The Indian government now wants its central bank's help in reviving the real estate sector

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  • After securing a relief package for small businesses earlier this week, India’s central government now wants the Reserve Bank of India’s help in increasing credit to the commercial real estate sector.
  • The current liquidity crunch among NBFCs has hurt the real estate sector as developers have relied on them for credit in recent years as commercial banks have imposed curbs on lending.
  • Not only will the resulting financing shortage lead to a slowdown in new construction and cancellation of housing projects, but it will also lead to job losses.
After securing a relief package for small businesses earlier this week, India’s central government is now seeking the Reserve Bank of India’s (RBI) help in reviving another important sector of the economy: the real estate market.

The Modi administration is all set to propose a number of measures to increase liquidity for real estate developers at the next board meeting of the RBI in mid-December, a government official told the Indian Express. The move follows a number of closed door meetings in the last month between Finance Minister Arun Jaitley and the heads of real estate developers, who have pushed for greater access to credit.

The current liquidity crunch among non-banking financial companies (NBFC), a consequence of the IL&FS crisis, has hurt the real estate sector. Developers and homeowners have relied on non-banking financial lenders for credit in recent years as commercial banks have imposed curbs on lending due in order to prevent their bad loans from piling up further.

Not only will the resulting financing shortage lead to a slowdown in new construction and cancellation of housing projects, but it will also lead to job losses — something the government wishes to prevent at all costs. Simultaneously, there is also a demand-side problem as the recent interest rate hikes has made it more expensive for potential homebuyers to take out housing loans.

As a proxy for general business and consumer confidence, a slump in the commercial real estate market has wider implications for the rest of the Indian economy.

While the RBI has been traditionally averse to handing out sops to a particular industry, affordable housing comes under the priority lending sector for commercial banks.

So the central bank could increase loan limits for the sector.

The RBI can also direct banks to release last-mile funds for stalled projects or develop a restructuring package for the bad loans of real estate developers, which is similar to what it is doing for micro-small-and-medium-sized enterprises (MSME). The the Confederation of Real Estate Developers’ Associations of India (CREDAI) has also lobbied for the creation of a “stressed assets fund” for unfinished housing projects.

However, the central government runs the risk of eroding the goodwill generated from this week’s compromise arrangement with the RBI. It secured a number of concessions from the central bank, and in pushing for a relief package for the real estate sector, it could be asking for a lot more than the RBI is willing to give.

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