Asset reconstruction, home loan

Reconstruction is nothing but converting the loan portfolio into a sort of securitised debt which will be sold to other institutions at a ‘discount’

Many of us would have noticed a statement from the Chairman of H.D.F.C (Housing Finance and Development Corporation Limited) a few days back that there is great scope for development of asset reconstruction in real estate sector. Let us examine this concept and find out the effect of asset reconstruction on the home loan.

While on the subject, we can either start from the lenders end or the borrowers end. If we start from the lender, as all of us know, the lender is always looking for,

* Increasing business

* Higher income from lending

* Quality of assets

* Zero bad debts

* Be the leader in the business segment

When a lender talks about reconstructing his asset, in this case the loans to real estate sector, either he is not happy with the quality of his asset or he wants to get more solid income. The quality of asset can suffer due to many reasons, such as,

* Repayment delays

* Delay in completion of projects

* Cost escalation

* Borrowers at the cross roads
The property sector

No one complained till a couple of months ago when the stock market was ‘up-ish’ on the portfolio. Even the turmoil in the U.S. property market did not worry anyone as Indian market was high on demand, new projects were many and the economy has been buoyant.

The slow down: Where did the slow down start? Is it because of less demand? Is it because of tight money conditions? Dear money policy of the Reserve Bank of India? Growing inflation? …Or a combination of all these factors? Much can be said about all the above.

Effect of slow down on loan segment: When cash generation is affected adversely, repayment suffers and the ongoing projects suffer. New projects will virtually be nil. Cost increase will be the other issue affecting the sector. Cost of land, construction materials, cost of rising labour and service charges are basic problems. Allied problems are widespread industrialisation and conversion of farm lands for housing purposes. The proliferating Special Economic Zones, in spite of strife and struggles from the land owners here and there make land rare for further construction of houses and office complexes.

What do bankers do when their loans are stuck? Banks will have to provide for the low quality assets; Income by way of interest will stop; New lending will be few to come by; Recovery proceedings will have to start.

One way of recovery will be to ‘sell’ the loans before it is classified as non-performing. Loan securitisation is the concept which is now called ‘asset reconstruction.’

The reconstruction process: Reconstruction is nothing but converting the loan portfolio into a sort of securitised debt which will be sold to other institutions and investors at a ‘discount’. Some lenders set up subsidiary ‘holding companies.’ What the HDFC and other major real estate lenders may be looking at is to ‘sell’ the loans to Asset Management Companies (AMCs). Some primary lenders may set up their own AMC to which the home loan portfolio can be transferred. Such reconstructed asset can be treated as a ‘securitised debt’ by extending a Corporate guarantee and sold to other banks or private investors, with attendant risks.

The borrower vis a vis asset reconstruction and securitisation: If the process yields extra income to the lender, the retail borrower has to be given at least a portion of it by way of interest reduction. This is an opportunity for the retail borrower to benefit from reduction in cost.

The bank should in fact obtain the borrower’s consent for securitization. So, here is the benefit for the retail home borrower who should bargain for interest concession.