The Indian real-estate market today looks healthier on headline metrics — rising prices in many cities, brisk sales for large listed developers, and continued flow of housing credit. Under the surface, however, the sector is shaped by a two-way financial trap: heavily leveraged developers pushing projects forward with debt, and buyers locking themselves into long EMIs (equated monthly instalments) that transfer much of the project risk to household balance sheets. That structural imbalance creates vulnerability for banks, NBFCs, asset-reconstruction companies (ARCs) and millions of homeowners if economic conditions wobble. This report explains the mechanics, shows the key data, describes developer and buyer behaviours, and offers practical policy and financial fixes.

Big picture — the numbers that matter

Outstanding individual housing loans in India reached ₹33.53 lakh crore as of September 30, 2024, a year-on-year increase of ~14% — evidence that households continue to borrow heavily to buy homes. 

Regulators and market trackers show that while sales and collections have improved for many large developers, developer leverage and project-level construction finance remain material risks, and recoveries on stressed residential projects are still modest (but improving). 

The Reserve Bank of India (RBI) has recently signalled concern by directing higher risk weights for some commercial real-estate (CRE) exposures, prompting banks to seek clarity — a sign that supervisory scrutiny of bank exposure to property risk has risen. 


These three datapoints set the frame: big household mortgage stock, persistent developer leverage, and rising regulator attention.


How the “finance trap” works — the two sides of the ledger

1) Developers: build faster, fund with debt, sell by pre-booking

Most mid-to-large developers run projects using a mix of incremental customer advances (pre-bookings), bank/NBFC construction loans, and short-term private credit (including private credit funds and bilateral loans). After the 2018–2020 stress cycles, many large listed developers strengthened balance sheets and improved collections; however, the overall sector still has elevated net debt because new launches, land acquisitions and faster project execution require fresh financing. Rating agencies note that net debt in the sector can rise when developers accelerate execution or buy land, leaving them dependent on continued sales and refinancing. When sales slow or receivables lengthen, debt servicing pressure rises quickly — projects stall or get refinanced at higher cost. 

Mechanics that create the trap for developers:

Short-dated construction finance: loans are often tied to project milestones; cost overruns or slow collections force repeated refinancing.

High leverage on balance sheet: land-heavy acquisitions increase leverage ratios, reducing headroom for new borrowing.

Reliance on NBFC/private credit: banks have tightened selective exposures; NBFCs and private credit fill gaps but at higher cost and maturity mismatch risk. 


When developers don’t reduce leverage quickly, they remain vulnerable to interest-rate rises, input cost shocks or demand slowdowns — even if headline sales appear healthy.

2) Buyers: EMIs as risk transfer

For most Indian homebuyers, a home is the largest household liability, funded through long-tenor EMIs. The prevalence of housing loans (see the ₹33.53 lakh crore figure) shows how many buyers are in the interest-servicing loop. EMIs are stable when incomes and job security hold up, but problems arise when:

Buyers use maximum allowable leverage (high loan-to-value), reducing buffers for other shocks.

Interest rates rise, increasing monthly EMIs and stress on household budgets.

Buyers pre-pay or continue to pay EMIs while projects are delayed — in some stalled project cases, buyers continue servicing EMIs even if delivery is uncertain (to avoid credit downgrades or NPA recognition), effectively transferring project risk to households.


The result is paradoxical: buyers become creditors to developers indirectly (through delayed possession and continued payments), while still servicing bank loans — magnifying systemic risk if mass delays or defaults occur.


Who bears the risk in practice?

Banks & HFCs: direct exposure through housing and construction loans. While home loans are generally retail and low individual default rates, concentrated exposure to CRE and construction finance is riskier. RBI’s recent directions to increase risk weights on certain CRE exposures reflect this supervisory concern. 

NBFCs & private credit funds: they provide project funding where banks are cautious. NBFC bank funding has slowed, tightening the refinancing pipeline for developers. 

Buyers: locked into EMIs and sometimes paying for property they have not received — they have limited legal recourse and face liquidity/cashflow stress.

