Property prices may crash as loan scam hits funding

Liquidity for the sector may dry up as bankers turn cautious in sanctioning fresh loans, forcing builders to cut prices to improve cash position, helping prospective buyers who have been holding on due to high prices.

Finance minister Pranab Mukherjee’s direction to state-run lenders to prevent a recurrence of the loans-for-bribes scandal, and banks’ decision to go for a critical appraisal of all real estate loans above Rs 50 crore may stall projects and drive developers to private funds.


DB Realty tumbled 10%, Indiabulls Real Estate lost 5.2%, DLF fell 3.8%, and Unitech declined 6% as a fund shortage threatens to derail their project execution, which had just started to show signs of recovery after the 2008 credit crisis.

The arrest of eight finance executives by the Central Bureau of Investigation on Wednesday on charges of taking bribes to sanction loans does not lead to a systemic risk since the amount involved is tiny, bankers and bureaucrats said. It is getting more attention than it deserves, they said.

“ banks and financial institutions should strengthen the NPA (non-performing assets) monitoring and management in their institutions to ensure that advance action is taken to identify incipient sickness and take appropriate action on it,” said Mukherjee.

A Bank of India official said, “All big-tickets loans, particularly to builders, will come under the scanner now. Recall of loans can happen if there is a fear that the quality of loans may suffer. But as of now, there is no such worry and hence it would not prompt us to recall loans.”

Adarsh Builder Scam Gets Murkier...

The mystery surrounding the missing documents relating to the Adarsh scam just got murkier. Even as the theft of crucial papers missing from the Adarsh file in Mantralaya is being investigated, other vital papers relating to the case have gone missing from the records of the Colaba-based Defence Estate Office (DEO). The DEO is the custodian of all land records involving local defence force units.

While four pages related to notations made by babus on various clearance granted to the society have gone missing from Mantralaya files, the DEO has been unable to trace official records regarding the no-objection certificate (NOC) granted by it to the project in March 2000. Also missing are records showing the existence of a defence-built garden (Kukri Park) at the site before the plot was allotted to Adarsh society.



Official sources added that even as the DEO was the first office to be approached by the society for an NOC for the project, the DEO file relating to the case does not contain papers revealing the names of the proposed members. A senior official said that the army top brass has already been informed about the missing papers.

As many as eight officials employed with the DEO at some point had initially applied for membership to the society. The aspirants included M Guruswamy, the defence estate officer who granted the NOC to the project in March 2000.

Ironically, Gurusamy’s name had figured in the list of proposed members in the society before he granted the NOC, which claimed that the ‘‘disputed land was outside defence limits and could be used for the welfare of acting and retired defence personnel’’. Interestingly, the same records have also gone missing from the DEO’s file.

Just as in the case of the urban development (UD) department, which had custody of the missing Mantralaya papers, the DEO began looking for the papers after CBI officials sought the documents. Fortunately, the local army headquarters was in possession of copies of most of the documents that were missing from the DEO file, and the CBI collected these papers from them.

RBI Rules To Impact Real Estate

The realty sector is unlikely to be impacted adversely following the measures announced by the Reserve Bank of India on Tuesday aimed at tightening home loan regulations.

However, rising capital values can play a spoilsport hereafter as the RBI, through these measures, has alerted home buyers, developers and banks, industry experts said.

The RBI on Tuesday, as part of its monetary policy review, raised repo and reverse repo rates by 25 basis points each while keeping the cash reserve ratio and bank rates unchanged. It also announced reduction in loan-to-value ratio to 80%, which most commercial banks were keeping at around 85%.

RBI also increased the risk weights for loan of more than Rs 75 lakh to 125% from 100%, and raised provisioning requirement for teaser rates to 2% from 0.4%. According to Ajay D’souza, head of research at Crisil, increasing risk weights for loan of more than Rs 75 lakh may not impact the demand, as a large part of demand is for loans less than that.

However, borrowers with a loan above Rs 75 lakh may have to face a 150-basis point higher cost as a result of all the measures announced on Tuesday, said an analyst with a foreign brokerage.