Financial Needs of housing & Real Estate

1. Meeting Financial Needs of Housing and Real Estate:
Presentation to Governor, Reserve Bank of India by CREDAI
June 28, 2016
CA Vinit Vyankatesh Deo

2. Ideas to Kickstart the economy through MSMEs
Dear Readers,
The pandemic of Covid 19 which is also now know (in)famously as Corona, will lead to a
major remake of the World Economy. Unlike the other crises of this century viz the Dot
Com bust of 2001 and the Lehman crisis of 2008, this crisis will not just affect the
financial world but will shake the foundations of economies of all the countries - right
from Villages and Cities to State and the Nation. Governments at all levels will need to
take drastic measures to first stabilise the economy and then to plan for its growth.
MSMEs are like the veins of the economy. They are essential to keep the supply of
money flowing between the vital organs viz. Large corporates, MNCs, Banks, Government
etc. This brief Concept Note presents 5 ideas that can help revive and grow the MSME
sector.
We urge the Central and State Governments to take swift and drastic steps to revive the
MSME Sector so that it can become a solid foundation for building the revival of Indian
economy in the post-Corona world.
CA Vinit Deo
Founder & CEO, Posiview Policy Solutions
Feedback to mdoffice@posiview.in or +91 89757 61062

3. Confederation of Real Estate Developers’ Associations of India (CREDAI)
▪ CREDAI set up in 1999, is the apex organization representing 11,500 developers spread across 23 states and 160
city chapters.
▪ CREDAI brings the grass root knowledge of the real estate sector to bear upon its agenda of a facilitative policy
framework to achieve housing for all, now a Government objective.
▪ CREDAI’s advocacy for housing rests upon the twin role of housing as a growth engine and a development
imperative.
▪ CREDAI has also worked incessantly for the protection of consumer interests. Its members follow a voluntary code
of conduct binding them to transparency, fairness and equity. The Consumer Grievance Redressal Forums
established by CREDAI serve as first port of call for resolution of disputes.
▪ CREDAI has adopted an ambitious social responsibility agenda embracing welfare of workers, skill development,
education and cleanliness.

4. Real Estate and Housing: Where are we today?
▪ Indian real estate sector accounts for about 6% of GDP, is the largest employer after agriculture and is a growth
driver for about 250 plus ancillary industries.
▪ However, Real Estate accounts for more than 10% of GDP in all major economies of the world, with USA topping
the chart at 17%. At 6% of GDP, Indian real estate has a long way to go before reaching maturity.
▪ The size of the real estate sector in comparison to what India needs fares no better. Officially admitted shortage
of housing stands at 18.78 million homes.
▪ To overcome this shortage by 2022, India needs to increase the pace of building homes to about 10 times its
current level.
▪ The task is beyond the capacity of the public sector alone.
▪ Real Estate (Development and Regulation) Act, 2016; the uncertain and unpredictable regime of environment
regulation and the changes in Land Acquisition Act, further exacerbate the challenges in creating housing stock.

5. Housing Finance: Its Role in the Indian Context
▪ India is far below the level of developed countries in housing stock and share of real estate to GDP. Hence, India
does not face the same issues of housing oversupply or bubble in real estate. Hence, housing needs a supportive
financial architecture and not a restrictive one.
▪ Real Estate Bank Credit to Gross Bank Credit in percentage terms has been below 3%.
▪ Net Non-performing Assets in real estate sector stand at zero. On the other hand, according to RBI’s latest
Financial Stability Report, industry records the highest stressed advances ratio of about 19.5 per cent, followed by
services at 7 per cent. Five sub-sectors viz. mining, iron & steel, textiles, infrastructure and aviation, contribute
53.0 per cent of the total stressed advances.
▪ While India needs ten fold increase in pace of housing construction to overcome housing shortage, the growth of
bank credit to housing has fallen into single digits. In fact, the growth in bank credit to real estate in FY 2015-16
has been the slowest in 17 years.
▪ Inference is that improving access of real estate to bank credit is safe and profitable for banks, boosts
investments, and incomes and above all increases welfare.

6. CREDAI’s Suggestions on Bank Credit for Real Estate: Summary
▪ Loans up to Rs. 50 Lakh for houses costing up to Rs. 65 Lakh in metros be classified as priority sector, up from loan
of Rs. 28 Lakh for house costing up to Rs. 35 Lakh.
▪ Banks be re-allowed to fund customers for a cash down price as this enables customers to avail of big discounts.
Access to committed cash flows from such sales helps deleverage construction cost. The disbursement can be
kept in a fixed deposit by the bank and released on construction milestones committed by the developer.
▪ Loan to Value ratio should be more realistic and risk weight to be reduced.
▪ Private Sector to be eligible for slum rehabilitation loans.
▪ Loans to projects for affordable housing be also extended Priority Sector Status.
▪ Affordable housing projects and slum rehabilitation projects should be eligible for raising long term bonds by
banks.
▪ Commercial Real Estate has zero level of NPA but requires provisions for standard assets at 1 per cent as
compared to 0.40 per cent for the rest of industry.
▪ Real estate projects are infrastructure projects and may be allowed the same treatment under prudential norms
for restructuring.
▪ Land cost to be funded by banks as part of project cost as was the case until 2006. Banks should be allowed also
to fund incidental costs of land such as zone conversion charges, premium paid to planning authorities and
purchase of Transferable Development Rights.

