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NBFC slowdown in India - Is a credit crunch looming?

3 MIN READNovember 23, 2018
GRI Club India met in Mumbai in November 2018 to discuss the current slowdown in non-banking financial companies (NBFC) lending and ways out of a potential credit crunch.

Participants discussed how a potential credit crunch looms over India’s real estate markets, exacerbated by the loan default in October of property developer Supertech. The general viewpoint is that NBFCs have slowed down their lending to the real estate industry, and that while refinancings might get approved, new loan applications are not being considered. In practical terms, even where loans are being signed off, the actual amount may not be disbursed. It appears that a few NBFCs have also backed out of pre-approved financing commitments to the real estate sector. And wherever NBFCs find opportunities to recover funds from borrowers, prepayment is being demanded - this is in spite of the NBFCs having adequate asset cover. 

All participants agreed that the next six months look negative for the real estate sector. One major hit might be enough to make affect lending sentiment and the market as a whole, triggering a major crisis: lenders seem to be waiting to stop funds flowing into the sector. 
 
Ways out 

It might be that NBFCs are classifying developers and lending only to the financially stronger ones. As such, one way to access development finance - amongst options and outcomes discussed at the meeting - would be for the typically over-leveraged real estate development company to strengthen its balance sheet with an equity injection. 

A reduction in property prices could cause developers to sit on their inventory, resulting in potential defaults. A way out here could be for developers to agree to sell their inventory at a lower price and for the lender to take a haircut.  However, lenders do not yet seem ready to take haircuts. 

Sales velocity - the bigger issue

Sales velocity was agreed to be a far bigger issue than the credit crunch, which has been caused by the construction of luxury houses that typically have a low sales velocity. Real estate sales, that had picked up in the last five quarters, have now reduced. Furthermore, residential sales failed to pick up during Diwali this November, indicating that the sector might be facing some stress. 

India’s comparatively new Goods and Services Tax (GST) was agreed to be a killer for under-construction sales. Currently, around 40%-50% of under-construction property is sold up to the plinth stage; the balance of sales tends to take place post-OC (occupancy certificate), when sales velocity will typically depend on project quality. 

Given that high sales velocity is needed by lenders as much as developers, a solution could be for real estate lenders and developers to engage in a dialogue on how to increase sales velocity.

Best time to invest?

In spite of the slowdown, now could very well be the best time to invest in India’s real estate sector, taking a counter-cyclical viewpoint and based on a 7-8 year, long-term outlook, participants of the club meeting agree. NBFCs were typically being funded by mutual funds and a few banks: while mutual funds have already stopped investing in NBFCs, the banks are also slowed down. New money coming into the real estate sector over the next 1-2 years seems to be low. 

Conclusion

NBFCs have slowed down their lending to the real estate industry. Refinancing is becoming tough and development finance is expected to be constrained for the next 2-3 years, but there are ways out and solutions. Achieving greater sales velocity is the greater challenge - but this should not be a major issue where the project is of good quality.
 
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