Banks ask for higher cover on loans to realtors as prices fall

Banks, especially the private ones, are asking for higher collateral from real estate companies while sanctioning loans in view of the softening of property prices.

Banks are now asking for as much as three times cover for their advances to developers compared to two times earlier, real estate executives said.

Axis Bank, for instance, has increased its cover on loans to developers from two times to 2.25 times from this quarter.

"It is just a safety margin," said an Axis Bank executive who did not want to be quoted. Other banks have also started taking extra cover for their credit as developers are trying to boost absorption by giving discounts

"Banks are asking for higher collateral from developers in some cases. I have heard that they are asking for a cover of 2.5 times to three times in some cases," said Lalit Kumar Jain, chairman, confederation of real estate developers associations of India (Credai) and chairman of Pune-based Kumar Builders.

"During these tough times, they should not have resorted to this move," Jain said.

A senior executive from another Mumbai-based bank said developers have no other option but to cut prices. "In such a scenario, we are better off asking them higher collateral," he said.

According to Amit Goenka, managing director and chief executive of Essel Financial Services, the financial services arm of Essel Group, those banks which took 1.2 times or 1.3 times on sale price are the ones who are asking for a higher collateral.

"Since sale prices are soft, they begin to feel that they need higher cover. Those who took same cover on construction costs, there is no problem," Goenka said.

Public sector banks normally lend on land and construction costs while private banks give loans on sale value, he said. Essel Finance takes cover on average sales prices for the past one year.

The recent launches in cities such as Mumbai have happened at 15 to 20% discount to market prices "Bankers are getting little edgy since prices are stagnant in some pockets of metros such as Mumbai," said Revati Kasture, head, research and grading at CARE Ratings.

The decrease in realty stocks in the last couple of months has also played a part in banks asking for higher collateral.Sales are indeed slackening. According to realty research firm, Mumbai Metropolitan Region (MMR) which consists of Mumbai, Thane and Navi Mumbai, saw a decline of 22% in absorption of Chennai and Hyderbad had seen a drop of 8% and one% respectively while Bangalore saw an increase of 17% in FY 2013. The National Capital Region, which consists of Gurgaon, Noida, New Delhi among others saw a marginal rise of two% in FY 2013.

The inventory pile-up across the National Capital Region (NCR), Mumbai Metropolitan Region (MMR) and Hyderabad have almost doubled in the last three years, said recent report from realty research firm Liases Foras.

However, some like Amar Merani, CEO, Xander Finance, say their firm has not increased collateral due to stagnancy in sales.

'We evaluate transactions on a case to case basis.. In transactions which merit higher collateral, we get that and the commercial terms and security structure are adjusted according to the risk profile," Merani said.