Non-banking finance companies (NBFCs) and mortgage lenders, which control the lion’s share of developer loans, are using all the tricks in the marketing and finance trade books to help realtors, who are still reeling from the pain inflicted by the note-ban, RERA and GST, to sell their inventory so that these lenders secure their monies. According to a recent report, non-banking finance companies and pure-play mortgage lenders, have an exposure of a whopping Rs 2.2 trillion of the Rs four-trillion developer loans market, while commercial banks’ exposure is much lower at Rs 1.8 trillion only.
These lenders fear that with so little demand in the market that is sitting on nearly 0.5 million units of unsold inventory, the chances of more developers going broke and their assets turning dud, are higher in the near future. It can be noted that the realty sector saw a wave of reforms in the recent past, beginning with the note-ban in November 2016, followed by the introduction of the Real Estate (Regulation and Development) Act (RERA) and the Goods and Services Tax (GST), which have all badly hit the sector, with new project launches and sales declining significantly.
“NBFCs, which have lent to small and mid-sized developers, will be in serious recovery mode. We believe that NPAs reported by NBFCs focused on the realty sector, will increase in 2018. These lenders may also drive smaller firms to consolidate with reputed developers,” Sahil Vora, founder and managing director of realty consultant, SILA, said. According to a report by property consultant JLL, as many as 4,40,000 residential units remained unsold, across key cities at the end of 2017. The number of unsold ready-to-move-in homes is estimated at 34,700 in the top seven metros of Mumbai, Delhi-NCR, Chennai, Hyderabad, Pune, Bengaluru and Kolkata.
According to a recent report by Ambit Capital, the total exposure of lenders to developer financing is Rs four trillion, with banks having an exposure of Rs 1.8 trillion and NBFCs and housing finance companies (HFCs) contributing the rest. “While banks have been reducing their exposure, NBFCs have significantly increased their exposure to the realty sector, backed by benign liquidity and interest rate environment of late. Seasoning and tenure of loans, city and developer-wise exposures and yields on loans, show that NBFCs/HFCs have significantly riskier real estate loan books than banks,” Ambit Capital’s Pankaj Agarwal said in the report.
Some of these NBFCs/HFCs like Piramal Capital and JM Financial among others, are also running huge asset liability mismatches to the tune of two years and rising bond yields can impact their margins further and their asset quality, the report said. Apart from these, Aditya Birla Capital, Edelweiss Capital, HDFC, Indiabulls Housing Finance, DHFL and IIFL, among other, also have higher exposure to developer loans. Vora further said many firms have also engaged teams into project management and development and other allied services, to help developers to not only assist in funding but to also to ensure they achieve sales. “Some have even assisted in providing home loans to buyers, thus, ensuring sales,” he added.
Saurabh Gupta, vice-president and fund manager at IIFL Real Estate Practice said, “We are always monitoring developers and wherever direct or indirect involvement is required, we have to step in.” His company assists developers in various areas like sales, getting them introduced to a sales partner or private wealth partners, so that inventory can move. “Sometimes, we show the developers the market trends so that they can re-price, resize or tweak the product design. Also, sometimes, there can be capital engagement, wherein the capital market players may suggest an alternative capital structure,” said Gupta.
Echoing similar views, Amit Goenka of Nisus Finance, says NBFCs will have to help realtor drive sales, to recover their loans. “The advantage that NBFCs have, is that they can adopt various tools for corporate debt restructuring without resorting to refinancing, as they are not under the purview of the regulations that guide the commercial banks. They can buyout inventory and sell them, as they are not limited by product structures. NBFCs can, thus, innovate and come up with practical models, to recover their money,” he added.