As NBFCs pull plug on credit, builders stare at cash crunch, defaults2 min read . Updated: 18 Oct 2018, 11:20 AM IST
Serial defaults at IL&FS made it hard for NBFCs to raise money, forcing them to avoid fresh lending.
Bengaluru: Non-banking financial companies (NBFCs), which kept credit flowing for real estate developers, have finally turned off the spigots, sparking concerns of defaults and delays.
Serial defaults at Infrastructure Leasing & Financial Services Ltd has made it hard for NBFCs to raise money, forcing them to avoid fresh lending and stop disbursing loans already sanctioned.
The impact could be worse than the days of demonetization when they were able to raise money despite a fall in customer sentiments, according to builders.
With banks not financing real estate developers for several years now, most developers have been kept afloat by NBFC funding. The ongoing property market slowdown that is now into fifth year has not helped either.
“There is a significant slowdown in lending by NBFCs, and to make it worse, home loan disbursements to customers by housing finance companies have also been suspended in many cases. What is most worrying is that we don’t know how long this will last," said Vinod Menon, chief executive officer (CEO) of Citrus Ventures Pvt Ltd, a Bengaluru-based developer.
Most developers are now fully dependent on NBFCs to finance operations, repay old loans and even to pay for land. For many, it’s a hand-to-mouth survival, where if NBFCs don’t disburse money on a time-bound basis, builders will have to rely on project sales, which are not adequate.
Another Bengaluru developer, who did not wish to be named, said while one or two months can be managed with sales, timely disbursement from the lender is required.
“This month, a lender has already delayed payment and if it continues I may have to default," he said.
Chasing rapid growth in market share and assets under management in recent years, many NBFCs and housing finance companies (HFCs) lent to developers in excess of the value of the underlying assets or projects.
Many developers who gorged on debt are facing defaults after several rounds of refinancing and several years of interest servicing.
A senior executive of a Mumbai-based NBFC confirmed the situation is bad, and there is no clarity on when normalcy will return.
“The current crisis is significant because though demonetisation was bad, developers didn’t have a problem raising money. Last 20 days, there is no access to capital for most firms," said Sandeep Runwal, director of Mumbai-based Runwal Group.
According to Amar Merani, managing director and CEO, Xander Finance Pvt. Ltd, NBFCs and HFCs have virtually shut down lending to developers in the past few weeks.
“Many NBFCs and HFCs have been lending to developers by diluting credit standards in the last 4-5 years just to show rapid growth to investors. This growth was fuelled by banks and mutual funds. As a result of these excesses, real estate developers today are sitting on huge debt and the servicing of this won’t be easy particularly when sales are very sluggish for so many projects," said Merani.
Xander has never borrowed short-term debt and has enough cash resources to provide liquidity to good developers, wherever it makes sense, Merani said.
Hiranandani Communities chairman and director Niranjan Hiranandani said while all NBFCs didn’t lend indiscriminately, this will lead to a correction and many of them will be beaten out.
“Till then, there will be an obvious impact in terms of financing for developers," he said.
“For builders, property sales is the only way right now. Mid-sized developers, who form the largest chunk in the sector, have got squeezed badly this time. While consolidation in real estate is already happening, it may gain pace more rapidly now because of the liquidity crisis,’ said Anuj Puri, chairman, Anarock Property Consultants.