Govt nudging banks to solve real estate tangle

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Assets amounting to at least Rs 3 lakh crore of various stakeholders from banks to customers are stuck up in incomplete real estate projects around the country and the government is quietly prompting banks to work out deals to catalyse their completion, The Economic Times has reported. The trick is to surrender first rights on the assets and engage fruitfully with last-mile financiers to resume work on stalled projects that have jeopardised life’s savings of lakhs of home buyers.

Pushed by the Supreme Court the government created special windows for the resolution of the real estate imbroglio where developers have run out of money resulting in real estate projects running aground leaving hapless consumers in high sea.

Following the court directive in 2019, SWAMIH Fund (Special Window for Completion of Affordable and Mid-income Housing) was set up to provide fresh capital to complete projects that are stuck up. This fund is managed by SBICAP Ventures an as alternate investment fund.

But so far only two projects that have been originally funded by banks have been taken up by this fund for completion.

“The government was to fast-track the resolution of such stalled projects,” said an unnamed official quoted in the report.

Underutilised fund The impatience of the government originates from the fact that the SWAMIH Fund was created way back in 2019. To accelerate the process, all the stakeholders have met three times in the past two months to get more projects going. Latest data state that the fund has approved in principle 131 projects cumulatively worth Rs 13,600 crore. The government obviously wants more bank-funded projects to be fast-tracked for completion.

The central idea of this entire exercise was to pave the way for completion of stalled housing projects. Developers need more money to finish the projects, which banks are reluctant to provide since their money is already stuck in these. Therefore, developers have to turn to new financiers, who on their part, are reluctant to lend if the banks claim first right on the assets and the cash flow when old buyers pick up these flats or settle the remaining part of their money to take possession of the dwelling units. Before committing their money, new financiers predictably put forward the condition that they will have the first right on the flow of cash when the apartments get sold.

“That’s the precondition the new creditor insists on. Without that there is no deal. With the money stuck for years and project cost escalating, banks are beginning to realise that holding on to the first right is not helping… In surrendering their first claim banks would probably agree on projects where the cash flow is expected to be more,” bank representatives earlier told the same newspaper explaining the logic behind the move.

SWAMIH offers money to stalled projects only when the cash provided by it has a senior charge. The only exception is situations where a regulatory authority holds the first charge. The significance of the first charge is that its holder gets precedence over other creditors/stakeholders to sell the asset and realise its dues.

However, with the realisation dawning among banks that this may be their last chance to be a little flexible and get the projects off the ground since the real estate market is picking up, the chance of reaching settlements look brighter than earlier.

Bank officials have also said that they have sought some flexibility from the Reserve Bank of India that any fresh funding to these projects should be treated as standard loans and not money issued to projects that are stuck. In some of these real estate projects loans issued earlier have already turned NPAs.

SWAMIH is considering projects that have a positive net worth. Reports suggest that it has come out of 12 projects and granted approval to about 1.1 units. Projects that are registered with RERA have run up at least 30% of the project cost and require last-mile funding to complete the projects, the report claimed.