RBI Move On Bad Loans Means New Launches Will Dip Further

If the boom that India's real estate witnessed after liberalisation did not last long, delays had much to do with it. Among the many things that brought shame to India's second-biggest employment-generating sector in the past decade was developers', big and small, invariable record of not meeting the project completion deadlines. Largely, they attributed their failure to deliver projects on time to cash crunch and regulatory hurdles. Despite not being able to complete their already-launched projects, developers went on with their launching spree, betting on the sector's huge potential. This was before they were allowed to launch projects without having to prove to anyone that they are in a position to complete it -we are speaking of the time before the real estate Act came into play.
A lot has changed since.
According to a recent report by PropTiger DataLabs, "temporary setbacks" led to total new launches in top nine cities of the country dropping 43 per cent in the Calendar Year (CY) 2017 when compared to the CY2016. If the Reserve Bank of India's (RBI) late-night move on February 12 is any cue, new project launches will fall further quite substantially.
The RBI abolished half a dozen existing loan-restructuring mechanisms on that day, and provided for a strict 180-day timeline for banks to agree on a resolution plan in case of a default or else refer the account for bankruptcy. The move is aimed at faster resolution of bad loans, which the government has termed as a "wake up call" for defaulters.
Under the new rules, insolvency proceedings would have to be initiated in case of a loan of Rs 2,000 crore or more if a resolution plan is not implemented within 180 days of the default. The revised framework has specified norms for "early identification" of stressed assets, timelines for implementation of resolution plans, and a penalty on banks for failing to adhere to the prescribed timelines.

Also, banks will have to report defaults on a weekly basis in the case of borrowers with more than Rs 5 crore of loan. Once a default occurs, banks will have 180 days within which to come up with a resolution plan. Should they fail, they will need to refer the account to the Insolvency and Bankruptcy Code (IBC) within 15 days.

As soon as there is a default in the borrower entity's account with any lender, all lenders, singly or jointly, will initiate steps to cure the default.

If strict provisions of the real estate Act were not enough to curtail developers' enthusiasm about project launches, the fresh RBI move would do the trick. In the times to come, developers in India are going to find it even harder to get their projects financed-banks are going to be even more cautious than they already were. In case the money is received somehow, they would have to stick with the plan.

As for homebuyers, only hardworking and genuine developers would be left to pick from.

With inputs from Housing News