Financing Real Estate: Bridging the Gap

ACKNOWLEDGMENT
At the outset, I would like to thank Jamnalal Bajaj Institute of Management
Studies and University of Mumbai for granting me an opportunity to work on this
project, which introduced to the exciting world of Research Study.
This project has been a rich learning experience, exposing me not just to the industry
at large, but also allowed me to put into practice the Real Estate knowledge that I
had accumulated. This project would not have been possible without the support of
the following:
1. My project guide who enlightened me with the clarity of subject and guided me
throughout the project duration.
2. My friends from industry & from institute - who helped me understand this sector
and provided relevant reference material and guidance.
3. Institute Library and staff for providing reference material, books, articles and
journals for this project.
4. I would also like to thank my colleagues Roshni Lakhwali and Siddhesh Dalvi,
seniors, alumni for advising on various aspects for selection of topic and
providing there valuable guidance on the project.
Once again I extend my warmest regards to all those individuals who contributed to
shaping up this project and helped me at each step of the wayI

Jamnalal Bajaj Institute of Management Studies Page 2
TABLE OF CONTENTS
1 EXECUTIVE SUMMARY ............................................................................................... 5
2 PROJECT OVERVIEW.................................................................................................. 7
2.1 OBJECTIVE OF THE STUDY................................................................................. 8
2.2 RESEARCH............................................................................................................ 8
2.2.1 RESEARCH STATEMENT .............................................................................. 9
2.2.2 NEED FOR RESEARCH ............................................................................... 10
2.2.3 BACKGROUND FOR RESEARCH ................................................................ 10
2.2.4 AREA OF FOCUS ......................................................................................... 11
2.3 LITERATURE REVIEW ........................................................................................ 11
2.4 BANKING SECTOR PERSPECTIVE – SIGNIFICANCE AND CONCERNS.......... 12
2.5 REAL ESTATE SECTOR PERSPECTIVE – SIGNIFICANCE AND CONCERNS.. 14
2.6 HYPOTHESIS....................................................................................................... 15
2.7 DATA COLLECTION - METHODOLOGY ............................................................. 15
3 SECTOR IN FOCUS – INTRODUCTION..................................................................... 16
3.1 REAL ESTATE ..................................................................................................... 16
3.1.1 OVERVIEW OF REAL ESTATE INDUSTRY.................................................. 18
3.1.2 STAKEHOLDERS.......................................................................................... 20
3.1.3 CHALLENGES FACED BY REAL ESTATE SECTOR ................................... 21
3.2 BANKING ............................................................................................................. 22
3.2.1 STAKEHOLDERS.......................................................................................... 23
3.2.2 CURRENT SCENARIO.................................................................................. 24
3.2.3 CHALLENGES FOR BANKING SECTOR...................................................... 25
3.3 CORRELATION OF REAL ESTATE AND BANKING SECTOR ............................ 29
4 NEED FOR RESEARCH.............................................................................................. 32
4.1 IDENTIFY THE GAP............................................................................................. 32
4.2 PROCESS EFFICIENCY ...................................................................................... 33
4.3 SECTOR PERSPECTIVE..................................................................................... 34
4.4 COUNTRY PERSPECTIVE – IMPORTANCE....................................................... 35
4.5 CURRENT SCENARIO......................................................................................... 37
5 PERSPECTIVE RESEARCH ....................................................................................... 43
5.1 QUESTIONNAIRE FORMATION.......................................................................... 43
5.2 IDENTIFYING PARTICIPANTS ............................................................................ 44
5.3 RESULTS AND INFERENCES............................................................................. 45
6 HYPOTHESIS.............................................................................................................. 51

7 OBSERVATIONS AND CONCLUSIONS ..................................................................... 53
7.1 MEANS AND METHODS OF FINANCING ........................................................... 53
7.2 COMPARISON OF AVAILABLE MEANS AND METHODS OF FINANCE ............ 55
7.3 LIMITATIONS AND CHALLENGES OF THE STUDY ........................................... 57
7.4 CONCLUSIONS & RECOMMENDATIONS........................................................... 57
8 BIBLIOGRAPHY AND APPENDIX............................................................................... 60
8.1 BIBLIOGRAPHY ................................................................................................... 60
8.2 APPENDIX ........................................................................................................... 62
LIST OF FIGURES
Figure 1: Area of Focus...................................................................................................... 11
Figure 2: 3 year Commercial Real Estate Lending to Loan Book (Public Sector Banks)...... 38
Figure 3: 3 year Total Real Estate Lending to Loan Book (Public Sector Banks)................. 39
Figure 4: 3 year Commercial Real Estate Lending to Loan Book (Public Sector Banks)...... 39
Figure 5: 3 year Total Real Estate Lending to Loan Book (Private Sector Banks) ............... 40
Figure 6: Survey – Category of Participants........................................................................ 44
Figure 7: Frequency and Type of Finance Raised............................................................... 45
Figure 8: Type of development............................................................................................ 45
Figure 9: Ideal Route to Raise Funds.................................................................................. 46
Figure 10: Preference of Service......................................................................................... 46
Figure 11 : Response to Opinion Statement 1 and 2 – Real estate Perspective................ 47
Figure 12: Response to Opinion Statement 3 and 4 – Real estate Perspective.................. 47
Figure 13: Response to Opinion Statement 5 and 6 – Real estate Perspective.................. 48
Figure 14: Response to Opinion Statement 7 and 8 – Real estate Perspective................... 48
Figure 15: Response to Opinion Statement 1 and 2 – Bank Perspective............................. 49
Figure 19: Preferred means of financing by Developers...................................................... 56

LIST OF TABLES
Table 1: Article on Top 10 Banks with Exposure to Real Estate .......................................... 13
Table 2: Type of Developments .......................................................................................... 17
Table 3: %Commercial Real Estate to Loan Book for Public & Private Sector Banks.......... 32
Table 4 : 3 year Commercial Real Estate Lending to Loan Book (Public Sector Banks)...... 37
Table 5: 3 year Total Real Estate Lending to Loan Book (Public Sector Banks).................. 38
Table 6: 3 year Commercial Real Estate Lending to Loan Book (Private Sector Banks) ..... 39
Table 7: 3 year Total Real Estate Lending to Loan Book (Private Sector Banks) ................ 40
Table 8: Comparison of different means of financing........................................................... 56

1 EXECUTIVE SUMMARY
“Roti Kapda aur Makaan” are the three goals that an average individual is trying to
achieve each day in this fast evolving world. The Focus of this study is on “Makaan”
and the two sectors i.e. REAL ESTATE and BANKING that complement each other
with the former playing the role of a car and the latter playing the role of fuel to drive
the economy and meet the growing demand of space to live and to work.
With Liquidity taking a hit in the open Market, the Real Estate Developers are heavily
relying on financial Institutions to make Projects Feasible by financing projects at
considerate cost of such finance across the length and breadth of this country. The
Study is to identify the Gap between Banks Financing Real Estate Projects, the limit
Set for the sector and how to bridge the Gap to make this a profitable cycle for all
concerned i.e. the developer, banks and society at large that needs homes at the
right price now and in future.
The Data and facts generated out of this research will help us appreciate the current
scenario in the Mumbai Real Estate market and Banks funding Companies or
Projects. The Real Estate market is in a quest to meet high Demand of homes where
supply is short and thus overpriced. Real Estate Projects often get stuck due to
insufficient funds and thus the banks play an important role in bridging the gap. The
question is with Property market taking a hit will banks in the coming years dare to
lend to developers where the project may not yield returns or for that matter may
never get completed?

Commercial Real Estate sector is finally bending knees which stubbornly held high
prices in spite of consistently falling buying capacity of Indian consumers across all
major cities in India. Also hurting the developers is the Regulatory and governance
issues.
On the other hand Banks are neither lending easily, until and unless they
have solid track record of repayment and project execution, nor charging them low
interest rates making the project viable. Also most developers are facing cash flow
issues due to gap in low volumes and strained sales
The perspective of both sectors along with challenges is to be taken into account
and highlighted for the stakeholders. Optimize opportunities by improving the
environment for all concerned as a lot is dependent on the performance of the two
sectors for the world‟s most promising emerging market India.

2 PROJECT OVERVIEW
High Property Prices is a reflection of High Demand in a Potential Development zone
which has poor or growing Supply. E.g. South Mumbai Residential market., the price
for the infrastructure provided is bizarre. This highlights the fact that more homes
and commercial spaces are required for a growing area, city, society and a nation.
Real Estate Market is on an upward trend where thousands of societies are to be
redeveloped, several land parcels are yet to be developed to meet the demand for
Commercial and Residential spaces and infrastructural development moving at a
snail‟s pace.
All these Projects need legitimate finance to ensure that they become feasible and
profitable for those who are in business. Banks being one of the biggest sources
available for funds for Real estate Companies and Projects, there is a gap in Banks
Lending and Companies Borrowing the fund. Each bank has a sector limit; this
research will highlight what has been the exposure for the banks in context
(nationalized, private, co-operative) to this high risk high returns sector over the last
3 years. With that in place the research will try to bring out the reasons of such gap
in exposure limit and actual funds limit. Once the same is established the research
report will highlight the areas that both Banks and Real estate companies need to
work on to minimize that gap.
The Project will also highlight and test the base reality that the gap between banks
and real estate is ever increasing for several reasons. The Future of Real Estate
Sector vis-à-vis Liquidity, Sector performance, growth prospects will be discussed to
create a logical explanation towards changing trends.

