NBFCs Act A Friend Indeed As Builders Struggle To Sell Projects

Changes that were set in motion right at the end of 2016 to purge it of its ills disrupted growth in India’s real estate sector. Real estate developers are still a long way from recovering from the joint blow they received through the launch of demonetisation, the Real Estate Act and the Goods and Services Tax (GST).

While India’s overall performance may have helped it get sovereign updates from many agencies, real estate is still far from being out of the woods. Rating agency Crisil has put the sector in the “weak or fragile” category. Interestingly, construction and engineering have been kept in the “stable” category by the agency.

All the government support the sector received, especially affordable housing, did not do the trick. Reports by major real estate advisors show sales have been falling along with new project launches. In the middle of it all, already-in-great-stress big lenders have been figuring out ways to lower risks, and have been unwilling to lend money to real estate developers as they used to in the boom time.

In the meantime, housing finance companies (HFC) and non-banking finance companies (NBFCs), from whom builders have largely been borrowing money, are doing all they can to assist them to sell projects.

According to a recent report by Ambit Capital, the total exposure of the banking sector to developer finance is Rs 4 lakh crore. Of this, banks have an exposure of Rs 1.8 lakh crore while NBFCs along with housing finance companies are responsible for funding the remaining amount. These players are running a great risk at a time when India’s real estate developers are sitting on nearly 0.5 million units of unsold inventory.

"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 NBFCs/HFCs have significantly riskier real estate loan books than banks," Ambit Capital's Pankaj Agarwal said in the report.

Eager to help

Several NBFCs, says the report, have lent staff to builders’ project management to make sure achieve meet sales target. "Some have even assisted in providing home loans to buyers thus ensuring sales," Agarwal said in the report.

They are also connecting builders with sales partner and private wealth managers to lower the inventory burden. It is worth mentioning here that the plans are in the making to tax housing inventory lying unsold with developers. From this financial year, real estate developers, who are holding an unsold unit for over a year will have to pay 8-10 per cent of the property value as tax. So far, developers do not pay any tax on property that they hold as stock-in-trade.

"Advantage of NBFCs 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," Nisus Finance head Amit Goenka was quoted in a PTI report as saying.

With inputs from Housing News