The liquidity crisis faced by non-banking finance companies (NBFCs) may have further delayed the much-awaited recovery of the domestic real estate sector, but there could be a silver lining at least for some of the players.
Experts feel the current development is unlikely to significantly affect some of the larger and listed players who could now emerge stronger.
NBFCs, apart from housing finance companies (HFCs), have been the key source of finance for real estate companies. This happened after the banking system plagued by huge non-performing assets (NPAs) reduced its credit line to the industry.
According to a Credit Suisse report, NBFCs and HFCs have played a major role in credit supply in recent years and they account for nearly 25-35 per cent of the incremental overall credit.
While bank credit growth in the last two years averaged at only seven per cent, a robust 20 per cent plus growth in advances from NBFCs resulted in the overall credit expanding more than 10 per cent.
However, the developments at IL&FS, which had a ripple effect across the country’s shadow banks, have also adversely affected the real estate sector.
“Post the banking system’s freeze on real estate funding because of rising non-performing assets, NBFCs and HFCs 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,” said Shobhit Agarwal, MD & CEO at Anarock Capital.
Agarwal added that the NBFC crisis should be resolved as soon as possible or the real estate sector’s much anticipated recovery would be postponed by a couple of quarters.
However, not all will be affected by the current developments.
“The impact of this crisis will not be the same across the board. Many listed realty developers have well-diversified portfolios, including commercial and retail. Many of these players have also reduced their debt and ventured into affordable or mid-income housing, where growth is currently the highest,” Agarwal said while pointing out that these players will emerge stronger as they are better-equipped to ride the storm. Moreover, the current crisis could also hasten consolidation in the industry.
