Retailers try new ways to counter soaring rentals

Common sense is uncommon.
Raghavendra Kamath & Tejal Deshpande / Mumbai March 31, 2008
# Fashion retailer ETAM Future, a joint venture between the Future Group and French retailer ETAM, has closed three shops in Delhi, Surat and Ahmedabad owing to high rentals.

# For the same reason, Liberty Shoes has put plans to launch its high-end brand “Pairs” on hold.

# Indiabulls, the new entrant in retail with its brand Trumart, recently closed five stores, one each in Thane, Jaipur and Pune and two in Ahmedabad. The company has opened five new stores (two each in Ahmedabad and Pune and one in Jaipur) with better deals with developers.

Sky-high rentals are forcing retailers to explore new ways to stay afloat. Many have done the obvious thing by shifting to cheaper locations or simply downing their shutters. But others are renegotiating deals with developers to ensure business sustainability.

New deals like longer “rent-free” periods, no “lock-in” clauses in agreements and revenue-sharing deals with developers are becoming common.

“Today, 90 per cent of retailers are not making money. Many of them are earning only half of what they should make to break even. Zooming realty costs is the main culprit,” said a property consultant.

A cross-section of retailers Business Standard spoke to said rentals should account for 10 to 12 per cent of sales to make business sense but now make up 20 to 30 per cent of sales in many cases.

“We have decided not to pay more than 20 per cent of our sales as rent. How can one pay rents that are equivalent to total sales in some high streets?” said Jaydeep Shetty, chief executive of ETAM Future Fashions.

Retailers have started bargaining for more with developers. “We do not sign up for a lock-in period. If you do not make money in a place, what is the point in staying there,” said Subir Ghosh, chief executive of music and lifestyle retailer Planet M.

Most retailers sign up for three-year lock-ins that require them not to vacate the premises in that time-frame.

Revenue-sharing agreements are also catching up as footfalls wane in many malls in the country. French brand Lacoste has already opted for such arrangement with three of its stores.

“As our occupation costs go up, the revenue sharing model can help sustain operations, especially in high streets,” said Vikas Gupta, managing director of Lacoste India.

Retailers that are unwilling to opt for revenue sharing are looking at new retail formats. Arvind Brands, for instance, plans to launch multi-brand stores for its international brands.

“Multi-brand outlets are cost-effective since they make a 10 to 15 per cent difference in sales per square foot. It will also help improve footfalls because many brands are available under one roof,” said J Suresh, chief executive of Arvind Brands.

'High interest rates, prices stunt real estate'

High interest rates and overheated asset prices have cooled the super-charged growth in real estate even as a demand-supply mismatch continues in the Indian property market.

DECLINE AND FALL

# Price movement over the last three to six months in the central business districts in key cities has been flat
# Prices are expected to be flat in the near future
# Speculators moving out, end-users buying cautiously
# Commercial real estate supply to increase in coming six to eight quarters
# Interest rate cut would have helped boost demand, but with inflation up, this is unlikely
# Input costs — steel, cement etc — have gone up, along with land price
A cross section of opinion in the real estate sector suggests that overall prices have stagnated or declined 10 to 15 per cent in the past six months in prime commercial areas and are expected to dip 10 per cent more in the coming months across key Indian cities. Stagnation and fall in NCR
“We have not seen any major movement in prices of office buildings over the last three months. In fact, prices in the central business district of Delhi have remained hard. Rentals in the suburbs have stagnated,” said Pradeep Jain, chairman, Parsvnath Developers.

Rentals of prime commercial buildings in the New Delhi central business district, which covers the area around Connaught Place, stand at their December prices of Rs 330 to Rs 375 per square foot (sq ft).

At Nehru Place, the capital’s secondary business district, commercial rentals have been constant at Rs 220 to 260 per sq ft during the same period, say property consultants.

In contrast, rentals grew 40 to 50 per cent in the National Capital Region in calendar 2007, according to a recent report by property consultancy Jones Lang LaSalle Meghraj (JLLM)

In the emerging boomtowns Gurgaon and Noida, which command rentals between Rs 50 and 200 per sq ft, have seen a 5 to 10 per cent dip in commercial rentals in the last three months, according to consultants.

Slowdown in Mumbai
Last week, Mumbai’s city planning agency — the Mumbai Metropolitan Region Development Authority (MMRDA) — failed to get bidders for two plots in the Bandra-Kurla Complex (BKC), the city’s new business district. Analysts say this is a clear indication of a slowdown.

