Real Estate Feels the Squeeze as RBI Narrows Funding Avenues

Real estate developers in India are facing the brunt of high interest costs on loans from Indian banks. Since the ban on external commercial borrowings imposed by the Finance Ministry on May 18, builders have had to incur the highest rates on their credits in the last 5 years.

Real estate developers Unitech and Parsvnath have had to alter their
funding arrangements as the Ministry came down on overseas borrowings,
and will have to provide for higher costs on domestic loans.

Moreover,
banks have also been directed to restrict loans to the real estate
sector. The affected builders are strapped for funds to buy land and raw
material, and the community fears that their projects could come to a
standstill if remedial measures are not taken soon enough.

The RBI has increased its overnight lending rate to banks multiple
times over the last 18 months, and raised their reserve requirements
with a higher risk weightage to control lending.

As a case in point, Parsvnath will require almost Rs.2000 crore
to meet its targets of completing 153 million sq. ft of townships,
shopping malls and SEZs in 17 states across India but the daunting
interest rate of 14% is discouraging the builder to take up the
loan.

Meanwhile, the DLF issue was subscribed 1.17 times on its second
day on Tuesday, encouraging other real estate developers planning
IPOs to look forward to this avenue to fund their projects.