Will Insurance Cover For Developers Expedite Infra Projects?

Project delays and cancellations have not only kept home buyers in major Indian cities on tenterhooks but also led to a double whammy for real estate developers. Already hit by a cash crunch, developers have found it hard to get credit from the market.

A monthly release by the Reserve Bank of India (RBI) in June showed while credit to the larger industry grew by 0.9 per cent in May 2016, compared with an increase of 5.2 per cent in May 2015, there was a decline in credit to several sub-sectors like infrastructure, and vehicles, vehicle parts & transport equipment. Official data also show that banks' gross non-performing assets (NPAs) as a percentage of their total loan book also spiralled upwards -- from 2.3 per cent in 2008 to 4.3 per cent in 2015. And, a large number of investments that were becoming NPAs were in the infrastructure sector.

However, if media reports are to be believed, help might be around the corner.  The government is learnt to be in the process of creating a mechanism under which developers will be able to buy insurance to cover interest payments in case their projects are stuck due to reasons that are beyond their control. So, if you are a developer whose project is facing delays for no fault of yours, this fund will take care of the interest till the crisis ends.

How will this give a leg-up to the real estate sector?

Projects delays have been the main reason behind the negative sentiment around the sector in the past couple of years. And, while a lengthy bureaucratic hurdle is usually behind the delays, real estate developers have to take the blame for it, despite the fact that they, too, happen to be the victims. Project delays have major monetary repercussions for both developers and home buyers, who end up paying far more than they intended to which makes the transaction unprofitable for them. An insurance cover will ensure construction keeps going if a developer is not at fault.

Because public sector banks will be managing this fund, the onus will also be on the government to cut the rep tape and make the clearance process simpler and faster for real estate projects. As a matter of fact, bureaucratic hurdles are the most-cited reasons for project delays. An insurance cover will put the onus on the government to facilitate faster delivery of projects.