RBI proposal of higher provisioning for under-construction projects will hurt affordable and mid-segment housing: Experts

New Delhi [India], May 10 : The Reserve Bank of India's (RBI) proposal to set aside 5 per cent of the loan for construction projects, which is significantly higher than the 0.4% that it used to be earlier, has raised the concerns of the builders. The proposal, however, also provisioned it to be lowered to 2.5% when the project becomes operational and 1% when certain levels of cash flows are achieved.
Real estate consultants and experts say the proposal, if implemented, will hurt small builders more than big and branded real estate companies. Niranjan Hiranandani, founder and MD of Hiranandani group told ANI, "There is no need for this provisioning after RERA, as 70% of the receipts from the customers are in the Escrow account which adequately protect the customers and banks. This will not affect the funding of good projects by banks and financial institutions though it may become more expensive for non-branded developers or developers who do not have a track record."
Many real estate experts say if implemented, RBI proposal could delay sanctioning of loans to property developers and lead to increase in borrowing rates for them. Anuj Puri, Chairman Anarock property consultants told ANI, "This is more applicable to large infrastructure projects with long gestation periods. This move will certainly make project finances more expensive. Real estate projects, particularly residential, are of shorter duration and is managed by efficient and capable developers with records of timely delivery."
Anuj added that if RBI proposal is implemented, it is going to pose a serious challenge to affordable and mid-segment housing "Most large and listed developers have been able to significantly reduce their net debt by 12% to 15% in the last 4 years. However, it is likely to pose a serious challenge to the developers of affordable and mid-segment housing where the margins are thin and such provisioning may adversely impact the affordable and mid segment housing projects."
Anshuman Magazine, Chairman & CEO - India, South-East Asia, Middle East & Africa, CBRE said the RBI proposal could influence lending practices and financial dynamics of real estate projects.
"RBI's proposal for under-construction phase of projects aims to bolster financial oversight and risk management. This measure could influence lending practices and the financial dynamics of real estate projects, reflecting a cautious but necessary adjustment in banking operations to safeguard against potential risks. It's essential to observe how this will balance with the need to support the construction sector, a critical component of economic growth," he said.
However, a few experts also feel that the RBI proposal will have minimal impact on developers, due to tight liquidity conditions now. They say impact on developers may range between 10 to 30 basis points.