Banks face huge defaults as Real Estate sector faces meltdown

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With sales refusing to pickup and the economy in dire straits, its no secret that the real estate sector is in a severe recession. Not only have new projects failed to find any takers, even the old ones are struggling to survive. That the builders are in a severe mess is evident by the ongoing public outcry, court cases, media coverage, street demonstrations etc..but the chain reaction has also started to hit the banks which have lent money to this sector.

Recent figures of sales in the top eight cities shows that home sales increased only 6% in the past 1 year.
Infact,the home sales in the largest real estate market of India,the NCR,fell by 10% from a year ago.
New residential launches in Mumbai had dipped by 36%, In Bengaluru by 27% and in NCR by 20% in 2015.
If this scary and precarious situation continues, it may well lead to defaults by the real estate companies, to whom banks have an exposure of 1/5 of their total assets.

If the prices go down further, the banks will be left holding mortgages which are much more than the security that the banks are holding against these loans.
If that happens, the possibility of a default increases many fold.

A clear indicator of the health of the real estate sector is the recent auction of Kingfisher house for 150cr.The same has been re-priced at 135 cr as no buyers came forward at 150 cr.

The total amount outstanding to the real estate sector is 7.58 lakh crore.
Even if one major company goes bust, it may well take down the entire sector with it.

The banking system is already facing severe pressure with NPAs of PSU banks approaching 10 lakh crores.

Dangerous days ahead.

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