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June2016_Credai Presentation To RBI Governer


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Financial Needs of housing & Real Estate

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June2016_Credai Presentation To RBI Governer

  1. 1. Meeting Financial Needs of Housing and Real Estate: Presentation to Governor, Reserve Bank of India by CREDAI June 28, 2016 CA Vinit Vyankatesh Deo
  2. 2. Ideas to Kickstart the economy through MSMEs Dear Readers, The pandemic of Covid 19 which is also now know (in)famously as Corona, will lead to a major remake of the World Economy. Unlike the other crises of this century viz the Dot Com bust of 2001 and the Lehman crisis of 2008, this crisis will not just affect the financial world but will shake the foundations of economies of all the countries - right from Villages and Cities to State and the Nation. Governments at all levels will need to take drastic measures to first stabilise the economy and then to plan for its growth. MSMEs are like the veins of the economy. They are essential to keep the supply of money flowing between the vital organs viz. Large corporates, MNCs, Banks, Government etc. This brief Concept Note presents 5 ideas that can help revive and grow the MSME sector. We urge the Central and State Governments to take swift and drastic steps to revive the MSME Sector so that it can become a solid foundation for building the revival of Indian economy in the post-Corona world. CA Vinit Deo Founder & CEO, Posiview Policy Solutions Feedback to or +91 89757 61062
  3. 3. Confederation of Real Estate Developers’ Associations of India (CREDAI) ▪ CREDAI set up in 1999, is the apex organization representing 11,500 developers spread across 23 states and 160 city chapters. ▪ CREDAI brings the grass root knowledge of the real estate sector to bear upon its agenda of a facilitative policy framework to achieve housing for all, now a Government objective. ▪ CREDAI’s advocacy for housing rests upon the twin role of housing as a growth engine and a development imperative. ▪ CREDAI has also worked incessantly for the protection of consumer interests. Its members follow a voluntary code of conduct binding them to transparency, fairness and equity. The Consumer Grievance Redressal Forums established by CREDAI serve as first port of call for resolution of disputes. ▪ CREDAI has adopted an ambitious social responsibility agenda embracing welfare of workers, skill development, education and cleanliness.
  4. 4. Real Estate and Housing: Where are we today? ▪ Indian real estate sector accounts for about 6% of GDP, is the largest employer after agriculture and is a growth driver for about 250 plus ancillary industries. ▪ However, Real Estate accounts for more than 10% of GDP in all major economies of the world, with USA topping the chart at 17%. At 6% of GDP, Indian real estate has a long way to go before reaching maturity. ▪ The size of the real estate sector in comparison to what India needs fares no better. Officially admitted shortage of housing stands at 18.78 million homes. ▪ To overcome this shortage by 2022, India needs to increase the pace of building homes to about 10 times its current level. ▪ The task is beyond the capacity of the public sector alone. ▪ Real Estate (Development and Regulation) Act, 2016; the uncertain and unpredictable regime of environment regulation and the changes in Land Acquisition Act, further exacerbate the challenges in creating housing stock.
  5. 5. Housing Finance: Its Role in the Indian Context ▪ India is far below the level of developed countries in housing stock and share of real estate to GDP. Hence, India does not face the same issues of housing oversupply or bubble in real estate. Hence, housing needs a supportive financial architecture and not a restrictive one. ▪ Real Estate Bank Credit to Gross Bank Credit in percentage terms has been below 3%. ▪ Net Non-performing Assets in real estate sector stand at zero. On the other hand, according to RBI’s latest Financial Stability Report, industry records the highest stressed advances ratio of about 19.5 per cent, followed by services at 7 per cent. Five sub-sectors viz. mining, iron & steel, textiles, infrastructure and aviation, contribute 53.0 per cent of the total stressed advances. ▪ While India needs ten fold increase in pace of housing construction to overcome housing shortage, the growth of bank credit to housing has fallen into single digits. In fact, the growth in bank credit to real estate in FY 2015-16 has been the slowest in 17 years. ▪ Inference is that improving access of real estate to bank credit is safe and profitable for banks, boosts investments, and incomes and above all increases welfare.
  6. 6. CREDAI’s Suggestions on Bank Credit for Real Estate: Summary ▪ Loans up to Rs. 50 Lakh for houses costing up to Rs. 65 Lakh in metros be classified as priority sector, up from loan of Rs. 28 Lakh for house costing up to Rs. 35 Lakh. ▪ Banks be re-allowed to fund customers for a cash down price as this enables customers to avail of big discounts. Access to committed cash flows from such sales helps deleverage construction cost. The disbursement can be kept in a fixed deposit by the bank and released on construction milestones committed by the developer. ▪ Loan to Value ratio should be more realistic and risk weight to be reduced. ▪ Private Sector to be eligible for slum rehabilitation loans. ▪ Loans to projects for affordable housing be also extended Priority Sector Status. ▪ Affordable housing projects and slum rehabilitation projects should be eligible for raising long term bonds by banks. ▪ Commercial Real Estate has zero level of NPA but requires provisions for standard assets at 1 per cent as compared to 0.40 per cent for the rest of industry. ▪ Real estate projects are infrastructure projects and may be allowed the same treatment under prudential norms for restructuring. ▪ Land cost to be funded by banks as part of project cost as was the case until 2006. Banks should be allowed also to fund incidental costs of land such as zone conversion charges, premium paid to planning authorities and purchase of Transferable Development Rights.
