Real Estate Developers May Face Liquidity Crunch On NBFC Crisis, Says Fitch Report

Developers are likely to face a liquidity crisis as non-banking financial companies and housing financial companies are shying away from lending to them, Fitch Ratings Inc. said in a report released Friday.

A majority of the developers with weak balance sheets depend on the NBFC sector for funds. These players are likely to be affected if the shadow banks remain risk-averse.

“Liquidity risk is increasing for the country's real estate developers, as NBFCs are shying away from lending to the sector,” Fitch Ratings said in the report.

Defaults by two NBFCs—Infrastructure Leasing & Financial Services Ltd. in September 2018 and Dewan Housing Finance Corporation Ltd. in June 2019—have contributed to sector-wide liquidity crunch, as investors have become more risk-averse.

NBFCs had disproportionately increased their share of real estate sector credit in the last few years, owing to heightened risk aversion by banks. Banks’ low appetite for lending to real estate developers is due to the usually high-risk weights attached to such loans.

According to the Fitch report, NBFCs are also shying away from refinancing maturing debt of even large, proven developers to limit concentration risk to the real estate sector, which is pushing developers towards alternative funding channels, such as private equity.

“The availability of such funding could be more limited than the value of maturing debt and may only be available to established developers with sufficient unpledged assets,” the Fitch report said, adding that it would also come at a higher cost.

The availability of unencumbered assets among large developers may be of limited use, as NBFCs are looking to shed their already-high exposure to the sector, especially to large borrowers, the credit ratings agency said.

Developers that are focused on high-end projects may face higher risk, as sales of such projects have slowed in the last two years.

The government has announced measures to improve NBFCs’ liquidity situation, but their efficacy remains to be seen.

“We believe the government's July 2019 announcement to provide first-loss guarantee of 10 percent on securitised assets issued by NBFCs to banks could ease funding pressure for NBFCs in the short term,” the Fitch report said.

However, the provision refers only to financially sound issuers and there is a lack of clarity about the duration of the guarantee and the definition of what comprises a “financially sound” entity, it said.

The report said substantial bank recapitalisation to increase lending capacity could benefit NBFCs as well as real-estate developers, subject to the banks' risk appetite. However, a structural improvement in NBFCs’ health would take time.