Explainer: New RBI policy provides relief to all real estate projects, say experts

Real Estate: View Of Residential Apartments (Representative Image)

The Reserve Bank of India (RBI) has extended loans given for restructuring of projects by 12 months, without downgrading the asset classification. This is for projects that were delayed for reasons beyond the control of realtors and comes as a major relief to the real estate sector.

While the fine print is still not out, real estate experts say this measure is not limited to commercial real estate. They say it will benefit residential projects that were delayed on account of regulatory issues.

For example, the Noida Bird Sanctuary issue, the construction ban by NGT, ban on the use of groundwater or for that matter even government-related land acquisition issues, have delayed various realty projects.

Experts clarify that commercial real estate (CRE) refers to all the real estate asset classes. In RBI parlance, it means non-retail and includes all asset classes such as the construction of commercial buildings, IT buildings and even residential structures for which banks have lent loans to developers.

“CRE is a term used in banking parlance to cover the entire gamut of real estate lending. It covers loans given to housing projects as well,” Jaxay Shah, Chairman, Confederation of Real Estate Developers’ Associations of India (CREDAI) told Moneycontrol.

RBI’s standard definition of commercial real estate according to an earlier notification is: “Loans extended to builders towards construction of any property which is intended to be sold or given on lease (e.g. loans extended to builders for housing buildings, hotels, restaurants, gymnasiums, hospitals, condominiums, shopping malls, office blocks, theatres, amusement parks, cold storages, warehouses, educational institutions, industrial parks, warehouses).”

The policy fix

After the Monetary Policy Committee (MPC) meeting on February 7, the RBI kept interest rates unchanged amid uncertain inflation outlook.

There were also two surprising decisions to help the real estate sector.

First, it has allowed lenders to pool in the Cash Reserve Ration (CRR) buffer to lend at a cheaper rate for housing loans and given a one-year extension for date of commencement for project loans for real estate projects.

Second, to increase lending to medium and small enterprises (MSME), the auto and home segment, the central bank tweaked maintenance of CRR norms by providing relaxation in the calculation of total deposits. Banks will now get exemption in CRR over incremental lending till July 2020.

CRR is the percentage of total deposits that bank mandatorily park with the apex bank. It stands at 4 percent of a bank’s total deposit.

What does it say?

The RBI policy states: “It has been decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification in line with treatment accorded to other project loans for non-infra sector. This would complement the initiatives taken by the Government of India in the real estate sector. The detailed instructions will be issued shortly.”

What is DCCO?

DCCO refers to the date when the project was envisaged to be completed. The new policy has a specific provision for the real estate sector which allows rescheduling of the project loans by a year by changing the DCCO.

What this means is that if a project was to be commissioned in February 2021 has been delayed due to liquidity or regulatory issues, it will now be commissioned in February 2022.

Consequently, the repayment which was due from February 2020-February 2021 will now have to be paid from February 2021-February 2022.

This extension is over and above the currently available one-year period from the original DCCO. In addition to providing more time for the completion of delayed projects, it will also help ease project funding issues arising out cashflow mismatches, and provide developers with additional flexibility to raise last-mile funding for project completion.

“Further, the cash reserve requirements for incremental loans extended for housing purchases have been reduced, thus enabling increased lending to buyers at a lower cost of fund, which is expected to boost housing demand,” said Shubham Jain, Senior Vice President and Group Head at ICRA.

What constitutes ‘reasons beyond the control of developers’?

These could refer to changes in government’s policies, court or judicial directives. The detailed guidelines are expected to provide for precise norms for eligibility. These could be all force majeure issues.

According to Care Ratings, there are two reasons why projects get delayed or stuck. One is because the approvals take time. For example, if environmental approvals take more time, the project gets delayed and because it gets delayed, it gets classified as a non-performing loan.

RBI in its policy has made it clear that if the reasons for the delay are genuine, then the project will not be classified as a non-performing loan.

Second, is the lack of funding or non-availability of last-mile funding that requires one-time restructuring of real estate loans. Among these, the first has not been addressed in the credit policy, but second has.

As per market estimates, around 4.5-5 lakh launched housing units are facing delays for various reasons. While some of these delays would be attributable to project management issues, including funding and execution-related problems, a good chunk would also be on account of reasons beyond promoter control, such as delays in receipt of project approvals or title disputes.

“For the latter projects, added flexibility in terms of a further one-year extension of DCCO and consequential extension of the principal moratorium period on the loan, without a change in asset classification, serves as an important breather, especially since most of these projects are delayed by periods exceeding one year,” said Jain.

Project delays typically lead to a build-up in cost overruns in the form of increased interest during construction, as well as raw material and labour cost inflation. Sales proceeds, which are typically mile-stone linked, also get deferred.

Thus, significant cash-flow mismatches arise at an operating level. Commencement of principal servicing obligations, during this period of delay, can further exacerbate the pressures on cashflows.

“Hence, a further permitted deferment in the servicing of debt obligations can aid the project in remaining viable. Moreover, incremental funding can also be raised to finance the cost overruns, which would not be possible in case of a downgrade in asset classification. Therefore, with this easing in funding and financing of delayed projects, project deliveries are expected to get a boost,” he said.

The extension has been permitted by a year without downgrading the asset classification

With this extension, real estate developers will now be able to change their repayment schedule. This will result in more liquidity as project cash flows will not be utilised to service debt (for a year) but to complete the project.

Without downgrading the asset classification means the said project has not been declared an NPA – thus the quality of the asset is positive.

In line with the treatment accorded to other project loans for the non-infra sector

RBI has now taken a view that real estate should come under the category of non-infrastructure. Promoters are allowed to make use of up to the 12-month DCCO window for infrastructure projects.

How will it impact?

