The default by Altico Capital, a lender focused on the real estate sector, has rudely reminded investors that non-banking financial companies (NBFC) are not out of the woods yet.
Real estate has been in a prolonged slump and, therefore, lenders are bound to find themselves with increasingly stressed borrowers. It should have been a no-brainer for banks that the trouble at these real estate financiers will finally end at their doorstep in the form of a default.
But banks missed the wood for the trees and are now stuck with a potential bad loan mess in the roughly ₹4,000 crore exposure they have to Altico.
To be sure, flawed risk management at banks is to be blamed, but regulatory rules, too, contributed to the laxity.
The exposure to lenders, such as Altico, is treated as NBFC exposure by banks, but the risk is that of the real estate sector. Risk weights, according to the Reserve Bank of India (RBI) rule, therefore, are lighter than those on real estate exposure.
Ashwin Parekh, an independent banking expert, said this was the crux of the problem. “What has resulted is that banks have taken exposure indirectly and here the risk management of PSU banks is wanting. What banks thought is they’re taking exposure to NBFCs, which is safe, but they have been proven wrong now with the Altico example," he said.
Since Altico isn’t a lone story, the obvious solution is to fire up the real estate sector. That would set off a virtuous loop of honouring repayments by all in the funding channel.
The government announced a stressed asset fund for the sector, along with a few other measures, over the weekend. These don’t seem to have enthused the market.
Analysts at Kotak Securities noted that listed realtors may not meet some of the criteria necessary for benefitting from the government’s latest incentives.
Further, keeping out defaulters from the government-supported last-mile fund could beat the purpose of reviving the real estate sector.
“There were no new measures to boost home buyer demand, which was disappointing," analysts at Jefferies India Private Ltd wrote in a note. This is particularly worrying given that at last count, real estate was second only to manufacturing in the number of bankruptcy cases.
The lesson from the Altico Capital episode is not just that non-bank lenders need funding, but that the real estate sector needs to revive. The latest steps announced may lift sentiments, but it remains to be seen whether they help in increasing sales. The prospects for real estate developers, to that extent, are still bleak.