Small benefits

Smaller NBFCs/HFCs are the new friends of the real estate sector. With bigger players shying away from lending to the sector, smaller companies now play an active role in funding. They have lent around Rs 4,000 crore during six months post the crisis, according to JLL Research.

The story until now

Flexibility in the structuring of payments made NBFCs and HFCs a preferred choice for developers. This is corroborated by the fact that outstanding credit by NBFCs/HFCs to real estate developers increased by more than 3.5 times to about Rs 233,000 crore till FY 2017-18 from Rs 64,000 crore in FY 2011-12. Default by leading NBFC — Infrastructure Leasing & Financial Services (IL&FS) in scheduled payments has led to a liquidity squeeze in the real estate sector since September 2018. 

Filling the gap

Certainly, there is a problem, but real estate funding has not entirely dried up. The small and medium NBFCs/HFCs have stepped in to fill the gap that has been created in the market because relatively large NBFCs/HFCs have reduced their funding to developers. Small and medium players have been actively lending in th e range of Rs 30- 70 crore post the brief halt after the crisis. There is a perceptible decrease in the average lending ticket size after the crisis. Previously, most of the lending happened in the ticket size above Rs 150 crore; in some cases even higher value loans were sanctioned. Industry sources indicate that an estimated Rs 4,000 crore has been lent by small and medium NBFCs/HFCs during October’18 to March’19.

A new lending paradigm

Lending has now become selective and demands a lot of financial discipline. NBFCs/HFCs started lending in relatively smaller tranches to developers with better credit record and ability to sell residential units in mid-segment and affordable category.

Funding approval apart from stringent credit norms has been based on the financial strength of the entity and not just a specific project. Lenders are also ensuring that they have adequate security against the money lent in terms of assets and guarantees. On the other hand, responsive developers have adapted quickly to the stringent credit norms by injecting financial discipline. Many of them have de-leveraged by hiving off assets/projects etc.  

The journey ahead

However, all is not negative as it was even a few months ago. Recovery will take time. Ramesh Nair, CEO & Country Head, JLL India said, “The fact that Union Budget 2019-20 has made a provision of liquidity of Rs 1 lakh crore to the NBFC sector highlights the pain in the segment. However, NBFCs are likely to face challenges in the next few quarters. NBFCs will witness recovery toward the beginning of  2020.”

Fast facts

• With the lending ticket size of up to Rs 70 cr, medium and small sized NBFCs/HFCs have lent around  Rs 4,000 cr to the real estate industry during Oct’18 –March’19
• Bigger NBFCs have reduced their exposure to real estate
• Funding for the real estate sector remain a challenge but not entirely dried up
• Small and medium NBFCs/HFCs have been actively lending up to Rs 70 cr from the previous levels of lending of Rs 150 cr and above