2.1 OBJECTIVE OF THE STUDY
1. To Determine the Significance and Impact of Bank finance in Real Estate
2. To Establish the Importance and Correlation of Both Sectors in the Indian
Economy
3. To Introduce Banking Sectors Lending Issues and Significance towards Real
Estate Sector
4. To Introduce Real Estate Sectors Issues and Significance towards Banking Sector
5. To Determine the Gaps between Bank finance and Real Estate Sector
6. To Identify the Preferred Means and Methods of finance towards Commercial
Real Estate
7. To Highlight Industry Take on the Future of Commercial Real Estate in the
Country
8. To Create a Study that can be used perpetually for improvement and further
research
2.2 RESEARCH
With primary and secondary data collected, reading and referring to reports from
various sources the study on “Bank Finance in Real Estate – Significance and
Impact” aims to arrive at Some justification of the need for research to be conducted
on this topic; the chapters ahead explain that research will highlight gaps and
challenges – it might add to knowledge, deliver productive outcomes or add value for
policy and/or practice in the real estate sector.

2.2.1 RESEARCH STATEMENT
“Introduction to Gaps, Challenges, Significance and Impact of Bank Finance in
Indian Real Estate Sector. The way forward as looked upon by the industry in the
changing economic scenario”
• As a working professional from the Real Estate sector and my interest towards the
financial aspects of the supply side of the industry, the said research would help
me further understand the dynamics of how developers select and keep up with its
crucial stake holders “Financers”.
• My research is set out to answer the burning question…Why and how much do
banks fund this evolving sector? And what are the challenges both sectors face
while reaching out to each other.
• The changing trends, lack of experience in research and paucity of time are some
of the challenges that I faced during the research. The best way to overcome
these challenges was to network with people in the industry and gather a lot from
their shared experiences and data.
• The research is continuous and can be perpetual and it can be applied towards
identifying and bridging the gap of bank finance in real estate.
• The research openly discusses factors that maybe the obvious reasons for the
gap but it also highlights the significance and impact of Bank Finance in Real
Estate
• The research thus will help developers, bankers and all associated with the REAL
ESTATE universe to appreciate the challenges and thus be better prepared to

deal with finance in the industry, create better and farsighted policies, ease the
procedures and increase the numbers towards Real estate lending
2.2.2 NEED FOR RESEARCH
1. To identify and suggest how to reduce gaps in bank financing more real estate
projects
2. To appreciate the challenges for the both the sectors, as on ground reality in India
is far from theories
3. To look at Process efficiency
4. To correlate importance and impact on society and economy at large due to the
gaps in bank finance t o real estate
5. The grey areas of the systems – how to deal with them
6. Compare other means and methods of financing in the real estate sector
2.2.3 BACKGROUND FOR RESEARCH
The efforts towards making this research more of a learning experience began with
getting clarity on the selected topic by extensive discussion with colleagues and
project guide. The Background for research also involved in identifying the
introductory resources and creating an outline of different layers for the research.
Get a Broad overview of the subject matter
Definitions of the related topic
Introduction to key findings and issues
Major players and industry information

Keywords and subject-specific vocabulary terms that can be used for database
searches
Bibliographies and references that lead to additional resources
2.2.4 AREA OF FOCUS
The Research Study has been directed towards the gaps, significance and impact of
Bank Finance in Real Estate:
1. India Focus
2. Minimum 1-5 year Horizon
3. Commercial Real Estate
4. Banks and Real Estate Developers
Figure 1: Area of Focus
2.3 LITERATURE REVIEW
With two dynamic industries in discussion, the existing information on the topic was
available in plenty. Being a part of this industry for over 6 years, my understanding
about the supply side of the business will be handy in this research. I have created a
roadmap of tapping internal and external resources. The process includes exploring

relevant data from various banks, research reports, general industry interaction and
going through RBI regulation .
Various studies carried out so far focus on either Commercial Real Estate and its
Growth or on Banking where Real Estate is not usually looked upon the way this
study intends to. The study may loosely be related to work done on a few aspects
but the focus on the Gaps is entirely an untapped territory with India Real Estate
Market being the relevant area for study.
With No entry Barrier and evolving regulatory system the developers are adjusting to
the changing scenarios however Banks are cautious on the developments on the
supply and demand of the industry and increasing NPA‟s due to several factors.
RBI Circulars
Research Reports and Papers
Write up Govt. support to infra projects in emerging markets
Analysis by Consultants
RE growth vis a vis GDP growth
2.4 BANKING SECTOR PERSPECTIVE – SIGNIFICANCE AND CONCERNS
Real Estate Sector was on an upward trend with prices creating a bullish wave for
the investors but sadly missing on the core concerns of the demand side of the
industry. As an important segment in the Real Estate Universe it was inevitable that
with the growing supply of the end product there is bound to be a correction in prices

and liquidity will take a hit. The changing development norms have further pushed
the project viability for most and now most developers find themselves in limbo.
The developers thus expect the Banking sector to ease the norms and understand
the liquidity crunch to move on with their business as usual. As the cost of finance
will be low most developers would prefer getting lateral support from them, however
the banks feel differently considering the economic climate around us, slowdown in
growth, increase in NPA‟s over the years.
Table 1: Article on Top 10 Banks with Exposure to Real Estate
“But the property boom of past
5 years has led to huge
exposure by banks in Indian
property market which is now
becoming NPAs for the banks.
To amplify the pain the Reserve
Bank of India has turned down
banks' demand for
restructuring stressed real
estate loans without providing
for potential losses.
Putting together top 10 banks in India has around 5,00,000 crores of exposure
to real estate sector in India, a very high percentage of which could become
NPA if property prices and interest rates doesn't come down and actual
consumers start buying houses to live and not to invest.”
The study will try to establish and bring out major concerns of the Banking Sector
towards the Real Estate Sector such as:
RE Companies are not Transparent about their Project Valuations
Funding Commercial RE is Risky
RBI norms a hindrance to Financing Commercial Real Estate

RE sector is not well regulated
A small percentage of proposals for RE finance get approval
Documentation process is Rigid
Default Risk is High both in RE and CRE
Interest Rate plays important role in sustaining clients
2.5 REAL ESTATE SECTOR PERSPECTIVE – SIGNIFICANCE AND
CONCERNS
As a growing sector over the last 5 years the Indian Real Estate Market has
witnessed an upsurge in price and the ever increasing demand for housing and other
developments has forced this mildly regulated sector to bow down to the demands
and short comings of all its stake holders while the world is waiting for a major price
correction in the Indian Real Estate Market, the supply side of the Industry is already
planning the next 20 years of development. The question is that the banking sector
needs to cohesively create and cash onto this opportunity and help create a more
credible system for this billion dollar Industry.
With low cost of capital, bank finance should be the most preferred means of finance
for the Real Estate Sector. However the gaps are prominent and they have a
significant impact on Real Estate Project funding by banks. Mentioned hereunder are
some significant concerns from Real Estate Perspective :-
Not so Easy in process for documentation
Time Taken for approvals

Low Cost for Approvals and Post Sanction Formalities
Pre-Closure Formalities and Evaluation Process
2.6 HYPOTHESIS
After Ascertaining the Non Current Liabilities of Selected Group of Real Estate
Companies in India and gathering data on private and public sector banks and their
exposure to the commercial real estate out of the total loan book hypothesis have
been formed. It aims at ascertaining and supporting the central topic of discussion
“Bank Finance in Real Estate – Significance and Impact”
“There is a significant difference between average % of Commercial Real Estate
Lending to the loan book of private sector banks and public sector banks over three
years”
2.7 DATA COLLECTION - METHODOLOGY
The Topic and sector in view has plenty of relevant data in public domain. The Data
collection has been done to support and understand the Topic at large and open
multiple avenues for further research:
1. Primary Data – Questionnaire for the Industry
2. Secondary Data – Financial Facts and Figures from Annual Reports, Balance
Sheets
3. Secondary Data – Views, opinions and trends from Research Reports by
other Stakeholders

3 SECTOR IN FOCUS – INTRODUCTION
Real Estate Sector and Banking Sector needs to be understood at large and this
chapter give‟s a simplified Background, Current Scenario and possible relationship
between the two sectors. This chapter is focused at creating a sense of appreciation
towards the contribution of the overall growth India has seen in the past few years
3.1 REAL ESTATE
Most people use common terms to address entities in this industry for e.g. everyone
is a not Builder, or everyone may not be a Broker. There are various terms to define
these entities and terminologies that are often used in Real Estate Development.
Given their close inter-linkages, these sectors are often treated as one.
Real Estate – is a legal term that encompasses land along with those improvements
to it such as commercial and residential structures, roadways and ports that are all
fixed in location
Real Estate Development – is a multifaceted business, encompassing activities that
range from the renovation and re-lease of existing buildings to the purchase of raw
land and the sale of improved land or parcels to others.
Developers – are the coordinators of the activities such as buying land, finance real
estate deals, build or have builders build projects, create, imagine, control and
orchestrate the process of development from the beginning to end, converting ideas
on paper into real property. Real Estate Development is different from
Construction, although some developers also construct.

Builders – are general contractors that specialize in building work or
construction. Construction is the process of building new infrastructure on real
estate.
It’s fascinating that in India till early 90’s and even today developers were/are
known or called Builders. The modern trend in construction design has been
towards the integration of previously separated specialties, especially among large
firms who offer themselves as “one-stop shops” for construction projects. In the
past, architects, interior designers, engineers and developers were more likely to be
entirely individual companies, even in the larger firms. Far from being a single
activity, large scale real estate development is a feat of multitasking by a wide host
of professionals, including financial analysts, legal experts, project managers,
construction managers, design engineers and project architects, amongst others.
Table 2: Type of Developments
Sr. No. Category Type of Development
1 Commercial
Business park, Office building, Ports and waterfronts, Retail park,
Shopping mall / center, Shopping streets, Warehouse District
2 Residential
City block, Company town, Gated community, Housing societies/estate,
Mass/Public housing, Retirement community
3 Industrial Business cluster, Industrial district, Industrial park, Technology centers
4
Science /
Education
Campus Research parks Satellite campus Science Park
5 Municipal Garden city movement, Model village, Planned cities, Planned community
6 Buildings Apartment, House, Skyscraper, Tower block, Villa
7 Miscellaneous
Brownfield land, Cluster development, Construction, Town Park, Parking,
Redevelopment Regional planning, Urban Zoning

3.1.1 OVERVIEW OF REAL ESTATE INDUSTRY
Real estate term defined as structure on earth ground below it such as building
structure. Which is also known as “Realty“. Which include commercial, offices,
residential housing, hotels restaurants, theatres and factories.
Real estate includes sale purchase development of plots (Land),Buildings for
residential on other purpose. The role played in real estate market are land owner ,
developers, builder realtor, property agents, tenants buyers etc. The housing
sectors and construction sectors are main role maker in real estate. Real estate
industry is currently estimated to be US$ 16 billion with a CAGR of 30%.overall
economic value is estimated to be US$ 40-45 billion and accounts for 4-5% of the
GDP.
The real estate sector is a very important and also critical sector of our economy. But
It has a huge different effect on Indian economy and therefore, is a dynamic guider
of economic growth. Next to agriculture, Real estate is the second largest employer.
it also smooth the demand in over 250 Integrant industries .It is a large, huge
diversified sector, with many verticals such as investment, design/construction, land,
development, lending etc. Real estate sector is very important for the government as
it is a big generator of tax revenue. Urban planning is very critical to any growing city
and provides liabilities and huge opportunities. The Indian real estate industry has
been on a roller coaster ride since 2005. Consequent to the government‟s policy to
allow Foreign Direct Investment (FDI) in this sector, there was a boom in investment
and developmental activities. The sector not only witnessed the entry of many new
domestic realty players but also the arrival of many foreign Real estate investment
companies including pension funds ,private equity funds and development
companies entered the sector lured by the high returns on investments. The real

estate sector has been riding through many highs and lows since then. The industry
achieved new heights
Residential real estate industry has witnessed astonishing growth in the last few
years owing to the following reasons:
• Continuous growth in population
• Shifting towards urban areas
• Many job opportunities in service sectors
• improving income levels
• increment in nuclear families
• Easy availability of finance
Demand for houses increased rapidly when supply of houses could not keep pace
with demand thereby leading to a steep rise in residential capital values especially in
urban areas.
Due to change in business environment commercial office space in India has
evolved expressively in the past 10 years especially IT-ITeS. Previously commercial
properties were concentrated towards CBD (Central Business District) areas in large
cities. However, there were emergency huge office space requirement for IT-ITeS,
commercial development started moving towards city suburbs. It resulted in multifold
development of outside city and suburbs like Gurgaon near New Delhi, Bandra and
Malad in Mumbai, and the Electronic city in Bangalore. In addition, over the last 10
years, locations such as Bengaluru, Gurgaon, Hyderabad, Chennai, Kolkata and
Pune have established themselves as emerging destinations for commercial

development, which are competing with traditional business destinations such as
Mumbai and Delhi. Tax sops on the profits of IT companies also led to stupendous
development of IT Parks and SEZs.
Once there were demands for office it automatically linked to additional number of
employees, which in turn is dependent on economic growth.
Demand for commercial real estate was on an upswing between 2005 and early
2008, driven by exceptionally high employee additions in the IT sector. The strong
demand from domestic IT companies and captives of large global players was a
result of increased business, primarily from the US and European markets. A healthy
domestic economy coupled with aggressive corporate expansion plans led to strong
demand from sectors such as Banking, Financial Services and Insurance (BFSI) and
media and entertainment.
3.1.2 STAKEHOLDERS
Stakeholder is defined as “A person, group or organization that has concern or
interest in an organization”. Real Estate Sector in terms of development will ideally
have the following included as its stakeholders.
Micro Environment
Consumers –non destructible asset
Suppliers – Material and Labour who involve in process of Construction
Employees – Expertise required at all levels of Management.
Local Community – Society at Large
Financers – all means and methods of raising and managing funds

Macro Environment
Government – Norms and Regulations are governed and managed by them.
Shareholders – All those who believe in the Company and have a share in the
phenomenal framework
Environment – Social Responsibility towards the Environment at large.
Management – Overall Project as well as company management
3.1.3 CHALLENGES FACED BY REAL ESTATE SECTOR
The key challenges that the Indian real estate industry is facing today are:
1) Lack of clear land titles,
2) Absence of title insurance,
3) Absence of industry status,
4) Lack of adequate sources of finance,
5) Shortage of labour,
6) Increasing manpower and material costs,
7) Approvals and procedural difficulties.
The Indian real estate sector has traditionally been an unorganized sector but it is
slowly evolving into a more organized one. The sector is embracing professional
standards and transparency with open arms. The major established domestic
players in the sector are DLF, Unitech, Hiranandani Constructions, Tata Housing,
Godrej Properties, Omaxe, Parsvanath, Raheja Developers to name a few.

3.2 BANKING
A bank is referred to as a financial institution that provides banking and other
financial services to their customers. It is an institution providing fundamental
banking services such as accepting deposits and providing loans. They are a subset
of the financial services industry.
Before the establishment of banks, the financial activities were handled by Money
Lenders and Individuals. At that time, the interest rates were very high, moreover,
there was no security for public savings, so to overcome such problems, the
organized banking sector was established. The organized banking sector works
within the financial system to provide loans, accept deposits and provide other
services to their customers. The following functions explain the need and
significance of the bank:
To provide the security to the savings of customers.
To control the supply of money and credit
To encourage public confidence in the working of the financial system, increase
Saving‟s speedily and efficiently.
To avoid focus of financial powers in the hands of a few individuals and
Institutions
To set equal norms and conditions (i.e. rate of interest, period of lending etc) to
all types of customers

The following are the major steps taken by the Government of India to Regulate
Banking institutions in the country:-
1949 : Enactment of Banking Regulation Act.
1955 : Nationalization of State Bank of India.
1959 : Nationalization of SBI subsidiaries.
1969 : Nationalization of 14 major Banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalization of seven banks with deposits over 200 Crores
3.2.1 STAKEHOLDERS
Banking Sector is like the lifeline of the nation. It has to keep up with the
expectations of its stakeholders
Socially Responsible Investment Analysts
Professional bodies
Bank employees
Existing and potential shareholders
Customers
Business partners and suppliers
Government
Non-government organizations (NGOs)

