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Finance Minister asks banks to bail out builders

The Economic Times, Sangita Mehta, Mumbai

November 22, 2012


Finance Minister P Chidambaram has asked banks to lend a helping hand to builders, particularly those involved in construction of residential properties, in order to revive faltering economic growth.

The minister discussed the problems of the real estate sector with the chiefs of state-run commercial banks at a meeting last week in New Delhi. Bankers who attended the meeting described the broad thrust of Chidambaram's comments, but declined to speak on record.

"The minister asked banks to fund those residential projects that are stuck for want of funds. This, according to him, will help kickstart the economy," said a bank chief who attended the meeting.

In August this year, shortly after returning to the ministry, the finance minister had asked banks to put pressure on builders to lower prices in order to reduce a growing inventory of unsold apartments.

During the meeting, Chidambaram reviewed a report prepared by Ajai Kumar, CMD of Corporation Bank, on unsold stock in the real estate market and the way ahead.

The report highlighted the need for builders to arrange their own resources for equity.


It also stressed the need for builders to open an escrow account with banks. As of now, many builders show advances collected from purchasers of property as their equity contribution.

The report, according to people at the meeting who described its contents, said this should end. This is because the builder does not have any stake in completing the project.

In its edition dated November 17, this paper had reported that half of the 3,23,000 apartments due for delivery in 2013 were likely to be delayed on account of problems faced by builders, including lack of financing and delayed clearances.

Further, one-fourth of apartments due for delivery in 2014 were likely to be delayed, according to the report from real estate research firm Liases Foras.

Credit from commercial banks to the real estate sector rose only 4% for the year ended September 30, 2012, compared with a double-digit rise in 2010-11, a possible indication of the diminishing attraction of the sector.

In August, the finance minister had told banks to put pressure on builders to cut prices. "Builders are sitting on huge inventories (unsold apartments) they are neither able to sell at the prevailing prices nor are they allowing others to buy by lowering prices." He further questioned banks as to why they were not putting pressure on builders to lower prices since they had funded both the builder and the retail home loan borrower. It's unclear what impact the minister's exhortation will have.

At least half-a-dozen bankers that ET spoke to after the meeting in August said they did not discuss the subject of reducing prices with builders. "Even as we agree that real estate prices are at elevated levels, builders won't really care for our views," said a bank chief when asked if the bank has sent out any communique to builders to lower prices.

"Back then (in August) the idea was to kickstart the economy and he is attempting it again. This time he has changed the approach," said a bank chief attending both meetings.