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Commercial Real Estate exposures: Lending risks and Regulatory focus

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– Team Finserv | finserv@vinodkothari.com

Background

Lending backed by value or liquidity of certain types of assets is regarded as sensitive sector exposure and calls for a special focus of the lending institution from a risk management perspective. Regulators view it with attention, for reasons of the vulnerability of these exposures to cyclical price changes, as also the contribution of such lending to asset bubbles and systemic instability. Capital market and commercial real estate lending are two instances. Lending to capital markets (equity shares) may cause an excess flow of liquidity into stocks, thereby creating an asset bubble. When the bubble bursts, lending goes bad, and of course with several other systemic implications. Same is the case with commercial real estate. Flow of easy or cheap money causes investor interest in CRE to build up, thereby causing prices to spiral up, resulting into asset bubble.

It is for this reason that CRE exposures have always been seen by regulators with concern.

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Special Window Fund for Affordable Real Estate Segment: Achche Din for Home-buyers?

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– Sikha Bansal and Priya Udita

(finserv@vinodkothari.com)

Relief has come to the builders of stalled housing project and distressed homebuyers in in the form of establishment of a ‘Special Window‘ fund by the Government to provide priority debt financing for the completion of stalled housing projects that are in the affordable and middle-income housing sector. See the press release here. The announcement came after this package was introduced on September 14 by the Finance Minister. The Government has also issued FAQs on the same, which can be viewed here.

The write-up discusses salient features of the plan.

KEY FEATURES OF THE FUND

  1. Fund will be set up as Category II-AIF (Alternative Investment Fund) with initial amount of Rs. 25,000 crores and registered with SEBI.
  2. The government acting as a sponsor shall infuse Rs. 10,000 crore and the remaining amount to be contributed by State Bank of India, Life Insurance Corporation of India and other institutions.
  3. Investors can be Government and other private investors including cash-rich financial institutions, sovereign wealth funds, public and private banks, domestic pension and provident funds, global pension funds and other institutional investors.
  4. The SBICAP Ventures Limited is proposed to the Investment Manager.
  5. Project declared as non-performing assets (NPAs) or which have been dragged to the NCLT for insolvency proceedings will be included. Apart from that any projects undergoing corporate insolvency resolution process before the NCLT will be considered for funding through the Special Window upto the stage where the resolution plan for such insolvency resolution process has not been approved / rejected by the committee of creditors. However, cases pending in the High Courts or Supreme Court will not be considered.
  6. The retail loans of the selected stalled projects will be restructured as per RBI Guidelines and bank board approved policies.
  7. The investments will be in the form of non-convertible debentures subject to legal, regulatory or other considerations.

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