3.2.2 CURRENT SCENARIO
The banking sector has become quite challenging nowadays, after the subprime
crisis that surfaced last year and which resulted in an unprecedented global liquidity
crunch.
The flattening of the world has dramatically impacted the dynamics as well as the
pace of global banking business. Mergers, acquisitions, consolidation, expansion,
diversification of lines of business, shifting customer orientation and the changing
regulatory environment are building up the pressure for banks to explore new
possibilities by abandoning the familiar and embracing the unconventional.
Competition is a factor ensuring banks to be creative and innovative every day. In
this milieu, what really enables banks to build a lasting competitive advantage is the
ability to continuously innovate, achieve differentiation and respond quickly to
dynamic business challenges.
During 2008, the banking sector had witnessed wide ranging changes under the
influence of the financial Sector reforms initiated. The approach to such reforms in
India has been one of the gradual and non-disruptive progress as it involved a
consultative process. The emphasis has strongly been put on deregulation and
opening up the banking sector so as to market forces. The Reserve Bank is
consistently working on the development of technological and institutional
infrastructure as well as establishing a regulatory framework with prompt and
effective supervision. Persistent efforts have been made towards adoption of
international benchmarks taking Indian mentality and conditions in consideration.
While certain changes in the legal infrastructure are yet to be effected, the

developments so far have brought the Indian financial system closer to global
standards.
3.2.3 CHALLENGES FOR BANKING SECTOR
This segment showcases challenges faced by public and private sector banks at macro
level. Understanding these challenges will drive the way forward of the discussion on the
said topic.
CHALLENGES FACED BY PUBLIC SECTOR BANKS
Man Power Planning: The banks have to suitably realign their existing human
resources from surplus to deficit pockets. Surplus staff has now been computerized.
Mobility of staff has to be negotiated with employees' organizations as a measure to
improve organizational efficiency and improve productivity.
Customer Relation: Public sector banks firstly, have to concentrate on training their
employees so as to behave correctly with the customers. Apparently, the bank
people treat customers as worthless. If they take certain measures and get
improvement in their services, also if the customer relation in public sector banks
improves, then Public sector banks can prove to be the best.
Talent Management: Banks need to have an excellent pool of competent personnel
who could accept challenging roles early in the career and future as well. Therefore,
banks will have to pay increasing attention to training and development of the
employees to develop a wider managerial pool of competent people who can be
developed fast to play the role of modern banker in ever difficult and turbulent times.
Non-Performing Assets: Non Performing Assets are one of the major challenges of
public sector banks in India. The dreaded NPA rule says simply this: when interest or

other due to a bank remains unpaid for more than 90 days, the entire bank loan
automatically turns into a non performing asset. Main reason for NPA‟s is because of
giving loans to people without proper check of their credit histories. In order to avoid
NPAs banks should provide loans to creditworthy persons & industries after seeing
their creditworthiness.
Employee Training & Motivation: Banks are regularly introducing several new
products but not providing adequate knowledge among their staff. This has resulted
in unsatisfactory services. Also, banks have opened too many service centers
(Branches) but they are not equipped with complete staff which leads to dilution in
customer services. The Banks have not taken up this issue seriously but recruiting
staff to complete the numbers (Heads) and branches are facing various problem and
pressures from all corners. Motivation is also limited to few staff members and
majority of staff is de-motivated. There are different heads but the entire work is
delegated to a single person and it is impossible for just one person to look into all
the matters. Consultants also have played a bad role in this industry. Bank should
seek consultancy teams from their own staff members who are well trained and
experienced instead of employing consultants from outside and paying heavy fees.
Handling Militant Unions: Indian Banking System has so many plus points but the
most unwanted irritant is the militant trade union activism, which is every now and
then trying to paralyze the entire economy, to bully the government and achieve their
wants.
CHALLENGES FACED BY PRIVATE SECTOR BANKS
Interest rate risk: It is the exposure of bank's net interest income to adverse
movements in interest rates. A bank's balance sheet consists mainly of rupee assets

and liabilities. Any movement in domestic interest rate is the main source of interest
rate risk.
Banking in the recent years had been reduced to a trading operation in government
securities. Recent months have shown a rise in the bond yields leading to profit from
treasury operations falling. The latest quarterly reports of banks clearly show several
banks making losses on their treasury operations. If the rise in yields continues the
banks might end up posting huge losses on their trading books.
Competition in Retail Banking: The entry of new generation private sector banks has
changed the entire scenario. The retail segment, which was earlier ignored, is now
the most important of the lot, with the banks jumping over one another to give out
loans. The consumer has never been so lucky with so many banks offering so many
products to choose from. With supply far exceeding demand it has been a race to
the bottom, with the banks undercutting one another. A lot of foreign banks have
already burnt their fingers in the retail game and have now decided to get out of a
few retail segments completely.
The PSBs have been losing business to the private sector banks in this segment.
Therefore, PSBs need to figure out the means to generate profitable business from
this segment in the days to come.
The Urge to Merge: Most of the PSBs are either looking to pick up a smaller bank or
waiting to be picked up by a larger bank.
The central government seems to be encouraging PSBs to merge or acquire other
banks. Global evidence seems to suggest that even though there is great
enthusiasm when companies merge or get acquired, majority of the
mergers/acquisitions do not really work.

Before a merger is carried out, cultural issues should be looked into. A bank based
primarily out of North India might want to acquire a bank based primarily out of South
India to increase its geographical presence but their cultures might be very different.
So the integration process might become very difficult. Technological compatibility is
another issue that needs to be looked into in details before any merger or acquisition
is carried out.
Impact of Basel-II Norms: Banking is a commodity business. The margins on the
products that banks offer to its customers are extremely thin vis a vis other
businesses. As a result, for banks to earn an adequate return of equity and compete
for capital along with other industries, they need to be highly leveraged.
With the BASEL-II norms, the bank can decide on the amount of capital to set aside
depending on the credit rating of the company.
Credit risk is not the only type of risk that banks face. There are various other
operational risks as well such as competition risk, technology risk, casualty risk,
crime risk etc. The original BASEL rules did not take into account the operational
risks. As per the BASEL-II norms, banks will have to set aside 15 per cent of net
income to protect themselves against operational risks.
So to be ready for the new BASEL rules the banks will have to set aside more capital
because the new rules could lead to capital adequacy ratios of the banks falling. For
example, a few banks are planning initial public offerings (IPO) to have enough
capital on their books to meet these new norms.

3.3 CORRELATION OF REAL ESTATE AND BANKING SECTOR
Real estate cycles and banking cycles may occur independently but they are
correlated in a remarkable number of instances ranging over a wide variety of
institutional arrangements, in both advanced industrial nations and emerging
economies.
During the recent financial crisis, the most seriously affected countries first
experienced a collapse in property prices and a weakening of the banking systems
before experiencing their exchange rate crises. Countries where banks play a more
dominant role in real estate markets and hold a greater percentage of assets are the
most severely affected during such a crisis. Therefore, below mentioned, is an
explanation of how real estate cycles and banking crises are related to each other
and why they occur.
Let‟s look upon how real estate prices are determined and why they are so
vulnerable to deviations from long-run equilibrium prices, paying special attention to
the role of the banking system in determining prices-- Increase in the price of real
estate may increase the economic value of bank capital to the extent that banks own
real estate. This then increases the value of loans collateralized by real estate and
may lead to a decline in the perceived risk of real estate lending. For these reasons,
an increase in real estate prices may increase the supply of credit to the real estate
industry which is then likely to lead to further increases in real estate prices. The
opposite is also true. A decline in the price of real estate will decrease bank capital
by reducing the value of the bank's own real estate assets as well as reduce the
value of loans collateralized by real estate. This may lead to defaults, thus further

reducing capital. A decline in the price of real estate is also likely to increase the
perceived risk in real estate lending.
All of these factors reduce the supply of credit to the real estate industry. Supervisors
and regulators may also react to the resulting weakening of bank capital positions by
increasing capital requirements and instituting stricter rules for classifying and
provisioning against real estate assets, leading to even further decline in prices and
supply of credit to the real estate industry.
The beginning of Real estate cycle is explained by a model developed by Mark
Carey that details the role of optimists in the process. They then bring in the role of
non-financial variables as well as of banks and then turn to the part played by
"disaster myopia" -- the tendency over time to underestimate the probability of low-
frequency shocks -- in determining cycles. One result of "disaster myopia" that
occurs when lenders believe that they can accept higher loan-to-value rations,
weaker commitments or guarantees and looser loan covenants without increasing
their risk of loss.
Most studies on the relation between house prices and financial system soundness
share two characteristics:
a) They often focus on overheated housing markets. But the vast majority of
economies does not exhibit clear signs of real estate prices deviating
excessively far from fundamentals. Real estate markets are prone to deviations
since supply is fixed in the short run and the ability of banks to verify riskiness of
borrowers‟ investment is imperfect. Often it is possible with hindsight to
determine which deviations from fundamentals constitute a bubble. Therefore it

is surprising that only few studies investigate the relation between bank distress
and real estate markets when the latter are obviously not overheated.
b) Most studies take a macro perspective and focus on mortgage loan supply
following monetary shocks. But financial stability implications of real estate
developments might apply in particular to more granular micro and regional
levels of the banking system.

