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Troubled NBFC sector likely to further starve realty
The Economic Times  |  June 10, 2019

Sobia Khan & Kailash Babar Bengaluru & Mumbai

Funds flow from non-banking finance companies (NBFCs) to the liquidity-starved real estate sector is expected to dry up further after DHFL’s recent downgrade, as other NBFCs wait out the latest uncertainty.


Not just NBFCs, the funding challenges will hit the real estate sector’s recovery and put pressure on property prices too.


“Since the Reserve Bank of India (RBI) is custodian of the financial stability of the economy, we expect it to come out with specific measures relating to this crisis and not just stop at providing liquidity to the system,” said Samantak Das, chief economist (research and REIS, India), JLL.


“Funding to the (realty) sector has reduced by 80% since September 2018, with average ticket size ping by at least 60% in the last six month,” said the managing director of an international NBFC.


The NBFC sector was limping back to normalcy early this year, with funds such as Xander, KKR and Tata Capital deploying capital to builders, though based on stringent credit norms, with focus on the financial strength of the entity and not just a specific project.


The residential real estate sector also saw some green shoots, with listed builders registering profit for the last quarter of FY19. Housing sales surged 28% from a year ago to 38,600 units in the top seven cities, according to JLL India data.


NBFCs and housing finance companies’ (HFCs) share of outstanding credit to developers rose from 36% in FY12 to 58% in FY18, highlighting their growing importance compared with scheduled commercial banks, JLL India said.


However, the IL&FS crisis of September 2018 led to a drastic reduction in NBFC lending during October&ndashDecember 2018 due to the liquidity squeeze.


“Recent developments in the NBFC sector have further increased uncertainty in real estate financing, which was expecting some cheer post elections and formation of a stable government,” said Subhash Udhwani, founder of real estate-focused boutique investment bank Elysium Capital.


However, he also believes that for retail buyers, the past six months have been — and the next 12 months will be — the best time to negotiate and get assets at a bargain. “Genuine buyers might not get this opportunity once the dust settles,” Udhwani added.


Banks’ lending to NBFCs has plateaued over the past few quarters. Incremental credit by banks to NBFCs has seen a 37% growth between April 2018 and March 2019, a deceleration from 175% a year ago, JLL data mentioned.


“The government has to step in. Real estate is looking tricky with NBFCs (non-banking finance companies) contracting. Banks are not lending to real estate despite being flush with cash,” said another fund manager.