It is an innovative financing structure that must be replicated across several capital-intensive industries. Innovative financing is, indeed, the need of the hour. However, the biggest yardstick to measure success of the scheme will be in providing homes to middle-class families, which had their household wealth stuck over the last several years.
Vivek Singh is officer on special duty to the Finance Minister
Karan Bhasin is an economistRecently, Nirmala Sitharaman handed over the first set of homes that were completed using capital provided by GoI’s Special Window for Affordable and Mid-Income Housing (SWAMIH) Investment Fund, which is managed by SBICap Ventures.
SWAMIH fund was created to tackle the challenges faced by the real estate sector, especially as delayed projects had resulted in an erosion of trust that augmented consumer preference towards finished projects. Consequently, the conventional mechanism for financing projects by builders, by which they sold underconstruction units, and use those funds for the project, had broken down.
To overcome these constraints, builders were required to raise capital. However, in India, banks don’t fund the land component, a major part of the project cost. Even for the construction component, banks are risk-averse. Even when banks do lend, they tend to do so conservatively, without considering the day-to-day fluctuations in construction costs on account of changes in prices of cement, steel, etc.
Moreover, the present lending structure enables banks to lend to companies as a whole, not to a specific construction project. As a result, most builders were relying on non-banking financial companies (NBFCs) to help funding. However, after the Infrastructure Leasing & Financial Services (IL&FS) crisis, NBFCs, too, were unable to meet demand. Subsequently, several homeowners who had already paid for under-construction units found their wealth stuck in delayed real estate assets. On the one hand, these households were paying their monthly instalments. On the other, they were paying rents as their homes were yet to be constructed.
Consequently, GoI adopted a unique approach. This relied on finding a financial structure that enables builders to complete projects in the interest of both builders and homeowners. Thus, SWAMIH fund provides money to projects as a stand-alone entity, not to a builder. So, to lend to a project, a viability assessment of the project is conducted, after which SWAMIH provides additional funding.
The structure of financing is self-compliant. Funding is distributed in stages, ensuring additional funds are disbursed only once the builder meets a particular project milestone. Moreover, at each construction site, there is a representative of an independent project management company, who checks labour and material movement while the disbursements happen directly to vendors as required, several times a week. This ensures that the money is used only for construction-related payments. The fund has complete control on the input escrow account. This ensures scrutiny of funds to ensure proper due diligence.
Also, the sanction limit is sufficient to complete the entire project without significant dependence on collections and incremental sales. This is to ensure that the financing is adequate, thereby providing all possible support to the builder during the project cycle. Further, the interest and payment liability begin after the completion of construction of the project. However, to ensure that funds are recovered, the lender has the first charge on the assets constructed using SWAMIH funds.
All investment decisions are taken by an independent investment committee, which includes five external members, apart from SBICap Ventures’ CIO and CEO. External members may come from large law firms, construction companies, persons with development or home finance expertise, and private equity investment professionals. Thus, these external members are domain experts, enabling them to take prudent decisions regarding financing of projects. The fund has also scaled up to create one of India’s largest real estate private equity teams with about 40 professionals.
At 43 meetings till date, the committee has given 72 final approvals and 132 preliminary approvals, taking the total number of approved projects to 204. The sanctioned amount for these projects is Rs 18,546 crore, while the total project costs are at Rs 54,520 crore, which will create a total of 1,16,572 home units. So far, only five projects have been rejected by the investment committee.
Therefore, a total capital of Rs 54,520 crore will be released, which will lead to the creation of more than one lakh homes. Even though we have seen just one completed project so far, the fund expects to complete 25 projects with 12,600 homes in the next 12 months.
The SWAMIH fund provides us with an innovative financing structure that must be replicated across several capital-intensive industries. Innovative financing is, indeed, the need of the hour. However, the biggest yardstick to measure success of the scheme will be in providing homes to middle-class families, which had their household wealth stuck over the last several years.