Banks Tighten Lending Norms for Commercial Real

Estate Projects
Banks are getting tough with developers of commercial projects such as office buildings,
malls and shopping centres—a fallout of the corporate loan scam that came to light last
year. Meanwhile, several large property developers have to repay loans in the coming
months. Builders seeking fresh loans have been asked to meet more stringent conditions,
including demands to produce five-year lease agreements with tenants, and having to
settle for considerably lower borrowings against future rent receivables, two bankers said.

Indian Overseas Bank, for instance, will lend to developers only if they produce a five-
year leasing agreement with a lock-in period for tenants. “This is what banks do at this
moment,” said M. Narendra, chairman and managing director of the public sector bank.
“This way, you can be sure of the repayment capacity of the borrower.” Banks grew wary
of lending to commercial real estate projects after several of them turned sour during the
slowdown and developers struggled to repay debt. Their worries increased when in
November the Central Bureau of Investigation nabbed eight senior officials of state-
owned banks and other financial institutions for irregularities in lending to builders.

The Reserve Bank of India (RBI) had been warning banks even earlier about the high-
risk nature of realty, terming it a “sensitive sector” along with capital markets and
commodities because of likely price fluctuations. Anand Gupta, honorary treasurer of
Builders’ Association of India, an industry body of construction contractors and builders,
said no new commercial real estate project has been launched in the past couple of
months. “Banks have not approved any fresh proposals in the last one-two months,” he
said. “Most banks are even hesitating to release sanctioned money.” Bank loans
constitute at least half of a developer’s borrowings.

Already, starved of funds from this key source, developers are turning to land sales, pre-
sales from projects, rental income from office buildings, institutional borrowings, and
money from public share sales to raise money, a majority of it to repay bank debt. “We
have made the process more stringent and are highly selective in choosing (real estate)
borrowers,” said the head of corporate banking at a state-run bank. He did not want to be
named. The executive said his bank has sharply lowered the amount of loan given to even
“good” borrowers in the sector against future rent receivables.

“For instance, if the rent lease agreement produced by the developer or owner for five
years amounts to Rs.1 crore, we earlier used to give some Rs.80 lakh against that. Now,
this proportion has been brought down to, say, Rs.50-60 lakh,” he pointed out. The
exposure of Indian banks to the real estate sector was about Rs.5.8 trillion on 31 March
2010, accounting for nearly 17% of their advances. Of this, bankers estimate around
Rs.14,000 crore is repayable by the end of March. Property analysts say in the wake of
falling revenues, cash flow constraints and tightening of bank lending, repayment will not
be easy for developers.
“Since banks have stopped issuing fresh loans to the sector, developers would resort to
high-cost private equity money or refinance debt,” said Parikshit Kandpal, analyst at
brokerage firm Ambit Capital Pvt. Ltd. “Essentially a lender’s market in the current
scenario, we will see bankers asking developers to pay up even if there is a shortfall of
20-30%.” Kumar Gera, chairman of the Confederation of Real Estate Developers’
Association of India, said bank lending to the real estate sector is crucial. “If banks
tighten lending, not only would it up borrowing costs for developers, but it would impact
the pricing of the end-product,” he added.

India’s top developer DLF Ltd needs to repay around Rs.1,600 crore of debt by 31
March. It repaid Rs.1,224 crore as of end-September with money raised by selling land as
well as stakes in its retail business, according to numbers provided by the company after
its second quarter earnings. Its net debt now stands at Rs.19,000 crore. A DLF
spokesperson said the company would not comment because of the mandatory silent
period ahead of its quarterly results. Housing Development and Infrastructure Ltd (HDIL)
has to repay Rs.350 crore by March 2012, and it intends to do so through large land sales
and cash flows from its residential transactions, said Hari Prakash Pandey, vice-president
(finance and investor relations).

HDIL, which recently sold its suburban Mumbai Popular Car Bazaar land for Rs.800
crore, will use some of the sale proceeds to repay debt. “Though we can actually prepay
some of our debt with this money, the macro challenge today is if we should hold on to
cash or repay debt considering tightened liquidity conditions that the sector is likely to
face,” said Pandey. Typically, advances to commercial real estate projects form only a
small part of a bank’s loan book due to the higher risk weight for such lending. Even for
residential property, a segment that has fared relatively better, RBI announced a slew of
measures in its November policy, including a cap on the loan to value ratio at 80% and a
higher risk weight for loans above Rs.75 lakh at 125%. Banks typically lend to
commercial real estate projects at 13-14% on 5-10-year tenures.

Property consultants are also worried about how the dozen-odd developers who were
looking to go public last year, but still haven’t, will repay their debt. Mumbai-based
Lodha Developers Ltd, which was eyeing an initial public offering in 2009-10, has repaid
only Rs.850 crore of the Rs.1,650 crore loan it took from Deutsche Bank AG in 2007.
Managing director Abhisheck Lodha said the company plans to repay the remaining
money in the next few months, largely through internal accruals. “Even if some amount
of refinancing of debt takes place, developers will also try to restructure loans to borrow
money from the same lender, and that will be expensive,” said another property analyst,
who didn’t want to be named.

While revenues did not scale up substantially in the December quarter, robust land
purchases have led to increased borrowings. For instance, Indiabulls Real Estate Ltd’s
(IBREL) debt mounted by Rs.1,690 crore to Rs.3,340 crore on the back of aggressive
land acquisition in the fiscal third quarter, according to reports by brokerage firm Motilal
Oswal Securities Ltd.