPAs from the real estate segment. According to an HDFC official, HDFC’s gross non-performing loans as on September 30, 2013 amounted to Rs 1,473 crore. This is equivalent to 0.79 per cent of the loan portfolio as against the previous year’s 0.77 per cent.
Bankers are not worried much about defaults by individual customers. “The main worry is whether builders will get into more defaults. Some real estate companies — even listed ones — have defaulted and some are on the verge of becoming NPAs. A couple of big defaults could create problems for bankers who will in turn close the funding tap to the sector,” said the chairman of a public sector bank who preferred anonymity.
He added that banks could face problems if a major real estate price correction becomes a reality.
“Collaterals of real estate companies will be a problem if land value falls. Moreover, the segment is currently unregulated and it is free-for-all. In the case of individual customers, the asset (house) exists.” he said.
Industry insiders say that real estate developers are defaulting in the timelines committed for giving possession and the buyers, mainly short term investors, are defaulting in payments.
“Investors are finding that it is really difficult to hold on to the property they have invested in, and repayment has become a major obstacle in this process. There are ultra-high-end defaulters, but the mid-segment is a cause for concern,” said Sahil Kapoor, assistant regional owner, RE/MAX India – Delhi/NCR, a property brokerage.
Investors came under pressure as sales to end customers slowed down due to various reasons like increase in the input costs, which was passed on to the buyers, increase in equated monthly instalments (EMIs) due to hike in interest rates and ban on subvention schemes by the RBI.
“Among buyers, investors are defaulting more than end-users in both ultra-high and mid segments since upward movement of the prices is very slow and there are very few buyers in the market even if they want to settle for less than the expected return on investment and exit. Since planned exits to end-users became unviable, these loans became NPAs,” said Om Chaudhry, chairman, Astrum Homes and CEO, Fire Capital Fund.
Chaudhry added that in the case of Mumbai, the luxury market suffered a setback due to various reasons like excess supply over demand and pull-out of local investors and end-users from under-construction properties. As an after effect, builders landed in a financial deficit in the wake of reduced sales.
Those who had over-invested in lands and borrowed huge sums from banks, to raise capital for completing projects, could not stick to their repayment schedules. The burden of interest also hampered the completion of projects by the promised delivery date.
That said, most experts do not anticipate any major problem in the real estate segment. Having been focused on inflation control for a while, the RBI is expected to push for growth and with a stable government hopefully in place by mid-year, 2014 should see a more robust economic environment, which will definitely help the real estate sector. While the first half of the year is likely to remain sluggish or improve slightly from where it stands today, the latter part of the year should see the return of better times.