NCR Realty sector woes: How buying a flat became a nightmare in NCR

India’s biggest property market by volume has numerous projects stuck for years. What has led to this dismal situation?

On a blazing hot Saturday afternoon in June, a group of people assembled in a small room in an under-construction building at Today Ridge Residency, Sector-135, Noida, a part of the National Capital Region (NCR) centred around Delhi.

The motley group, with people ranging from senior citizens to software engineers, had one thing in common. Each one of them has parted with a huge chunk of their savings to buy a home, which had not been delivered to them.

Most of them booked an apartment in the project owned by Today Homes and Infrastructure Pvt. Ltd in 2010.

The buyers were assured of delivery in about two-and-a-half years; it has been six years now and most are yet to get possession.

At some other projects by builders such as Unitech Ltd, Amrapali Group, The 3C Company, Gardenia Group and Jaypee Group, the wait for possession has lasted more than eight years.

Rajiv Kumar Goel, who works for a private firm, said he commutes every Saturday for five hours to and from Faridabad to join the group.

“I have to take leave every Saturday to come here and my company cuts that amount from my salary,” he said.

Today Homes, The 3C company, Gardenia Group, Amrapali Group and Jaypee Group did not respond to a Mintquestionnaire sent a day earlier.

The NCR, India’s biggest property market in terms of volume, has numerous projects such as Today Ridge Residency that have been stuck for years, with just concrete structures and minimal work on the ground.

A combination of lack of funds, rising debt, unsold inventory, a trust deficit among customers and incessant litigation have brought the sector to a standstill, with no takers for the flats under construction.

A Knight Frank India report released on 4 July said that new launches in the NCR have been in a decline since 2010 and have dropped by more than half over the last six years.

Property consultant Liases Foras said NCR has witnessed a rise in unsold inventory by almost 14% to hit a high of 267,000 units by the end of March 2016 and it will take around six years to sell them.

The rot began to set in during the early part of the decade. The residential property market touched a high in early 2010 with firms raising loans to enter real estate in pursuit of what looked like an unstoppable boom.

“In the last 4-5 years we saw everyone from every industry come to real estate. Shoemakers and milk packagers, Godrej, Tata and the who’s who of the world entered the business. But many of them are stuck now,” Omaxe Ltd chief executive Mohit Goel said in an interview.

The sector went from boom to bust in the face of a spate of farm protests and resulting litigation.

Puneet Parashar is a buyer in Amrapali Group’s Heartbeat City project in Sector 107, Noida, which has been stuck in litigation after farmers challenged the land acquisition by New Okhla Industrial Development Authority. The Supreme Court, in an August 2013 order, quashed the acquisition of about 547 acres of land, which included two other projects by the 3C Company and Great Value Projects India Ltd, encompassing a total of about 5,000 flats.

While the apex court passed its order in August 2013, the New Okhla Industrial Development Authority, builders and the lenders didn’t inform the buyers, who kept paying their dues for a whole year without knowing that projects had actually been declared illegal.

Great Value Projects India Ltd and New Okhla Industrial Development Authority didn’t respond to a questionnaire sent to them.

“With the project stuck and the weight of rent already weighing me down, I wasn’t able to shell out EMIs (equated monthly instalments) to my bank. Taking the situation into account, I asked my bank for a restructuring of my loan, but they instead sent me a notice. I had to finally sell my property to pay the loan amount,” said Parashar of the loan taken from Axis Bank.

Axis Bank didn’t respond to a questionnaire sent by Mint.

Low investor interest and lack of cash flow have resulted in ballooning debt at all the major real estate companies, with Jaiprakash Associates Ltd (Jaypee) having a consolidated debt of Rs.58,250 crore as of 31 March. DLF Ltd is saddled with a debt of Rs.22,202 crore and Unitech weighed down byRs.7,165.7 crore.

“The customer cell here clearly says that they don’t have money to finish the project,” said Ashish Srivastava, who booked a flat in Noida’s Jaypee Kassia project in May 2011 and is still waiting for possession.

Jaiprakash Associates did not respond to a Mintquestionnaire.

