NBFCs with exposure to realty developers stare at fresh trouble

India Ratings revises outlook for NBFC sector to negative; growth to be 10-12%

Wholesale non-banking financial companies (NBFCs), which have huge exposure to real estate developers, could see their asset quality slide as early as the second half of FY20 if refinancing pressure continues, said rating agency India Ratings & Research (Ind-Ra) in its NBFC sector outlook for FY20. Most of these NBFCs have given a moratorium of 18-24 months on the principal amount lent in the last two years. This will end towards the second half of FY20 and the first half of FY21. NBFCs account for about 16 per cent of the total loan outstandings to real estate developers. Of the total of Rs 6 trillion, NBFCs have an exposure of around Rs 1 trillion.

“Wholesale and semi-wholesale NBFCs in real estate, corporate lending and the large-ticket housing segment have seen challenges in mobilising liabilities. This is largely because of the asset size perception risk arising from slowdown in real estate and refinancing opportunities,” said Ind-Ra.  
 

NBFCs have lent 60-80 per cent of the outstanding Rs 1 trillion in the last two years for which they have granted moratorium. After the moratorium ends, if the refinancing pressure persists, there could be serious asset quality challenges. So, asset sale with a haircut in the interest rate would be the only option for NBFCs.

“There can be a dual risk that can come in because funding for many of these NBFCs has slowed down post September 2018. Hence, construction activity has been hit with real estate developers not getting financing. On the other hand, homebuyers are also delaying their purchases. So, there could be a situation where home buyers may not see construction activity completing and they may also start delaying their EMIs”, said Pankaj Naik, associate director of India Ratings.

India Ratings outlook for wholesale NBFCs is negative for FY20. They have also cut their growth forecast for the entire NBFC sector to 10-12 per cent in FY20 as opposed to 15 per cent in FY19. 

This is in view of the funding challenges and slowdown in economic activity. 

The rating agency expects the overall profitability to moderate across the industry, as rising funding cost and lower disbursals will lead to an increase in margin pressure. The rating agency has also revised the sector’s outlook to negative. Within the asset classes, the rating agency has maintained its stable to negative outlook for commercial vehicle and tractor loans. The loan against property segment may see its delinquency level inch up in FY20 or moderate at the current level of 5 per cent. It has revised its outlook to negative from stable for the loans against property segment. Despite a slew of measures by the government to ease liquidity pressure in the NBFC sector, the rating agency feels that in the short term, the measures would not bring any relief to distressed players.