The reason why the real estate sector is regulated tightly is because it is prone to bubbles, says State Bank of India chairman and managing director Arundhati Bhattacharya. It is not that banks are reluctant to lend to the real estate sector, it is just that self regulation hasn't been of the highest order in the industry and hence there is hesitation on the part of bankers, she says.
But it is not just the fault of the developers. The entire environment is at fault here. "Developers need too many approvals to get projects running," she explains.
Speaking about lending towards cash flows and not equity, Bhattacharya says lending against equity or 'ninja loans' created the housing bubble in US. Banks in India lend towards cash flows and not equity. She further adds: "We cannot be expected to lend against land just on the basis of the value of the land." She says banks can still consider financing land as part of the entire project cost, but funding realtors to build land banks cannot happen.
She says one cannot confuse debt with private equity. "Equity has the capacity to absorb losses; debt has to be serviced regularly," she adds. Hence, realtors must have true equity in projects and not debt disguised as equity. Besides high debts also lead to projects turning bad. Realtors must also have equity as part of their project cost.
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