NBFC crisis has put real estate on tenterhooks

It may be true that ‘when the going gets tough, the tough gets going,’ but this doesn’t hold true for the Indian real estate sector currently. The ongoing NBFC (non-banking financial companies) crisis post IL&FS default has made things even more difficult for developers.

Post the banking system’s freeze on real estate funding due to rising non-performing assets, NBFCs and housing finance companies (HFC) were the sole source of funds for the cash-strapped developers. Now, however, NBFCs themselves are struggling and their loan disbursals to developers have slowed down significantly.

A source of broad spectrum dismay and despair, the NBFC crisis needs to be resolved as soon as possible or the real estate sector's much-anticipated recovery will be postponed by a couple of quarters more.

As a Credit Suisse report reiterates, NBFCs and HFCs have played a major role in credit supply in recent years, accounting for nearly 25-35 percent of the incremental overall credit. While bank credit growth in the last two years averaged at a mere 7 percent, strong 20 percent-plus growth in NBFC credit aided overall credit expansion beyond 10 percent.

What began as a singular event with one of the biggies - IL&FS - failing to repay its commercial dues has blown up into a liquidity crisis for the entire NBFC spectrum. As an immediate aftermath, NBFCs' stocks went into free fall. The top 15 NBFC companies cumulatively lost over Rs 75,000 crore in just two initial trading sessions.

To say that this rattled investors would be a gross understatement, and the government and regulators’ immediate efforts to rein in the panic failed to curb the sell-off tidal wave. Since September 20, NBFC stocks have tumbled by more than 50 percent for DHFL.

The current NBFC crisis can have a cascading effect on the real estate sector’s growth forecasts, which were already nebulous on the back of the liquidity crisis created by rising defaults and non-performing assets in banks.

Apart from weak residential sales, increasing input costs and promotion expenses coupled with the high compliance costs will result in decreased earnings before interest, tax, depreciation and amortisation margins.

With most things being unequal in Indian real estate, the impact of this crisis will not be the same across the board. Many listed realty developers such as Puravankara, DLF, Prestige Group, Oberoi Realty and Godrej Properties have well-diversified portfolios, including commercial and retail. Many of these players have also reduced their debts and ventured into affordable or mid-income housing, where growth is currently the highest.

In the highly competitive real estate business environment, these players will, in fact, may emerge stronger as they are better-equipped to ride the storm and continue to deliver while others can’t. Large-scale consolidations are already ensuring that only the fittest will survive in the future, and this crisis will hasten the process.