NPA: Scenario of Indian Real Estate

: The real estate industry in India has been fighting debilitating battles on multiple fronts for several years now. The sales are nowhere near the heydays of 2011-13 and the reforms that the Government has implemented since 2014 have made it impossible to carry out business the way it was done earlier. The biggest blow to the industry was the NBFC crisis in 2018

File photo
File photo

The Non-Performing Assets (NPAs) in the real estate sector are being referred to the National Company Law Tribunal (NCLT) under the new Insolvency Act - the Insolvency and Bankruptcy Code (IBC) 2016. In 2018, under the IBC framework, home buyers were allotted financial creditor status, which allowed them to take developers to NCLT and claim refunds. As advance from homebuyers is an important source of finance for developers, this was imperative. Earlier, homebuyers did not have any say in the bankruptcy resolution process. However, the law provided scope for even a single homebuyer to drag the project to bankruptcy courts. This provision allowed vested interest to scupper the project and jeopardise the interest of all stakeholders. The Government has plugged this loophole by amending the law again and raising the threshold requirement from single homebuyer to 100 homebuyers or 10% of homebuyers of the project, whichever is lower. Developers got some reprieve but have been requesting the Government to raise this limit further

As on 31st March 2020, there were 757 cases related to ‘Real estate, Renting & Business activities’ admitted under IBC of which 450 are on-going and 307 closed. Out of the 307 closed cases, 148 have commenced liquidation, 27 have approved a resolution plan, 45 have been withdrawn and 87 are under the category of ‘Appeal/Review Settled’

India’s GDP growth had already slowed to an 11 year low in 2019-20, and the country on March 26th 2020, had enforced one of the most stringent lockdown measures globally to tackle the pandemic. The resultant economic impact of the lockdown is expected to be severe in the case of India. IMF, in its June World Economic Outlook, has forecasted Indian economy to contract by 4.5% in FY 21 which would be the first contraction in 40 years

The residential sales in India have already dropped by 54% YoY in H1 2020. NPAs in real estate sector may spike unless the Government steps in and announces meaningful measures to improve the health of the industry. The breather that the industry has for now, is the 6 month repayment moratorium extended by RBI till August 31st 2020, and the relief announced by the Government to suspend insolvency proceedings for six months (this can be extended to 1 year) for defaults occurring after March 25th 2020 due to the enforcement of lockdown

https://content.knightfrank.com/research/2028/documents/en/india-real-estate-residential-office-h1-2020-indian-real-estate-residential-office-7302.pdf