Many buyers have also accused banks of lack of monitoring while disbursing loans to the builders even when they didn’t have clearances and of looking other way when those funds were diverted.

“Unitech has taken Rs.180-200 crore from buyers. Later, they told us that they spent only Rs.20 crore on the project, which was shocking,” said a buyer who didn’t want to be identified.

The buyers filed a first information report (FIR) against Unitech for fraud and also named ICICI Bank Ltd in the FIR for lack of monitoring and colluding with the builder in cheating the buyers.

“As per the agreement for the housing loan between ICICI Bank and the customer, the bank has in no way any control over the delivery of the property by the developer. Consequently, the bank cannot be held responsible for any delays. However, the bank is engaging with the builder to explore options to resolve the current situation,” an ICICI Bank spokesperson told Mint.

Unitech did not respond to a Mint questionnaire sent on 5 July.

Reserve Bank of India guidelines stipulate that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project and upfront disbursal should not be made in cases of incomplete, under-construction or new housing projects.

The delay in executing the project has also resulted in large volume of litigation with buyers organizing themselves into associations and approaching the National Consumer Disputes Redressal Commission for better compensation or refund of their money.

“In the last three years, the filings at national commissions have risen three times. People are becoming aware of their rights, they are also exerting their rights,” said Sudhir Mahajan, a property lawyer.

The buyers have also staged protests against builders.

“We asked Jaypee to meet us on 11 June but they refused to address the group and insisted on meeting individuals only. When 1,000 buyers gathered together on the set day to demand action, they blocked us from the office and even welded the gates. We blocked the expressway for 40 minutes and finally they agreed to talk,” said Nrip Kumar Mehta, one of the organizers of the protest.

The gates of the Jaypee office in Sector 128 today resemble a military outpost, protected by barriers, large gates, barbed wires and a posse of guards to prevent protests on the premises.

“What these builders have been doing is a matter of fraud. They have been raising money on one project and then siphoning it off to another project. Everything is getting stacked up and now it has resulted in this domino effect,” said Vivek Chib, a lawyer who has filed several cases against Unitech on behalf of buyers.

While questions about the conduct of banks remain, they have already started the process of recovering their dues from the defaulters. ICICI Bank and Axis Bank have taken over several properties from Jaypee to recover their dues.

The Gardenia project in Sector 46, which is being operated by Gardenia Aims Developers Pvt. Ltd, is an example of the domino effect on the real estate industry.

According to documents seen by Mint, the developer took a loan of about Rs.134 crore from a consortium of three banks— Bank of India, Oriental Bank of Commerce and Corporation Bank—but couldn’t pay back as the project got stuck due to regulatory issues.

The developer still owes about Rs.86 crore to the bank consortium and about Rs.250 crore to the New Okhla Industrial Development Authority in land dues.

Gardenia did not respond to a Mint questionnaire.

With loan repayment elusive, Oriental Bank of Commerce, on behalf of the consortium, issued a public notice against the Gardenia project, declaring its intent to take over the asset to recover dues.

The consortium of banks didn’t respond to a Mintquestionnaire.

This has led to a plunge in the project’s value with the existing buyers panicking and attempting to cancel their bookings.

“Clearly the project appraisal mechanism could have been better,” said Rajeev Bairathi, head of capital markets, Knight Frank India, adding that around the time banks started to lend, the projects seemed to be doing well.

Some buyers, by staging protests and through constant persuasion, have been able to get the developers to give them possession of their flats, but they have only encountered new problems.

“Jaypee has used very low quality material and has done cost cutting wherever possible. We paid more than a lakh for the club, but nothing is ready and still they are charging us for common area utilization. They have not given us occupancy certificate as well,” said Sanjeev Kumar Aggarwal, a software engineer who finally got possession of his flat in Jaypee Klassic, Noida, after a three-year delay.

There are no signs of recovery in the near term. According to the 4 July report by Knight Frank India, residential unit prices in NCR fell 4% in the first half of 2016 and are expected to keep falling for the rest of the year.

This will further increase the financial strain on developers struggling with a cash crunch.

