This is banking with a difference. It’s informal and unregulated. Reeling under a severe cash crunch and drop in sales, big realty companies are now turning to the unorganised market for their cash needs.

Industry sources familiar with the development say all major realty companies around the country are collecting cash from private financiers and even individual lenders at a whopping interest rate of 36-48% per annum to save and complete their projects.

These sources further say that the developers are taking at least Rs 500 crore to Rs 1,500 crore from financiers and putting on block projects with these financiers in lieu of these loans. In fact, such is the situation, that the top five listed developers in the country have reportedly picked up Rs 4,000 cr to Rs 6,000 cr at interest rates of 40-48% from these financiers in the last four to six weeks. Many developers confirmed that they were picking up money from the market at such high rates to complete their projects. Liquidity concerns were squeezing the real estate sector, with developers taking loans between 24 to 36%.

Earnst & Young India: “Private equity deals have dried up and there are no financial sources to support smaller real estate developers. Banks have made it clear that they are looking at viable lending options and will consider providing support to only large real estate companies. It remains to be seen how these companies go about reassessing their consumption model to bring it in line with the current market expectations.” Stock prices of major realty players, including DLF, Unitech, Housing Development & Infrastructure (HDIL), Indiabulls Real Estate, Puravankara Projects, Parsvnath Developers, Sobha Developers, Omaxe, Mahindra Lifespace Developers and Ansal Properties & Infrastructure have all tumbled more than 60% in the last six months on Dalal Street.

Industry sources, in fact, say that across all metros and tier II cities such as Mohali, Kundli (Sonepat), Jaipur, Lucknow, Indore, Surat and Cochin, there has been a 70% to 80% drop in the number of deals. Arvind Mahajan, executive director of KPMG India, feels that the recent steps by government to boost real estate sector will take time to trickle down. With banks cautious towards lending to smaller developers, consolidation should take place soon. Wealth perception is a big issue in the market right now, especially in the backdrop of these companies’ valuation going down drastically on the stock market. There is demand up to a point. In misplaced euphoria, these realty players created more supply than demand in some places, which has backfired on them. The mix of housing holds the key. For developers, who have priced properties between Rs 25 lakh and Rs 1 crore, the going has been tough.

In fact, realising that the industry is facing a cash crunch, many developers are planning to do tie-ups at a project level, or even give huge discounts on commercial properties which then can sell as hot cakes. Many in the industry feel that a lot of projects already announced may not actually take off.

With significant pressure on realty companies, they are likely to go for restructuring and focus on selective projects in the short to medium term. There will be more tie-ups at the project level. For developers, these will be testing times that will check whether they are strong enough to weather the downturn.