Real estate sector needs to tap finance from banking system not home-buyers, says Housing Ministry
The sector needs a rating system to sieve out good projects from bad to access bank financing

The real-estate sector needs to access finance from the banking system and not be so heavily dependent on money of homeowners to build houses, said Mr Manoj Joshi, Secretary, Ministry of Housing and Urban Affairs 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 can access capital from the 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 indicated.

In the real-estate sector, contractors and vendors (who work for developers) do not access credits from banks. Both work on money that they get as advance from the government clients or developers who get their money from the house owners. This leads to a tight crunch in working capital in the entire supply chain. This further leads to delays, higher-cost and inefficiencies, and a project that could get completed in three years takes five, said Mr Joshi. “We are hurting our economy by not providing capital to such an important segment of the real-estate sector” he emphasised.

Admitting that the sector has had its blacksheeps, Mr Joshi said that is one reason the banking sector is wary to invest in it. “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” observed Mr Joshi.

The real-estate sector needs to help the regulator and banking system evolve a credible framework, may be a rating system to differentiate between good projects and bad projects, so that it can access capital from the banks, said Mr Joshi.

“We don’t have an efficient well-oiled system, and even if within government arms such as Central Public Works Department (CPWD), National Buildings Construction Corporation (NBCC) we give advance to the contractors, they don’t pass it to the vendors before 4 to 5 months” he said, adding that the government is looking to create formal structures, where it can give some amount of money directly to vendors.

Stressing that there have been a lot of improvement in the real-estate sector in last seven years with Real Estate Regulatory Authority (RERAs) coming into being, Mr Joshi pointed out that most state level regulators till now have focused on the consumers getting their booked homes on time. “The next wave of improvements have to come from RERAs on whether what was being promised to the consumer by the developers on standards of construction and other quality parameters are being delivered. This again takes us to accessing finance from banking systems, which can make it possible for developers to expedite construction and deliver the consumers after they have made the houses—this would be the ideal scenario” he added.

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

The Secretary of Ministry of Housing And Urban Affairs also stressed that urban planning for Tier 2, Tier-3 Cities needs to evolve, and that is a priority area for the government.

Mr Raheja further foresees demand in the sector to be driven by growth in services sector like BPO, high-end technology work, pharmaceutical sector work, and data centres.

Mr Sriram Khattar, Managing Director, Rental Business, DLF, noted that the growth in real estate sector have been helped by reforms like RERA (real estate regulator), GST (goods and services tax), framework for REIT and digitisation of land records.

29 May 2023

New Delhi