Indian Property Developer Bailout Backfiring

A recent initiative by the Indian government to prop up property developers by allowing banks to restructure and extend loans is backfiring and turning into another fiasco. Last December, the Reserve Bank of India (RBI) relaxed a key rule on restructuring bank loans to the real estate sector as a one-time measure to help Indian real estate developers cope with falling demand and a credit crunch.

The key requirement from the government was that developers agreed to reduce property prices. Which they now flatly refuse to do. Despite falling demand and dropping prices in the market, newly built properties are still being advertised (but not sold) at artificially high prices.

Bankers have now complained to the Central Bank that after making use of the relaxed rules, which permit banks not to classify loans to real estate firms as bad loans the moment they are restructured, builders continue to hold on to artificially-inflated prices. During a meeting with the RBI’s deputy governor Rakesh Mohan on Thursday to discuss monetary policy issues, a senior banker pointed out that the RBI’s relaxation had provided builders with an opportunity to hold on to high property rates that were quoted before the market slump.

“There is a feeling among bankers that builders are choosing to retain assets on their balance sheets rather than reducing prices and getting rid of assets,” said one banker, who asked not to be named. “In other words, to overcome the liquidity crisis, builders are pushing for restructuring of loans rather than selling off assets or reducing property prices.”

Several developers such as DLF, Unitech, Sobha, Omaxe, Parsvnath Developers and Housing Development and Infrastructure have approached banks to restructure their loans.

The developers, of course, are  blaming the banks for causing the market slump by over-charging for home loans.

Several public sector banks recently cut rates charged on loans for affordable housing. Many of them now charge a fixed rate of 8.5% for loans up to Rs 500,000 and 9.25% for loans up to Rs 2,000,000.