Why SBI Is Taking A New Bet On Real Estate Financing
SBI launched a new residential real estate financing scheme. Why is the lender taking a renewed bet on this stressed sector?
State Bank of India has introduced a real estate financing product, which, according to Chairman Rajnish Kumar, will help revive interest in under-construction residential real estate projects and allow the lender “take back the bankruptcy remote from homebuyers”.
Launched today, the product offers loans of up to Rs 400 crore to ‘reputed’ residential developers and also a guarantee to homebuyers in case the project were to get stuck. The product is aimed at houses which cost up to Rs 2.5 crore and will be open to projects across 10 major cities in the country.
How Does The Product Work?
The guarantee will be part of a tripartite agreement between India’s largest lender, the developer and the homebuyer.
The bank will fund the project and also extend the home loan necessary to buy a house. If the project is stuck for longer than a specified period of time, likely to be 18 months from the signing of the agreement, the bank will refund the homebuyer for all the money that they have spent on the house.
The bank is calling the product: Residential Builder Finance With Buyer Guarantee or RBBG.
In an emailed statement, SBI said that reputed builders can approach the bank for this product if they fulfill specific criteria, which includes a high-star rating and strong CIBIL score. “We believe that RBBG will build confidence among home buyers by securing their hard-earned money and at the same time will boost under-stress real estate sector,” Kumar was quoted as saying in the statement.
As a start, the bank has signed a memorandum of understanding with Sunteck Realty Ltd. to provide these loans for three affordable housing projects in Mumbai.
“Biggest benefit from this programme will be for the homebuyers,” Kamal Khaitan, chairman and managing director, Sunteck Realty told BloombergQuint. “Sales volumes are expected to rise from the current levels from the benefit seen by SBI’s financial guarantee.”
By offering a guarantee on the money they have spent on the house, SBI is ensuring that the homebuyer has no reason to pursue insolvency proceedings in case of project delay or failure. The bank will also ensure that all of the builder’s payments to service providers are done through an SBI account, which will help the bank keep a close tab on any defaults, Kumar explained.
According to the head of a large housing finance company, who spoke on condition of anonymity, SBI could end up earning a bigger margin on home loans if it raises the interest rate for borrowers who avail of the guarantee product. Since mortgages are usually low-yield products owing to the long term nature of the loan, SBI can charge homebuyers a premium for the insurance it provides. If the bank vets the developers thoroughly, the likelihood of actually paying the guarantee will be low.
The product, however, is unlikely to become the norm, the person cited earlier said.
Why Is SBI Doing This?
SBI’s housing finance portfolio stood at Rs 4.24 lakh crore as on Sept. 30, 2019, and the bank controls 22 percent of the housing finance market. As such, the lender has no pressing need to grab market share of this relatively safe and consistently growing segment.
So how does the new product help the bank?
Kumar, at a press conference following the release of the product, said that real estate financing is a new funding opportunity for the bank. Currently, the bank’s real estate portfolio is under Rs 6,000 crore and the non-performing assets are low. For a bank with SBI’s size and reach, ramping up real estate lending, even within the borrower limits prescribed by the regulator, will be relatively easy.
We also wanted to give the customers a reason to invest in under construction projects, which are usually looked at as risky. We expect the velocity of sales to double, once more builders are signed on to this product.Rajnish Kumar, Chairman, SBI
The Indian real estate sector has faced considerable stress over the last 12-18 months due to liquidity problems. A number of projects are stuck and high value residential projects are saddled with unsold inventory. In particular, under-construction projects have been hurt by the National Housing Bank’s decision to stop housing finance companies from offering interest subvention schemes. Such schemes allowed developers to get money upfront, in return for a promise that the company would a home loan borrower’s initial monthly interest payments.
SBI also wants to take back the “bankruptcy remote from homebuyers and operational creditors”, said Kumar.
The government, in August 2018, had amended the Insolvency and Bankruptcy Code to include homebuyers as financial creditors, giving them the power to drag a builder to court if a project isn’t completed in time.
Stress in the real estate sector, which is a large employer, is among the key concerns for the economy at this stage. To address the concerns, the government has announced a Rs 25,000 crore real estate fund aimed at funding stuck residential projects. The government will invest Rs 15,000 crore in the fund, with the rest likely to be raised from private investors. So far, SBI and Life Insurance Corporation of India have committed Rs 1,000 crore each to the fund, while Housing Development Finance Corporation Ltd. has agreed to invest Rs 250 crore. The fund, managed by SBI Capital Services, will be independently assessing projects and their viability, before investing in them.
Watch SBI Chief Financial Officer Prashant Kumar interview here: