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Indian real-estate developers at risk as credit dries up

Mumbai

INDIAN real estate developers are at risk of going belly-up as mounting stress in the nation's credit market dries up funding even for those willing to pay decade-high rates.

"With the worsening shadow-banking crisis, borrowing rates for most developers have surged to the highest in more than a decade, in some cases about 20 per cent," said Amit Goenka, managing director of Nisus Finance Services, which lends to developers. "Even at that cost, capital availability is limited."

India's year-old credit woes, which began after a shock default by the IL&FS Group continue to linger, with many mortgage lenders struggling to roll over debt amid downgrades in their credit ratings.

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Shadow banks that lent heavily to developers in recent years are among the worst hit, as the recovery in housing sales remains tepid amid a slowdown in the nation's economic growth.

Borrowing costs have increased by about four percentage points over the past year and the funds pool for developers is now one-fifth of the previous year's average, said Mr Goenka.

The cash crunch has raised questions around solvency of real-estate companies, and threatens to push 70 per cent of them out of business in the next two years, Goldman Sachs Group said in a note last week.

Challenges to paying debt obligations amid a slump in apartment sales might force developers to sell assets, wherein lenders may face haircuts and exposure losses, India Ratings analysts said earlier this month in a note.

The dim outlook is reflected in the bond market, where dollar notes of property tycoon Mangal Prabhat Lodha have slumped amid weak liquidity and refinancing risks.

"There are pre-sanctioned limits on our projects, but disbursal is not happening as per the committed amount," said Parth Mehta, the managing director at Paradigm Realty, a Mumbai-based mid-sized developer.

Decision-making at lenders is taking long with negotiation time doubling to 90 days, he said.

There's hope that measures proposed in the budget on July 5, including lenders offering a partial credit guarantee for the purchase of high-rated pooled assets of sound non-bank finance companies, would help ease the cash crunch, Mr Mehta said. BLOOMBERG