Since decades, Indian real estate and the Indian banking sector has been facing a number of challenges. To overcome these shortcomings, the Narasimham Committee on Banking Sector Reforms (set up in 1991) suggested merger of 27 public sector banks (PSB) to 12. To consolidate, empower and recapitalise public banking sector to uplift the economy of the country and meet global banking standards are the key highlights of the merger. ‘It would make greater economic and commercial sense and would be a case where the whole is greater than the sum of its parts’, said an official of the Narasimham Committee about the merger. Succeeding the previous merger of the largest lender in the country, State Bank of India (SBI) and its subordinate 5 banks with Bharatiya Mahila Bank on 1st of April, 2017, the government executed the merger of Dena Bank and Vijaya Bank with Bank of Baroda on 1st of April, 2019. On Friday, 30th of August, 2019, Finance Minister, Nirmala Sitharaman announced the merger of 10 PSBs into 4.
Key highlights of the announcement are:
· Make Indian economy reach a $5 trillion milestone with financially capable lenders and technology driven banking sector.
· Mergers: Punjab National Bank (PNB) with Oriental Bank of Commerce (OBC) and United Bank of India. This merger is said to be the second largest state-run bank in India | Canara Bank with Syndicate Bank. This merger is said to be the fourth largest state-run across the country | Union Bank of India with Andhra Bank and Corporation Bank, fifth largest banking sector | Indian Bank with Allahabad Bank, seventh largest banking sector.
· Government to provide Rs 55,250 crore upfront capital to the merger to monitor regulatory compliance and credit growth to boost the economy.
· Rs 3,000 crore liquidity sanctioned to Non-Banking Financial Companies (NBFCs). Partial credit guarantee scheme approved for NBFCs.
Effect of Merger on Real Estate
· As per a report by the Times of India (TOI), recovery in the realty sector constitutes nearly 18% to Gross Domestic Product (GDP) of India. Along with enhanced budget and the size of the banks, the banking sector is set to serve consumers efficiently and duly.
· In order to boost the lending capacity of housing finance companies (HFCs), on Friday, 23th of August, 2019, Finance Minister, Nirmala Sitharaman announced liquidity support of Rs 20,000 crore in addition to previous Rs 10,000 crore to the struggling housing finance companies (HFCs). National Housing Bank (NHB) is the parent body that monitors the activities of HFCs. Also, with RBI cutting down on marginal cost of funds based lending rate (MCLR) and repo rate, real estate sector is set to witness massive growth amidst the predictions of market slowdown in 2020. SBI, one of the leading lenders in the country has reduced its repo rate to 8.05%.
· Also, the PSB merger may help reduce unnecessary duties charged by the bank thereby encouraging investment in the bank for Fixed Deposits (FDs) and secured loans. With Reserve Bank of India (RBI) contributing a fixed amount to the merged PSBs, interest on secured loans are said to decline. Low interest rates on secured loans will eventually increase the number of people opting for home loans rather than personal loans from public sector banks and may reduce the loan recovery rate further. Thus, monthly instalment amount would be reduced significantly. Consequently, amount spent on recovery of NPAs or bad loans would be reduced. Hence, more number of people would opt to invest in real estate.
· Mortgages or Home Loans and Car Loans, tops the list of secured loans. Thus, an increase in demand for residential, commercial, hospitality and retail sectors calls for infrastructural development, which in turn, urges for expansion in the housing sector, thereby boosting the investment in the realty sector.
· The proposed development of 200 million square feet by the end of 2019 in the country would be occupied with reduced risk factors and ease. Ascent in real estate investment will not only boost the economy of the country but will fetch the FDIs more than ever before. Thus, realty sector is expected to contribute 13 percent to India’s GDP by 2025.
· Also, implementation of Real Estate (Regulation and Development ) Act, has digitised the modes of communication like providing buyers with all the details of a project, option to file complaints and fast-track dispute resolution system for the same. Thus, various multinational companies (MNC’s) are setting up their base in India, which in turn, is a boost for the employment sector. Availability of employment opportunities enhances the potential for real estate investment.
· Construction is the fourth largest sector that encourages Foreign Direct Investment (FDI). And so, the government of India has allowed 100 percent of FDI in township and other development projects in India. This has led to an increase in FDI in India.
Owing to all of these factors, it is no wonder that ‘Housing For All’ scheme under Pradhan Mantri Awas Yojana (PMAY), an initiative by the government of India is reportedly expected to bring investment worth nearly USD 1.3 trillion in the realty sector by 2025.