Since the repayment schedule will now be extended by a year, the cash flow will be ploughed back into the project, indirectly infusing liquidity into the stuck project.

It should be remembered that this is an additional 12-month window. It is not a full one-time rollover or a waiver. Developers will have to pay interest for the one-year period.

“The earlier policy did not have a specific provision to restructure/reschedule loans given to the real estate sector. There was a classification between infrastructure and non-infrastructure and there was nothing specific to real estate,” said Piyush Gupta, Managing Director, Capital Markets India, Colliers International.

Developers who may have defaulted on their payments to the financiers would have had to get their loans categorised as NPAs. This would also have had a negative impact on the books of the banks.

The liquidity crisis triggered by default in one of the large non-banking financial companies (NBFCs) in 2018 has literally choked off the flow of funds from NBFCs to real estate, leading to defaults.

The result is that financial assistance to most real estate companies even when they are absolutely viable with adequate security and cash flow in the long run to repay the loans borrowed from banks and NBFCs has become increasingly hard to come by.

Besides, a slowdown in economic growth coupled with short term effects of structural reforms such as the real estate regulatory act (RERA) and the goods and services tax (GST) have adversely impacted housing demand.

The slack in demand has exacerbated the temporary mismatch in the cash flows of real estate projects. The liquidity crisis in the real estate sector has been leading to delays in project completion which in turn has undermined buyer confidence in under-construction projects, thus setting in motion a downward spiral.

Developers, in their wish list submitted to the finance ministry before Budget 2020, had demanded an 18-month window for deferring payment.

“This demand has been partially met through the RBI announcements. Builders will pay both the interest and the principal amount. Only the payment has been deferred by a year. If this assistance had not come in, these loans would have been declared NPA. The announcement will give us partial relief,” said Satish Magar, National President, CREDAI.

Gaurav Gupta, President, CREDAI Ghaziabad and Director, SG Estates explained: This scheme will have a bearing on all projects. For one-year loans taken for real estate projects will not be classified as NPA. Nothing is being waived off.  While the stress asset fund seeks to provide last mile funding, this classification will enable developers to get more time to repay.

“Both schemes complement each other. It also helps both the developers and the banks. It will ensure that the realtor’s credit history remains positive and the bank doesn’t get NPAs in their books,” Gupta stated.

“Restructuring of loans involves having to declare the project an NPA first and following it up with adequate provisioning. The process often leads to the asset quality of the loan turning bad and has negative implications for both the banks as well as the developer. Through this mechanism (as announced by the RBI) the asset can be restructured sooner without any impairment on the bank’s balance sheet,” Anckur Srivasttava, chairman, GenReal Advisers noted.

“We expect this singular guideline to have a far more pervasive and impactful effect on Indian real estate loans than any other initiative taken by the government and RBI in the recent past including the creation of the stress asset fund,” Srivasttava added.

Is this a better scheme than the infusion of Rs 25,000 crore stressed asset fund?

The Rs 25,000 crore stressed asset fund announced by the government to provide last mile funding/liquidity to stuck projects seeks to infuse liquidity into projects that meet the following criteria: Stalled for lack of adequate funds, projects come under the affordable and middle-income category, are net worth positive projects (including NPAs and projects undergoing NCLT proceedings), are RERA registered and are close to completion.

Experts say both the schemes were the need of the hour and complement each other. While the Rs 25000 crore fund will help a certain category of projects in certain markets, the RBI policy is applicable to a larger pool of projects across the country.

The Rs 25,000 crore funding for stuck projects is a finite pool and may get absorbed in bigger markets, especially Delhi NCR and Mumbai. The RBI policy is applicable to projects across India at any stage of construction.

Following the RBI’s directive, all developers will receive an equivalent extension subject to a cap of one year. “This will prove to be a lifeline for a significant number of developers across the country. This step was much needed and will be significantly more effective than the stress fund,” said Srivasttava.

Homebuyers’ take

Homebuyers are of the view that a similar moratorium should be provided for them too, especially those burdened with both EMI and rent. “Why should we continue paying EMI for a project where construction has stalled? Delay in the project is not our fault. Also, what is the guarantee that the projects for which this one-year window is being given, will not turn NPA next year?” Abhay Upadhyay, President and member of homebuyers’ body Forum for People’s Collective Efforts asked.

The MPC also mentioned that banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans including housing loans over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR).

This exemption will be available for incremental credit extended up to the fortnight ending July 31. This is also expected to aid the flow of bank credit to the housing sector and support residential sales.

What this means is that on a certain category of assets, incremental loans or any new loans that are getting disbursed, including housing loans, will be waived off. It has also called for giving a push to more housing loans from January 31. The CRR requirement will not be applicable to those loans.

“With this bank credit in the system will increase which means they will have more liquidity available to deploy elsewhere. This window is open from January 31 to July 31. RBI may choose to extend the window in its next review. This measure has been taken to boost housing sales,” Piyush Gupta explained.

On the demand side as well, the RBI has allowed banks to deduct the equivalent of incremental credit disbursed by the banks as retail home loans from their net demand and time liabilities (NDTL) for maintenance of the cash reserve ratio.

This will increase the institutional fund availability for the home loans segment, and also permit a reduction in interest rates, thereby impacting housing demand positively. Nevertheless, the overall slowdown in the economy will continue to have a negative impact on demand.

“Going forward, the Government may also focus on improving project approval timelines and processes. It is also important to clarify that this extension in DCCO will not impact RERA stipulated project completion timelines, and therefore, buyers may still refer delayed projects to NCLT as per the prevailing IBC norms, even if financial institutions permit an extension in the DCCO. Alignment between the extension in project timelines as per financial institutions and under RERA would aid in making the impact of this announcement by the RBI more effective,” said Jain.