4 NEED FOR RESEARCH
The Research carried out here on marks a simple correlation and highlights the
confidence of Banks (Private and Public sector) in Commercial Real Estate Sector
and over all real estate sector. The need is to identify the gaps in Bank Finance in
Real Estate, understand the process efficiency from Bank to Real Estate and Real
Estate to Banks. Get over all sector and country perspective and then get an
overview of the current scenario in terms of sales and revenue in the Real estate
Sector.
4.1 IDENTIFY THE GAP
There are several factors why Bank lending to Commercial Real estate is less than
what the Real estate sector actually expects. Mentioned hereunder are reference
tables stating the percentage of Commercial real estate advances by bank to the
entire loan book.
Table 3: %Commercial Real Estate to Loan Book for Public & Private Sector Banks
Public Sector Banks
Sr. No. Bank %CRE of loan Book
2011 2012 2013
1 Dena Bank 0.00% 0.97% 1.67%
2 Bank of Maharashtra 1.73% 1.65% 4.71%
3 Union Bank of India 1.79% 1.41% 1.70%
4 SBI 1.85% 1.46% 2.39%
5 United Bank of India 2.01% 1.71% 1.23%
6 Syndicate Bank 2.27% 3.89% 4.11%
7 Bank of Baroda 2.66% 2.03% 2.05%
8 BOI 3.15% 2.47% 2.46%
9 IDBI 3.19% 2.95% 2.35%
10 Indian Bank 4.09% 2.74% 1.83%
11 IOB 5.66% 7.31% 5.57%
12 Central Bank 6.38% 5.38% 6.47%
13 Oriental Bank of Commerce 6.41% 5.08% 5.95%
14 PNB 6.71% 5.49% 4.39%
3.27% 2.85% 3.07%

Contd…
Private Sector Banks
Sr. No. Bank %CRE of loan Book
2011 2012 2013
1 HDFC Bank 4.03% 3.15% 3.39%
2 Jammu & Kashmir Bank 5.05% 8.12% 7.18%
3 Yes Bank 5.63% 6.47% 12.24%
4 Axis Bank 6.34% 6.65% 1.20%
5 Kotak Bank 10.36% 13.12% 12.55%
6 ICICI Bank 11.60% 9.38% 9.58%
7.75% 7.06% 6.14%
The Gaps need to be identified to also find appropriate solution and create a viable
roadmap for Real estate Companies to reach out to banks and vice versa. The
discussed gaps broadly include Quality of the Final Product for valuation, Lack of
Transparency, Internal Compliance, Strong regulatory Authority for Real Estate
Sector, Collaterals and stringent terms. The Research will help us identify and review
these gaps from both perspectives.
4.2 PROCESS EFFICIENCY
A major segment of all banks is managing the advances and since the percentage to
the now sensitive sector Real Estate is high, huge efforts go behind creating efficient
processes at their end to manage, create and appraise such advances. On the other
hand the Real Estate sector also deploys best minds in Finance to reduce their debt
servicing to manage all their borrowings, timely payment of cost of capital and other
payments.
The process of getting the funds at the time of requirement determines how swiftly
the project will move. The compliance and documentation may however be lengthy
and the research will help us understand the process efficiency from both the sectors
refer table

4.3 SECTOR PERSPECTIVE
“After recording sluggish growth in the previous financial year, bank credit (loan) to
commercial real estate (CRE) projects has picked up in the current financial year,
registering a 17.4 per cent growth in August, compared to 8.6 per cent during the
corresponding period of FY13. In FY13, bank credit to the commercial real estate
sector grew by 11.5 per cent, compared to overall credit growth of 14.3 per cent.
According to the latest data released by the Reserve Bank of India (RBI), in the first
five months of FY14, credit growth to this sensitive sector was 7.9 per cent
compared to 2.8 per cent during the same period of last year.
In absolute terms, banks have extended Rs 9,900 crores of loans to the commercial
real estate sector in the first five months of the current financial year compared to Rs
3,200 crores during the April-August period of FY13. Due to the sensitive nature of
the commercial real estate, the central bank has prescribed high standard asset
provisioning norm for such loans. Banks have to make one per cent standard asset
provisioning requirement for CRE loans while for residential CRE loans, the
requirement is 0.75 per cent. For most loans, the standard asset provisioning
requirement is 0.4 per cent. In early September, the banking regulator had barred
banks from providing upfront housing loans for under-construction projects through
innovative schemes termed as „80:20‟ or „75:25‟ by the developers. Under such
schemes, one can purchase a property from a developer with bank finance, where
only 20 per cent is to be paid as upfront payment, while 80 per cent can be paid after
getting possession.
The other sector which has seen significant rise in bank finance is the non banking
finance companies (NBFC) sector. According to RBI data, in August, bank loans to
NBFCs has seen a growth of 18 per cent, compared to 5.4 per cent in July. In June,

loan to the NBFC sector grew by 1.9 per cent. Due to the spurt, loan growth during
the April-August period was 10.3 per cent, reversing the trend seen in the last month
when loans fell by 0.2 per cent compared to April. In August this year, banks also
saw a healthy growth in retail loans which increased by 17.8 per cent compared to a
13 per cent rise in August 2012.
RBI data shows credit to industry increased by 17.3 per cent in August, which is the
same as last year. “Acceleration in credit growth to industry was observed in all the
major sub-sectors, barring mining and quarrying, engineering, vehicles, rubber and
rubber products, construction and glass and glassware,” RBI said. Credit to
agriculture continues to see sluggish growth as it increased by 12.1 per cent in
August this year, compared with the increase of 18.7 per cent in the year-ago
period.”
4.4 COUNTRY PERSPECTIVE – IMPORTANCE
Advantage India
Demand for residential property has gone up due to increased urbanization
Growing economy driving demand for commercial and retail space
Growth in tourism providing opportunities in the hospitality sector
FDI in real estate of more than USD11.25 billion between April 2000 and May
2012
In FY12, the real estate sector accounted for 2.0 per cent of total FDI inflows into
India

Allocation of USD625 million for rural housing
FDI up to 100 per cent allowed with government permission for developing
townships and settlements
Market size: USD 55.6 billion 2010-11 Market size: USD126 billion 2015E
Macro Economic View
India‟s GDP growth was registered • at 4.7% in the Jan - Mar quarter of the current
fiscal, marginally up from the last quarter figure of 4.5%. Headline inflation, based on
the wholesale price index, stood at 4.7% for the month May 2013 as compared to
7.55% for the corresponding month of previous year. The reserve bank of India kept
the policy rates unchanged despite lower inflation due to various economic factors
such as currency depreciation and fiscal deficit.
The rupee plunge 8.6% in the April-June quarter due to massive capital outflows and
month end dollar demand from importers. The rupee closed at an all-time low of
60.72 against the US dollar in the last week of June. The overall slowdown in the
economy has impacted the residential market sentiments as buyers were cautious to
make long term Investments decision. The slowdown in sales has resulted in
increased unsold inventories and downward pressure on capital values. Increasingly
projects are offering incentives, and easy payment options.
ECONOMIC BAROMETER
Jul-12 Jul-13
REPO RATE 8.00% 7.25%, REVERSE REPO RATE 7.00% 6.25%,
CRR 4.75% 4.00%, INFLATION 7.52% 4.86%, Home Loan Rate 11.00% 9.95%

Jul-12 Jul-13 YoY % Change
Gold 29,216 26,717 -8.55%, SILVER 51,572 41,026 -20.45%,
Fi xed Deposit 9.00% 8.75% -2.78%, EQUITY 17,103 20,034 17.14%
REALTY INDEX 1,725 1,548 -10.29%
4.5 CURRENT SCENARIO
The current scenario where Public sector banks have been cautious rather
unchanged over 3 years towards Commercial Real Estate lending with a few
exceptions like State Bank of India, on the other hand the private sector bank though
have a higher percentage of loan to Commercial Real estate it has been skewed and
the range has been influenced by individual bank policy.
Table 4 : 3 year Commercial Real Estate Lending to Loan Book (Public Sector Banks)
Public Sector Banks (Amt. in crores)
Sr.
No. Bank Commercial Real Estate Loan Book %CRE of loan Book
2011 2012 2013 2011 2012 2013 2011 2012 2013
1 Dena Bank - 550 1,096 45,163 56692.54 65781.22 0.00% 0.97% 1.67%
2 Bank of Maharashtra 810 927 3,552 46,881 56059.77 75470.78 1.73% 1.65% 4.71%
3 Union Bank of India 2,700 2,508 3,545 150,986 177882.08 208102.19 1.79% 1.41% 1.70%
4 State Bank of India 14,011 12,674 24,988 756,719 867578.89 1045616.55 1.85% 1.46% 2.39%
5 United Bank of India 1,077 1,080 850 53,502 63043.3 68908.66 2.01% 1.71% 1.23%
6 Syndicate Bank 2,428 4,807 6,065 106,782 123620.18 147569.02 2.27% 3.89% 4.11%
7 Bank of Baroda 6,082 5,835 6,727 228,676 287377.29 328185.77 2.66% 2.03% 2.05%
8 BOI 6,814 6,138 7,129 216,154 248833.35 289367.5 3.15% 2.47% 2.46%
9 IDBI 5,009 5,329 4,607 157,098 180572.3 196306.45 3.19% 2.95% 2.35%
10 Indian Bank 3,095 2,472 1,931 75,726 90323.6 105642.55 4.09% 2.74% 1.83%
11 IOB 6,330 8,176 7,834 111,833 111832.97 140724.45 5.66% 7.31% 5.57%
12 Central Bank 8,385 7,941 11,131 131,407 147512.85 171935.85 6.38% 5.38% 6.47%
13 Oriental Bank of Commerce 6,148 5,688 7,668 95,908 111977.69 128955.06 6.41% 5.08% 5.95%
14 PNB 16,243 16,119 13,566 242,107 293774.76 308725.22 6.71% 5.49% 4.39%
79,131 80,246 100,689 2,418,943 2,817,082 3,281,291 3.27% 2.85% 3.07%

Figure 2: 3 year Commercial Real Estate Lending to Loan Book (Public Sector
Banks)
Table 5: 3 year Total Real Estate Lending to Loan Book (Public Sector Banks)
Public Sector Banks (Amt. in crores)
Sr.
No. Bank Real estate Loan Book %RE to Loan Book
2011 2012 2013 2011 2012 2013 2011 2012 2013
1 Dena Bank 5,165 6172.9 7096.81 45,163 56692.54 65781.22 11.44% 10.89% 10.79%
2
Bank of
Maharashtra 8,034 10213.98 14531.99 46,881 56059.77 75470.78 17.14% 18.22% 19.26%
3 Union Bank of India 18,543 20580.69 25928.79 150,986 177882.08 208102.19 12.28% 11.57% 12.46%
4 SBI 134,623 144668.37 183601.46 756,719 867578.89 1045616.55 17.79% 16.67% 17.56%
5 United Bank of India 6,823 7647.55 8196.3 53,502 63043.3 68908.66 12.75% 12.13% 11.89%
6 Syndicate Bank 14,049 16773.54 21724.61 106,782 123620.18 147569.02 13.16% 13.57% 14.72%
7 Bank of baroda 23,858 27157.4 30861.48 228,676 287377.29 328185.77 10.43% 9.45% 9.40%
8 BOI 20,812 24049.57 26628.09 216,154 248833.35 289367.5 9.63% 9.66% 9.20%
9 IDBI 31,291 36784.47 38636.91 157,098 180572.3 196306.45 19.92% 20.37% 19.68%
10 Indian Bank 13,648 12310.02 11940.44 75,726 90323.6 105642.55 18.02% 13.63% 11.30%
11 IOB 15,041 17485.23 18333.4 111,833 111832.97 140724.45 13.45% 15.64% 13.03%
12 Central Bank 17,350 18780.32 23639.02 131,407 147512.85 171935.85 13.20% 12.73% 13.75%
13
Oriental Bank of
Commerce 15,106 14539.64 17703.9 95,908 111977.69 128955.06 15.75% 12.98% 13.73%
14 PNB 42,687 48474.59 52413.99 242,107 293774.76 308725.22 17.63% 16.50% 16.98%
367,031 405,638 481,237 2,418,943 2,817,082 3,281,291 15.17% 14.40% 14.67%

Figure 3: 3 year Total Real Estate Lending to Loan Book (Public Sector Banks)
Table 6: 3 year Commercial Real Estate Lending to Loan Book (Private Sector Banks)
Private Sector Banks (Amt. in crores)
Sr.
No. Bank Commercial Real Estate Loan Book %CRE of loan Book
2011 2012 2013 2011 2012 2013 2011 2012 2013
1 HDFC Bank 6454 6147 8116 159983 195420.03 239720.65 4.03% 3.15% 3.39%
2 Jammu & Kashmir Bank 1323 2686 2815 26194 33077.42 39200.41 5.05% 8.12% 7.18%
3 Yes Bank 1936 2459 5752 34364 37988.63 46999.56 5.63% 6.47% 12.24%
4 Axis Bank 9029 11292 2357 142408 169759.53 196965.96 6.34% 6.65% 1.20%
5 Kotak Bank 4274 5126 6085 41242 39079.24 48468.98 10.36% 13.12% 12.55%
6 ICICI Bank 25095 23790 27804 216366 253727.65 290249.44 11.60% 9.38% 9.58%
48111 51501 52928 620556 729053 861605 7.75% 7.06% 6.14%
Figure 4: 3 year Commercial Real Estate Lending to Loan Book (Public Sector
Banks)

Table 7: 3 year Total Real Estate Lending to Loan Book (Private Sector Banks)
Figure 5: 3 year Total Real Estate Lending to Loan Book (Private Sector Banks)
Muted performances expected in the near to medium term for the real estate sector
led by liquidity concerns, stressed balance sheets, defaults in the system, all time
high inventory levels, high investor involvement,weakening demand and the
overhang of elections. Accordingly, there will be a cut in volumes, average
realisations and valuations across the coverage universe by 10-25%. However, at
Private Sector Banks (Amt. in crores)
Sr.
No. Bank Real estate Loan Book %RE to Loan Book
2011 2012 2013 2011 2012 2013 2011 2012 2013
1 HDFC Bank 30277 25020.26 30121.47 159983 195420.03 239720.65 18.93% 12.80% 12.57%
2
Jammu & Kashmir
Bank 2943 4451.64 4676.67 26194 33077.42 39200.41 11.24% 13.46% 11.93%
3 Yes Bank 2362 3590.95 8377.35 34364 37988.63 46999.56 6.87% 9.45% 17.82%
4 Axis Bank 39401 52730.39 62020.69 142408 169759.53 196965.96 27.67% 31.06% 31.49%
5 Kotak Bank 8988 9832.37 12315.03 41242 39079.24 48468.98 21.79% 25.16% 25.41%
6 ICICI Bank 77734 81421.73 96431.28 216366 253727.65 290249.44 35.93% 32.09% 33.22%
161705 177047 213942 620556 729053 861605 26.06% 24.28% 24.83%

current prices, it is believed most risks have been factored in and the stocks are
trading at attractive
discounts to NAVs. Execution, operating cash flows and debt levels continue to be
key monitorables for the sector. DLF, Oberoi Realty and Mahindra Lifespace are our
top picks in the space.
Expected: Weakening liquidity, elevated inventories, Prices and volumes seen
softening going forward, Physical markets to weaken, stock valuations attractive
MUMBAI
In 2Q 2013, Mumbai‟s residential market witnessed an increase in launches of
premium residential projects in micro-markets like the Powai, Goregaon,
Kanjurmarg and Parel. These projects were priced in the range of INR 10,500 -
26,500 per sq ft.
Construction activities remained slow, resulting in no major new supply during
the quarter.
Demand for smaller residential properties from investors, as well as end-users,
has picked up. To cater to lower ticket sizes; many developers are focusing on
developing smaller unit sizes.
Capital values for prime residential properties remained stable, barring select
locations which witnessed marginal increase in the range of 1 - 2% QoQ. • The
rental values of premium residential properties increased marginally in the range
of 1 - 2% QoQ in almost all of the micro-markets, with the exception of micro-
markets in southcentral locations like Malabar Hill, Altamount Road, Carmichael

Road, Breach Candy, Napeansea Road, Peddar Road, Colaba and Cuffe
Parade, which experienced a marginal decrease in rents of 1% QoQ.
This quarter the rail link between Churchgate and Dahanu Road became
operational, which will improve the connectivity of the western suburbs to the
south Mumbai area.

5 PERSPECTIVE RESEARCH
This Chapter showcases results of the perspective research carried out. A total of 78
respondents to a primary online survey on “Bank Finance in real Estate –
Significance and Impact “have shared their views on basic questions thrown at them.
The Survey helps the study in various ways:
1. Helps us identify the Category of Participants
2. Based on the Category of Participants the survey bifurcates into two sub
surveys
3. Financial Institution professionals share the Banks Perspective
4. All others respondents share the Real estate Perspective
5. Create a Correlation between both sectors
5.1 QUESTIONNAIRE FORMATION
The Questionnaire Segment 1 helps the participant identify himself/herself with
personal details and how they are associated with the Real Estate Universe.
Segment 2 is specifically for all participants that DO NOT represents Financial
Institutions. Their questions focus on the Real Perspective, the preferred means of
finance and so on. There is Opinion to statement question that further highlights the
gaps from Real Estate Sector to RE
Segment 3 is specifically for the participants that represent Financial Institutions.
Their questions focus on the Real Perspective. There is Opinion to statement
question that further highlights the gaps from Real Estate Sector to Banking Sector.

The questionnaire was created after discussion with Colleagues, Bankers and
articles read online.
Appendix 1 - Questionnaire
5.2 IDENTIFYING PARTICIPANTS
The following table highlights the Category of participants. Based on their responses
to segment 1 of the survey they are directed to answer relevant question in either
segment 1 or segment 2.
Total respondents – 74
Financial Institution Professionals – 26
Others - 48
Figure 6: Survey – Category of Participants

5.3 RESULTS AND INFERENCES
Mentioned hereunder are the Results of the Survey carried out. The figures give a
graphical/statistical outlook to each question of the survey. Also mentioned are the
inferences thus drawn.
Figure 7: Frequency and Type of Finance Raised
Inference Drawn: Frequency and Type of Finance Raised – Developers prefer
Annual Valuation based model to determine frequency and type of Funding
Figure 8: Type of development

Inference Drawn: Type of Development - The Figure highlights the type of
development preferred by the respondents i.e. More residential and commercial
property
Figure 9: Ideal Route to Raise Funds
Inference Drawn: Ideal Route to Raise Funds – this figure clearly highlights that the
response is divided when it comes to determining ideal route to Raise Funds
Figure 10: Preference of Service
Inference Drawn: Preference of Service - The result being Public sector banks
states that most respondents feel that Public sector banks are providing better
service.

