MUMBAI/NEW DELHI: Finance minister Pranab Mukherjee’s direction to state-run lenders to prevent a recurrence of the loans-for-bribes scandal, and banks’ decision to go for a critical appraisal of all real estate loans above Rs 50 crore may stall projects and drive developers to private funds.
Liquidity for the sector may dry up as bankers turn cautious in sanctioning fresh loans, forcing builders to cut prices to improve cash position, helping prospective buyers who have been holding on due to high prices.
DB Realty tumbled 10%, Indiabulls Real Estate lost 5.2%, DLF fell 3.8%, and Unitech declined 6% as a fund shortage threatens to derail their project execution, which had just started to show signs of recovery after the 2008 credit crisis.
The arrest of eight finance executives by the Central Bureau of Investigation on Wednesday on charges of taking bribes to sanction loans does not lead to a systemic risk since the amount involved is tiny, bankers and bureaucrats said. It is getting more attention than it deserves, they said.
“ banks and financial institutions should strengthen the NPA (non-performing assets) monitoring and management in their institutions to ensure that advance action is taken to identify incipient sickness and take appropriate action on it,” said Mukherjee.
A Bank of India official said, “All big-tickets loans, particularly to builders, will come under the scanner now. Recall of loans can happen if there is a fear that the quality of loans may suffer. But as of now, there is no such worry and hence it would not prompt us to recall loans.”
The arrest of finance sector executives for alleged corruption and passing on information regarding these transactions has shaken the banking sector. Bank of India, Central Bank of India and LIC Housing Finance , whose executives were arrested, have said they followed set norms and any violation may relate to individual cases involving specific executives.
“There is no chance of anything becoming NPA as a result of what has happened,” said TS Vijayan, Chairman of LIC, the parent company of LIC Housing Finance. CBI has said, in-custody LIC Housing CEO Ramachandran Nair, has confessed to the involvement of other board members, according to Times NOW news channel.
Some of the telephone conversations of these arrested executives have also been tapped, it said. “There will be repercussions in terms of increased caution by banks while lending to developers,” said Anuj Puri, Chairman & Country Head, Jones Lang Lasalle India. “Borrowing will become more expensive and the process involved in getting it will get lengthier as banks increase their vigilance levels.”
While the panicky bankers would stay from decision-making for a while, there is unlikely to be any recall of sanctioned loans that would be disruptive.
“There is no question of recalling loans since all the procedures of giving loans are followed,” said KR Kamath, CMD of Punjab National Bank , one of the banks named by CBI. “There is no need for any knee-jerk reaction. However, the loans that are sanctioned will be reviewed.”
An unintended consequence of the scandal could be lower prices for home buyers as developers look to sell at a faster rate to improve cash flows. “If one looks at the last three quarters, sales have been dropping and most developers have built lot of debt pressure on their books,” said Pankaj Kapoor, Managing Director of property consultant firm Liases Foras.
`This issue, along with tighter measures already announced by RBI in its policy review, may expedite the process of correction,” he said, estimating the correction to be at least 25%. This scandal need not necessarily be as bad as the ones in 1992 and 2001, when investors lost thousands of crores of paper wealth.
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