Some buyers, however, want to take matters into their own hands and finish projects by pooling money.

“Banks should let us build ourselves because Unitech doesn’t have either the willingness or the capability to complete the project. We are ready to help ourselves if administration allows us to do that,” said Vibha Bhatra, a buyer of a flat in Unitech E-space, Gurgaon, which has been under construction since 2011.

Amid crisis in banking, fresh risk for the RBI

The banks, especially nationalised ones, in India have been in a perpetual state of crisis.

In any economy, the banking system is the steel frame that holds it all together. Banks can go bust when depositors withdraw money in panic, or when the companies or people to whom they give loans are unable to return them. The system is in crisis when the bad loans equal or exceed the capital of the banks. It is saved only when governments bail out the banks by putting in more money to “recapitsalise” them. The banks, especially nationalised ones, in India have been in a perpetual state of crisis. The bankers on instructions (a phone call) from powerful politicians extend loans to dodgy promoters. The rot starts with top appointments that are made in deals in which both top managers and their political bosses share the cut. The practice has been going on for so long that, it became part of business lore, until RBI Guv Raghuram Rajan clamped down, The crucial factors are the percentage of loans that are “non-performing”, the infusion of public money needed to save the banks, the pressure that can be put on promoters to return the money, and the effect of all this on the economy. The June 2016 Financial Stability Report (FSR) brought out by the RBI quantifies the crisis.

This was because the gross non-performing advances (GNPAs) of banks “sharply increased to 7.6 per cent of gross advances from 5.1 per cent between September 2015 and March 2016.” Besides this, the banking sector’s GNPAs showed a sharp increase year-on-year of 80 per cent despite the low growth of credit. The growth of bad loans was not evenly distributed. It is the large borrowers who do not pay back. The ratio of bad loans of large borrowers increased sharply from 7.0 per cent to 10.6 per cent during September 2015 to March 2016. Moreover, “there was a sharp increase in the share of GNPAs of top 100 large borrowers from 3.4 per cent in September 2015 to 22.3 per cent in March 2016.” The crisis in the banking system is thus largely a result of the big borrowers’ inability or unwillingness to pay. One recalls the ever-flamboyant Vijay Mallya, who did not settle his dues to the banks and took refuge in the UK.

The debt owed by some of the biggest companies in the power, transport and steel sectors made for compelling reading in a report “The House of Debt” by merchant banker Credit Suisse. The report mentioned 10 top debtors. The total debt of these 10 groups was Rs 7.32 lakh crore (or trillion). The debt of these groups has risen seven times over the past eight years and some of these groups are carrying an interest burden that exceeds their earnings before interest and taxes. Not all these loans are bad, and many of these business groups are selling part of their assets to reduce their debt. Still, around Rs 4 trillion will be needed by the government if it is to recapitalise the banks. The pumping of money into banks comes from the government’s budget expenditure.

NPAs: Need For A Holistic Approach To Resolution

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016

Banking system faces enormous challenges as the spectre of gargantuan non-performing assets (NPAs) is haunting them even as the regulator is coming out with new schemes to address the NPA menace head-on.

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016. This Herculean task needs to be addressed in a holistic manner, keeping the Indian ecosystem in mind, so as to minimise future slippages in the accounts. To begin with, it would be pertinent to recognise that all borrowers are not ‘chors’ and that all lenders cannot be accused of not having done the due diligence and then try to find a resolution before the problem starts eating into the very growth of economy.

Aggravating Factors
The list of factors that caused a jump of more than 475 per cent in NPAs in a matter of 5 years are many. However, factors like commodity cycle downturn, delays in approval from government be it environmental clearance, land acquisition process, obtaining right of way, forest clearance and lack of dispute redressal mechanism in a business-like manner, besides, policychanges like cancellation of telecom licences, withdrawal of coal and iron ore mines, dumping by some countries which made local products unviable, were other contributory factors which were further compounded by the indecisiveness of the decision makers who simply did not take any timely decisions fearing political backlash.