7. Increase in Limits for Housing Loans under Priority Sector
Present Rule Suggestion Explanation
Cities above 10 Lakh population :
Loan upto Rs 28 Lakhs (Cost of the
house upto Rs 35 Lakhs)
This limit be increased to loan of
Rs 50 Lakh for house cost upto
Rs 65 Lakh
Whereas the Government has come up
with a Housing for All with subsidies for
the EWS and LIG segment, the Middle
Income Group buyer who finances his
house entirely through home loans is
unattended. Our suggested limits are
based on high and increasing land cost.
The aim is to help 90% of the middle
income group buyers with reduced cost
of home ownership.
Cities less than 10 Lakh population
: Loan upto Rs 20 Lakh (Cost of the
house upto Rs 25 Lakh)
This limit should be increased to
loan of Rs 40 Lakh for house cost
upto Rs 50 Lakh.
This matches definition of
Affordable Housing in Circular
for Long Term Bonds RBI/2014-
15/127
DBOD.BP.BC.No.25 / 08.12.014 /
2014-15

8. Re-permitting Loans for Cash Down Payment by Customers
Present Rule Suggestion Explanation
Banks are prohibited from
disbursal of housing loans
under cost effective innovative
structures.
RBI may re-allow banks to fund
customers for a cash down price. The
disbursement can be kept in a fixed
deposit by the bank and released on
construction milestones committed
by the developer.
Upfront payment avails
customer big discounts.
Developers get access to
committed cash flows and
deleverage construction cost.
It also builds up the balance
sheet of the HFCs.
This was how it was operating
before the ban by RBI.

9. Loan to Value (LTV) Ratio should be relaxed
Present Rule Suggestion Explanation
Loan to Value Ratio is:
Upto 20 Lakhs-75%
20-75 Lakhs-80%
Above Rs 75 Lakhs-90%
LTV Ratio does not include stamp
duty and registration charges
Loan to Value Ratio should be
standard 90% for all loans.
Most of the houses are
financed by housing loans.
Housing loans to individual
buyers will also help the
Developers to improve cash
flows through faster sales.
Banks will be able to reduce
risk by converting their
Construction Finance loans
into Housing Loans.

10. Risk Weights (RW) on Housing Loans should be reduced to augment housing
credit
Present Rule Suggestion Explanation
Loans upto Rs 30 Lakhs
LTV<=80% : RW 35%
LTV >80% & <90% : RW 50%
Loans upto Rs 30 Lakhs
LTV<=80% : RW 20%
LTV >80% & <90% : RW 20%
Housing Loans across categories are
the most secure and least risky loans
for Banks and NBFCs. EMIs are paid
on time. The underlying asset is
appreciating all the time. Hence, Risk
Weightage of standard housing loans
should be realistic.
Loans upto Rs 30 Lakhs
LTV<=80% : RW 35%
LTV >80% : RW 50%
Loans upto Rs 30 Lakhs
LTV<=80% : RW 20%
LTV >80% : RW 20%
Loans above Rs 75 Lakhs:
LTV<=75% : RW 75%
Loans above Rs 75 Lakhs:
LTV<=75% : RW 20%

11. Construction Finance for Affordable Housing Projects
Present Rule Suggestion Explanation
Construction Finance for
projects where dwelling units
cost upto Rs 10 Lakhs and
family income of the buyer is
upto Rs 2 Lakhs are considered
as priority sector lending.
Loans to Projects which satisfy the
criteria of Housing for All Scheme
should be considered as Priority
Sector for the purpose of
construction finance. The main
criteria are 30/60 sq mtrs area and
Rs 3/6 Lakh per of family income for
EWS and LIG buyers respectively.
Developers have started taking
up projects under the Housing
for All Scheme. The alignment
of the definition under
Housing for All Scheme will
direct bank credit to the right
projects and thus support.

12. Finance for Slum Rehabilitation Projects
Present Rule Suggestion Explanation
Loans to Government Agencies
for Slum Clearance Projects
upto Rs 10 Lakhs per unit is
included in priority sector
lending
Loans to Private Developers
should also be included in this
category
Private Developers are work with
Government for slum rehabilitation
and deliver projects timely. There is a
case to treat this segment on par
with Public Sector.
Banks do not have clarity for
creation of security as it is in
form of Development Rights
given by Government and not
land
In SRA Schemes the security
can be taken as Development
Rights given to the Developer
against the development
being done by him.
Development Rights have good
liquidity as they are tradable.
Hypothecation of the Cash Flows
from such sale can be good security
for Bankers.

