Ticking real estate timebomb might default INR 700 billion or USD 10 billion up for repayment in 2020, surging the crisis for the already struggling Indian Banking Sector.

The Government is pumping boosters and the financial sector is pretending that NPA or bad loan crisis is behind them. However, another bombshell will fall on the Indian economy in 2020. The Indian real estate sector is facing the worst slump in its history resulting in a serious liquidity crunch.
Around USD 10 billion of development loans given to real estate developers by lenders are up for payment or in other words, could default in the first half of 2020.
Shadow lenders such as housing finance firms have given more than half of loans to real estate developers. Consequent to the prolonged slump in residential real estate, many builders are not in a position to pay back. As per Fitch Rating’s Indian division, the non-payment of these roughly USD 10 billion loans will directly impact the regular Indian banks who have in the first place, lent to these shadow lenders and also invested in their bonds.
Worst of NPA is not over: Triple Whammy for banks from real estate slump
The finance ministry and RBI are reassuring the public that the worst of the mammoth USD 150 billion NPA crisis in Indian banks is over. Bad loans are on an apparent decline after swelling year after year since 2015. However, the number of real estate developers gone bankrupt has doubled in the last 9 months. With non-payment of at least USD 10 billion loans in the near future, shadow lenders or NBFCs are again seeing red.

Moreover, as per a Reuters report from at least 12 banking and real estate sources, the potential defaulting of loans to NBFCs will directly hit the regular banks. Banks in India will feel the impact of real estate and NBFC implosion in three ways. Firstly, their lending to NBFCs will suffer. Secondly, a number of banks that have directly lent to real estate developers. And thirdly, thousands of individuals that will be unable to repay mortgages.
Real Estate Crisis and Piling of Human Misery
Several individuals who paid substantial amounts to real estate developers for new housing have seen delay. This has left their equity hanging in balance. Jaypee went bankrupt in 2017, leaving thousands of homebuyers in frenzy and limbo with regard to the money they had paid for future possession of homes.

Furthermore, at least USD 63 billion of real estate projects are stuck in limbo as slump continues across India. Homebuyers are hoping that new real estate developers will take over these incomplete projects. However, current symptoms are of escalation of the real estate epidemic rather than resolution.
Critical Point in Real Estate Sector Slump
NBFCs are the main lenders in real estate to both developers and home buyers. An NBFC crisis is a fatal blow for the sector. As per Reuters, 421 realty firms are currently under bankruptcy and corporate insolvency resolution process (CIRP). This number has more than doubled from 209 in 2018, as per Insolvency and Bankruptcy Board of India.

Recent liquidation of two housing finance giants, Dewan Housing Finance Corp (DHFC) and Altico Capital have also increased the fears of the financial sector. Thus, with loans of up to INR 700 billion up for repayment in 2020, and many developers expected to default, the banking sector could be vulnerably exposed.
Developers are unable to sell properties
As per industry sources, real estate developers are having a tough time in selling properties even after discounts as high as 25%. Consequently, the inventories of realtors across India have hit an all-time high. Moreover, real estate prices have not gone up in the majority of India in the last 4-5 years.

As per a property consultancy firm Anarock, stalled real estate projects across India amount to INR 1.8 trillion (USD $25). Furthermore, purchasing homes have become less affordable for consumers as the house price-to-income ratio climbed to 61.4 in 2019 from 56.1 in 2015. Investors are also staying away from residential purchases due to the slowing rental market.
Current Stress levels and who will survive
With the number of firms struggling and NPAs going up, the Indian real estate sector is looking at a monumental collapse. While the mid-sized to large developers with bandwidth are expected to survive, 2020 could see the demise of the many small-scale developers who make up the major chunk of the sector’s assets.

As per confidential research conducted by one of India’s leading real estate consultancies, non-payment of ¾ of the outstanding real estate loans could mean addition of USD 15 billion to banking NPAs. Real estate slump also showed signs in the market. The Nifty Bank index went on a bull-run after FM Nirmala Sitharaman slashed the corporate tax in September. It has already lost over half of those gains.
NPA in banks: Decline or Distraction?
Earlier in 2019, the RBI stated that the NPA crisis was on the decline. Gross NPAs fell from 11.5% to 9.3% of total loans in March. This was a full percentile more than the RBI’s predictions of 10.3%. However, India still tops the NPA ration among all major economies of the world. Italy suffered a major banking crisis but its NPA ratio stood at lesser than India’s at 9% in 2018.

In terms of which banks will be most impacted, Yes Bank and IndusInd Bank are at the biggest risk. They have the largest direct exposure to commercial real estate slump. Likewise, other banks bearing the brunt of impact are ICICI Bank and Axis Bank.
How can India resolve the Bad Debt Crisis?
The real cause of the current NPA crisis is the ‘out-of-control lending’ between 2006 and 2011, at the time of the UPA government. Moreover, as the economy grew rapidly, Banks under-reported NPAs for years. The under-reporting was finally buster by the RBI in 2015 when it was forced to acknowledge and address the crisis.
RBI Governor Shaktikanta Das spoke of the real estate crisis in October. He stated that RBI will monitor the sector. It will also be included in its six-monthly report on the stability of the financial system due in December. The PSU banks have a major share in the NPA crisis. However, they have already received billions of infusion from the government to refresh finances recently.
This will also help them bear the storm. International banks with an almost minuscule presence in the Indian market are expected to remain unaffected. However, private banks, with no support system like the RBI are the most vulnerable. Thus, it remains to be seen how they address the incoming storm.
