The Alternate Investment Fund - The Government's Real Estate Bailout
The real estate sector has faced a slowdown in business after demonetisation and GST. As per estimates by PropTiger, there was a 25 per cent decrease in the sale of houses in the major nine Indian cities. During this time, the number of new house launches saw a 45% decline.
The government's decision to create a Rs 25,000 crore alternative investment fund (AIF) has been hailed as a big relief for the real estate sector.
The government will contribute Rs 10,000 crore to the fund to help about 1600 stalled projects. Apart from this, Rs 15,000 crore will come from Life Insurance Corporation of India (LIC) and State Bank of India (SBI).
The government said that cash-positive companies will be given financial assistance from this. But this package also includes housing projects declared NPA or undergoing bankruptcy resolution process, which may be a matter of concern for us and you.
The government also said it may later increase the amount of this fund or include more real estate projects.
The real estate sector has faced a slowdown in business after demonetisation and GST. As per estimates by PropTiger, there was a 25 per cent decrease in the sale of houses in the major nine Indian cities. During this time, the number of new house launches saw a 45 per cent decline.
The Real Estate Developers Association (CREDAI) has welcomed the government's decision.
Finance Minister Nirmala Sitharaman, however, has made it clear that only residential projects registered under the Real Estate Regulatory Authority (RERA) will get the benefit of this fund. But after the Real Estate Regulation and Development Act 2016 (RERA) came into effect, almost all real estate companies have come under the authority.
RERA was formed to regulate the shortcomings in the real estate sector. But the agency has been demanding more teeth to fulfil the demands over it.
But experts are questioning the support extended to the sector, with the tax payer’s money, which is known for defaults and Non-Performing Assets (NPAs). There are also questions over the monitoring mechanism to make sure the money doesn't get diverted and end up as black money.
RERA's rules were already weakened and now RERA's decisions remain stuck in the High Court and the Supreme Court for years.
“The government is talking about giving money to cash-positive companies. But troubled companies often show themselves as cash positive by creating dummy buyers,” says Ravi Sinha, CEO of Track2Realty.
Under the new announcements companies that have NPA and declared bankruptcy are also eligible to get support.
"We all know what is going on in the economy at the moment. So, is the government really ready to take such a big risk? Companies like DHFL have defaulted. If any such default happens then It will shock the whole economy,” Sinha says.
The financial conditions of LIC and SBI:
LIC's risky investment has doubled in the last five years. Such investments were worth only Rs 11.94 lakh crore between 1956 and 2014. But it has become Rs 22.64 lakh crore now.
LIC has 28.84 million customers across the country. WIth 2 crore new policies every year, the company accounted for 71% of the total first-year premium of the Indian insurance market. But the public sector insurer incurred a loss of Rs 57,000 crores in the last few months, as per media reports.
SBI's NPA was 5 per cent in 2016-17, which has increased to 14 per cent in September 2019. In the last three years, the bank has written off loans of 220 borrowers of more than 100 crores, totalling an amount of Rs 76,600 crore, as per an RTI.
In March 2019, the bank announced that there are 33 such creditors who owe more than 500 crores, which it cannot recover. Their combined debt is about Rs 37,700 crores.
The bank has 42 crore customers and about 24,000 branches across the country.
Nirmala Sitharaman said that this alternative financing arrangement, a long term demand from the sector, would help in the completion of 1,600 stalled projects with a total of 4.58 lakh housing units.
Money diversion trail and guidelines:
Aditya Pratap, a lawyer dealing with RERA cases in the Mumbai High Court, says, "As per the LIC rules, the government cannot be held legally wrong. But the rules of RERA have been relaxed. The original draft of RERA had said that if a company defaults twice, it will be blacklisted. But the rule has been removed. Companies that have NPAs or who have filed for bankruptcy are also eligible to get money from institutions like SBI and LIC. "
Finance Minister Nirmala Sitharaman said that the decision was approved by the cabinet under the chairmanship of PM Narendra Modi.
This fund is to support the construction of 4.58 lakh house units. This would provide loans to real estate companies on easy terms. Initially, the government will deposit the Rs 10,000 crore with SBI.
The incomplete projects under the RERA will get support to the last stage. The support will go to the projects that are 30% complete.
According to an estimate by the real estate market analysts, between Rs 55,000 and Rs 80,000 crores will be needed to complete the 1600 stuck projects.