Inference Drawn: Response to Opinion Statement 1, 2, 3, 4, 5, 6, 7, 8 from Real
Estate Perspective highlights the agreement and disagreement of the respondents to
the possible gaps that the banking sector must focus on to reduce. This will help
them reach out to the Real estate Sector at large.
Figure 11 : Response to Opinion Statement 1 and 2 – Real estate Perspective
Figure 12: Response to Opinion Statement 3 and 4 – Real estate Perspective

Inference Drawn: Response to Opinion Statement 1, 2, 3, 4, 5, 6, 7, 8 from Banks
Perspective highlights the opinions at large by the respondents towards the concerns
of the banking sector towards the real estate sector. The responses further confirm
the major areas that both sectors are weary of.
Figure 15: Response to Opinion Statement 1 and 2 – Bank Perspective

6 HYPOTHESIS
The Research Study gives an opportunity to test various possibilities and various
relationships between the collected data on the giving sector. We are trying to
explain certain statements by using statistical analysis and drawing a hypothesis
amongst variables.
PRIVATE SECTOR BANKS LEND MORE TO COMMERCIAL REAL ESTATE
SECTOR AS A PERCENTAGE OF LOAN BOOK
Hypothesis: There is a significant difference between % of Commercial Real
Estate Lending to the loan book of private sector banks and public sector
banks
Let Mean 1 = %of commercial real estate to loan book by a private sector bank
for 3 years
Let Mean 2 = %of commercial real estate to loan book by a public sector bank
for 3 years
H0 : Mean 1 “not equal to” Mean 2
H1 : Mean 1 = Mean 2
2011 2012 2013 Mean
Public sector banks 1.61% 1.85% 2.63% 0.016088
Private sector banks 7.75% 7.06% 6.14% 0.077529
Sr. No. Bank
% of
loan
Book
2011 2012 2013
1 Dena Bank 0.00% 0.97% 1.67%
2 Bank of Maharashtra 1.73% 1.65% 4.71%
3 Union Bank of India 1.79% 1.41% 1.70%

4 SBI 1.85% 1.46% 2.39%
5 United Bank of India 2.01% 1.71% 1.23%
6 Syndicate Bank 2.27% 3.89% 4.11%
1.61% 1.85% 2.63%
Sr. No. Bank
% of
loan
Book
2011 2012 2013
1 HDFC Bank 4.03% 3.15% 3.39%
2 Jammu & Kashmir Bank 5.05% 8.12% 7.18%
3 Yes Bank 5.63% 6.47% 12.24%
4 Axis Bank 6.34% 6.65% 1.20%
5 Kotak Bank 10.36% 13.12% 12.55%
6 ICICI Bank 11.60% 9.38% 9.58%
7.75% 7.06% 6.14%
By applying the ANOVAs test we see that P < 0.05 and F > F critical. This shows
that H0 is true and there is a significant difference of the two values.
Anova: Single
Factor
SUMMARY
Groups Count Sum Average Variance
0.016088164 2
0.04484
5
0.02242
2
3.08342E-
05
0.077528983 2 0.13207
0.06603
5
4.24214E-
05
ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups
0.00190
2 1
0.00190
2 51.9290838
0.01871805
3
18.5128
2
Within Groups
7.33E-
05 2
3.66E-
05
Total
0.00197
5 3
Further Comparisons of means shows that mean 1 is greater than mean 2 which
proves that %of commercial real estate lending of its loan book of private sector
banks is greater than public sector bank.

7 OBSERVATIONS AND CONCLUSIONS
The Research and the study has helped us reach at multiple conclusions and
observations. The topic is evolving and can be interpreted by different sensibilities in
different ways. Mentioned hereunder in this chapter the focus shifts on looking at
multiple factors observed and some recommendations
7.1 MEANS AND METHODS OF FINANCING
Mentioned hereunder are means and methods of Finance that are available for the
real estate Sector. Finance Plays the most important role in the process of
development as everything is a cost and the production time is generally spread over
2-5 years.
• Financial Institutions – Banks and NBFC‟s that lend money and take exposure
to the magnum Real estate sector to push growth and developments
• Buyers Advances – On booking of a Real estate space buyers to secure a hefty
discount or confirm their booking often pay advances. The Said advances may not
necessarily be used to fund the same project by the developer. It may be used to
acquire new property for development or invest in another project altogether.
There is minimal cost to this option
• Owners Funds – Promoter‟s funds are a sense of commitment and security for
the end user. Financially stable companies prove profitable in the long run and
attracts investors.
• Lease Rent Discounting - The owner of a leased property discounts the lease
agreement and gets the amount upfront by simply diverting the future cash flows
from the party that has leased such property. The said party is now suppose to

pay to the bank or the institution who has been at the receiving end of the
discounting of the lease agreement.
• Investors – they speculate and invest with profitable ventures, stable developers
and promising developments only to unlock value after a some time
• Private Equity – Money galore and interested in being a part of ventures where
high returns can be achieved. High Cost of Capital but is beneficial as the process
becomes more strong and transparent
• Strategic Partners – JV, Competency – The most preferred model in this
liquidity hit market is to bring in a strategic partner that will absorb cost and
shoulder responsibility unlike anyone else
• Grey market – the system is in such a stage that corruption has taken over even
the smallest facet of this industry. The external environment wants to be gratified
at each stage and to do so grey market becomes another means for the
developers.
Non Current Liabilities - Particulars Amount in millions % of total borrowing
A Borrowing from banks 242832.8 22.31%
B Borrowing from financial institutions 54732.8 5.03%
C Borrowings from central & state govt 0 0.00%
D
Borrowings syndicated across banks &
institutions 0 0.00%
E Debentures and bonds 117985.1 10.84%
F Foreign currency borrowings 16595.1 1.52%
G
Loans from promoters, directors and
shareholders 613.4 0.06%
H Inter-corporate loans 47916.8 4.40%
I Deferred credit 13388.9 1.23%
J Borrowings 549188.2 50.46%
K Other borrowings 31748.7 2.92%
L Fixed deposits 13460.5 1.24%
M Commercial papers 0 0.00%
Total Borrowing for 78 Real Estate Companies 1088462.3 100.00%

7.2 COMPARISON OF AVAILABLE MEANS AND METHODS OF FINANCE
The following table states a small comparison from Real Estate perspective amongst
the 3 most preferred means of financing. The table has been formulated after a brief
interaction with a leading consultant Colliers International.

Figure 19: Preferred means of financing by Developers
Table 8: Comparison of different means of financing

7.3 LIMITATIONS AND CHALLENGES OF THE STUDY
The study had certain limitations and thus it remains an open research project for
others to add on to the study conducted so far. Mentioned hereunder are some
glaring limitations:
1. Focus was on Mumbai Real Estate Markets
2. Indian Real Estate Market is to wide and unaligned to have a uniform study
on prices of the project
3. Banking Sector Disclosures are available but there is little scope to create
massive changes in lending decisions
4. Paucity of Time to conduct in depth study about core issues and India
Markets
5. Limited knowledge of designing and carrying out a Research project
7.4 CONCLUSIONS & RECOMMENDATIONS
The Research Project is an open study of Bank Finance in Real estate and has
opened several avenues for all associated to explore more in every way. Looking at
the changing scenario of Demand and Supply of Real Estate Industry and the
economic Environment times to come ahead surely will see:
1. Corrections in Prices in most metros
2. High cost of Capital towards financing Real Estate Markets
3. Upsurge in investment by Non Resident Indians
4. More interest in development through FDI route

5. Banks will have to deal with high number of NPA‟s and reconstruct most
products for the Real estate and Commercial Real Estate at large
6. Proportion of Bank Borrowing for Real estate Companies may further reduce
as transparency and gap in process at large will take time to resolve
7. Concentrated efforts may be made to bring better regulations in the Real
estate Market
8. A joint effort from all three segments in question here will be required to do a
system overhaul
It would be safe to conclude and state that bank finance in Real estate Sector is
significant and does have a huge impact as it caters to the consumers. However to
increase its significance it will have to align and the Real estate sector will have to
align itself with the banking sector to reap the large benefits and create value for
each other.
Most Banks derive their maximum business through Real estate Sector lending and
thus the significance is large and cannot be ignored
Recommendations for how to improve Bank Finance in Real Estate is a huge
statement that requires a lot more study, experience, background, history and
subject understanding. However since the topic has been researched and worked
upon here are my recommendations:
1. Regulatory Authority to verify the authenticity of Developments, Credibility of
the Developers. The Authorities must develop a system to recreate the
confidence in the minds of the consumer, stabilize cost and price of the
product.

