Real estate sector needs to tap finance from the banking system and not depend on customer advances: MoHUA Secretary

The real estate sector needs to access finance from the banking system and not be dependent on homebuyers’ advances to build homes

The real estate sector needs to access finance from the banking system and not be dependent on homebuyers’ advances to build homes, said Manoj Joshi, Secretary, Ministry of Housing and Urban Affairs (MoHUA) at the CII Annual Conclave on Indian Real Estate, 2023.

“The real estate sector needs to help the regulator and the banking system evolve a credible framework to differentiate between good projects and bad projects so that it (good projects) can access capital from banks,” he said.
In the absence of a system to segregate good borrowers from bad ones, all players are treated as unreliable by the banking sector, he said.

"I think the sector needs to work on enabling that differentiation between good projects and bad projects. Rating is one way. Past performance is another way. But we don't have a framework as of now," Joshi said.

Unless there is a credible framework with the regulators, financing real estate projects would be difficult, he said.

"...so if you want a really professional market, we need to provide finance to this industry and not the homebuyers providing the entire finance. That model needs to change.”

"I think the sector needs to enable regulators through a better rating system or a better appraisal system to enable that to happen. Otherwise, all of you will be treated as bad or as good as the worst person in the group. I think we need to work on that," he observed.

In the real estate sector, contractors and vendors (who work for developers) do not get access to credit from banks. Both work on money that they get as advance from government clients, while developers get their money from home buyers. This leads to a working capital crunch, which in turn results in delays, higher costs and inefficiencies.

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Joshi pointed out that inadequate cash flow in the hands of contractors and small vendors leads to project delays and cost inefficiencies. Hence, a project that can get completed in three years may end up take five, he said.

"Are we helping our economy by not providing finance to such an important segment of our economy?" he asked. "We are hurting (it) far more," he said.

"We have had black sheep in the sector, and probably that guides our entire prudential policy of whether finance should go to this sector or not. Everyone agrees that finance is required by this sector, but because of those black sheep everyone is scared of taking action," Joshi said.

“The banking system wants its capital in safe hands. If the borrowing was through a market system, it would differentiate between a good borrower and a bad borrower, but since we largely have a public sector-based banking system, our appraisals are not so sharp. Our inability to differentiate between the good and bad borrowers is leading to brand the whole real estate sector as a bad case of finance, and (that’s the reason) we don’t liberalise finance in this sector,” he said.

“We don’t have an efficient, well-oiled system. And even if government arms such as Central Public Works Department (CPWD) and National Buildings Construction Corporation (NBCC) give advances to the contractors, they don’t pass it to the vendors before four to five months,” he said, adding that the government is looking to create formal structures where it can give some amount of money directly to the vendors.

Stressing that there has been a lot of improvement in the real estate sector in the last seven years with Real Estate Regulatory Authority (RERA) being brought in, Joshi said that most state-level regulators till now have focused on buyers getting their homes on time.

“The next wave of improvement has to come from RERA on whether what was being promised to the consumers by the developers on standards of construction and other quality parameters are being delivered. This again takes us to the issue of access to finance from the banking system, which can make it possible for developers to expedite construction and deliver homes to consumers—this would be the ideal scenario,” he added.

Urban planning

The Secretary also stressed that urban planning for Tier-2 and Tier-3 cities needs to evolve, and that is a priority area for the government.

On urban planning, Joshi said that Rs 6,000 crore was provided in last year's Budget and Rs 20,000 crore in the current year’s Budget to provide incentives to States for undertaking reforms. He lamented the fact that there is no urban planning in Tier II and Tier III cities.

India’s real estate sector expects to see demand from low-cost units where affordability is key, said Neel Raheja, Chairman, CII National Committee on Real Estate and Housing, and Group President, K Raheja Corp.

Sriram Khattar, Managing Director, Rental Business, DLF, noted that growth in the real estate sector has been aided by reforms like RERA, Goods and Services Tax (GST), framework for REIT and digitisation of land records.

Addressing a session on Tier II and Tier III cities emerging as the new centres of real estate growth, Rajan Bandelkar, Naredco President, said, “In the past, before RERA and ease of doing business initiatives, developers who ventured into Tier II and Tier III cities faced significant challenges and financial losses. Only those who focused on commercial properties and leasing were able to survive, as there was less urgency to sell. On the other hand, the residential market posed obstacles such as the need for local approvals, knowledge of the local language, and familiarity with the local community. These factors can create difficulties for non-local developers. The development of infrastructure, including high-speed rail networks and metro systems plays a vital role in boosting the growth of these emerging cities.”