Banks & The Indian Property Market

Indian banks are opening their doors to real estate developers but remain wary about the risks of a rapidly growing but new property market, making loans expensive and difficult to come by. Rules on inward investment in the construction industry got eased last year, unleashing a wave of activity and a flurry of deals involving foreign funds.

The realty industry is shedding a shady image of self-financed wheeler dealer property developers. Young businessmen are eager for bank borrowing to help lure foreign partners and turn plots of family land into offices, shopping centers and housing befitting an economy growing at more than eight per cent a year. But industry professionals complain banks have been slow to adapt.

Prospective foreign investors, such as US shopping mall developer Taubman Centers, are also keen to borrow locally but balk at the personal and corporate guarantees on loans often required by Indian banks.

"The immaturity of India's debt markets is one of the most constraining conditions of investing there," said Taubman's Asia president, Morgan Parker. "It's not only the requisite guarantees but the cost of debt and low leverage that make Indian sourced real estate debt generally unattractive."

On the equity side, India's regulators are allowing real estate mutual funds (REMFs) to set up to channel much needed capital into the property industry.

But traditionally, the central bank has tried to steer banks away from lending too heavily to the property sector, wary that banking systems in other developing countries, such as Thailand, have nearly disintegrated because of property market crashes.

Property project funding by Indian banks adds up to $1.8 billion, about 1.5 per cent of outstanding bank loans, according to the Reserve Bank of India. In comparison, Chinese bank exposure to developers in a private property market barely a decade old is worth $114.7 billion, 4.7 per cent of total loans.

Murky land titles
Banks are wary of murky land titles and lack of centralised title registry in India, and land disputes are hotting up as property prices soar. Projects can also get tied up in red tape, and few developers have proven track records.

Yes Bank, says it is leading the way in property project lending, together with ICICI Bank and UTI Bank.

Some 12 per cent of Yes Bank's loans have been to relty developers, and around a third of those are non-recourse loans, which are priced just on projected cash flows with the property as collateral and do not require personal guarantees.

The bank, with outstanding loans of $750 million after two years, aims to double its business each year. Many of its property loan deals are syndicated to other banks. "We're the active players, the rest are frankly followers," as per Yes Bank's president for corporate finance.

Charges and interbank rates: Loans with personal guarantees are charged at a 10.0% to 10.5% rate, compared with an interbank rate of 6.1%. Chinese banks lend to small developers at around 6.0%, but offer much lower rates to listed developers. Loan to value for a project in India is typically 65%, similar to emerging property markets such as China, but much lower than developed markets such as Japan or Hong Kong.