Outstanding credit to real estate developers given by Non-Banking Finance Companies (NBFCs) and Housing Finance Companies (HFCs) has increased four times from Rs 640 billion in 2011-12 to about Rs 2,600 billion till 2017-18.
At a time when NBFCs/HFCs were a major supporters to developers, defaults in payments by Infrastructure Leasing & Financial Services group of companies led to drying of funds to NBFCs and in turn to real estate sector, news reports have said.
Refinance provided by NBFCs had become lifeline for developers to service their old debt obligations and to reduce their interest costs. The refinance market has come to standstill as NBFC have become extremely cautious.
The number of deals has reduced significantly as decision making has slowed down. Interest rates have increased by 150 basis points for those in need of funds.
Lending at higher rate of interests may appear favourable for lenders in short term, however, this might eventually result in higher non-performing assets in longer term.
Some NBFCs have even deferred home loans to buyers as they try to factor in the impact of the crisis on their business.
The relaxation in loan-to-value norms would be discontinued as these players become more cautious in sanctioning home loans. This is likely to affect the revival of residential segment, which had witnessed signs of recovery in 2018.
Any subvention schemes by developers to attract buyers have been put on hold by Banks as well as NBFCs.
The residential segment sales have been driven by buyers’ preference for projects with occupancy certificate to avoid paying GST taxes. As a result, developers have had to depend on NBFCs for funding during construction phase.
The NBFC crisis is expected to force consolidation in the real estate industry as developers with high leverage would be left with no other option but to hand over projects to lenders.