Is NBFC funding crisis, the next big threat to the Indian realty business? (An industry insight)

It’s been almost a couple of quarters while Non-Banking Finance Companies (NBFCs) have been undergoing a financial crunch, caused by the tighter fiscal policy. The inverse market situation stirs both the 'consumption' and 'investment' capacity of individuals.

Since NBFCs have been one key source for the local real estate developers and corresponding stakeholders; it's no surprise that the situation has made the market condition quite backbreaking. As a consequence, the advancement of the sector is again on a stroll.

Despite this adverse market scenario, a few possibilities are still there which could prove to be a benefactor for the sector for its much-awaited comeback.

Let’s have a quick look at what experts have denoted as the Pros & Cons of this market plight:

 

Pros: NBFCs (apart from the Housing Finance Companies) are among the key sources of estate business.

Cons: The present cash crisis will further slow down the recovery process of the sector.

Pros: Listed developers may spring up.

Cons: The dire straits might expedite consolidation in the industry.

 

It’s worthwhile mentioning that as per the Credit Issue report, NBFC and HFCs have played a major role in credit supply in recent years and they resolved almost 25-35% of the incremental credit. Again, credit growth for the past couple of years had been quite trivial on an average (7%). A giant 20% plus growth was solely contributed by the NBFCs and the overall credit expanded more than 10%.

“We hope this present situation won’t last long, rather it would be a short-term shock to the real estate sector and certainly it would have a rippling effect on the funding segment as well which at this situation won’t have many avenues open to depending upon,”- said Mr. Mahesh Somani, Chairman - National RERA Committee, National Association of Realtors, India and Vice President of RECA Kolkata.

He also added, “No wonder funding crisis was always there. For impending projects were on a screaming halt despite being legally bound. So, not only the developers, this fund shortage will inversely affect the buyers too who would seek refunds against their prior investment."

Apart from the said market behaviour, 'bad loan'/'non-performing assets' had been one severe pain on the neck for the banking sector in the same line.

Once, banks were legally hedged by RBI, real estate developers chose NBFCs for loan-related transactions. Now NBFCs are reeling under cash shortage, developers have no other choice but to downtrend.

However, this is a short-term stagnancy and it wouldn’t affect the same across the board. Real estate developers with diverse portfolios commercial and retail in particular who are mostly clean on their debts and have stepped in Middle-income-group (MIG) and affordable housing business will be safe and sound.