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I drafted this blog post four years ago after reading this article in Economic Times.
Not wanting to sound alarmist, I decided to can it. I revisited the post many times since then and I stuck to my decision each time.
Until I read this question on Quora a couple of days ago:
Is there a situation in India like The Big Short movie as there are big NPA in Public and Private Banks?
This is when it struck me that the anxiety I felt a few years ago when I read the bestseller by Michael Lewis has probably spread to a wider audience after the movie version of the book hit the screens last month. Therefore, I decided against keeping my thoughts to myself and to publish the post. Here goes:
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Banks have huge exposure of loans to both builders and home buyers.
Sales of new homes have been hit by high prices of real estate. I've my own views on whether Indian real estate prices are reasonable or not. But, since prices are decided by an interplay between supply and demand in a free market, I'll keep my $0.02 on this subject to myself. That said, a broker I know told me that he hadn't closed a single deal in the past month, which is apparently a first for him in his eight-year career.
Despite lukewarm sales, builders are not reducing prices. This has led to an impasse in the Indian real estate market. This has hit the government in two ways:
According to the aforementioned ET article, the government has told CEOs of government-owned public sector banks to put pressure on builders to drop prices and to instigate home loan takers to push builders to execute projects on time.
The government's suggestion sounds well-placed because, by virtue of having lent such huge sums, banks are in a pivotal position to intervene with builders and home buyers to break the current deadlock.
How're banks responding? They're reportedly asking the government to appoint a real estate regulator, whose role it'd be to "tackle malpractices in the sector, including lack of transparency about the size of the property or the date of completion of projects".
Whaaaat? I didn't expect banks to act on the government's advice immediately. But I was shocked by their pushback for several reasons:
Not finding any logical answers, my thoughts drifted to The Big Short, the non-fiction book by Michael Lewis. Released in 2010, the book explained why American banks relaxed lending norms and opened the floodgates of mortgages in the first half of the 2000s, which triggered the subprime mortgage crisis in 2007.
I began wondering if similar factors are in play in India now and whether they'd lead to the same consequences as in USA.
The NPA problem faced by the Indian banking system has stemmed from loans made to real estate, infrastructure and a few other sectors. To that extent, the above real estate-centric post won't fully explain the reasons undergirding the looming crisis. But, since it captures the NPA zeitgeist accurately, I decided to publish it without any change.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
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