Editorial

Editorial : Fund Starved Real Estate inclined to reduce the rates

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By Dr. Sanjay Chaturvedi, LLB, PhD
Real Estate industry is caught unaware and nothing to respond to after RBI had dictated to NBFCs and other financial institutions and Nodal agencies. The main source of funds comes to Real Estate is from NBFCs where the initial and very substantial funds comes to builder at the time of conceptualization or just after getting Building permissions likes Commencement Certificates.
All of a sudden, the industry comes to stand still when NBFCs have stopped all disbursements. It was just not in the case of project funding but also housing finance. No further funds are made available and no further installments were disbursed.
Builders says that such sudden stoppage with out giving any intimation or notice will lead to huge loss to them as they have already made commitment to contractors and vendors. The funds requirements is maximum when in the festive season, said one of the badly stuck builder.
Huge litigation in RERA and in other courts are soon be expected as the delay in projects will be blamed on lack of flow of promised funds by NBFCs.
Reserve Bank of India (RBI) has issued a Prompt Corrective Action (PCA) framework to maintain sound financial health of banks. It facilitates banks in breach of risk thresholds for identified areas of monitoring, viz., capital, asset quality (which is tracked in terms of the net Non-Performing Assets ratio) and profitability, to take corrective measures in a timely manner, in order to restore their financial health. Thus, it is intended to encourage banks to eschew certain riskier activities, improve operational efficiency and focus on conserving capital to strengthen them.
The framework is not intended to constrain the performance of normal operations of the banks for the general public. RBI has placed eleven PSBs, viz., Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India under the PCA framework.
After IL&FS, RBI had issued instruction for inspections to NBFCs who have over exposed their loan portfolios. Even housing finance companies are been instructed to reduce their risk and enhance margins.
In the coming months, fund starved real estate may adopt discount pricing for their inventories to fund the ongoing projects instead of waiting for the financiers to release more and subsequent funds.
Good news for home buyers.

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