Danger ahead: $63-bn stalled real estate projects a threat for Indian banks

As lenders stop new credit, builders are forced to offload properties.

Business Standard : Ashish Shah is caught in the middle of India’s latest financial crisis. As chief operating officer of Radius Developers, he’s struggling to fund construction of apartment complexes because of a liquidity crunch in the nation’s bloated shadow-banking sector.

“Real estate is a sitting duck,” said Shah. “The timing is very crucial as the slowdown has hit the real estate market quite hard. The industry can’t service interest, new interest, additional interest, because there is no cash flow.”

Radius and hundreds of other developers relied on loans from what India calls non-banking financial companies (NBFCs) to fuel a five-year property boom. That came to a halt a year ago with the default of one of the shadow banking sector’s leading lenders, Infrastructure Leasing & Financial Services Ltd. The resulting credit squeeze has left builders such as Radius and Omkar Realtors & Developers Pvt. looking for support, or, like scandal-hit Housing Development & Infrastructure Ltd., filing for bankruptcy.

There are $63 billion of stalled residential projects across the country, according to Anarock Property Consultants, and their developers have become locked in a downward spiral with shadow banks. As lenders stop new credit, builders are forced to offload properties. Prices fall, causing more real estate loans to turn sour, pushing more shadow banks toward default.

In turn, that has cast a shadow on traditional banks and dried up funding to other businesses, putting more stress on an already slowing economy.

For Radius, the crunch started when one of its main lenders, Dewan Housing Finance Corp., shut off new loans as it attempts to restructure some $12.7 billion debt to avoid bankruptcy. Shah said he gained a temporary reprieve by selling a project to Blackstone Group Inc., but like all builders, his company needs cash to operate while projects are being built.

Edelweiss Financial Services Ltd. and Indiabulls Housing Finance Ltd., which have some of the largest exposures to the sector, are also tightening funding.

The risks of exposure to real estate were underlined by the scandal surrounding HDIL. The Reserve Bank of India abruptly imposed withdrawal curbs on a small cooperative bank that it said had under-reported loans to the developer. The decision triggered panic withdrawals from the bank, prompting the RBI to issue a statement to reassure the public that the banking system is “safe and stable.”

Shadow bank woes may continue to haunt stock market after disrupting rally

The S&P BSE Sensex Index posted its third day of losses on Tuesday, ending a surge since the Sept 20 announcement of the tax cuts.

Business Standard : India’s shadow banking crisis has sucked in more financial firms this week, eroding a stock market rally that’s been driven by a surprise $20 billion tax cut package.

The S&P BSE Sensex Index posted its third day of losses on Tuesday, ending a surge since the Sept. 20 announcement of the tax cuts. Financial stocks, which account for 45 per cent of the benchmark index, contributed the most to the declines since late last week, according to data compiled by Bloomberg.

Debt concerns at lenders including Indiabulls Housing Finance Ltd. and a co-operative bank, and worries a cleanup in corporate debt could be prolonged, have spooked the financial markets. The sight of depositors lining up to pull their money from Punjab & Maharashtra Co-operative Bank Ltd., after the central bank put limits on lending, has also been unsettling.

The Reserve Bank of India on Friday tweeted the “banking system is safe and stable and there is no need to panic.” The nation’s stock markets will reopen Thursday after a one-day holiday.

Banking Troubles

Punjab & Maharashtra Co-operative Bank concealed large exposures from RBI since 2008, a former managing director said

Central bank put restrictions on Lakshmi Vilas Bank Ltd., which Indiabulls Housing plans to acquire

Yes Bank Ltd.’s shares plunged almost 34 per cent in two days on concerns a cleanup in corporate debt could drag on

Here is what the analysts are saying:

Stay Selective

Negative news flow around lenders has “overshadowed the recent tax cut tailwind, bringing focus back on sector issues: liquidity issues and contagion risks,” Jefferies Financial Group Inc. analysts including Bhaskar Basu wrote in a note on Tuesday.

Basu said he likes non-bank lenders with a strong liability base, low asset quality risks and good earnings visibility. He prefers stocks including Bajaj Finance Ltd. and Mahindra & Mahindra Financial Services Ltd.