India's real estate bad loans have nowhere to go but up for now, according to a major Swiss bank


  • A report by Credit Suisse indicates that non-performing loans from the real estate sector are likely to rise this quarter.
  • This is largely due to the drying up of refinancing options for real estate developers as well as subdued property sales.
  • In July last year, Bloomberg reported that Indian real estate developers were on the hook for $20 billion worth of loans to commercial lenders
After the recent tax relief granted to India’s real estate developers by the Indian government, the sector’s prospects for the coming financial year looked upbeat.

However, a report published this week, by Credit Suisse has given investors a reality check for the immediate term.

The report, entitled “The second wave”, indicates that non-performing loans from the real estate sector are likely to rise this quarter owing to the drying up of refinancing options for real estate developers.

This is primarily due to the cash crunch faced by non-banking financial companies as they navigate the fallout of the IL&FS default crisis.

The final quarter of every financial year usually accounts for more than a third of housing finance companies’ loan disbursements, but given the liquidity crunch, there will be a significant slowdown in credit to the real estate sector.

As a result, the next few quarters will likely see a dip in construction, which will cause further cash flow problems for real estate developers that need to service their loans.

Another reason for the rise in bad loans is the subdued demand for property. The GST tax cut will only be applicable from April 1st. So for the rest of the financial year, property sales are expected to be sluggish, exacerbating the burden of unsold inventory borne by realtors.

In July last year, Bloomberg reported that Indian real estate developers were on the hook for $20 billion worth of loans to commercial lenders - a category that excludes shadow banks. This was made worse by a near 40% slump in home sales since 2014.

Credit Suisse concluded the report by saying that it remained “cautious” on lending to the sector in the near term, especially to housing finance companies like Indiabulls and L&T Finance.

The surge in NPAs might be less than initially expected, however. Earlier this week, the National Company Law Appellate Tribunal (NCLAT) that banks did not have treat IL&FS loans as bad loans until a specific court order to do so.

While this grants banks a temporary relief, experts said that it amounted to a whitewashing of the problem. The Reserve Bank of India is expected to challenge the order.


SEE ALSO:

Indian real estate builders welcome GST relief but opinions are divided

As India’s shadow banks brace for a tough 2019, the central bank and government will try and prevent a repeat of the IL&FS crisis by solving the data problem
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