Mumbai,  27 July,  2019 (GPN) : With the lending ticket size of up to INR 70 cr, medium and small sized NBFCs/HFCs have lent around  INR 4,000 cr to the real estate industry during October’18 –March -19

• Bigger NBFCs have reduced their exposure to real estate
• Funding for the real estate sector remain a challenge but not entirely dried up
• < /span>Small and medium NBFCs/HFCs have been actively lending up to INR 70cr from the previous levels of lending of INR 150 c r and above

Smaller NBFCs/HFCs are the new friends to the real estate sector. With bigger players shying away from lending to the sector, smaller companies now play an active role in funding. They have lent around INR 4000 cr during six months post the crisis, according to JLL Research.

 

The role of NBFCs and the story until now

It is important to note that over the years the dependence of developers on NBFCs/HFCs had increased as banks reduced their exposure to developers. On the back of continuous shrinkage of bank finance to developers, NBFC funding got a priority because of the lower cost of funds compared to institutional investors. Flexibility in the structuring of payments made NBFCs and HFCs a preferred choice for developers. Thi s is corroborated by the fact that outstanding credit by NBFCs/HFCs to real estate developers increased by more than 3.5 times to about INR233,000 cr till FY 2017-18 from INR  64,000 cr in FY 2011-12.

Default by leading NBFC – Infrastructure Leasing & Financial Services (IL&FS) in scheduled payments led to a liquidity squeeze in the real estate sector since September 2018. Our interactions with the industry indicate that NBFC and HFC funding was normal during Apr il-Septemb er 2018. The period of October-March is considered to be a peak in lending activities. But, because of the NBFC crisis, the lending slowed down substantially during the above period. In FY 2018-19, net disbursals by NBFCs/HFCs to real estate developers declined by almost half from ~ INR 52,000 crore in FY 2017-18 to on estima ted INR 27,000 crore in FY 2018-19.

The share of the larg e NBFCs/HF Cs accounted for an estimated 50-60% of lending to the real estate developers. The lending by these players came to standstill after the default crisis. Rather they focused more on recovering their dues fearing default from developers. Most of them re-organized their asset portfolio leading to lower real estate sector lending. The default crisis also led to a sea change in lending behaviour with stringent credit guidelines in place.

Filling the gap

Cut to the present, some things remain the same. However, having said that, we see some interesting developments in the real estate funding space.

Certainly, there is a problem, but real estate funding has not entirely dried up. The small and medium NBFCs/HFCs have stepped in to fill the gap that has been created in the market because relatively large NBFCs/HFCs have reduced their funding to real estate developers. Small and medium players have been actively len ding in th e range of INR 30- 70 cr post the brief halt after the crisis. There is a perceptible decrease in the average lending ticket size after the crisis. Previously, most of the lending happened in the ticket size above INR 150 cr; in some cases even higher value loans were sanctioned. Our interactions with industry sources indicate that an estimated INR 4,000 cr has been lent by small and medium NBFCs/HFCs during October’18 to March’19.

A new lending paradigm

Lenders have naturally adopted rigorous lending parameters in the current scenario. Lending has now become selective and demands a lot of financial discipline. NBFCs/HFCs started lending in relatively smaller tranches to developers with better credit record and ability to sell residential units in mid-segment and affordable category.

Funding approval apart from stringent credit norms has been based on the financial strength of the entity and not just a specific project. Lenders are also ensuring that they have adequate security against the money lent in terms of assets and guarantees. Since these lenders do not want to take up too much of risk, small loan amounts are being disbursed.

On the other hand, responsive developers have adapted quickly to the stringent credit norms by injecting financial discipline. Many of them have de-leveraged by hiving off assets/projects etc. For example, in Mumbai, there are several developers beyond Andheri, Thane and Vashi who have been doing business with a very good track record, for which they are also meeting funding requirements. These developers are locally very well established and can sell their projects.

The journey ahead

However, all is not negative as it was even a few months ago. Recovery will take time. We believe t he new cre dit discipline will benefit the real estate sector in the medium to long term. Also, the new government has taken cognizance of the struggling NBFCs.

In the latest Union budget, our Finance Minister chose to address this issue by creating a provision of INR 1 lakh crore one-time partial credit guarantee to Public sector banks (PSBs). This will enable PSBs to purchase high-rated pooled assets of financially sound NBFCs with provision for the first loss up to 10%. While this government guarantee won� 80� help clean the NBFC mess, it will provide immediate relief to the sector by restoring confidence among NBFCs.

We believe that this move by the government is likely iron out the current challenges for the NBFCs and in turn help the real estate sector.

Ramesh Nair, CEO & Country Head, JLL India said “The fact that Union Budget 2019-20 has made a provisi on of liquidity of INR 1 lakh crore to the NBFC sector highlights the pain in the segment. It also shows that the government is cognizant of this pain. However, NBFCs are likely to face challenges for the next few quarters. And the impact of the government’s measure will take some time to yield results. As a result NBFCs will witness recovery toward the beginning of the year 2020.” Ends