  7. 7. Increase in Limits for Housing Loans under Priority Sector Present Rule Suggestion Explanation Cities above 10 Lakh population : Loan upto Rs 28 Lakhs (Cost of the house upto Rs 35 Lakhs) This limit be increased to loan of Rs 50 Lakh for house cost upto Rs 65 Lakh Whereas the Government has come up with a Housing for All with subsidies for the EWS and LIG segment, the Middle Income Group buyer who finances his house entirely through home loans is unattended. Our suggested limits are based on high and increasing land cost. The aim is to help 90% of the middle income group buyers with reduced cost of home ownership. Cities less than 10 Lakh population : Loan upto Rs 20 Lakh (Cost of the house upto Rs 25 Lakh) This limit should be increased to loan of Rs 40 Lakh for house cost upto Rs 50 Lakh. This matches definition of Affordable Housing in Circular for Long Term Bonds RBI/2014- 15/127 DBOD.BP.BC.No.25 / 08.12.014 / 2014-15
  8. 8. Re-permitting Loans for Cash Down Payment by Customers Present Rule Suggestion Explanation Banks are prohibited from disbursal of housing loans under cost effective innovative structures. RBI may re-allow banks to fund customers for a cash down price. The disbursement can be kept in a fixed deposit by the bank and released on construction milestones committed by the developer. Upfront payment avails customer big discounts. Developers get access to committed cash flows and deleverage construction cost. It also builds up the balance sheet of the HFCs. This was how it was operating before the ban by RBI.
  9. 9. Loan to Value (LTV) Ratio should be relaxed Present Rule Suggestion Explanation Loan to Value Ratio is: Upto 20 Lakhs-75% 20-75 Lakhs-80% Above Rs 75 Lakhs-90% LTV Ratio does not include stamp duty and registration charges Loan to Value Ratio should be standard 90% for all loans. Most of the houses are financed by housing loans. Housing loans to individual buyers will also help the Developers to improve cash flows through faster sales. Banks will be able to reduce risk by converting their Construction Finance loans into Housing Loans.
  10. 10. Risk Weights (RW) on Housing Loans should be reduced to augment housing credit Present Rule Suggestion Explanation Loans upto Rs 30 Lakhs LTV<=80% : RW 35% LTV >80% & <90% : RW 50% Loans upto Rs 30 Lakhs LTV<=80% : RW 20% LTV >80% & <90% : RW 20% Housing Loans across categories are the most secure and least risky loans for Banks and NBFCs. EMIs are paid on time. The underlying asset is appreciating all the time. Hence, Risk Weightage of standard housing loans should be realistic. Loans upto Rs 30 Lakhs LTV<=80% : RW 35% LTV >80% : RW 50% Loans upto Rs 30 Lakhs LTV<=80% : RW 20% LTV >80% : RW 20% Loans above Rs 75 Lakhs: LTV<=75% : RW 75% Loans above Rs 75 Lakhs: LTV<=75% : RW 20%
  11. 11. Construction Finance for Affordable Housing Projects Present Rule Suggestion Explanation Construction Finance for projects where dwelling units cost upto Rs 10 Lakhs and family income of the buyer is upto Rs 2 Lakhs are considered as priority sector lending. Loans to Projects which satisfy the criteria of Housing for All Scheme should be considered as Priority Sector for the purpose of construction finance. The main criteria are 30/60 sq mtrs area and Rs 3/6 Lakh per of family income for EWS and LIG buyers respectively. Developers have started taking up projects under the Housing for All Scheme. The alignment of the definition under Housing for All Scheme will direct bank credit to the right projects and thus support.
  12. 12. Finance for Slum Rehabilitation Projects Present Rule Suggestion Explanation Loans to Government Agencies for Slum Clearance Projects upto Rs 10 Lakhs per unit is included in priority sector lending Loans to Private Developers should also be included in this category Private Developers are work with Government for slum rehabilitation and deliver projects timely. There is a case to treat this segment on par with Public Sector. Banks do not have clarity for creation of security as it is in form of Development Rights given by Government and not land In SRA Schemes the security can be taken as Development Rights given to the Developer against the development being done by him. Development Rights have good liquidity as they are tradable. Hypothecation of the Cash Flows from such sale can be good security for Bankers.
