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The real estate sector has been one of the key contributors of India’s success story. Being the second largest source of employment, it routinely contributes to over 6 percent of India’s GDP and has been a cornerstone of the country’s growth and prosperity.
The economic impact of the COVID-19 pandemic has been widespread, particularly for the real estate sector. The sector which was already suffering from the triple impact of changing regulation, muted demand and liquidity concerns is further burdened due to change in consumer preference, labour shortages.
Over the last few years, the central government and the Reserve Bank of India (RBI) have announced various initiatives to address some of the key concerns of the stakeholders.
Some of these came in the form of introduction of Real Estate Regulatory Authority (RERA) to rekindle consumer confidence announcement of a special window Alternative Investment Funds (AIFs) like Special Window for Affordable and Mid Income Housing (SWAMIH) investment fund, and extension of date for Commencement of Commercial Operations (DCCO) for the non-banking financial companies (NBFCs) by a year.
The RBI circular adds to the body of work already undertaken. The RBI has taken a special notice of the debilitating impact that the pandemic has had on the long-term viability of firms, including on those with excellent financial performance in the past. As such, it has decided to extend an olive branch by not labelling the loan as sub-standard on account of financial relief extended by the lenders.
Due to the onset of the pandemic, there have been numerous commercial and physical disruptions which no lender or promoter could have foreseen at the time of sanctioning of loans.
Such events, colloquially termed as Black Swan events, have been recognized by the regulator as inherently unpredictable in nature, implicitly by accommodating potential moratorium(s) on servicing the outstanding debt while keeping the account as standard. This may go a long way to re-instill investor confidence in the beleaguered sector.
Further, assistance in the form of access to additional sources of funding to the borrower has been recognized and may address some of the impending liquidity issues faced by the sector. The latest circular and other measures (enumerated earlier) have the potential to offer a comprehensive set of tools for the lenders to address the problems faced by the sector.
The RBI burdens the lender to ensure only genuine corporates are supported and expects application of commercial wisdom and haste while designing the best solutions for the borrower. To ensure the same, the circular carries enough penal provisions and allows for assistance from independent credit rating agencies and recommendations of the expert committee to provide necessary checks and balances.
However, lenders would ideally benefit from an early identification and addressal of financial stress, while also incentivising regular monitoring and supervision for weaker credit profiles which can help prevent further deterioration of asset quality. Most importantly, they have been saved from a nightmarish situation of being saddled with a whole host of under-performing assets which would otherwise have to be put up for a fire sale.
One must understand that the real estate sector, especially home and small commercial properties, owing to the large upfront capital outlay, are disproportionately financed by retail loans. Recognizing the severe adverse financial impact on the purchasing power of the retail customers on account of the pandemic, the circular addresses the need to restructure personal loans but does not go as far as to address the whole body of home loans which would have provided much needed relief to the homebuyers.
The RBI’s scheme on Resolution Framework for COVID-19 related stress has demonstrated that the regulator has moved from palliative to intensive care of the economy to ensure early recovery. However, there are many questions which remain unanswered. What view(s) are the rating agencies taking on the attempts by companies or individuals to restructure the loans under this circular.
Given the nature of the pandemic, a once in a century event, would the same allowance be made while addressing the future credit worthiness of the company or individual?
Would a highly-rated corporate or individual undertake such an exercise and potentially loose its hard-earned rating forever? The lack of clarity on the impact on credit rating and exclusion of certain types of loans and corporates has diluted the initial cheer with which the scheme was welcomed by the real estate market. The initiative is a great first step in the right direction, however, there is a need for further clarifications and actions from the regulator to address the sector’s root cause of problems.The author is Partner, EY – Turnaround and Strategy