Real estate companies, which are already under severe financial strain, have to make a bullet repayment of over Rs 14,000 crore in the next two months to banks. This will force builders to cut prices of real estate stock, especially residential units, to boost cash flows to help them repay dues.

The huge repayment burden in December and January was created when many banks restructured real estate loans for one and a half years in June 2009 under the Reserve Bank of India’s (RBI) special dispensation. “This is falling due in the next two months,” said a senior executive of a bank, who did not want to be named.

Normally, a real estate loan cannot be restructured or rescheduled and has to be considered a non-performing asset (NPA) if payments are delayed beyond 90 days.

Now banks are expected to pressurise the companies to repay restructured loans without relaxation. Private sector banks declined to comment on the repayment expected from builders.

But a senior banker from a public sector bank said, “Real estate companies will have to drop prices and sell properties so that there is a regular cash flow into their books.”

The problem started when developers began to jack up prices, stifling sales at lower rates. This hit cash flows of developers. Banks aggravated the situation by helping developers to roll over debt by recording repayment on the due date and granting a fresh loan to the same company the next day.

This helped the bank to continue the account as a standard asset while the developer got funds with no pressure to lower property rates and generate cash flows. Now, banks are watching their real estate exposure and implementing strong checks.

DLF has the largest debt among listed companies, followed by Unitech, HDIL, Omaxe and Purvankara, according to their annual reports in March 2010.

“Now builders will be forced to sell properties and repay loans and restructuring will not be extended. Homes have not been selling as prices have risen beyond affordable levels. Home loan segment’s year-on-year growth continues to be sluggish at 10 per cent,” a senior banker with a large public sector bank added.

But realty companies say they are ready to face the situation.

A senior official from DLF, which had an outstanding bank loan of about Rs 12,976 crore, said, “All our repayments will be on schedule. We have not rolled over any or restructured any debt from banks. As housing stock gets sold, revenues will be generated for companies to repay their loans.”

A senior Unitech official added: “We are quite comfortable with our debt repayments. We have a monthly debt obligation of close to Rs 100 crore. We restructured our debt during the financial crisis, and after that the company has been comfortable with the debt on its books.”

But it may be a different situation for smaller firms. Between March 2006 and May 2010, the real estate sector received about $15 billion (Rs 68,722 crore) from the banking system. Of the total exposure of Rs 95,700 crore to commercial real estate as on March 2010, only 22 per cent has gone to listed players, while the remaining 78 per cent went to unorganised, small and medium developers. These companies do not have multiple avenues to raise capital and they rely heavily on bank funding, HDFC Securities said in a report in September 2010. This is forcing real estate companies to scramble for financing.

The situation became worse after the RBI stopped the 90:10 scheme recently. Banks can now finance only up to 80 per cent of the cost of the house.

According to a senior advocate, who was marketed a special home loan scheme by a leading Mumbai-based real estate and financial services company, banks and financial services companies were marketing special schemes where the customer pays 10 per cent of the price of the property at the time of booking and the bank sanctions 90 per cent of the cost of the house as a retail loan to the customer, which actually flows into the books of the builder in lieu of the flat he would be releasing to the customer when he builds it. “Even if the builder defaults, the obligation of repayment is upon the customer.”

"Under this arrangement, the builder starts to repay the interest component to the bank on behalf of the customer until he gets possession of the flat. Builder gets the money upfront without having to raise project finance and the customer has to bear the risk is the builder defaults,” said the advocate.

Public sector banks have a higher exposure to commercial real estate (CRE). The loans given by eight large PSU banks have risen at a CAGR (compounded annual growth rate) of 20 per cent over the past three years. For PNB, ICICI Bank, Central Bank of India, HDFC Bank, Axis Bank and Oriental Bank of Commerce commercial real estate forms 2-8 per cent of their loan book.

According to the RBI data on September 24, commercial real estate exposure of banks comes to Rs 1,01,662 crore while home loans account for Rs 3,17,150 crore. This figure does not look alarming as the RBI in September 2009 took off a number of exposures earlier considered CRE from its list. For example, loans extended to an entrepreneur developing land for a hospital or hotel is no longer CRE nor is a loan to companies to acquire units in a SEZ, or credit for construction companies who work as contractors.

While banks have been gradually reducing the exposure to CRE, repayment is crucial for a healthy balance sheet, and, for real estate companies, to stay afloat with fresh funds for projects.