Real estate lenders should explore debt for asset swaps

The real estate sector in India is slow and lately many real estate developers are defaulting in delivering their projects and servicing their project loans. Such defaults have increased the number of outstanding real estate loans in the books of the lenders and some of the loans are at the verge of becoming non-performing assets (NPAs).

Debt for asset swap (DAS) arrangements are an alternative for lenders in a scenario where the borrower is or may become unable to pay its debts. In a DAS, the borrower exchanges an asset (typically an immovable property) with the lender for the outstanding loan amount. Implementing a DAS may not be an easy option for a lender, but it is better to have a quality asset in its balance sheet than to have a NPA. Such arrangements can help lenders avoiding NPAs particularly on loans to real estate developers.

Whether an asset may be acquired by a bank is determined by section 6 of Banking Regulation Act, 1949. Usually an immovable property generating real estate value can be acquired by a bank if it meets the requirements under section 6.

When formulating a DAS arrangement with a real estate developer, the lender will have to assess from a commercial perspective the scope of development of and around the property; saleability, competitiveness and marketability of the property; present and expected valuation of the property; demand and supply factors in the area where the property is located; sanctioned plan and master plan of that area; egress and ingress available to the project/property; maintenance of the property (including ensuring no encroachment) upon acquisition by the lender, etc. In respect of land, the lender must also ascertain the floor space index sanctioned in respect of the land parcel, to assess the land’s development potential.

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Amit Ronald Charan is a principal associate and Kanika Malhotra is an associate.