ARCs & resolution market: recoveries from stressed residential projects are improving but remain low compared with original exposure; ARCs’ recoveries are rising, which helps clean balance sheets but is not a systemic cure. 

Developer and buyer mentalities — behavioural patterns that sustain the trap

Developers
Optimism bias on sales & pricing: developers often assume stable or rising prices and front-load execution & marketing. This optimism supports faster launches but increases financing needs.

Land acquisition mindset: many developers prefer securing land even if it raises leverage, betting that future revenue will justify the purchase. Rating agencies warn this raises net debt metrics. 

Refinancing dependence: rather than reducing leverage, developers may roll debt if markets allow, creating rollover risk.


Buyers
Home as investment: Indian buyers commonly see property as both a home and a long-term investment, accepting high EMIs and extended tenures to secure an asset.

EMI fixation and fear of missing out: many buyers prioritize taking a loan now (to lock prices) rather than waiting, believing EMIs are manageable relative to future appreciation — this reduces price sensitivity and keeps demand alive even when fundamentals wobble.

Tolerance for delivery risk: in markets with chronic delays, buyers sometimes accept late possession in exchange for perceived capital gains — transferring the delivery risk from developers back to themselves.

These behaviours can be self-reinforcing: developer leverage supports supply and launches; buyer willingness to take EMIs keeps demand alive — until a shock exposes the mismatch.

Where the system is already showing strain?

Regulatory nudges: RBI has stepped up scrutiny (risk-weight changes and other prudential steps) to contain bank risk from CRE and stressed exposures. 

Slowing credit to NBFCs: bank lending to NBFCs has shown signs of slowdown, tightening funding channels for developers. 

Stressed recovery but improving: ARCs and rating agencies report improving recoveries from stressed projects — helpful, but recoveries are still low relative to total stressed stock. 

---
how to break or soften the trap?

1. Stronger project-level transparency and escrow enforcement
Enforce project-wise escrow accounts (cash flow ring-fencing) so customer advances are used for construction, reducing diversion risk and protecting buyers. This also reduces bank and investor uncertainty.

2. Prudential calibration for developer lending
Banks and NBFCs should combine risk weights with forward-looking stress tests (cashflow, sales sensitivity) and cap gross leverage for project loans. Regulators can encourage staggered disbursement tied to verified construction milestones.

3. Buyer protection & alternate financing
Promote liquidity products (e.g., purchase-linked staged financing, insurance for delayed possession) and improve legal speed for buyer remedies. Encourage refinance products that let buyers shift to longer, lower-cost EMIs where justified.

4. Develop a robust secondary market for stressed projects
Improve ARC frameworks, securitisation and transparent auctions for stalled inventory so projects can be completed rather than left as ghost assets.

5. Incentivise deleveraging by developers
Structured equity infusions (via REITs, institutional equity) coupled with conditional refinancing can reduce coupon pressure and refinance risk.

Conclusion — a cautious optimism with heavy caveats

India’s housing credit growth and improved sales for large developers are positive signs for the economy — they reflect demand, household confidence and sustained urbanisation. At the same time, the finance trap — high developer leverage on one side and households burdened with long EMIs on the other — remains a structural vulnerability. Regulators are increasingly alert (RBI’s actions, higher risk weights) and market mechanisms (ARCs, private credit) are adapting, but the system still needs better transparency, stronger project-level protections and incentive structures that prioritise completion over perpetual refinancing.

If policymakers, banks and developers combine prudential housekeeping with buyer protections and active resolution markets, India can convert this vulnerability into durable housing growth. If not, a shock to incomes, interest rates, or credit availability could test the resilience of a market where — in effect — many flats today are financed not just by loans, but by a bet that both developers and buyers will successfully manage refinancing and delivery risk.

NHB Trends and Progress of Housing in India (NHB press release / report — Sep 30, 2024 data) and RBI Sectoral Deployment of Bank Credit (Mar 31, 2024 numbers). I used the headline reported figures: NHB ₹33.53 lakh crore (individual housing loans outstanding as on Sep 30, 2024) and RBI ₹27.22 lakh crore (housing credit outstanding as on Mar 31, 2024) plus ₹4.48 lakh crore for commercial real estate.