Commercial banks are getting tougher with real estate developers, asking for supporting documents in advance and increasing scrutiny while sanctioning loans to safeguard risks in such loans.
The Reserve Bank of India, the banking regulator, has been voicing its concerns about spiralling property prices and advising banks to go slow on loans to commercial real estate. It has also increased risk weightage on loans to property developers in the past to make such loans expensive.
Pujit Aggarwal, managing director and chief executive of Orbit Corporation, a Mumbai based property developer, says banks are asking for valuations report, chartered accountants certificate for investments and details about promoters background in advance.
“Earlier, all these documents were called at the time of disbursal. Now they are called even before the proposal is scrutinised and in principle sanction is granted,” Aggarwal adds.
Adds Sunil Mantri, chairman of Sunil Mantri group, another property developer: “Banks have gone extremely slow. Hardly anyone is lending now. There is too much of cross checking and scrutiny.”
Besides calling for documents in advance, banks have gone that extra mile in ensuring that the money is landing in right hands. Banks are putting priority on stringent verification processes such as cross verification of documents with local authorities, authenticating chartered accountants certificates and checking property valuation and lines of credit and so on, said Sandipan Pal, an analyst with Motilal Oswal in a recent report. Banks say they are playing safe as the property market is going through a slowdown.
“The risk associated with this sector (real estate) has gone up dramatically. So, as measure of an abundant caution banks are doing diligence at the time of disbursement as well,” says V Ahuja, chief executive of Ratnakar Bank.
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Senior State Bank of India official associated with risk management said in many cases where there is a perception of rise in risks, banks are going the extra mile to check clearances.
“This is being done based on pre-disbursement conditions mentioned in loan contracts,” the SBI executive said.
A senior Bank of Baroda executive said the bank is insisting on authentication of the background by asking chartered accountants certificates.
“This is to signal our seriousness in risk management. If there is a discrepancy that certificates by audit firm and actual financial status then we could inform the Chartered Accountants Institute which may lead to a disciplinary action", the executive said.
Banks and housing finance companies increased the scrutiny after bribe for loan scam came to the fore late last year, which saw the arrest of executives of LIC Housing Finance, Money Matters and other public sector banks for taking bribes for clearing loans for some property companies.
In the aftermath of the scam, LIC Housing Finance suspended lending to realty sector from December to February this year.
“Slowly we have started lending but we have been very selective and sanctioned loans far and few in between," VK Sharma, chief executive, LIC Housing Finance.
The cost of funds of most of developers have gone up by three to four per cent in the last 18 months after the RBI raised the interest rates thirteen times in the last 18 months.
With sharp decline in home sales and drop in bank lending, realty developers are forced to borrow from non banking finance companies at 16 to 20 per cent, private equity at 25 to 30 per cent and private lenders at 25 to 35 per cent, say property consultants and analysts.
"Developers have no option but to go for such sources if they are in urgent need,” says Mantri.
"While replacing low cost debt with high cost finding renders short term respite; it could aggravate the cash flow pressure further, going forward, especially if liquidity from the primary sources doesn't improve in due course,” Pal said.