“The days of super-high growth are over. Now developers are only going for those properties which are reasonable,” said Abhishek Kiran Gupta of JLLM.

A landmark office tower at Worli, which commanded rentals of Rs 550 per sq ft, has seen a decline to Rs 375 per sq ft, said a city-based property consultant. He added that rentals in BKC, which had gone up to around Rs 450 per sq ft, are likely to soften by Rs 75 to Rs 100 per sq ft.

The addition of new office space over the next six to eight quarters is expected to lead to a further decline in rentals. Nearly 15 million sq ft, the equivalent of the BKC, of office space will be added in Mumbai by end-2008, the NCR is expected to see an addition of 7 million sq ft of office space.

“Rentals will not grow by 30 to 40 per cent now as was the case till now. Rates in the prime city centre areas will not fluctuate much,” said Gupta, adding: “Rentals in the suburbs will not grow more than 8 to 15 per cent.”

Given that economic growth is expected to slow in 2008-09, experts say reduced demand could see more supplies coming into the market.

“Companies book and lease space keeping three- to five-year horizon. But given the slowdown in economy, they tend to scale down their demand projection of space. Reduction in demand means more supply hitting the market,” said Jai Mavani, executive director, KPMG.

Slump in housing
Residential demand, which is more sensitive to interest rate movement, has cooled in recent times, though developers are reluctant to admit this.

However, it is a fact that property transactions have dropped and the rate of new home loan disbursals has also fallen.

The State Bank of India (SBI), the country’s largest lender, saw a home loan portfolio growth rate of 16 per cent in 2007, slower than the 20 per cent growth witnessed in 2006.

SBI has cut home loan rates twice since January 2008, a bank executive said, adding that there was no visible growth as yet in the home loan portfolio. “Property prices are still high and people still cannot afford flats in big cities,” he added.

“Apartment sales have gone down by 20 to 30 per cent in Mumbai. Developers are doling out goodies like stamp duty relief, free parking and interiors to boost sales,” said Rajiv Sabharwal, head, retail assets, ICICI Bank.

Crucially, developers are not cutting prices.

“Developers can not cut prices because once you do that, it signals the start of a downward spiral. They are holding on to the prices to maintain the momentum,” said Rajesh Mehta, a leading property consultant in Mumbai, adding: “April and May are the key months as far as property deals go. If transactions do not pick up, prices of apartments will fall at least 10 to 15 per cent”.

Traditionally a stock market boom has a direct impact on real estate prices. However, the near 5000-points fall in Bombay Stock Exchange Sensex from its peak in January 2008 has wiped out much investor wealth.

This reversal of fortunes is expected to have an immediate impact on residential real estate prices. The last two or three years have seen prices escalate across the country.

Despite anecdotal evidence of prices falling marginally in recent times, the fact remains that supply of apartments and built up plots in the developed areas of Mumbai and Delhi is scarce.

“New residential projects have slowed down. Only big developers are launching new projects. Buyers are also waiting whether prices will come down,” adds ICICI’s Sabharwal.

Speculators have exited many areas like Greater Noida, Kundli and even some parts of Gurgaon. JLLM Chairman Anuj Puri believes that investors, who comprise nearly 20 per cent of property buyers, are staying out after the stock market crash. “The absence of speculator interest has led to a 15 to 20 per cent correction in areas like Gurgaon and Noida,” he said.

The scenario in Cyberabad
The southern city has seen a change in the nature of buyers. Where investors dominated before, more and more end-users are buying properties, says I Syam Prasad Reddy, managing director and chief executive officer, Indu Projects Ltd.

“Hitherto, demand was driven both by investors and end users. Currently there is a substantial drop in investor interest, but there isn’t any slow down and demand is only flat”, he adds.

All quiet in Silicon city
“No upward movement of prices has been evident in Bangalore’s commercial business district for the last four to five months. Residential realty prices have stagnated due to an increase in supply, much more than the demand,” said Samira Chandra Gupta, regional director, Colliers International.

Others concur with this view. “Prices have been generally flat. In many localities prices have fallen sharply. The reduction is greater in peripheral areas and to some extent in premium or super-luxury residential properties,” said Shivaram Malakala, executive director, Habitat Ventures.

