Kolkata: Finding it difficult to convince bankers to grant loans to a provisionally stagnant realty sector, developers are exploring new ways of funding to ensure cash flow to their projects. Several funding instruments like lease discounting for completing ongoing projects, especially the commercial ones, are on cards, reported Business Standard.

Under a lease or rent discounting agreement, banks lend to developers for new projects against rents they directly realize for completed projects, which also is mortgaged with the bank. Thus, banks are assured of guaranteed cash flows and also have physical assets in case of defaults.

"We have entered into lease discounting arrangements with developers. However, one has to take into account several factors like proper lease agreement, credit rating and market conditions before entering into such agreements," said sources in Allahabad Bank. "We have limited headroom for real estate sector, and have already exhausted the stipulated limit for real estate lending. If we had the limit, we would have considered, alternative and safer lending options to the sector," said sources in another public sector bank.

According to a senior official from SBI Capital Markets, "Lease discounting is a much safer mode of lending, as the entire loan amount is covered through the rent agreement, and the banks are cushioned against defaults."

Moreover, the rate of interest charged by banks for loan against rent, generally for a tenure of five-six years, is generally 1-2 percent lower than the benchmark lending rate. "Unlike other sources, bank loans against lease agreements have not dried up in the recent months. Also bankers are more interested in such safer modes of funding," said Pradeep Sureka, president, Confederation of Real Estate Developers' Associations of India (CREDAI) Bengal.

In the recent months, unviability of commercial projects has prompted many developers to convert commercial projects into residential ones, said Pradip Chopra, chairman and managing, P S Group, which is also developing an IT project in Sri Lanka.

For real estate developers with a national presence, the withdrawal of funds by foreign institutional investors have also been a cause of concern, prompting newer instruments for completing the ongoing projects.