Raghuram Rajan's warning, that the deep trouble in the real estate, construction and infrastructure industries could cascade on to non-banking financial companies (NBFCs) that lend to them, comes at the most inopportune time for the slowing economy. The Reserve Bank of India (RBI) former governor said the asset quality of the NBFCs with exposure to the sectors should be reviewed, media reports say.
Gross Domestic Product
There is also "significant distress" in the rural areas, Rajan wrote in an opinion piece in the India Today magazine. He said the country is facing a growth recession with the economy growing at a slow pace and unemployment rising. The gross domestic product (GDP) growth slowed to 4.5 per cent in the quarter ended in September, which was a six-year low. He said a crisis among the shadow lenders and a build-up of bad loans at banks have curbed lending in the economy.
We have a fairly good idea of where the vulnerabilities lie."
The RBI should carry out an asset quality review of the NBFCs, Rajan suggested. RBI governor Shaktikanta Das has said the central bank closely monitors the top 50 non-bank financiers, which account for about 75 per cent of total assets in the shadow banking sector, "We have a fairly good idea of where the vulnerabilities lie," Das had said. He said central bank would not allow any large or systemically important non-bank lender to collapse.
An Economic Times report cites a recent survey that said due to the financial crisis and the slowdown in the sector, residential projects worth around Rs 4.7 lakh crore were facing bankruptcy proceedings. According to property consultant JLL, nearly 4.54 lakh units are running behind the completion dates due to various reasons.
"In the current scenario, it is the residential real estate segment that presents the maximum amount of stressed assets. India's residential sector has been reeling under the pressure of delayed/stalled projects with 4.54 lakh units running behind their completion dates," the report quotes the agency as saying. Some of them were already under bankruptcy proceedings and the value of these projects was estimated at $66 billion, JLL said.
As per the Insolvency and Bankruptcy Board of India, a total of 115 insolvency cases had been filed as of September 2019 under the real estate category. Of these, 87 cases are under process while 28 are closed, the report said.
Finance Minister Nirmala Sitharaman has announced a slew of measures, including those targeting the real estate sector, in an attempt to shore up flagging economic growth which hit the lowest in a decade at 4.8 per cent in the last quarter. The government of Prime Minister Narendra Modi has proposed to inject Rs 25,000 crore to revive stalled housing projects.