The commercial real estate loan portfolio of non-banking financial companies (NBFCs) could see stress building up from January, with around ₹70,000 crore of these loans coming up for staggered repayment, according to credit rating agency India Ratings and Research.
As of now, only the interest component of these loans is being serviced, and the principal will start coming up for repayment only from quarter four of fiscal year 2020.
According to an analysis by India Ratings, close to 70% of builder loans on the books of NBFCs are under principal moratorium. Pankaj Naik, associate director of financial institutions at India Ratings, said the outstanding commercial real estate loans by banks, NBFCs and housing finance companies (HFCs) stood at ₹6 trillion in FY19, of which ₹1 trillion was from NBFCs. He estimated that 70% of this ₹1 trillion will come up for staggered repayment from Q4 FY20.
“Lot of these NBFC loans to real estate developers carry a (principal) moratorium of 18-24 months. Technically, a large part this lending has happened in FY18 and in the first half of FY19. If the same kind of refinancing pressure is there, which is prevalent in the market, then there could be serious asset quality challenges which can come for lot of these lenders," said Naik, adding there may be more of asset sales to meet this repayment schedule.
The credit rating agency on Monday cut its growth forecast for NBFCs from 15% to 10-12% in FY20, besides revising its sector outlook from stable to negative. It cited funding challenges and slowdown in economic activity, which is evident from the fall in auto sales, slowdown in rural infra activity and the challenges faced by small and medium enterprises (SME). India Ratings said it has also maintained its negative outlook on large-ticket HFCs.
India Ratings expects overall profitability to moderate across the industry, as the rise in funding costs and falling lending opportunities would lead to increased margin pressure. The ability to partially pass on the increase in funding cost to retail borrowers also remains constrained due to subdued demand, it added.
“Most NBFCs have been facing funding challenges post the credit crisis in September 2018, and though the funding costs have softened, they remain higher than the costs prevailing a year ago. With the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand, NBFCs have been grappling with a double whammy," it added.