Real estate sector slows down, huge bad loans may show up

With the implementation of Real Estate Regulation Act (RERA) many new and existing real estate projects have slow down. Residential project launches have fallen by 8% since the Real Estate (Regulation and Development) Act 2016 was announced, said a report issued by a leading real estate research and service agency.

RERA make it mandatory for all commercial and residential real estate projects where the land is over 500 sq. mt. or eight apartments to register with the regulator before launching a project. The act also impose regulations on the promoter and ensures that construction is completed on time.

Under RERA, developers will have to put 70% of the money collected from a buyer in a separate account to meet the construction cost of the project. This would leave them with only 30% of the sales proceeds to be used for any other purpose against 100% earlier.

Many bankers are worried that the project financed by them would get stuck under RERA. Bankers have also invested money with a buyback guarantee or an option of converting debt to equity and taking over part of the project, in some cases, they have even demanded personal collaterals from promoters. Despite all this safeguards lenders expect that new bad loans will arise from the real estate sector.

According to the Reserve Bank of India (RBI) data, loans to commercial real estate have dropped by over 3.3%. After demonetisation, the sharpest slowdown took place in the cash-intensive real estate sector and the situation become worse after the introduction of RERA. The construction sector has suffered from relatively high leverage and high-interest burden.

“We have a few developers in the North who have not been constructing property, or a slowdown in construction has triggered some movement in the NPA category. This is not a significant number, but you do see some stress when these changes happen,” said by PS Jayakumar, MD of the Bank of Baroda to the leading news agency.

The Indian government enacted the Real Estate (Regulation and Development) Act 2016 on March 26, 2016 and all its provisions came into effect, from May 1, 2017. Till midnight of July 31, the regulator had received a total of 10,852 applications for registration of ongoing projects across Maharashtra and so far the number has crossed 12,000.

The deadline for registration under RERA was July 31, after which the builders were to deposit a penalty of 10% of their total project cost. On August 29, the government announced its decision to reduce the penalty. Originally fixed at 10%, the penalty was reduced to a meagre 1% for the ongoing projects, if registered till September 30.

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