The move to rejuvenate the realty sector through Rs 25,000 crores special bank and FI funds look good but may be misplaced.
The Cabinet Committee nod for the package risks people’s deposits. It includes Rs 10,000 crores to be sunk by the Central Government and Rs 15,000 crores by banks, FIs, sovereign and pension funds. Undoubtedly, these are all diversion of people’s deposits in risky ventures.
The Rs 25,000 crores fund is a small fraction of the Rs 4,64,300 core worth of unfinished projects, many now decaying in seven top cities. The fund will not help the core albeit the buyers.
Apparently the realty sector lobbying succeeded. They have been arguing that banks have cash stash of Rs 1.5 lakh crores “unutilized” monies.
Clearly, this is the biggest myth. Indian banks and NBFCs are in the throes of a severe crisis. Their cash has evaporated since the UPA “incentives” to the industry post-the Lehman sub-prime crisis in 2007-8. Whereby the Indian industry was virtually doled out huge loans though they were sitting on huge cash reserves of over Rs 2 lakh crores.
Besides, public sector banks have over Rs 14 lakh crores accumulated NPAs (non-performing assets) which means they have lost the money. Bluntly, deposits of India’s poor and middle class. The mergers of various banks are the result of this profligacy.
Worse, it resulted in virtual denudation of bank coffers, much of it led by the realty sector. The real estate did not need the funds as they were pouring in from home buyers. But the builders siphoned off and swindled the money leading to unfinished 5.76 lakh home units today, mostly a legacy of that era.
True, the courts intervened in a number of cases forcing builders to take corrective steps. But this has not helped buyers as lakhs of them in Delhi, Mumbai, Hyderabad, Bengaluru, Kolkata and Lucknow stare at a bleak future of losing their life’s earnings.
The biggest shock to the realty sector has come from the road and highway segment. They were funded by the IL&FS on the premise that the monies would be repaid through collection of toll. It is another matter that toll has become the biggest scam.
Certainly, toll collection is increasing every year but IL&FS was not repaid consequently, it collapsed in 2018 and Rs 91,000 crores has been lost. Further, this has hit other NBFCs including housing finance companies. Interestingly, little is known about actions taken against large toll companies. In fact, a new package may be taken by them as a reward for swindling public fund.
There is no gainsaying that NBFC’s are a key source of funding for real estate projects in the country and the liquidity crunch due to the collapse of IL&FS had a devastating effect on the real estate sector as builders lacked capital to complete stalled projects. Today, our policy makers need to review the decision for a new package. While concern is welcome, the remedy needs a relook.
Think. Till 2008, NPAs were around Rs 4 lakh crores. It soared to over Rs 12 lakh crores in the next four years as 50 large companies did not repay huge loans. Presently, having settled much of it through book process, it remains officially at over Rs 9.1 lakh crores though it might be higher, according to the CAG.
Pertinently, a SEBI action on 2 November reveals three banks are in crisis zone. Namely, Indian Bank: divergence of Rs 820 crores in its net 2018-19 NPA, Union Bank Rs 998.7 crores and private bank Lakshmi Vilas (LV) Rs 54.9 crores. Add to this the net loss of Union Bank widened to Rs 3978.37 crores in 2019 from Rs 2947.45 s and LV Rs 1006 crores from Rs 894 crore
This is not all. The financial sector is in difficulty. There is little guarantee that banks would be repaid after doling out Rs 25,000 crores to now mostly sick realty units.
Importantly, India’s slowdown, which has hit even the IT sector like Infosys, is led by the failed realty sector. Builders promised and collected funds from people and banks but neither delivered houses nor repaid loans. Today, they are enjoying double-profit as the new package would give them more and as hinted on low interest rates.
It appears the Government advised by the same set of people or officials has not been able to take right remedial measures. It is unable to see beyond clichéd methods. The fault lies in the system of high taxation, tolls, fees, charges and liberal loans to the mighty and powerful. In contrast, people and home buyers whose money they are playing games including banks, insurance or mutual fund depositors are treated shabbily.
Depositors suffer as deposits are taxed, unbelievable as interest rates are being continuously cut and now after the PMC bank failure, the entire banking system is looked at with suspicion.
Shockingly, demands for payment of Government and corporate salaries in cash are being raised by workers of different sectors. Some are even demanding a Constitution amendment to check a free hand to the Government on monetary matters.
Questions are being raised as to how any Government could play with banks or LIC deposits which belong to customers and not the Government. A relook is being suggested for preventing interference in public sector companies like Air India, MTNL or BSNL.
The Indian realty sector feels markedly different from the difficulties it faced in recent years on account of slack demand. Rating by Fitch states that in the first quarter of 2020, builders would have to repay loans worth over Rs 71,000 crores. A default in repayment could affect mainstream banks and NBFCs.
Also, bankruptcy among realty companies has doubled in a year. The Insolvency and Bankruptcy Board of India data shows that realtors like Unitech, Jaypee and Amrapali may miss the deadline for repayment. This is likely to aggravate as house sales declined by 11% in 2019-20 and there is a 47% slump in new projects. Despite this slump sellers have not reduced prices and taxes remain high amidst calls for a cut.
Furthermore, stamp duty charges for property registration are higher than most other countries. The GST on a sale of a house and bank transactions have worsened it. Hence, the realty sector is risk laden. Builders fear they would lose out in case of liquidation because home buyers’ claims will be considered only after those of secured creditors like the banks have been settled.
In the ultimate, a mere cosmetic fund is not a solution. It calls for open discussion on the economy, taxes and the banking system and curbs on the rights of executive for a lasting solution and real growth.
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