Just to elaborate this point further, let me draw on the steel sector. According to RBI’s Financial Stability Report, June 2015, five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors. And then the operational units in the steel sector lost their cost competitiveness. As is well-known, some of the critical factors affecting the competitiveness of this industry, particularly in economic downturn, include government’s support (tax incentives), tariff protection, raw material security at competitive prices and availability of infrastructure and logistics. Who would have seen this coming when the projects were set up.

Five Sectors-Demand Upside Holds The Key
It is interesting to note here that five sectors-iron and steel, infrastructure, EPC, mining and textile account for bulk of the reported NPAs which had their share of external factors responsible for accumulation of NPAs in the last 4-5 years. While wilful defaulters need to be dealt with strictly, it is also a fact that all these sectors play key role in the growth of the economy-both at the domestic level and in international trade. A robust revival of demand would enable the companies in these sectors to generate enough cash flows to not only service the debt but return to growth path in a short time.

RBI’s S4A Scheme-May Not Meet With Enough Success
During the last few years, the corporates have piled on an unmanageable mountain of debt without commensurate increase in the earning capacity. In this backdrop, the caveats attached relating to limiting the lenders from changing any of the terms of repayment and interest rate in respect of the sustainable debt portion as also the high level of equity dilution that could be expected with the implementation of the scheme, may lead to limited success and may not meet with the desired results.

Financial Health-palliative Care
As RBI Governor rightly put it, ‘band aid’ approach would not work over a long term. What is needed is a major surgery. While it is a good sign that banks are finally willing to acknowledge the problem, it does not mean that the issue is resolved. The real task begins only now. It is not DRT or CDR or SDR or S4A or Bankruptcy laws alone which can cure this malady. What we need is a macro view taken on the entire economy and then arrive at a resolution strategy which could unlock fair value from the distressed assets for the benefit of all stakeholders. 

The success of the above will to a great extent depend on pro-active measures taken in a co-ordinated manner by Govt. and the Regulator to quickly respond to the challenges being faced by the industry and ensure long term stability in policies which are critical to their well-being. To address the existing NPA problem and protect the economic value of their loan, it is imperative that banks go for a holistic resolution. It is the right time that pain is acknowledged, loan book is corrected, and assets are rightly priced and nurtured further by infusing new money for revival and operations by inviting a new promoter or special situation fund who can bring in their portion of equity or risk capital.

We all understand that without removing the extra flab of debt, the brides may not find any suitors. Further, the investors willing to take over stressed assets are well informed and fully aware of the inherent risks and challenges associated with reviving a distressed company without the support of the old promoters. The new promoter/investor will not be able to bring in the entire equity since Indian businesses cannot sustain superlative returns as they are not very competitive. Thus, it essentially means that the project/company would need to be supported mostly by the existing lenders who have access to cheaper funds in the form of low cost deposits and can manage risk of recovery in the hands of new management/special situation fund who have proven track record of success with higher credibility. When this happens as also with the bankruptcy laws coming in place, the business of investment in distressed assets will become more mature and there will be good interest among serious investors and business assets will be put back to use.

Unlike in other parts of the world, where business successes and failures are taken with equanimity and promoters do not mind shutting the business and moving on, Indians hate ‘failure’ and see failure as a stigma and leave no corner to project success. This die hard belief in making the venture successful and running might turn out to be a blessing in disguise in turning around the stressed assets and resolving the NPAs.

Why banking in India will never be the same again

India needs more banks of different shapes, sizes and business models. The banking regulator is responding to this need

Last week, the focus was on the change in the Reserve Bank of India (RBI)’s stance on liquidity and the cut in its benchmark policy rate and many of us overlooked the structural changes in the banking industry architecture that the Indian central bank had hinted in its first bi-monthly monetary policy for fiscal 2017. If RBI is serious about it, banking in India will never be the same again.

After giving licences to two full-service or so-called universal banks, 11 payments banks and 10 small finance banks, RBI is ready to release norms for bank licensing on tap soon. It is even exploring the possibility of licensing other differentiated banks. A discussion paper on that is expected in the next few months and they could include wholesale banks, custodian banks and investment banks.