  13. 13. Long Term Bonds for Housing - Definition of Priority Sector Present Rule Suggestion Explanation Banks have been allowed to issue Long Term Bonds with minimum maturity of 7 years for Affordable Housing Projects . Definition of Priority Sector should be amended as follows: a) Affordable housing projects definition in line with Housing for All Policy b) Slum Rehabilitation Projects to include Loans to Private Developers Banks have not issued any Long Term Bonds under this excellent Scheme due to Lakhk of eligible projects in the Real Estate sector. We request you to bring the scope in line with industry requirements
  14. 14. Provision for CRE Loans - Standard Assets Present Rule Suggestion Explanation Commercial Real Estate has provision of 1.00 pc The provisioning for CRE exposure for Standard Assets should be in line with that of other industries. With low NPAs, higher credit to real estate would mean improved profits for banks. Banks have a marketable security in the form of land and unsold inventory. NPAs in real estate are non-existent as compared to rest of industry. The reduced risk weightage will also enable Banks to reduce interest rate which can be passed on by the Developers to the Customer. Commercial Real Estate – Residential has provision of 0.75 pc (Clause 5.5)
  15. 15. ECB guidelines for Real Estate should be in line with FDI Present Rule Suggestion Explanation ECBs are not allowed for housing projects ECBs should be allowed for housing project on par with Foreign Direct Investment (FDI) guidelines. ECB should also be allowed for land acquisition. Foreign Investors and especially NRIs are keen to invest in India’s growing real estate sector due to its growth potential & Real Estate Regulation Act, 2016 effective from 1st May 2016. However they would like to have commitment of some basic fixed returns which are not allowed under the FDI Scheme.
  16. 16. Restructuring of Stressed Assets in Real Estate on par with Infrstructure Present Rule Suggestion Explanation Banks are not allowed to restructure real estate project loans by revising Date of Commencement of Commercial Operations (DCCO) and retain standard classification Real estate loans for projects should be included in infrastructure projects and be allowed for restructuring and standard account classification for a maximum period of three years. Real estate projects comprise all elements of infrastructure such as roads, sewerage, power. Solid Waste management etc. They also involve multiple approvals which are delay prone. Restructuring would help banks take commercially prudent decision.
  17. 17. Banks should be allowed to fund for Land Acquisition Present Rule Suggestion Explanation Banks are not allowed to fund purchase of .land since 2006 Banks should be allowed to finance land purchase as Land is a marketable and appreciating security. Land cost forms 50-70% of cost of the project and is funded by expensive funding of 18-24 pc from Non Banking Finance Companies and Private Equity Funds. This pushes up both the cost and risk of the project pushing housing prices beyond the reach of many.
  18. 18. Banks should be allowed to fund Approval and Premium Costs of a Project Present Rule Suggestion Explanation Banks are not allowed to finance incidental costs of land such as approvals Banks should be allowed to fund Incidental Costs a) Zone conversion charges b) Premiums payable to Planning / Sanctioning Authorities c) Transferable Development Rights / Building Rights These costs add to the value of land In most cities the premiums / charges have been increased significantly in recent years and their financing will ensure faster project implementation
  19. 19. Founders & Advisors ▪ CA Vinit Deo, Founder & CEO Vinit is a Chartered Accountant and an entrepreneur at heart. After a brief stint in leading Corporates (Times of India Group & Geometric Software Solutions), he co- founded Posiview Consulting Partners, an investment banking firm which has has closed over 200 advisory transactions of advising entrepreneurs on business planning, debt and equity raising. His passion for research and governance led to the founding of Posiview Policy Solutions, an Data and Insights driven organisation that will suggest innovative but pragmatic policy initiatives to Governments (Central, State, Local), Industry Associations, Development Institutions etc. ( ▪ Shweta Shalini, Mentor & Senior Advisor After a successful stint as a entrepreneur where she founded and scaled up companies (Fortune Cookie,Real Time Wave), Shweta joined politics and became Spokesperson for BJP Maharashtra as well as a key person driving BJP’s Social Media effort. She also plays a key role in the Startup and Innovation arena with her unique skill sets spanning Corporates, Political, Social and Entrepreneurial Worlds. She will mentor and guide Posiview Policy Solutions to focus on the right issues and devise solutions that can be implemented within India’s governance framework. (
  20. 20. Disclaimer: Presentation represents personal views of the author and not that of Posiview. It is prepared based on publicly available data to the best of the author’s knowledge. The author does not take responsibility of the authenticity, accuracy of the publicly available data. The contents of this presentation are for information purposes only and the author will not be responsible for any decisions made on the same Office 202, Chintamani Pride Near City Prid Multiplex, Kothrud, Pune 411038 Cell: +91 8975761062 Email : THANK YOU!
  21. 21. “Tough times never last. Tough people do.” Robert H Schuller Incubation, Mentoring & Fund Raising for Startups Fund Raising for Real Estate & SME Enterprises Policy Advisory to Government & Industry Associations / / +919130018000