Real Estate Sector Urged to Establish Credible Framework for Financing from Banking System

The Ministry of Housing and Urban Affairs (MoHUA) has emphasized the importance of the real estate sector accessing finance from the banking system instead of relying solely on homebuyers’ advances for construction purposes.

During the CII Annual Conclave on Indian Real Estate 2023, Manoj Joshi, Secretary of MoHUA, stressed the need for the real estate sector to collaborate with regulators and banking institutions to establish a credible framework that differentiates between good and bad projects, allowing access to capital from banks.

Joshi highlighted the absence of a system that segregates reliable borrowers from unreliable ones, resulting in all players being treated as untrustworthy by the banking sector. He emphasized the sector’s responsibility to develop mechanisms, such as rating systems and performance evaluations, to enable this differentiation. Without a credible framework supported by regulators, financing real estate projects will remain challenging.

Joshi further stated that the current model, where homebuyers provide the entire finance, needs to change for a truly professional market to emerge. He pointed out that the real estate sector must enable regulators, through improved rating systems and appraisal processes, to differentiate between reliable and unreliable projects. Failure to do so results in all developers being perceived as risky, affecting the sector’s access to finance.

The article also shed light on the challenges faced by contractors and vendors in the real estate sector, who often struggle to obtain credit from banks. These stakeholders heavily rely on advance payments from government clients, while developers primarily rely on funds from homebuyers. This financial dynamic leads to working capital constraints, causing delays, increased costs, and inefficiencies.

Joshi emphasized that inadequate cash flow in the hands of contractors and vendors results in project delays and cost inefficiencies, extending the construction timeline. He raised concerns about the detrimental impact of not providing finance to such a vital segment of the economy, highlighting the need for a more nuanced approach to financing in the real estate sector.

Joshi also discussed the role of the banking system and the challenges it faces in assessing borrowers due to the public sector-dominated structure. He highlighted the importance of sharp appraisals and the ability to differentiate between good and bad borrowers to prevent the entire real estate sector from being perceived as high-risk. Joshi expressed the government’s intent to create formal structures that directly provide funds to vendors to address the cash flow issue.

Additionally, the article touched on the significance of urban planning in Tier-2 and Tier-3 cities, emphasizing that it remains a priority area for the government. The need for reforms and incentives to promote urban planning in these cities was highlighted, with a focus on providing affordable, low-cost housing units to meet the growing demand.

The real estate industry experts attending the conclave expressed optimism about the sector’s growth, acknowledging the positive impact of reforms such as RERA, GST, REIT frameworks, and the digitization of land records. They also emphasized the role of infrastructure development, including high-speed rail networks and metro systems, in fueling the growth of emerging cities.

The Ministry of Housing and Urban Affairs emphasized the importance of establishing a credible framework for accessing finance from the banking system in the real estate sector. Collaboration between regulators, developers, and banking institutions is crucial to enabling sustainable growth and addressing the challenges faced by the industry.

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