On the outlook for Bangalore, Collier’s Gupta said demand from the IT sector may be impacted by the US slowdown, but sectors like pharma, R&D services and some manufacturing companies would continue to drive demand. Hardening interest rate over the past year have seen second and third home buys, which drove the markets, dry up.

Like elsewhere, prices are expected to remain bearish, with Malakala saying they could fall further by up to 10 to 15 per cent.

'High interest rates, prices stunt real estate'

High interest rates and overheated asset prices have cooled the super-charged growth in real estate even as a demand-supply mismatch continues in the Indian property market.

DECLINE AND FALL

# Price movement over the last three to six months in the central business districts in key cities has been flat
# Prices are expected to be flat in the near future
# Speculators moving out, end-users buying cautiously
# Commercial real estate supply to increase in coming six to eight quarters
# Interest rate cut would have helped boost demand, but with inflation up, this is unlikely
# Input costs — steel, cement etc — have gone up, along with land price
A cross section of opinion in the real estate sector suggests that overall prices have stagnated or declined 10 to 15 per cent in the past six months in prime commercial areas and are expected to dip 10 per cent more in the coming months across key Indian cities. Stagnation and fall in NCR
“We have not seen any major movement in prices of office buildings over the last three months. In fact, prices in the central business district of Delhi have remained hard. Rentals in the suburbs have stagnated,” said Pradeep Jain, chairman, Parsvnath Developers.

Rentals of prime commercial buildings in the New Delhi central business district, which covers the area around Connaught Place, stand at their December prices of Rs 330 to Rs 375 per square foot (sq ft).

At Nehru Place, the capital’s secondary business district, commercial rentals have been constant at Rs 220 to 260 per sq ft during the same period, say property consultants.

In contrast, rentals grew 40 to 50 per cent in the National Capital Region in calendar 2007, according to a recent report by property consultancy Jones Lang LaSalle Meghraj (JLLM)

In the emerging boomtowns Gurgaon and Noida, which command rentals between Rs 50 and 200 per sq ft, have seen a 5 to 10 per cent dip in commercial rentals in the last three months, according to consultants.

Slowdown in Mumbai
Last week, Mumbai’s city planning agency — the Mumbai Metropolitan Region Development Authority (MMRDA) — failed to get bidders for two plots in the Bandra-Kurla Complex (BKC), the city’s new business district. Analysts say this is a clear indication of a slowdown.

“The days of super-high growth are over. Now developers are only going for those properties which are reasonable,” said Abhishek Kiran Gupta of JLLM.

A landmark office tower at Worli, which commanded rentals of Rs 550 per sq ft, has seen a decline to Rs 375 per sq ft, said a city-based property consultant. He added that rentals in BKC, which had gone up to around Rs 450 per sq ft, are likely to soften by Rs 75 to Rs 100 per sq ft.

The addition of new office space over the next six to eight quarters is expected to lead to a further decline in rentals. Nearly 15 million sq ft, the equivalent of the BKC, of office space will be added in Mumbai by end-2008, the NCR is expected to see an addition of 7 million sq ft of office space.

“Rentals will not grow by 30 to 40 per cent now as was the case till now. Rates in the prime city centre areas will not fluctuate much,” said Gupta, adding: “Rentals in the suburbs will not grow more than 8 to 15 per cent.”

Given that economic growth is expected to slow in 2008-09, experts say reduced demand could see more supplies coming into the market.

“Companies book and lease space keeping three- to five-year horizon. But given the slowdown in economy, they tend to scale down their demand projection of space. Reduction in demand means more supply hitting the market,” said Jai Mavani, executive director, KPMG.

Slump in housing
Residential demand, which is more sensitive to interest rate movement, has cooled in recent times, though developers are reluctant to admit this.

However, it is a fact that property transactions have dropped and the rate of new home loan disbursals has also fallen.

The State Bank of India (SBI), the country’s largest lender, saw a home loan portfolio growth rate of 16 per cent in 2007, slower than the 20 per cent growth witnessed in 2006.

SBI has cut home loan rates twice since January 2008, a bank executive said, adding that there was no visible growth as yet in the home loan portfolio. “Property prices are still high and people still cannot afford flats in big cities,” he added.

“Apartment sales have gone down by 20 to 30 per cent in Mumbai. Developers are doling out goodies like stamp duty relief, free parking and interiors to boost sales,” said Rajiv Sabharwal, head, retail assets, ICICI Bank.

Crucially, developers are not cutting prices.

