Zombie’ Buildings Worth Rs. 4.47 Lakh Crore Sound Warning For Banks

Zombie' Buildings Worth Rs 4.47 Lakh Crore Sound Warning For Banks

Non-real estate borrowers are getting caught in the cross-fire.

Ashish Shah is caught in the middle of country’s latest financial crisis. As chief operating officer of Radius Developers, he’s struggling to fund construction of apartment complexes because of a liquidity crunch in the nation’s bloated shadow-banking sector.

“Real estate is a sitting duck,” said Mr Shah. “The timing is very crucial as the slowdown has hit the real estate market quite hard. The industry can’t service interest, new interest, additional interest, because there is no cash flow.”

Radius and hundreds of other developers relied on loans from what India calls non-banking financial companies (NBFCs) to fuel a five-year property boom. That came to a halt a year ago with the default of one of the shadow banking sector’s leading lenders, Infrastructure Leasing & Financial Services. The resulting credit squeeze has left builders such as Radius and Omkar Realtors & Developers Pvt. looking for support, or, like scandal-hit Housing Development & Infrastructure Ltd., filing for bankruptcy.

There are $63 billion (Rs. 4.47 lakh crore) of stalled residential projects across the country, according to Anarock Property Consultants, and their developers have become locked in a downward spiral with shadow banks. As lenders stop new credit, builders are forced to offload properties. Prices fall, causing more real estate loans to turn sour, pushing more shadow banks toward default.

In turn, that has cast a shadow on traditional banks and dried up funding to other businesses, putting more stress on an already slowing economy.

For Radius, the crunch started when one of its main lenders, Dewan Housing Finance, shut off new loans as it attempts to restructure some $12.7 billion debt to avoid bankruptcy. Mr Shah said he gained a temporary reprieve by selling a project to Blackstone Group, but like all builders, his company needs cash to operate while projects are being built.

Edelweiss Financial Services and Indiabulls Housing Finance, which have some of the largest exposures to the sector, are also tightening funding.

The risks of exposure to real estate were underlined by the scandal surrounding HDIL. The Reserve Bank of India abruptly imposed withdrawal curbs on a small cooperative bank that it said had under-reported loans to the developer. The decision triggered panic withdrawals from the bank, prompting the RBI to issue a statement to reassure the public that the banking system is “safe and stable.”

The stresses in the banking industry are an added headache for the RBI as it prepares to cut rates, expected in a decision today, to counter slowing growth.

Some commercial banks that lent to developers and shadow finance firms — notably Yes Bank — have been caught up in the crisis. Banks had boosted overall lending to NBFCs by more than 50 per cent over the past five years, to about $96 billion or nearly 8 per cent of their total exposure.

Yes Bank shares have led the declines in bank stocks, dropping more than 80 per cent in the past six months, including a 13 per cent slump this week. Its proportion of stressed loans could rise to more than 12 per cent, from a net bad debt of 2.9 per cent, according to Credit Suisse Group AG analyst Ashish Gupta.

Yes Bank Chief Executive Officer Ravneet Gill said his bank only had exposure to three NBFCs. “There is a general perception that there is a closer linkage between Yes Bank and NBFCs than actually exists,” he said in an interview on Thursday.

“The biggest risk is, at its core, a liquidity crisis. A liquidity crisis left unattended balloons into a solvency crisis,” said former Reserve Bank of India Governor Duvvuri Subbarao, who steered India through the 2008 global downturn. While he doesn’t see any local bank going down in the current scenario, “some weak non-bank finance companies should be allowed to fail for the entire financial system to come out stronger,” he said.