How will the 3-month moratorium announced by the RBI on loans will offer some comfort to property builders?

July 8th, 2020

In consideration of the pandemic and the disruption caused due to it, the RBI has taken the significant decision of extending the moratorium for term loan repayment by another 3 months, till August 31, 2020. This rule holds for home loans as well thereby bringing the much-needed respite for all the stakeholders in real estate including home buyers and property builders.

What does this new rule entail?

According to the statement issued by RBI, due to the extending lockdown due to COVID -19, they have decided to allow financial institutions to stretch the moratorium on term loans for 3 more months , from June 1st 2020 to August 30 2020. The repayment schedules, due dates and tenor for these loans will also be shifted by 3 months.

The interest payment on working capital loans have also been deferred by 6 more months.

All other conditions for the loans will not be affected. The loan will be classified by the lender as non-performing and the individual credit score will not be impacted.

Implications of the moratorium on real estate developers

This measure announced by the RBI is expected to bring a huge relief to real estate developers. According to this announcement, all commercial banks including rural banks, local banks, small financial institutions, housing finance companies and non-banking financial corporations(NBFCs) were allowed to offer a 3 -month moratorium on payment of instalments for all term loans outstanding as on 1st March 2020.

Other than this, with respect to working capital loan in the form of cash, credit or overdraft, banks have been allowed to defer outstanding interest payment beginning March 1st 2020. The accumulated interest can be paid post the deferment period.

According to RBI data, the total outstanding loan amount of property builders from NBFC’s, commercial banks, and housing companies stood at around 5 lakh crores as of March 2020. Outstanding loan amount taken by the construction sector alone from commercial banks is estimated to be around Rs. 1.05 lakh crores as of January 2020.

Due to this prudent decision of the RBI, liquidity will be infused into the real estate sector that can set the ball rolling once normalcy resumes. The industry is very optimistic about this announcement if implemented effectively. The RBI has let the bank board to decide the criteria to allocate these reliefs and ensure that most of it passes on to the eligible borrowers.

RBI has infused liquidity into the system by reducing the interest rates. Now it is in the hands of the banks and financial institutions to pass on the same to bring about relief to the real estate businessmen. These 3 months of grace period offers the developers a welcome breather to repay their loans in a situation where cash flows have completely dried up.  The deferred payments will not impact the credit ratings of the real-estate businesses.

The central bank also cut down the repo rate to 4.4%, the lowest in about 15 years. This will urge banks to lend more to the adversely hit real estate sector and delay interest on working capital loans till June 2020 enabling builders to better manage their working capital.

The 3 -month moratorium on home loans and deferred interest payment on working capital will not result in asset classification downgrade. Regular EMI’s will resume once the period ends.

Impact of the moratorium on Home Buyers

The moratorium announcement is also a blessing for the home buyers as major financial institutions have lent over 20 lakhs crores as home loans as of March 2020. The liquidity of around 3.74 lakh injected combined with the 3-month moratorium on term loans by banks and financial institutions will not only alleviate short-term liquidity issues of home buyers but also help them cruise through these difficult times. Many self-employed individuals and the middle-income group would find it difficult to repay their loans due to loss of income and missing an EMI would drastically affect their credit rating. This measure by the RBI will ease the burden on the borrowers and avoid turning them into defaulters with no impact to their credit score.

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