MUMBAI: Four different lenders have turned down a Kolkata-based real estate developer’s application to borrow Rs 40 crore for a residential project in the last two months, without giving any explanation. And, according to two people aware of the development, the builder would struggle to raise money, because all the four non-banking finance companies (NBFCs) that rejected his application did so after carrying out a forensic investigation. The probe revealed that the developer had political affiliations and the land on which the project was to come up may belong to a local politician.
NBFCs and banks, looking for ways to reduce their mounting bad loans, have become extra cautious about lending to real estate developers, particularly lesser known ones, and are increasingly roping in corporate investigators to conduct forensic due diligence before they lend money. NBFCs including HDFC, Indiabulls, Edelweiss and DHFL have started roping corporate investigators before lending.
“Lately, many NBFCs and funds have become cautious while lending to real estate developers and want a thorough reputation and integrity due diligence to be conducted, especially for the first time borrowers,” said Tarun Bhatia, managing director at Kroll India, a forensic specialist.
Lenders are roping in the big four — Deloitte, EY, PwC and KPMG — and other boutique firms such as Kroll, and Alvarez and Marshal (A&M) to undertake forensic due diligence of lesser known developers before lending to them. The fear is that these loans could turn toxic, experts said.
The lenders want to be sure of not just repayment but also whether the project would be completed or there could be any future litigation.
Investigators are required to find Real Estate Regulation and Development Act norms compliance by the developers and their political affiliations, criminal antecedents, if any, and status of land titles, among other things.
Experts indicated that in the past NBFCs have rejected proposals where it was revealed that builders own the land via politicians and have criminal proceedings or too much litigation in personal capacity against them.
DHFL, in response to an ET query, said it “has always followed a rigorous system of ensuring utmost risk assessment in project loans”.
HDFC, Indiabulls and Edelweiss did not respond to ET’s queries on this issue as of press time Wednesday.
According to people in the know, a due diligence is done in all corporate loans above Rs 25 crore. The firms on their part are charging anywhere between Rs 5 lakh to Rs 15 lakh per due diligence.
“Most banks and NBFCs conduct basic due diligence checks before lending to the SME sector, including the real estate sector, considering the limited availability of information in these segments,” said KV Karthik, partner forensic, financial advisory, at Deloitte India.
“Usually a first level diligence is undertaken, wherein information is sought from the public domain to verify claims made by the loan requestor. Based on the findings, a second level detailed diligence may be recommended,” he said.
Source from:http://realty.economictimes.indiatimes.com/news/industry/lenders-turn-extra-cautious-on-loans-to-builders/59675718
