RBI Can Let Realty Firms Run Banks; Finance Ministry

Favoring the real estate sector, Finance Ministry expressed its view that the realty firms should be permitted to run banks by the Reserve Bank of India (RBI).
Will RBI permit realty builders to run banks as Finance Ministry suggests?

Will RBI permit realty builders to run banks as Finance Ministry suggests?

Finance Ministry, favoring the realty sector and broking firms said that they should be permitted to run banks. The ministry said that the RBI should permit the real estate firms and broking firms to run banks. Finance Ministry was commenting on the RBI’s plan over giving new bank licenses.

Though Finance Ministry supported and favored the real estate sector and broking firms, it added that there should be absolute ban on gaining exposure in the group companies or entities related to any of the promoters. Continue reading

No bar on Real Estate Sector from applying for UASL.

A prosecution witness in the 2G spectrum allocation case on Thursday told a Delhi court that as per the Unified Access Service Licences guidelines, the real estate firms were not barred from applying for the licences.

Company Secretary V Mohan of real estate firm Parsvnath Developers Ltd, which had applied for the UAS licences in 22 circles in August 2007, told Special CBI Judge O P Saini that when the company had applied for the 2G licences, they had gone through the UASL guidelines.

“When the company made application for UAS licence, I had gone through UASL guidelines. When I went through guidelines and the company decided to file application for UAS licences, it was quite clear to me that there was no restriction on a real estate company, applying for a UAS licence,” Mohan said.

Mohan deposed that in August 2007, the firm tried to venture in the telecom business and made applications to the Department of Telecom (DoT) for licences.

Mohan said their application was rejected by the DoT and Parsvnath Developers Ltd did not get any licence.

During his cross-examination, he said their firm was complying with net worth criteria and paid up equity capital criteria when it applied for the UASL on August 24, 2007.

He said the firm knew about August 2007 recommendations of the Telecom Regulatory Authority of India (TRAI) and in view of this, they knew that the entry fee for grant of pan-India UAS licence was Rs 1,658 crores.

“The company was in the know of TRAI recommendations of August 2007. The company knew that the entry fee for grant of a pan-India UAS licence was Rs 1,658 crore, in view of TRAI recommendations. When the company made the application on August 24, 2007, it never knew that DoT was going to announce a cut-off date,” Mohan said.

Mohan, whose deposition concluded today, said the main ground communicated to Parsvnath Developers Ltd by the DoT for rejecting its application for the UASL was that the telecom business was not in the object clause of the firm at the time of making the application.

He said the rejection of the application by the DoT was challenged by the firm before the Delhi High Court. Besides Mohan, the court also recorded the testimony of prosecution witness Raj Kumar Kapoor, a retired Director of Bycell Communications (P) Ltd, which had also applied for UAS licences in 2007.

Kapoor, whose recording of testimony concluded today, said he was called by the DoT officials for licences on January 10, 2008 but at Sanchar Bhawan, he was given a letter to the effect that their application for UASL was not considered.

Real Estate Sops can’t impress Firms.

The finance minister relaxed borrowing norms for real estate firms and extended the loan subsidy for low-cost affordable houses. The concessions have, however, failed to impress the industry leaders who termed it as a too-little-too late move that would have a limited impact on the sector.

“I propose to allow ECB (external commercial borrowing) for low-cost affordable housing projects,“ the Budget said.

The move has a dual aim of expanding the window of funds for real estate developers such that affordable housing projects do not face cash crunch and are completed within the time frame.

Global consultancy Deloitte said RBI had earlier allowed ECB for developers in integrated township projects of 100 acres or more till December 31, 2010.

The FM also extended, by a year, the 1% interest subsidy on loans up to R15 lakh where the cost of house does not exceed R25 lakh.

Builders Losing on Projects Due to Falling ROI

Inflation and peaking cost of raw materials have started denting in the balance sheets of the real estate firms here. In spite of bleeding balance sheets and dipping return on investment, the firms here commit that they will give the housing units to the buyers at the booking price only. KC Naik, president, Mangalore chapter of the CREDAI, says there is a boom clause in the agreement with the buyer but he has not used it till now. His firm Mahabaleshwar Promoters and Builders is currently executing two projects of 260 housing units and will inaugurate another two projects soon. “We have been in operation since the past two decades and not even once we have used the boom clause in our favour,” he said.

His idea is to accelerate the completion period of the project when cost of raw materials start going up. All houses are not sold at one go. So the first buyer is the lucky one who will get it at the lowest rate. It goes by INR 100-200 per sq ft subsequently.

The ROI is dipping and builders are losing 10-15 pc on the projects. In the past six months, the prices of sand, cement, steel and flooring tiles have increased from 20 pc to 100 pc. Prices of rough sand, used for construction of slabs, is up from INR 8 per cubic feet to INR 16. Fine sand used for plastering has gone up from INR 9 to INR 18. Adding to the woes is the scarcity of fine sand. Likewise steel is up by INR 33 to INR 40 to INR 45 per kg and cement from INR 250 to INR 310 for a bag of 50 kg. Flooring tiles has also increased from INR 33 to INR 38.

Commercial Realty unable to seek Buyers

Commercial National Bank
Due to the continuous oversupply of the commercial projects, the signs of pickup in demand in the sector seems becoming dull and thus banks are also backing out from lending to real estate firms.

As compared to the residential sector, the demand growth of the commercial sector in past few months is much behind that of the residential one. Not only the office spaces are yet to be occupied, but also the ready projects are unable to seek buyers. This lack of buyer’s interest in the office spaces, multiplexes and retail has forced banks to back off lending to commercial sector.

Other than the uncertain demand scenario for commercial space, banks also have to look and take care of the rising realty sector debt on their ledgers. Ranjan Dhawan, the chief general manager of Punjab National Bank (PNB) said that since some of the banks have reached their sectoral exposure limit, they cannot now get into more lending. He also added that although PNB is still in is exposure limit, still it would get into some other lending only after thorough due-diligence.