As lenders stop new credit, builders are forced to offload properties
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.
The crisis has its roots in a lending binge by shadow banks between 2013 and 2018. Commercial banks were trying to chip away at a mountain of bad loans to large infrastructure and energy projects, so shadow lenders moved in, doubling their loan total to $438 billion in four years. Most of the new financing went to builders, home loans, and debt-laden infrastructure projects, according to rating company ICRA Ltd. In comparison, commercial banks’ lending rose just 46per cent to $1.36 trillion during the period.
When IL&FS defaulted, the funds dried up, and risks on banks’ balance sheets started rising. Total bad loans could rise to a record 12per cent by early next year, according to Credit Suisse and Fitch Ratings.
“A few months back we were essentially looking just at the real estate sector, but now the broader economic slowdown can affect other sectors and their creditworthiness,” said Fitch’s Guha.
But saving an NBFC from collapse would mean forcing a bank to absorb all or part of its bad debt. So while Das is leaning toward enforcing market discipline on NBFCs, borrowers like Radius are worried the crisis will continue.