- Real Estate Sector has emerged as one of the significant contributors of GDP in India. The country has witnessed a tremendous housing boom, specifically in the last decade. However, the price appreciation has slowed significantly during 2012 as a result of sluggish sales and increased holding and construction costs.
- The sector has always been identified with high volatility in price, demand and supply as well as execution delays. In such a scenario it becomes very important for the industry stakeholders to take an informed call and also monitor their investments carefully.
- Further, the Policy Makers of the country have realized the importance of Real Estate Sector performance in the overall performance of the country and have shown an increased willingness for taking steps towards revival of the sector. One such step is boosting housing finance and construction Finance by Banks and HFCs.
- However, the sector is still highly unorganized with very little data available (especially in Residential Real Estate) and throws many challenges for the housing finance industry to gauge and manage risks involved in financing real estate. Similar challenges plague the developer community as well as the PE players and Individual Home buyers who are interested in investing in the projects.
- Moreover, in the background of the downfall of the western mortgage market, the regulators all over the world have increased the emphasis on liquidity risk management by financial institutions. In India, RBI under the Basel III norms has asked all Banks to establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity including cushion of assets to withstand a range of stress events.
- Given this background, prudent Collateral Risk Management framework is the call of the day which will help lenders understand and monitor the risk associated with the underlying security. These risks include price volatility of the collateral and project execution risks (for under construction projects). Thorough Evaluation and Regular monitoring of the collateral becomes vital so as to avoid further exposure in case of stress and spot the risks early to take remedial action.
- As of now these services are being undertaken either by the Bank / HFC itself or are outsourced to various agencies for legal and technical due diligence. Either way there is lot of cost and resources involved for collating the project documents and sending them for the due diligence. Further, these activities are being carried on at regional levels and hence central monitoring and collating of all project related information is difficult.