The move will ensure that projects are evaluated individually before being declared NPAs; buyers no longer will have to wait for an indefinite period for their homes and developers will get greater payment flexibility.
The Reserve Bank of India (RBI) giving the go-ahead to banks to restructure the loans of real estate firms at the project level rather than developer level is expected to benefit both homebuyers as well as real estate developers. The move may ease liquidity and enable construction to recommence in projects that were stuck due to the impact of the COVID-19 pandemic.
“Both buyers and developers will stand to gain when stuck projects will eventually see the light of the day. From a buyers' standpoint, they will no longer have to wait for an indefinite period for their homes," said Anuj Puri, chairman - ANAROCK Property Consultants.
As for a developers, they will get the requisite liquidity to eventually complete their projects. Overall, it will ease liquidity within the cash-strapped real estate sector which was already struggling even before the pandemic set in. COVID-19 had only worsened its woes further, he said.
That said, even while the RBI has given its nod to the banks, “we will have to wait and see how different banks carry this forward,” he said.
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The RBI has also indicated that banks can restructure loans drawn by a borrower during the current fiscal, provided the account was classified as ‘standard’ (not overdue for more than 30 days) as on March 1, 2020.
This clarifies that banks can only restructure loans of borrowers that were regular in their repayments and did not have over 30 days of overdue as on March 1, 2020, and their asset classification had not been downgraded to the level of a non-performing asset.
Simply put, it means that projects that were not regular with repayments before COVID-19 may not be allowed to be restructured under this allowance.
The RBI’s clarification on restructuring of real estate loans impacted by COVID-19 to be project specific rather than based on the developers is a welcome move as real estate developers will be able to benefit irrespective of the size of the firm, real estate experts have said.
As per the report dated September 4, 2020, issued under the chairmanship of KV Kamath on the ‘Expert Committee on Resolution Framework for Covid-19 related Stress’, it is specified that considering the typical nature of real estate projects, the prescribed thresholds for the financial parameters as guidance for preparation of resolution plan may be considered at project level rather than at entity level, explains Nitin Jain, partner, Turnaround and Strategy – Real estate, EY India.
In real estate business, generally multiple projects are housed in one single entity, resulting in complexity and therefore, difficulty in meeting the prescribed financial parameters at entity level for implementation of resolution plan. Further, debt funding in the real estate business is done mostly at project level and not entity level.
"Considering restructuring of loans in real estate business at the project level is a welcome move and will provide flexibility to the lenders and enable in reviving of profitable projects which were previously starved off funds," he says.
“The way real estate developers’ balance sheets in India are organised is more project oriented and therefore financial and operating parameters are more relevant for projects rather than the overall developers’ balance sheet. However, applicability for restructuring is only for loans which were standard as on March 1, 2020,” said Piyush Gupta, managing director, Capital Markets and Investment Services at Colliers International India.
The rationale behind this decision could be that different real estate projects have their own independent risks which may be related to regulatory compliances, development approvals, completion timelines, financing and marketing/sales of the project.
If a special purpose vehicle (subsidiary) has defaulted, it should not mean that the parent company is at fault. The RBI here is asking bankers to evaluate the risks associated with each project separately.
This is a good move for developers as it provides bankers more flexibility and a practical approach towards restructuring loans in the absence of which all projects would have turned to non-performing asset (NPA).
“The solution for one project may not apply to another project. Each of the projects have their own dynamics, some may have approvals and others may not have, some may witness healthy sales while others may not. Even the deadlines may be different," explains Ankur Srivasttava of GenReal Advisers.
"Therefore, projects cannot be bundled up under a single entity and have to be dealt with at an individual level. This ties in very well with the fact RERA grants separate approvals for different projects by the same developer. Even the NCLT has allowed for alienation of Special Purpose Vehicles from the parent company,” he says.
This accords greater flexibility to the bankers and a practical way forward for bankers/lenders to restructure COVID-19-impacted real estate projects. In the absence of such a provision, SPV-level defaults would have led to a contagion effect and impacted the parent developer group’s creditworthiness. Now, this guideline effectively allows every project to be evaluated and restructured in its individual capacity, he says.
The process between the banker and the developer also gets streamlined. The banker provides incremental capital or restructures the loan, clearing the path for construction to begin at the earliest and shortening timelines.Having said that, the restructuring exercise may lead to the credit bureau scores of the developer getting impacted. “It is put on record that the account against a particular project had been restructured and that may impact a developer’s creditworthiness,” adds Srivasttava.