The document discusses several challenges for construction finance in India. It notes that small-scale contractors, which make up 95% of the construction industry, operate on very low margins of 10% or less. Contractors focus on volume over quality and profit margins in order to win contracts through aggressive bidding. Construction companies also struggle with high interest rates, low working capital, delays in funding and project approvals, and political and economic risks. The document analyzes how these challenges have contributed to a boom and bust cycle in the real estate market based on irrational buyer expectations known as the "Greater Fool Theory."

1. Challenges forConstruction
Finance in India
CE725 : Construction Economics & Finance
Term Paper
IIT, Bombay
Under Guidance of
Prof:Venkata Santosh
Kumar Delhi
Yash Shah
163044005

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3. “ProblemsfacedbySmallScale
ConstructionContractorsinIndia”,
Prof.VSrinivasaRaghavan, Karthik
Kumar.
International ResearchJournalof
EngineeringandTechnology(IRJET),May
2015
• Small scale – 95% of
construction industry
in India
• 58 Companies
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4. Low Margins
Lowest Bidder the winner
Low estimation - Aggressive bidding
Most contractors work on low EBIDTA of 10% or less
Net profit margin of 2-4%
Focus on turnover volumes than margin
Win large orders based on pre-qualification
Partly sub-contract
Conventional technology
Inferior quality
Retention Money : 10-15% (12-24 months)
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5. https://www.wsj.com/articles/SB122843724270881449
Repo
Rates
Between
2007-2015
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6. “Construction companies
facedifficultiesindebts
servicing”byRahulChandran
& AmanMalik,
LiveMint(e-news)
 87 Infrastructure Companies studied
 Average Interest Ratio of 2 (EBIT/Interest)
 Around 17 companies have Interest Ratio less than 1
 LowWorking Capital
 Current Ratio less than 2
 Delay of financial closure
 Funding Delay by bank beyond Financial closure time.
 Approval delays
 Political risk
 Failure of estimated cashflows
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7. Rising Interest
 Almost nil equity funding
 Bank cautious on giving loans
 High Bank Guarantees submitted by company
 Fees Charged by bank high ,due to increased risk
perception
 Decrease of credit rating on default
 Around 15-18% -commercial loan
 Builders wrongly use loan credits from buyers: 9- 10%
housing loan
 Decrease in value of Rupee - Imported resources with
Fixed price in contract .
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8. Greater Fools
Theory
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Greater FoolsTheory

9. Greater Fools
Theory
 Price not determined by its intrinsic value
 Irrational beliefs and expectations of market
participants
 Always a buyer willing to buy at a higher price
 Beliefs
 Property prices always rise
 Never ending demand
 Real Estate growth always related to GDP
 Trap for foreign / inexperienced investors
 New funding to cover old losses
 Property Bubble
 Last Person – the looser
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10. Concluding
Remarks
 Perception Based
 Trend Followers
 Price Sensitive- Highly low schedule rates
 Quantity over Quality
 Lack of Management & EconomicTechnicalities
 Labour intensive
 Political influence
 Single Window Clearance
 High Privatisation
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11. References
“Problems faced by Small Scale Construction Contractors in India”,
Prof.V Srinivasa Raghavan, Karthik Kumar.
International Research Journal of Engineering andTechnology (IRJET),
May 2015
“Construction companies face difficulties in debts servicing” by
Rahul Chandran & Aman Malik, Live Mint(e-news), September
2012
“Financing Infrastructure in India: Macroeconomic Lessons and
Emerging Market -Case Studies”, James P. Walsh, Chanho Park
and JiangyanYu, August 2011
“Challenges persist for construction sector: ICRA”, Published in
India Infoline News Service, Mumbai, April 20, 2016
“Concrete facts about construction companies”, by
V.Venkateswara Rao. Published in Business Line, 17th May 2012
http://www.investopedia.com/terms/g/greaterfooltheory.asp
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ThankYou..

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