The restricted liquidity scenario ignited by the IL&FS crisis has indeed prolonged the revival of the real estate industry.
After the successive shocks from demonetization, RERA and GST, the industry was finally witnessing some stabilization. However, the IL&FS default and the ensuing crisis of confidence / liquidity has perhaps made matters worse.
The real estate sector is highly dependent on non-banking financial companies (NBFCs) for their funding requirements, and with most mutual funds, NBFCs and banks alike exercising further restraint in credit lines owing to their own access to liquidity being considerably tightened, projects run the risk of further delays on account of a lack of easily available finance.
We had in some ways forecasted this scenario given there was a marked increase in the number of new players entering the wholesale lending space in the past few years, some of whom were resorting to compromised underwriting standards in an effort to ‘build a book’. A relatively liquid market with easy access to cheap shorter term borrowing, often through commercial paper as an instrument of choice, further worsened the asset liability mismatch. What was therefore a relatively small trigger in the IL&FS default and a subsequent sell down emerged as a wider crisis with many of the players withdrawing from the market in their entirety.
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However, all is not as grim as it is made out to be. The current crisis was driven more by weak investor confidence than an actual liquidity shortfall with banks. In the few weeks since, most large NBFCs and HFCs alike have managed to meet their short term liabilities that are due for repayment / roll over. With this, confidence is slowly returning to the market as it makes its way back to normalcy though lenders are choosing to stay away from NBFC issuances to some extent, purely as a risk aversion measure. The current preference is tilted towards safer government bonds which is evident from the weekly turnover in government long term bonds that has seen a marked increase from what it was before the IL&FS downgrade.
With this, however, a clear distinction has also emerged within the NBFC space with players being divided into three broad categories based on the comfort of those limited few banks and mutual funds who are still providing credit lines through current liquidity crunch.
The first one being the best-in-class NBFCs and HFCs who have low leverage, sufficient equity and good promoter reputation and are still able to access credit albeit at a slightly higher cost.
The second category are those who are of decent repute but have access to limited funds but at a significantly higher cost in the current market situation which is affecting their profitability.
And the last category comprises of those who perhaps have some skeletons in their closet and are therefore only able to create liquidity by resorting to a sale, in part or whole, of existing portfolios. This has also created a very unique opportunity for stronger financial institutions to grow inorganically and enhance their loan portfolios while also increasing their breadth of offerings.
In any event, some consolidation and further pain is inevitable in the industry over the next few weeks / months. The current situation may also allow banks to revive their lending portfolios. In a scenario where NBFCs have deferred disbursements and hiked interest rates, banks have a clear window of opportunity as it relates to wider wholesale lending.
Khushru Jijina is the managing director at Piramal Capital & Housing Finance.
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