INSUBCONTINENT EXCLUSIVE:
As chief operating officer of Radius Developers, he's struggling to fund construction of apartment complexes because of a liquidity crunch
in the nation's bloated shadow-banking sector."Real estate is a sitting duck," said Mr Shah
"The timing is very crucial as the slowdown has hit the real estate market quite hard
The industry can't service interest, new interest, additional interest, because there is no cash flow."Radius and hundreds of other
developers relied on loans from what India calls non-banking financial companies (NBFCs) to fuel a five-year property boom
That came to a halt a year ago with the default of one of the shadow banking sector's leading lenders, Infrastructure Leasing - Financial
The resulting credit squeeze has left builders such as Radius and Omkar Realtors - Developers Pvt
looking for support, or, like scandal-hit Housing Development - Infrastructure Ltd., filing for bankruptcy.There are $63 billion (Rs 4.47
lakh crore) of stalled residential projects across the country, according to Anarock Property Consultants, and their developers have become
locked in a downward spiral with shadow banks
As lenders stop new credit, builders are forced to offload properties
Prices fall, causing more real estate loans to turn sour, pushing more shadow banks toward default.In turn, that has cast a shadow on
traditional banks and dried up funding to other businesses, putting more stress on an already slowing economy.For Radius, the crunch started
when one of its main lenders, Dewan Housing Finance, shut off new loans as it attempts to restructure some $12.7 billion debt to avoid
Mr Shah said he gained a temporary reprieve by selling a project to Blackstone Group, but like all builders, his company needs cash to
to the sector, are also tightening funding.The risks of exposure to real estate were underlined by the scandal surrounding HDIL
The Reserve Bank of India abruptly imposed withdrawal curbs on a small cooperative bank that it said had under-reported loans to the
The decision triggered panic withdrawals from the bank, prompting the RBI to issue a statement to reassure the public that the banking
system is "safe and stable."The stresses in the banking industry are an added headache for the RBI as it prepares to cut rates, expected in
have been caught up in the crisis
Its proportion of stressed loans could rise to more than 12 per cent, from a net bad debt of 2.9 per cent, according to Credit Suisse Group
AG analyst Ashish Gupta.Yes Bank Chief Executive Officer Ravneet Gill said his bank only had exposure to three NBFCs
"There is a general perception that there is a closer linkage between Yes Bank and NBFCs than actually exists," he said in an interview on
Thursday."The biggest risk is, at its core, a liquidity crisis
A liquidity crisis left unattended balloons into a solvency crisis," said former Reserve Bank of India Governor Duvvuri Subbarao, who
steered India through the 2008 global downturn
While he doesn't see any local bank going down in the current scenario, "some weak non-bank finance companies should be allowed to fail for
the entire financial system to come out stronger," he said.Prime Minister Narendra Modi's administration and the RBI have taken steps to
try to improve cash flow to shadow lenders, including allowing banks to lend more to the sector, providing partial credit guarantees, and
easing banks' mandatory liquidity ratios.RBI Governor Shaktikanta Das said the bank is closely monitoring the top 50 NBFCs who contribute
about 75 per cent of the sector's loans, and it won't allow another systemically important NBFC to fail.Meanwhile non-real estate
borrowers are getting caught in the cross-fire
Country's shadow banks catered to a third of new lending until a year ago, and the tightening of new financing has hit businesses from
tailors to automakers and affected some of the nation's biggest business conglomerates, including Anil Ambani's troubled group, Essel
including Clearwater-backed Altico Capital India, which defaulted on repayments last month."The Achilles heel for the real estate sector is
weak sales velocity, which has a direct impact on cash flows," said Saswata Guha, director of financial institutions at Fitch Ratings
"At some point it is bound to have a cascading effect if unresolved."About $24 billion of shadow bank loans to developers could sour in the
coming two years, according to estimates from Anarock.Roots of the CrisisThe crisis has its roots in a lending binge by shadow banks between
Commercial banks were trying to chip away at a mountain of bad loans to large infrastructure and energy projects, so shadow lenders moved
in, doubling their loan total to $438 billion in four years
Most of the new financing went to builders, home loans, and debt-laden infrastructure projects, according to rating company ICRA Ltd
In comparison, commercial banks' lending rose just 46% to $1.36 trillion during the period.When IL-FS defaulted, the funds dried up, and
risks on banks' balance sheets started rising
Total bad loans could rise to a record 12% by early next year, according to Credit Suisse and Fitch Ratings."A few months back we were
essentially looking just at the real estate sector, but now the broader economic slowdown can affect other sectors and their
creditworthiness," said Fitch's Guha.But saving an NBFC from collapse would mean forcing a bank to absorb all or part of its bad debt
So while Das is leaning toward enforcing market discipline on NBFCs, borrowers like Radius are worried the crisis will continue."The
reliance on NBFCs has heavily hit cash flows," said Radius' Shah, who hopes the measures taken by policy makers will help the sector
"The need for more money is acute."Get Breaking news, live coverage, and Latest News from India and around the world on
TheIndianSubcontinent.com
Catch all the Live TV action on TheIndianSubcontinent 24x7 and TheIndianSubcontinent India
Like us on Facebook or follow us on Twitter and Instagram for latest news and live news updates.
