Alternate funding for developers

Due to the ongoing crisis, the real estate sector has seen a 60% fall in the demand for properties. Banks are quite reluctant to lend loans to firms even for ongoing projects. Hence, developers are looking at alternative instruments of funding such as lease discounting for completing ongoing projects, especially the commercial ones.

Under a lease or rent discounting agreement, banks lend to developers for new projects against rents they directly realize for completed projects, which also is mortgaged with the bank. Thus, banks are assured of guaranteed cash flows and also have physical assets in case of defaults. Lease discounting is a much safer mode of lending, as the entire loan amount is covered through the rent agreement, and the banks are cushioned against defaults. The risk averse banks are more willing to lend under this arrangement as it is safe. Also, the rate of interest charged by banks for loan against rent, generally for a tenure of five-six years, is generally 1-2 per cent lower than the benchmark lending rate.

But the question remains how many banks are willing to lend to developers? Most of the bankers say that they have limited headroom for real estate sector and have already exhausted the stipulated limit for real estate lending.