Banks, Bankers & Builders!

 --

“Banks do not create money for the public good. They are businesses owned by private shareholders. Their purpose is to make a profit.” …  John Rogers

“I believe that banking institutions are more dangerous to our liberties than standing armies.” …  Thomas Jefferson

 

John A. Rogers is a physical chemist and a materials scientist. He is currently Professor of Materials Science and Engineering, Biomedical Engineering, and Neurological Surgery at Northwestern University. And Mr. Thomas Jefferson was an American statesman, diplomat, lawyer, architect, philosopher, and Founding Father who served as the third president of the United States from 1801 to 1809. No wonder the opinion of Mr Rogers about banks matches with mine because going by his background he is well educated & trying to earn money by using his academia! But no wonder it’s Mr. Jefferson who is a successful politician (being President of the United States for two consecutive terms is a proof) understood perfectly the banks or say the banking system & described the same in his words!  It’s when my family friend Mr Kakirde who himself is a financial column writer called me & asked about what are my issues regarding banks in the real estate, my brain started (even after spending 30 years in real estate some part of brain is still alive, thanks to such questions asked) thinking about banks & my business i.e., real estate & surprisingly except problems, I couldn’t think of much! Sorry if I have hurt feelings of my bankers friends (yes, a banker also can be a friend too, sarcasm) by my such statement but take it like a dialogue in Deewar, “jubtak ek bhai boal raha hai, ek bhai sunega par jub ek murim bolega tub ek puliswala sunega”; please take it as experiences of an engineer builder who doesn’t have much knowledge of finance & try to understand it as per logic that too common man’s logic! Unfortunately, in this country (I don’t have experience of doing business in other countries) when its doing business then usually logic doesn’t work & banks are also no exception to this Law of Businesses (a self-derived term, lol)!

Coming back to our subject of sharing, this is what my friend wrote to me, “Dear Sanjay, I would like to know from you, important pointers while writing one article.” 

1. What is the present status of the construction industry?

How is it doing? What are its difficulties? problems

2. What are the issues involved in finance

 by banks?

Or any other points you would like to mention in the

my article.

 

On the WhatsApp, I replied in short, whatever came to my mind from my various confrontations with banks (read as encounters) but the writer in me got stirred up & I thought why not explore this aspect a bit in detail & use it to make my fellow professionals as well other personalities in the society know about the facts of bank’s role in the real estate? Either they will read & think I am exaggerating or they will guide me if I have wrongly analysed the scene, so here we are in pointer form so I should not miss any aspect…

1.   Consider real estate as an industry… This was my first point as even after spending thirty years in real estate, I have realized this one thing that no bank, (here after read as nationalized bank) considers the real estate as an industry but they think (or behave) it’s a business or profession such as trading in share market or a gamble, in frank words! And the banks do want their cut from the huge profits out of this gamble (business) but they don’t want to be part of the risk, is the problem. That’s why real estate developers unless they know someone in the bank are never ever favoured by the banks. Indeed, for this the behaviour of the builders in the past also has been a reason but then time changes & so do the nature of the business & the people in it, right? High time for the banks to recognize real estate as an industry & deal with it accordingly.

2. Make special provisions for funding for the affordable homes category where the unit price is less than Rs 50 lakhs at a lesser interest rate... More the risk, the more the profits, a basic law of nature & investments & adhering to this law which is applicable to the investments, the banks have set maximum interest rates for funding to the entire real estate industry. But where risk is less & so are the margins, especially affordable homes’ segment in cities like Pune where demand is more but rates are low for such housing, in such times the banks should have a funding provision as well lower rates of interest which is not the case.

3. Increase the repayment period, long term as at present it’s up to project completion and scene is most projects get sold ready possession... The best reason, the banks haven’t identified real estate as an industry is they haven’t studied the change in the pattern of this industry, especially on mass housing or trading trends of homes! With No GST on ready possession homes (one more prank on real estate by govt) & rates of the flats not increasing as fast as they used to earlier, more & more home buyers are opting for ready possession homes. This means if a builder has taken loan for a project he can repay it only after completion of the project by selling ready possession units which do takes time which can be two to three years after completion of the project, But most project finance repayments starts immediately after the completion of project or some specific period which is very less, making the developer impossible to repay in time as already he has exhausted all his funds for completing the project & when banks have mortgaged even the ready possession units why can’t the repayment period be increased for real estate?