The two new universal banks, Bandhan Bank Ltd and IDFC Bank Ltd, started operations last year. While Bandhan continues to focus primarily on small loans, the mainstay of its earlier microfinance avatar, IDFC is a corporate bank with a consumer banking wing. By April 2018, we could see 20 more—10 payments banks and an equal number of small finance banks. Of the 11 entities RBI had given conditional payments bank licences to, Cholamandalam Distribution Services Ltd has withdrawn from the race, citing competition and long gestation period. A couple more could follow. Meanwhile, Jalandhar-based Capital Local Area Bank will kick off operations as the first of the small finance banks this week as Capital Small Finance Bank Ltd.

Payments banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services and distribute third-party financial products. They won’t be able to give loans and issue credit cards, but can provide debit cards and Internet banking services. Essentially, they will mobilize deposits on behalf of other banks, acting as a business correspondent. Small banks, on the other hand, will offer loans. They have to give 75% of their loans to the so-called priority sector, and 50% of the loan portfolio should constitute small loans of up to Rs.25 lakh, even as they will be subject to all prudential norms like any other commercial bank. While payments banks will stick to their niche and try to take away other banks’ fee income and look for opportunities in the remittance space, successful small banks can graduate to universal banks after a few years.

By the time these new entities settle down, we will probably see a few wholesale banks, custodian banks and even investment banks to focus on new niches and lend depth and sophistication to India’s banking landscape, where the bond market is still not deep enough to meet the needs of long-term funding.

The bulk of Indian banks’ bad assets is in the infrastructure sector. Many had rushed to lend, often under pressure from the government, without understanding the risks associated with infrastructure financing. Besides, they didn’t have the long-term resources to support such loans. Wholesale banks can fill in this gap. They will be able to generate long-term funds and probably won’t be subjected to the reserve requirements such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

CRR, currently 4%, is the portion of deposits that banks need to keep with RBI on which they don’t earn any interest. SLR refers to the compulsory bond buying by banks, currently 21.25% of deposits. Such banks will also be exempted from priority sector lending—loans to agriculture, low-cost housing and small businesses. Currently, 40% of a bank’s loan must flow into these segments.

Some of the large non-banking financial companies that raise funds from the wholesale market and lend to corporations can become wholesale banks. A few foreign banks, too, will be happy to enter this space, even though they have reservations about local incorporation, which RBI has been pushing for.

Custodian banks don’t dabble in commercial and retail lending; they safeguard a firm’s or individual’s financial assets such as stocks, bonds, currency, commodities, metals and money market instruments like commercial papers. They arrange settlements of sales and purchases, ensure delivery of securities and offer accounting, legal, compliance and tax support services to customers such as commercial banks, insurance firms, mutual funds and pension funds in multiple jurisdictions around the world.

Unlike commercial banks, which offer loans using cash deposited with them, custodian banks can lend securities. Currently, Clearing Corp. of India Ltd provides guaranteed clearing and settlement functions for transactions in government securities, foreign exchange and derivatives as well as money markets, while there are two depositories—National Securities Depository Ltd and Central Depository Service (India) Ltd. Once RBI issues the guidelines for custodian banks, clarity will emerge on the future of these entities.

Almost two decades ago, in the late 1990s, RBI pulled down the barriers between development financial institutions and commercial banks and encouraged universal banking—a model that makes a bank a one-stop shop for all banking products. The experiment has not succeeded. Government-owned banks, with close to 70% market share of banking assets, have piled up bad loans due to their lack of expertise in project financing even as the share of foreign banks has been shrinking due to their failure to face the challenges in the Indian market and troubles overseas. A handful of new private banks cannot meet the diverse needs of Asia’s third largest economy. And anyway, they have mostly focused on retail business.

India needs more banks of different shapes, sizes and business models. The banking regulator is responding to this need. At the same time, it is also trying to de-risk the balance sheets of state-run banks. The consolidation move, if it succeeds, will lead to larger but fewer universal banks. Many more, relatively smaller banks offering specialized services will complete the landscape.

Sun Capital