Loans by real estate companies to their subsidiaries have gone up sharply — a fact that prompted the Reserve Bank of India to sound a note of caution on bank exposure to the sector.
Last week, banks were asked to factor in the loans extended to a group — comprising subsidiaries, special purpose vehicles and related parties of a real estate company — “as a matter of prudence”.
The RBI’s warning is timely because the exposure of these companies to their subsidiaries had gone up 13 to 54 per cent between 2008 and 2009. In the case of Mumbai-based Orbit, the exposure went up by as much as 257 per cent and Kolte Patil Developers saw its exposure to its subsidiaries go up by 1,400 per cent.
In the case of DLF, the country’s largest developer that has 308 subsidiaries and 41 companies, including partnership firms, joint ventures and associates, loans to subsidiaries moved up by 14 per cent between FY 2008 and 09.
Analysts attribute the increase in lending to subsidiaries to tightening bank credit towards the end of 2008.
“Buying and selling land requires a lot of transaction costs, so developers buy land through various special purpose vehicles (SPVs). There was an issue of bank debt with developers at the end of 2008 and the increase in loans to subsidiaries could be a result of that,’’ said Ambar Maheshwari, director of investments at DTZ, an international property consultant.
A Mumbai-based analyst who did not want to be identified added: “Developers cannot get loans from banks for buying land. So, some take loans for general corporate purposes and later transfer them to subsidiaries to acquire land. Though they are required to buy land through equity, not many could have done so, given the poor market conditions,’’ he said.
After the sharp rise in property prices between 2004 and 2006, the central bank has taken a slew of measures such as increasing the risk weights and standard provisioning for the real estate sector to prevent an asset bubble. Banks also went slow on lending to the sector and stopped lending for land buying.
| INBUILT LIABILITIES | ||||||
| Loans to subsidiaries | Investment in subsidiaries | |||||
| 2007-08 | 2008-09 | % Chg | 2007-08 | 2008-09 | % Chg | |
| Kolte Patil Dev | 3.36 | 52.55 | 1463.99 | 187.21 | 163.97 | -12.41 |
| Orbit Corpn | 35.61 | 127.58 | 258.27 | 1.01 | 1.02 | 0.99 |
| Peninsula Land | 271.08 | 417.96 | 54.18 | 86.28 | 86.3 | 0.02 |
| Ackruti City | 89.36 | 133.94 | 49.89 | 63.36 | 16.51 | -73.94 |
| H D I L | 421.66 | 559.16 | 32.61 | 21.34 | 54.06 | 153.33 |
| Ansal Properties | 5.24 | 6.94 | 32.44 | 58.17 | 157.66 | 171.03 |
| Parsvnath Devl | 107.46 | 140.03 | 30.31 | 37.37 | 38.44 | 2.86 |
| Anant Raj Inds | 372.37 | 484.32 | 30.06 | 147.74 | 157.34 | 6.5 |
| Omaxe | 481.99 | 585.2 | 21.41 | 255.96 | 259 | 1.19 |
| DLF | 6992.84 | 7945.85 | 13.63 | 1617.06 | 2210.02 | 36.67 |
| Unitech | 5222.46 | 3956.69 | -24.24 | 180.5 | 862.64 | 377.92 |
| Phoenix Mills | 348.26 | 209.03 | -39.98 | 90.79 | 212.56 | 134.12 |
| Figures in Rs crore | ||||||
Developers, however, say the increase in loans to subsidiaries is part of their routine business and not a matter of concern. Ramashraya Yadav, head of finance at Orbit Corporation, said, “We float subsidiaries to acquire different projects and ensure that we can get strategic investors. We have not taken any loan in the name of subsidiaries.’’
Hari Pande, deputy general manager with Mumbai-based realty firm HDIL, added, “It is an internal transfer from the company to subsidiaries. All the land in our projects is held by the parent and not by the subsidiaries.’
