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SBI’s new finance scheme with buyer guarantee: Should a bank own up potential failures of a builder?

Prima facie, SBI doesn’t have much risk in this scheme since the bank will grant loans to star rated builders with proven track record and strong cash flows

January 10, 2020 / 12:48 PM IST

State Bank of India (SBI), the country’s largest bank on January 8, launched a product that promises to refund homebuyers their principal loan amount if the developer delays the project beyond a specific period.

SBI calls it ‘Residential Builder Finance with Buyer Guarantee’. Under this product, builders having good scores with credit rating agencies and CIBIL can avail loans between Rs 50 crore to Rs 400 crore. For the buyer, this product is available for a house costing up to Rs 2.5 crore.

One has to look at SBI’s latest real estate product in the context of the government’s aggressive push for affordable real estate. Recently, the government announced a stressed asset fund of Rs 25,000 crore to revive stalled housing projects.

It has become something of a chicken and egg situation in the real estate sector. Banks are wary of funding builders for fear of further defaults. That is one of the contributing factors to projects getting stalled and homebuyers not getting possession in time. And when delayed projects make headlines, it holds back buyers from investing in new projects. This compounds the problem of slowdown in the real estate sector. Here’s where SBI appears to have found an opportunity.

‘Affordable’ push

Prima facie, SBI doesn’t have much risk in this scheme since the bank will grant loans to star rated builders with proven track record and strong cash flows. Also, since the bank is committing refund to the borrower, it will be highly selective in choosing the projects.

As for the homebuyer, he is getting an assurance from the bank that the project is clean and even if things go wrong, he will get his money back. This should work to revive the demand in the market, said Siddharth Purohit, senior analyst with SMC Global Securities.

“This is what is required to clean up the mess in the real estate sector. Banks had been quite risk averse, so were buyers. This product will help to bridge the gap,” the analyst said.

Anuj Puri, Chairman of Anarock Property Consultants, too gave a thumbs up to the scheme saying the underlying provision of this scheme -- that the bank commits to refund the principal loan amount if a developer fails to complete the project -- will ensure that SBI remains highly selective and work only trustworthy developers.

Going by its performance in the home loan department, SBI didn’t really need to come with a product to attract demand at this stage. The bank has done better than its rivals in the home loan segment.

SBI has a home loan portfolio of Rs 4,24,487 crore as of September 30, 2019 and its gross NPA from the segments is just 0.93 percent of total home loans. The bank witnessed a year-on-year growth of 18 percent in home loans till September and has a market share of 35 percent in that segment.

But if the product picks up, it could significantly benefit the bank to generate more margin. Chances of a risk in the form of guarantee payments are relatively less since only high quality builders can avail this scheme.

Demand slump

While SBI has done well in home loans, that isn’t the case with the industry. Growth has been largely muted in the recent quarters on account of slowdown in the economy. Growth in home loans too has suffered.

According to RBI data, home loan growth actually declined to 9.9 percent in the first eight months of FY20 as against 10.6 percent YoY. With consumer confidence at multi-year lows, banks have been struggling to attract buyers.

With SBI launching the product, it is likely that other banks will come with similar schemes in the next few months, said Naresh Malhotra, a senior banking consultant, who was previously with SBI.

But risk looms

A leading analyst with a Mumbai-based private bank said SBI may be owning up unnecessary risks by promising to compensate the homebuyer in the event of a project failure.

“A bank already runs a high risk the moment it give builder loans of up to Rs 400 crore. Why should it own up the risk of a project failure on the top of that?” asked the analyst, adding that even if the builder enjoys good track record, a project can get stuck due to many unforeseen reasons including various approvals.

A bank may not be in a position to predict such situations even with usual risk management tools, the analyst added.
Dinesh Unnikrishnan
first published: Jan 9, 2020 03:38 pm