13. Long Term Bonds for Housing - Definition of Priority Sector
Present Rule Suggestion Explanation
Banks have been allowed to issue
Long Term Bonds with minimum
maturity of 7 years for Affordable
Housing Projects .
Definition of Priority Sector should
be amended as follows:
a) Affordable housing projects
definition in line with Housing
for All Policy
b) Slum Rehabilitation Projects
to include Loans to Private
Developers
Banks have not issued any
Long Term Bonds under this
excellent Scheme due to Lakhk
of eligible projects in the Real
Estate sector. We request you
to bring the scope in line with
industry requirements

14. Provision for CRE Loans - Standard Assets
Present Rule Suggestion Explanation
Commercial Real Estate has
provision of 1.00 pc
The provisioning for CRE
exposure for Standard Assets
should be in line with that of
other industries. With low
NPAs, higher credit to real
estate would mean improved
profits for banks.
Banks have a marketable security in
the form of land and unsold
inventory. NPAs in real estate are
non-existent as compared to rest of
industry.
The reduced risk weightage will also
enable Banks to reduce interest rate
which can be passed on by the
Developers to the Customer.
Commercial Real Estate –
Residential has provision of
0.75 pc
(Clause 5.5)

15. ECB guidelines for Real Estate should be in line with FDI
Present Rule Suggestion Explanation
ECBs are not allowed for
housing projects
ECBs should be allowed for
housing project on par with
Foreign Direct Investment
(FDI) guidelines.
ECB should also be allowed
for land acquisition.
Foreign Investors and especially NRIs
are keen to invest in India’s growing
real estate sector due to its growth
potential & Real Estate Regulation
Act, 2016 effective from 1st May
2016. However they would like to
have commitment of some basic fixed
returns which are not allowed under
the FDI Scheme.

16. Restructuring of Stressed Assets in Real Estate on par with Infrstructure
Present Rule Suggestion Explanation
Banks are not allowed to
restructure real estate project
loans by revising Date of
Commencement of Commercial
Operations (DCCO) and retain
standard classification
Real estate loans for projects
should be included in
infrastructure projects and be
allowed for restructuring and
standard account
classification for a maximum
period of three years.
Real estate projects comprise all
elements of infrastructure such as
roads, sewerage, power. Solid Waste
management etc. They also involve
multiple approvals which are delay
prone. Restructuring would help
banks take commercially prudent
decision.

17. Banks should be allowed to fund for Land Acquisition
Present Rule Suggestion Explanation
Banks are not allowed to fund
purchase of .land since 2006
Banks should be allowed to
finance land purchase as Land
is a marketable and
appreciating security.
Land cost forms 50-70% of cost of the
project and is funded by expensive
funding of 18-24 pc from Non
Banking Finance Companies and
Private Equity Funds. This pushes up
both the cost and risk of the project
pushing housing prices beyond the
reach of many.

18. Banks should be allowed to fund Approval and Premium Costs of a Project
Present Rule Suggestion Explanation
Banks are not allowed to
finance incidental costs of land
such as approvals
Banks should be allowed to
fund Incidental Costs
a) Zone conversion
charges
b) Premiums payable to
Planning / Sanctioning
Authorities
c) Transferable
Development Rights /
Building Rights
These costs add to the value of land
In most cities the premiums / charges
have been increased significantly in
recent years and their financing will
ensure faster project implementation

19. Founders & Advisors
▪ CA Vinit Deo, Founder & CEO
Vinit is a Chartered Accountant and an entrepreneur at heart. After a brief stint in
leading Corporates (Times of India Group & Geometric Software Solutions), he co-
founded Posiview Consulting Partners, an investment banking firm which has has closed
over 200 advisory transactions of advising entrepreneurs on business planning, debt
and equity raising. His passion for research and governance led to the founding of
Posiview Policy Solutions, an Data and Insights driven organisation that will suggest
innovative but pragmatic policy initiatives to Governments (Central, State, Local),
Industry Associations, Development Institutions etc.
(www.posiview.in)
▪ Shweta Shalini, Mentor & Senior Advisor
After a successful stint as a entrepreneur where she founded and scaled up
companies (Fortune Cookie,Real Time Wave), Shweta joined politics and became
Spokesperson for BJP Maharashtra as well as a key person driving BJP’s Social Media
effort. She also plays a key role in the Startup and Innovation arena with her unique
skill sets spanning Corporates, Political, Social and Entrepreneurial Worlds. She will
mentor and guide Posiview Policy Solutions to focus on the right issues and devise
solutions that can be implemented within India’s governance framework.
(www.shwetashalini.com)

20. Disclaimer: Presentation represents personal views of the author and not that of Posiview. It is prepared based on
publicly available data to the best of the author’s knowledge. The author does not take responsibility of the
authenticity, accuracy of the publicly available data. The contents of this presentation are for information purposes
only and the author will not be responsible for any decisions made on the same
Office 202, Chintamani Pride
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Email : vinit@posiview.in
THANK YOU!

21. “Tough times never last. Tough people do.”
Robert H Schuller
Incubation, Mentoring &
Fund Raising for Startups
Fund Raising for Real Estate &
SME Enterprises
Policy Advisory to Government &
Industry Associations
www.posiview.in / mdoffice@posiview.in / +919130018000