2. Create a Corruption free regulated pricing index and implement it with grade
based development rights to individuals and groups
3. The Banks need to have a cell to do due diligence of all projects and create a
single window to ascertain proposals from developers
4. The Banks should reach out to various Developers in real estate universe with
smarter products and bigger exposure appetite.
5. The Banks must increase and exhaust the Commercial Real Estate exposure
limits to drive this relation
6. Joint Forums should be created to reach out to each other and the Policy
makers at large
7. The policy must be inclusive and cannot be one sided as it will create a lag
that will be tough to deal with.
The study has opened up several areas to be discussed and this small study is just
the beginning to the new era of the Bank and Real estate Sector relationship.

8 BIBLIOGRAPHY AND APPENDIX
8.1 BIBLIOGRAPHY
Annual Reports Banks
Report Type Bank Reviewed Year
Annual Report Dena Bank 2011-2012, 2012-2013
Annual Report Bank of Maharashtra 2011-2012, 2012-2013
Annual Report Union Bank of India 2011-2012, 2012-2013
Annual Report SBI 2011-2012, 2012-2013
Annual Report United Bank of India 2011-2012, 2012-2013
Annual Report Syndicate Bank 2011-2012, 2012-2013
Annual Report Bank of baroda 2011-2012, 2012-2013
Annual Report BOI 2011-2012, 2012-2013
Annual Report IDBI 2011-2012, 2012-2013
Annual Report Indian Bank 2011-2012, 2012-2013
Annual Report IOB 2011-2012, 2012-2013
Annual Report Central Bank 2011-2012, 2012-2013
Annual Report Oriental Bank of Commerce 2011-2012, 2012-2013
Annual Report PNB 2011-2012, 2012-2013
Annual Report HDFC Bank 2011-2012, 2012-2013
Annual Report Jammu & Kashmir Bank 2011-2012, 2012-2013
Annual Report Yes Bank 2011-2012, 2012-2013
Annual Report Axis Bank 2011-2012, 2012-2013
Annual Report Kotak Bank 2011-2012, 2012-2013
Annual Report ICICI Bank 2011-2012, 2012-2013
Annual Reports Real Estate Companies
Annual Report Godrej Properties 2012-2013
Annual Report Orbit Corporation 2011-2012
Quarterly Reports/Industry Journals
Quarterly/Annual Journal/Report Organization
Infrastructure in India, A vast land of construction opportunity PriceWaterHouseCoopers
Office Property Market Overview July 2013 Colliers International
Residential Property Property Market July 2013 Colliers International
Introduction to Private Equity July 2013 Colliers International
Industry overview July 2013
Bank of America Merill
Lynch
Reality Check - December 2012 JP Morgan

Real Estate - Sector Update September 2013 Edelweiss
Real Estate - September 2013 IBEF
Research Papers/Reports
Research Topic/Paper Author/Organization
Bridging the Finance Gap in Housing and Finance 2000 Ruth Mcleod
A Brief on Indian Real Estate Sector 2013 Corporate Catalyst India
Real Estate Indices As A Barometer Of Stable Real Estate
Returns And Predictor Of Real Estate Risks During Real Estate
Boom Or Burst Cycles.
Manohar Velpuri
Crisil Research February 2013 Crisil
Online Articles
1. http://www.indiapropertyboom.com/2013/02/banks-exposure-to-real-estate-sector-
in.html#sthash.keSS9ypE.dpuf
2. http://www.livemint.com/Specials/Jz0STkDuhEehFlOb6kVfoM/How-Indias-banking-sector-
weathered-the-global-storm.html
3. http://businesstoday.intoday.in/story/real-estate-sector-challenges-woes/1/192582.html
4. http://www.indianexpress.com/news/growth-in-bank-lending-to-real-estate-drops-to-4--in-june-
report/1001665/
5. http://businesstoday.intoday.in/story/world-bank-loan-for-low-cost-housing/1/197817.html
6. http://www.ibef.org/industry/real-estate-india.aspx
7. http://www.livemint.com/Money/dnnRHo4euIweeUaODAsRiK/Expanding-residential-footprint.html
8. http://services.bluebytes.info/BlueBytes/include/DetNewsMultiPage.php?mode=News&isChild=0&
NID=923f0057Ae2bfA4092Aba57A8cd18f1898b4&NUID=4042&Comp=8220AB02-649F-4BDB-
879E-BA3F7A649478&len=8&isLevel=175359&Qualify=1&FromD=2013-09-20&ToD=2013-09-
20&ChID=&isLevel=175359
9. http://www.realtyplusmag.com/rpnewsletter/fullstory.asp?news_id=24311&cat_id=1
10. http://content.magicbricks.com/bangalore-ensures-20-25-returns-in-2-years/
11. http://content.magicbricks.com/non-resident-gujaratis-wary-of-investing-in-realty-sector/
13. http://content.magicbricks.com/budget-housing-finds-demand-in-bangalore-south/

14. http://www.thehindubusinessline.com/industry-and-economy/real-estate/developers-selling-
noncore-biz-to-improve-balance-sheet-study/article5146377.ece
16. http://www.business-standard.com/article/markets/real-estate-stocks-present-pockets-of-
opportunity-113091700263_1.html
18. http://articles.economictimes.indiatimes.com/2013-09-19/news/42218024_1_luxury-segment-
luxury-housing-dwarka-expressway
20. http://articles.economictimes.indiatimes.com/2013-09-19/news/42218297_1_manual-parking-
multi-level-parking-underground-parking
21. http://www.thehindubusinessline.com/industry-and-economy/home-prices-could-
drop/article5142480.ece
22. http://content.magicbricks.com/slowdown-in-india-not-a-deterrent-for-global-realty-players/
23. http://www.business-standard.com/article/economy-policy/real-estate-regulation-bill-to-draw-fair-
industry-practices-accountability-113091901135_1.html
24. http://content.magicbricks.com/a-square-look-at-the-revised-land-acquisition-rehabilitation-and-
resettlement-bill/
26. http://www.business-standard.com/article/opinion/empty-shells-113091901125_1.html
8.2 APPENDIX
1. Questionnaire for Primary Data Collection through survey:
Name of the Participant? *
Current Company/Organization? *
Your Designation with Current Company/Organization? *
e.g. Managing Director, CEO, Manager and so on

In What Capacity are you part of the "Real Estate" Universe? *
Real Estate Developer
Real Estate Broker
Real Estate Investor
Agency to Real Estate Companies
Professional Service to Real Estate Company (Architects, PMC's)
Real Estate Professional (Employee)
Financial Institution Professional (e.g. Private Equity, Banks)
Real Estate Consultant
Other
Influencers: Supply Side of the Industry
Type Of Development that you are interested/associated with? *
Residential Property
Commercial Property
Commercial Parks
Leisure Infrastructure
Other
According to you what are Preferred Means & Methods of Financing Real Estate Projects By
Developers? *
Banks
NBFC's
Other Financial Institutions
Private Equity
Buyers Advances
Owners Funds
Lease Rent Discounting
Strategic Partnership
According to you what is the ideal Frequency & Type of Finance Raised for Real Estate Projects? *
Project Based Funding
Annual Valuation Based

Perpetual Limit Based
One Time Funding
Others
According to you what is the ideal route to raise such funds? *
Through an Agency
Through an Intermediary
Direct Approach
Others
Ideal for service to Real Estate Companies? *
Public Sector Banks
Private Sector Banks
Co-operative Banks
Other Banking Institutions
Availed Bank Products and Service opted/preferred by Real Estate Developers? *
Bank Guarantee
Term Loan
LC
Construction Loan
Lease Rent Discounting
Equipment Loan
Approvals for Home Loans
CASA
others
Bank Finance in Real Estate - RE Perspective *
Raising Funds from your preferred Bank, What is your opinion?
Strongly
Agree
Agree
Neither Agree
nor Disagree
Disagree
Strongly
Disagree
There is ease in
process for
documentation

Strongly
Agree
Agree
Neither Agree
nor Disagree
Disagree
Strongly
Disagree
Minimal Time
Taken for
approvals
There is Low Cost
for Approvals
Post Sanction
Formalities are
simple
Pre-Closure
Formalities are
simple
Amount Disbursed
is flexible
Evaluation
Process is
Simplified by
Banks
Overall experience
is great
Financial Institution Professional
Focus for your Company/Organization: Type of Development *
Residential Property
Commercial Property
Other
Preferred Form of Lending for your Company/Organization? *
Home Loans
Commercial Real Estate
Reverse Mortgage
Other

Bank Finance to RE - Bank Perspective *
Strongly
Agree
Agree
Neither Agree
Nor Disagree
Disagree
Strongly
Disagree
RE Companies
are not
Transparent about
their Project
Valuations
Funding
Commercial RE is
Risky
RBI norms a
hindrance to
Financing
Commercial Real
Estate
RE sector is not
well regulated
A small
percentage of
proposals for RE
finance gets
approval
Documentation
process is Rigid
Default Risk is
High both in RE
and CRE
Interest Rate plays
important role in
sustaining clients
Your Biggest Competitor in RE universe? *
Other Banks
Private Equity
Buyers Advances
NBFC's
Others

Financing Real Estate: Bridging the Gap

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