4. Include land cost in project finance as anyways the bank mortgages land also even of its loan for construction… This is the biggest joke in financing real estate (read as normal small or medium builders) as in present times where land cost governs the entire viability of a project, how can project finance for a real estate project not include land cost in it! But that’s a fact as while financing a real estate project only the construction cost is taken as subject of the finance & that doesn’t fulfill the purpose at all because nowadays it’s the land cost which is a major factor & has to be paid upfront especially in small or midsize projects. So, if a builder has to generate nearly 70% of project cost in the form of the land along with 20% of construction cost as his contribution, all the bank is ready to pay is approx. 20% of the project cost, what kind of banking support is this for the real estate, is I want to ask!

5. Take out collateral security norms as that makes it impossible to get project finance… If the joke (cruelty, actually) of not considering land cost in project finance is not enough then here is some more when asking for a loan from the banks for the real estate & that is collateral security! The banks (as well even private financers) ask to mortgage ready possession clear title free of any encumbrance property worth of loan asked for as collateral, again this is for small & middle segment builders. Well, if I have ready to sell property stock, worth of loan amount, why would I ask for loan & then the bank keeps charge on both properties means blocking my two projects, super, any comment?

6. Make housing a priority sector... And on top of all these one-way norms the standard answer or reply from the banks is, “we would have loved to finance your project but at present real estate is in the list of non-priority segment as per Reserve Bank’s guidelines, s, we are sorry, we can’t consider your proposal!” And the joke is these very banks are running behind the flat purchasers for home finance at lowest interest rates but are not lending to the makers of those homes!

7. One window or table loan system instead of a developer running all around for documentation… As usual all banks say they are loan friendly & blah blah blah but when you actually go for a loan then you have to run from table to table & each table (read as signatory or authority) has his or her whims & demands documents which are not just illogical but takes too much of time! Subsequently making you surrender to a Finance Consultant named entity, which needless to say keeps its own cut, making the loan costlier to you in the end! There has to be one window system actually in place (a dream) for real estate as this industry is key to the dreams of millions of owning a home, right?

8. Get construction work progress monitoring system in place… And if at all you are lucky to get project finance then its disbursement as well as accounting is one more tedious process as in the world of google maps & drones, why do you need repeated documentation of various certificates in print form & inward outward system? Why can’t the banks have a system in place to visit the site progress periodically & keep visual data stored by itself & charge the client a little extra for the same, is the question I want to ask the banks.

 

Well, I got exhausted (read as frustrated) even writing the issues about banking, imagine what would have been the condition of a builder who is fighting day in & out for his loan proposal with the banks! Sad part is the real estate industry which is one of the biggest by turnover, revenue & maker of a product which is one of the basic needs of living, for that also if the banks are so ignorant or unsupportive then do mind, it's not just the builders but entire system which is actually responsible to make the homes costlier! As when a builder doesn’t get finance from a proper banking system, then the only option for him is to bend the knee in front of private loan sharks at high interest rates & if he is lucky enough then be able to complete the project or become a bank-corrupt! Now I understand the term bank-corrupt, as it's actually the banks which are the main reason for making someone (read as a builder) to become so, lol!

--

Sanjay Deshpande 

Sanjeevani Dev.

Please view my sharing about real estate in Pune at You Tube link below..

 

https://www.youtube.com/watch?v=g4xX7eopH5o&t=5s

 

Please do visit my blog links below to read about real estate & home buying! 

https://visonoflife.blogspot.com/2021/09/choosing-right-home.html

http://jivnachadrushtikon.blogspot.com/2021/09/blog-post_21.html

Creating Togetherness; team Sanjeevani Way (Click link below) 

https://www.flickr.com/photos/65629150@N06/albums/72157627904681345

For any of your complaints about city, log in at link below

www.punecorporation.org

Take your issues to Hon PM at link below..

https://secure.mygov.in/

Think Green, Think Life

www.sanjeevanideve.com