India’s property slump exposes banks to fresh crisis

14 October, 2019 12:00 AM printer

NEW DELHI: India might have thought the worst of a bad loans crisis was past, but a severe cash crunch in the real estate industry could augur fresh strife for its banks.

A slump in the residential property market is leaving many builders struggling to repay loans to shadow lenders - housing finance firms outside the regular banking sector that account for over half of the loans to developers, report agencies.

With about $10 billion of development loans coming up for repayment in the first half of 2020, according to Fitch Rating’s Indian division, the fallout could spread to mainstream banks that have lent money to the shadow lenders or invested in their bonds. Indian financial authorities, including the central bank and government, have said this year that the banking sector’s bad loans - totalling more than $150 billion - are on the decline for the first time in four years after ballooning during a debt crisis.

But the number of property developers falling into bankruptcy has doubled during the past nine months, piling pressure on non-banking finance companies (NBFCs), commonly known as shadow lenders.

A senior banking industry official, declining to be named due to the sensitivity of the matter, said banks would be affected by the property cash crunch in three ways: their lending to NBFCs, their own direct exposure to developers and also individuals who do not repay mortgages.

“It will be a triple-whammy,” he said.

While the Indian banking system could be hit by billions of dollars of additional soured debt, the cash crunch in the housing market has levied a toll in human misery.

Retired Squadron Leader Krishan Mitroo has paid 90% of the cost of his house in Noida, northern India, to developer Jaypee, and the property was supposed to be handed over five years ago. However, Jaypee was forced to delay the project and went into insolvency in 2017.

“The project has been stuck and there is no progress at all. Even the bankruptcy court has not been able to resolve the issue so far, it is just hanging in thin air,” Mitroo said. He did not say how much money he had paid, but properties in that project range from about $56,000 to $140,000.