Builders and those in the real estate industry borrow large sums of money from shadow lenders (housing finance firms that lend loans to developers).
Now, due to high prices of property, demonitization, GST, increasing unemployment and other such problems the real estate sector is in a slump. This slowdown in the industry is a crisis for shadow lenders or NBFCs (Non banking financial companies) that have made big loans to the real estate sector. Many real estate developers are in deep debt, with 429 that have declared bankruptcy as of June. Insolvency or bankruptcy is a situation where a company or individual are unable to pay their debts. Many banks are also involved in this mess as they have lent money to NBFCs. Other than that, many home loan borrowers could also begin to default as the bankrupt developers are not able to complete their projects on time.
India already has one of the highest bad loan ratios in major economies. A further deterioration could slow down investments. Real estate sector problems itself could also lead to many job losses as it is one of the largest employers.
What steps can the government take to prevent bad loans? Leave your comments below…