“Developers can not cut prices because once you do that, it signals the start of a downward spiral. They are holding on to the prices to maintain the momentum,” said Rajesh Mehta, a leading property consultant in Mumbai, adding: “April and May are the key months as far as property deals go. If transactions do not pick up, prices of apartments will fall at least 10 to 15 per cent”.

Traditionally a stock market boom has a direct impact on real estate prices. However, the near 5000-points fall in Bombay Stock Exchange Sensex from its peak in January 2008 has wiped out much investor wealth.

This reversal of fortunes is expected to have an immediate impact on residential real estate prices. The last two or three years have seen prices escalate across the country.

Despite anecdotal evidence of prices falling marginally in recent times, the fact remains that supply of apartments and built up plots in the developed areas of Mumbai and Delhi is scarce.

“New residential projects have slowed down. Only big developers are launching new projects. Buyers are also waiting whether prices will come down,” adds ICICI’s Sabharwal.

Speculators have exited many areas like Greater Noida, Kundli and even some parts of Gurgaon. JLLM Chairman Anuj Puri believes that investors, who comprise nearly 20 per cent of property buyers, are staying out after the stock market crash. “The absence of speculator interest has led to a 15 to 20 per cent correction in areas like Gurgaon and Noida,” he said.

The scenario in Cyberabad
The southern city has seen a change in the nature of buyers. Where investors dominated before, more and more end-users are buying properties, says I Syam Prasad Reddy, managing director and chief executive officer, Indu Projects Ltd.

“Hitherto, demand was driven both by investors and end users. Currently there is a substantial drop in investor interest, but there isn’t any slow down and demand is only flat”, he adds.

All quiet in Silicon city
“No upward movement of prices has been evident in Bangalore’s commercial business district for the last four to five months. Residential realty prices have stagnated due to an increase in supply, much more than the demand,” said Samira Chandra Gupta, regional director, Colliers International.

Others concur with this view. “Prices have been generally flat. In many localities prices have fallen sharply. The reduction is greater in peripheral areas and to some extent in premium or super-luxury residential properties,” said Shivaram Malakala, executive director, Habitat Ventures.

On the outlook for Bangalore, Collier’s Gupta said demand from the IT sector may be impacted by the US slowdown, but sectors like pharma, R&D services and some manufacturing companies would continue to drive demand. Hardening interest rate over the past year have seen second and third home buys, which drove the markets, dry up.

Like elsewhere, prices are expected to remain bearish, with Malakala saying they could fall further by up to 10 to 15 per cent.

Real(i)ty check on prices under way

Hindu reports

Mumbai, March 29 A price correction of 10-15 per cent is slowly happening in the realty sector across the country though it is area-specific in cities.

While realtors point to various factors for the downtrend, developers blame skyrocketing land prices. Others tend to point fingers at a demand-supply mismatch and investor disenchantment. “Though a definite correlation cannot be established between the stock market and the price drop, investors/speculators are exiting the realty space,” says Mr Pankaj Renjhen, Managing Director, Jones Lang LaSalle Meghraj, Mumbai.
Impact

The impact is reflected more in the secondary markets (property resale) and in projects that have come in the last two years. The central business districts of the metros appear to be holding their own, especially in Delhi and Mumbai where economic drivers have been strong.

In Jaipur, projects are more and hence the supply side is overweight. In Gurgaon, where real time demand is for apartments in the Rs 40-75 lakh range, there is ample inventory of the premium class of Rs 1 crore plus, he says.

DLF’s entry on Old Mahabalipuram Road in Chennai with a price line of Rs 2,700 a sq ft triggered a change in the locale where the price was upwards of Rs 3,300.

Chennai suburbs are also feeling the heat, as the number of projects is on the rise. Twelve malls for a city like Indore suggests that only those with the right mix and strategy would end up survivors, given the city’s size, he says.

The apex body of developers feels land prices have touched unaffordable levels and hence the inevitable.

The president of the Mumbai Chapter of Confederation of Real Estate Developers Association of India, Mr R.S. Ajmera, said a 10 per cent correction was sure to take place in overheated markets such as Kochi, Chennai, Bangalore and Pune.

He, however, did not fail to blame the decline of realty stocks on market sentiments and the price correction to some extent on the US slowdown and sub-prime impact. The correction in real estate is also happening globally, he says.
Need-driven demand

Mr Ajmera points to the auction of a Bandra Kurla Complex plot here, for which Jet Airways bid Rs 826 crore to set up its global headquarters, to emphasise that demand is driven by need. Jet Airways was the lone bidder for the property.

