PremiumBengaluru: A year since the implosion of Infrastructure Leasing & Financial Services (IL&FS) Ltd set off a liquidity crunch, the crisis has only deepened for non-bank lenders to real estate, as the sector continues to limp along.
Lending by non-banking financial companies (NBFCs) which kept real estate afloat in the previous years is down to a trickle, and executives in the sector say the worst is yet to come. “There is still a lot of pain left in the NBFC sector and the cleaning-up process is yet to happen," said Ashish Khandelia, founder of Certus Capital Pvt. Ltd. “We have already seen a couple of defaults and there are other NBFCs who are facing liquidity concerns. Even though projects or assets weren’t bad, they turned bad because construction funding isn’t happening. In between, home loans were also slow in disbursement and overall consumer sentiment has been low," Khandelia said.
He said much of the capital needed to solve the issues will come from overseas and more systematic resolutions are needed to make it a bit easier for NBFCs, so they take haircuts in some cases and move on.
In July, Dewan Housing Finance Corp. Ltd (DHFL) defaulted on interest payments, hurting mutual funds which had lent to it. In September, Altico Capital, an NBFC, that grew rapidly on the back of real estate lending defaulted after a rating downgrade prompted lenders to recall a substantial amount of debt, sparking a liquidity squeeze.
“The problem with many wholesale NBFCs has been rapid growth in no time, poor asset selection, weak deal underwriting practices, greedy asset and liability management framework, sector concentration and high leverage. It’s clear by now that NBFCs need to rely on cash flows alone for exits. Once refinancing stopped, the passing-the-parcel game has also stopped," said Amar Merani, managing director and chief executive officer (CEO) of Xander Finance Pvt. Ltd.
With NBFCs cutting down on real estate lending, there are just four-five institutional lenders active in the market today from 20-25 players earlier.
The NBFC liquidity crisis and lending freeze in real estate comes against the backdrop of a sharp slowdown in India’s real estate sector.
Despite government measures to revive stalled projects and offer financial comfort, there are no signs of a recovery.
Amit Goenka, managing director and CEO, Nisus Finance Services Co. Pvt. Ltd, said the supply of capital for real estate has shrunk by two-thirds and lending stopped mainly because of asset-liability mismatches.
“The funding gap is creating a large burden in terms of construction of projects and cash flows. Many projects have already taken off courtesy NBFCs which were bankrolling everyone but now, that has stopped," he said.
However, Goenka is partly optimistic about the recent measures announced by the finance minister to offer last-mile funding to stuck projects; however, they also come with multiple conditions.
The commercial real estate loan portfolio of 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.
Two NBFC managers, who didn’t wish to be named, said that there could be trouble brewing for some companies as 30 September approaches. “It’s half-yearly closing, when repayments need to be made to lenders and this year, it’s not going to be easy," the first of the two persons said.
Outstanding commercial real estate loans by banks, NBFCs and housing finance companies stood at ₹6 trillion in FY19, of which ₹1 trillion was from NBFCs. Around 70% of this ₹1 trillion will come up for staggered repayment from Q4 FY20, Mint reported in September.
“There are good opportunities for NBFCs to invest in because competition is low, but most are cautious to lend. Lending which is happening now is on the merit of the project and cash flows and the premise that money should come back from the project," said Shashank Jain, partner, deals, PwC India.
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