Is the funding crisis in India beginning to subside?

The rise of lenders and NBFCs over the last 15 years has played a major part in India’s economic growth. They provided loans to thousands of small businesses who would’ve had no otherwise access to credit. However, the sector is now facing a crunch, with lending from NBFCs dropping by almost a third in the last 12 months - and it can be suggested that the damage to the lending sector has put strains on the real estate market as well. These strains came after the default of IL&FS sent shockwaves through the economy in mid 2018 - and the banks and mutual funds that had become key sources of capital for the sector dialled back significantly.

The Finance Industry Development Council (FIDC), the governing body for non-banking financial companies (NBFCs), discerned the current crunch/ liquidity crisis is purely a growth-related problem. At a press conference held on Tuesday, the FIDC said that while ‘funds were available at a higher cost, there was a need for a special liquidity window through banking channels’. 
According to K.V. Srinivasan, director and chief executive officer Profectus Capital and speaking at a recent FIDC conference, “We are not seeking liquidity support for the survival of the industry. We are talking about growth capital. All we are saying is there has to be steady, committed and sustainable flow of money to ensure that growth capital is provided to NBFCs. I don’t think after nine months of the crisis, anybody is questioning the survival of the sector.”

This isn’t the first time that the demand has been raised for a special liquidity window to help NBFCs get through the crisis following the default by IL&FS. The government, too, had requested the Reserve Bank of India to provide a window for NBFCs to keep the economy afloat. However, the central bank shot down the proposal, saying ‘system-wide liquidity is in surplus’ and it remains committed to infusing liquidity when required.

As a result of the crunch, India’s GDP growth has slowed to the lowest level in five years, falling from 6.6 per cent in the final quarter of 2018 to 5.8 per cent in the first quarter of 2019.

However, might this be turning around? Earlier this week Livemint reported that India’s technology startups are witnessing a funding boom, with 10 deals of $100 million or more in the first five months of this year - much higher than the deals in the first half of 2018 and 2017. Furthermore, there have been more deals so far than in the whole of 2016 and 2017.
So what does this mean for real estate? Livemint also announced a 26% increase in private equity investment in real estate. This might suggest a rising confidence of institutional investors in India’s premium residential and commercial sector.
Another huge development in the region to consider when talking about real estate funding is the recent creation of India’s first REIT. REITs can often be preferable to funding because they offer equity with a fixed income stream, and they’ve announced very good yield and valuation percentages. 

Furthermore, the GRI Barometer India 2019 would suggest the unfavourable current climate of lending hasn’t swayed member opinion, as almost 80% of Indian investors said they would looking at expanding their investment portfolio over the next 12 months

For more analysis on Indian funding, lending and investment in real estate, India GRI 2019 takes place on the 18-19 September in Mumbai.

Article by Matt Harris.