Said to have the third largest land bank in Mumbai, the Ajmera Group has developed over 170 lakh sq ft in the city. It has put up mega projects in Pune, Rajkot, Ahmedabad, Surat and Bangalore.

The demand-supply mismatch is also a prime factor, Mr Ajmera said.

On the positive side, he is upbeat about the opportunities in tier II and III cities where land prices were sober and realistic.

Black money saves financial sector

SWAMINATHAN S ANKLESARIA AIYAR

A housing boomand-bust has engulfed the US financial sector in crisis. India, too, has experienced a runaway real estate boom, which in a few areas is going bust. The share prices of real estate companies have crashed. Yet, India has no mortgage crisis or financial sector crisis.

Why not? Mainly because of the huge amount of black money in Indian real estate. This has saved the Indian financial sector in unexpected ways. Traditionally, US mortgage lenders checked the creditworthiness of borrowers, and then made the borrower pay at least 20% of the house value, loaning the remaining 80%. So, even if the price of the house dipped, it would still be higher than the bank's loan, and the borrower had an incentive to repay it.

However, in recent years, US banks relaxed loan conditions to increase lending volumes and profits. They began giving loans equal to the entire value of the house, so borrowers had no personal equity stake at all. Many lenders stopped checking the creditworthiness of borrowers. Ultimately, this led to loans to persons with no documented income, job or assets. Very risky!

Moreover, the US financial system created something called securitisation of home loans. Instead of retaining loans on their own books, banks chopped and bundled together thousands of loans, calling the bundle a mortgage-backed security. These securities were then sold to investors, who earned a high return provided borrowers paid regularly. In effect, banks originating home loans re-sold these, and no longer had to worry about defaults.

This led, inevitably, to malpractice. Many banks offered 'teaser' loans. These initially carried very low interest rates, which re-set after a few years at much higher rates. This attracted many low-income people since the monthly installments were initially low. But when the loans re-set higher, some poor borrowers could not repay. The bank originating the loan was unconcerned, having already sold the loan.

In this way, US home lending — and prices — shot up. As long as the economy and housing market were sunny, borrowers paid installments regularly. But eventually housing prices peaked, and then fell. Many owners with loans covering 100% of home cost now found that their homes were worth less than their outstanding loans. So, many borrowers opted to give up the property and rid themselves of the accompanying bank loan. They simply posted the home keys back to the banks.

US banks now face borrowers who can't pay for want of income, plus those who won't pay for properties worth less than the accompanying debt. Mortgage-backed securities are falling in value as underlying defaults rise. The fall in value was initially estimated at $100 billion, is now estimated at $600 billion, and will exceed a trillion dollars if home prices keep falling (as seems likely). This has inflicted huge losses on holders of the mortgagebacked securities, including the biggest banks in the world — Citibank and Bank of America. Many holders of these securities — such as investment bank Bear Stearns — will die or be forced to merge with more solvent entities.

Why does this not happen in India? Here, too, banks have increased lending aggressively for housing in the last five years. Here too, many banks finance the entire house value.

But Indian borrowers do not walk away from their homes — and loans — if prices dip. This is because a large proportion, often half, of almost all home purchases is paid in black money. If a house is sold for Rs 100 lakh, the official registered value will typically be only Rs 50 lakh, with the balance paid under the table in cash.

A bank may loan Rs 50 lakh, covering the entire formal price. However, the owner's contribution is not zero: he has paid Rs 50 lakh in black. To preserve that black investment, he will keep paying his installments even if house prices dip.

US banks give non-recourse loans — that is, the loan is secured only by the mortgaged property, and the borrower becomes debt-free if he returns the property. This is not so in Europe, where the borrower remains personally liable even after returning the mortgaged property, so the bank can seize his other assets. This discourages default. Hence, European banks are not suffering the way US ones are. Ditto for Indian banks.

When economic conditions get tough, defaults go up. In the last year, efaults have risen in Indian real estate, but mainly on account of commercial builders. The default rate remains modest for home-owners. Now, the Indian legal system is so slow that borrowers have little fear of even their mortgaged homes being seized, let alone other assets. Yet, they do not default, and India's financial system remains strong.

