Real Estate Prices May Soften

Here is something from the Reserve Bank of India (RBI) that should cheer up Individuals who are planning to buy their dream home but put real estate developers into a depression. According to media reports, the RBI has rejected a request from Banks to allow restructuring of loans given to real estate developers. The RBI has in the past too instructed Banks that they should avoid restructuring of such loans. But a slowing down of repayments following a bad phase in the business of real estate developers saw Banks scampering for cover by way of requesting the Regulator to allow restructuring of such loans. Such a request was quite an inevitable one in the light of the fact that the Banks had a heavy exposure to this sector. This rejection from the Central Banker will probably lead to softening of real estate prices as developers will now be forced to liquidate inventory to pay off debts.

Even though the RBI has now rejected the proposal for restructuring of such loans we believe, there is a possibility that one may see the Central Banker probably allowing it to happen in the March quarter of 2013. This is because the fortune of real estate developing companies is not likely to change drastically in a hurry. However, if this happens bigger real estate players with a holding capacity or a diversified stream of cash flows are likely to take an undue advantage going ahead. They would rather prefer to wait for the restructuring which could give them a respite in terms of an extended repayment period as well as lower rates of interest.

Failure to restructure the loans and a consequent non repayment will have and adverse impact on the asset quality of banks who have a good amount of exposure to the real estate Industry. According media reports, State Bank of India, ICICI Bank and Axis Bank among others are some of the banking companies having a large exposure to the real estate industry. Further, in its latest monetary policy announcement, the RBI had decided to increase the provision for restructured standard accounts to 2.75% from the existing 2% which will further create more trouble for the banks in terms of higher provisioning requirements thereby further worsening their financials.