The reason is that banks enjoy, without asking for it, a huge safety margin provided by the black money invested by every home owner. To preserve this black investment, borrowers will do their level best not to default and lose their property. Ironically, black money enforces loan discipline in India, far more effectively than formal contracts or legal processes.
Thanks for posting this. Sounds funny but very true. Black money plays a crucial role in the RE prices. In addition to what the article mentioned there is also new black money chasing RE that will help the RE prices. When I went to India this time I heard lot of black money transactions happening in the proposed SEZ areas.
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Black money saves financial sector
SWAMINATHAN S ANKLESARIA AIYAR

A housing boomand-bust has engulfed the US financial sector in crisis. India, too, has experienced a runaway real estate boom, which in a few areas is going bust. The share prices of real estate companies have crashed. Yet, India has no mortgage crisis or financial sector crisis.

Why not? Mainly because of the huge amount of black money in Indian real estate. This has saved the Indian financial sector in unexpected ways. Traditionally, US mortgage lenders checked the creditworthiness of borrowers, and then made the borrower pay at least 20% of the house value, loaning the remaining 80%. So, even if the price of the house dipped, it would still be higher than the bank's loan, and the borrower had an incentive to repay it.

However, in recent years, US banks relaxed loan conditions to increase lending volumes and profits. They began giving loans equal to the entire value of the house, so borrowers had no personal equity stake at all. Many lenders stopped checking the creditworthiness of borrowers. Ultimately, this led to loans to persons with no documented income, job or assets. Very risky!

Moreover, the US financial system created something called securitisation of home loans. Instead of retaining loans on their own books, banks chopped and bundled together thousands of loans, calling the bundle a mortgage-backed security. These securities were then sold to investors, who earned a high return provided borrowers paid regularly. In effect, banks originating home loans re-sold these, and no longer had to worry about defaults.

This led, inevitably, to malpractice. Many banks offered 'teaser' loans. These initially carried very low interest rates, which re-set after a few years at much higher rates. This attracted many low-income people since the monthly installments were initially low. But when the loans re-set higher, some poor borrowers could not repay. The bank originating the loan was unconcerned, having already sold the loan.

In this way, US home lending — and prices — shot up. As long as the economy and housing market were sunny, borrowers paid installments regularly. But eventually housing prices peaked, and then fell. Many owners with loans covering 100% of home cost now found that their homes were worth less than their outstanding loans. So, many borrowers opted to give up the property and rid themselves of the accompanying bank loan. They simply posted the home keys back to the banks.

US banks now face borrowers who can't pay for want of income, plus those who won't pay for properties worth less than the accompanying debt. Mortgage-backed securities are falling in value as underlying defaults rise. The fall in value was initially estimated at $100 billion, is now estimated at $600 billion, and will exceed a trillion dollars if home prices keep falling (as seems likely). This has inflicted huge losses on holders of the mortgagebacked securities, including the biggest banks in the world — Citibank and Bank of America. Many holders of these securities — such as investment bank Bear Stearns — will die or be forced to merge with more solvent entities.

Why does this not happen in India? Here, too, banks have increased lending aggressively for housing in the last five years. Here too, many banks finance the entire house value.

But Indian borrowers do not walk away from their homes — and loans — if prices dip. This is because a large proportion, often half, of almost all home purchases is paid in black money. If a house is sold for Rs 100 lakh, the official registered value will typically be only Rs 50 lakh, with the balance paid under the table in cash.

A bank may loan Rs 50 lakh, covering the entire formal price. However, the owner's contribution is not zero: he has paid Rs 50 lakh in black. To preserve that black investment, he will keep paying his installments even if house prices dip.

US banks give non-recourse loans — that is, the loan is secured only by the mortgaged property, and the borrower becomes debt-free if he returns the property. This is not so in Europe, where the borrower remains personally liable even after returning the mortgaged property, so the bank can seize his other assets. This discourages default. Hence, European banks are not suffering the way US ones are. Ditto for Indian banks.

When economic conditions get tough, defaults go up. In the last year, efaults have risen in Indian real estate, but mainly on account of commercial builders. The default rate remains modest for home-owners. Now, the Indian legal system is so slow that borrowers have little fear of even their mortgaged homes being seized, let alone other assets. Yet, they do not default, and India's financial system remains strong.

The reason is that banks enjoy, without asking for it, a huge safety margin provided by the black money invested by every home owner. To preserve this black investment, borrowers will do their level best not to default and lose their property. Ironically, black money enforces loan discipline in India, far more effectively than formal contracts or legal processes.
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