Real Estate Financing Pivots Away From NBFCs To Alternative Investment Funds
A labourer takes a break at the construction site of a Indiabulls Real Estate commercial building in Lower Parel, Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Real Estate Financing Pivots Away From NBFCs To Alternative Investment Funds

India’s non-bank lenders, particularly those that have exposure to real estate lending, have found it tough to raise funds at affordable costs over the past year. Concerns of asset quality risks emerging from the real estate sector have left investors worried and financiers starved for liquidity.

As a way around this, promoters of non-bank lenders are increasingly shifting real estate financing away from their NBFC platforms and towards alternative investment funds. Several NBFCs are tweaking their group strategy and considering setting up category-II AIFs as a way to continue financing real estate projects, according to numerous industry experts BloombergQuint spoke to.

Some have already started the process.

ECL Finance Ltd., the NBFC arm of the Edelweiss Group, plans to move most of its real estate developer financing to an AIF platform over the next few years. As of Sept. 30, ECL had over Rs 11,000 crore in wholesale mortgage assets on its NBFC’s book, while the groups’ alternate asset management business had around Rs 4,330 crore worth of private investor money in its real-estate funds, according to its investor presentation.

In the current scenario, developers need long-term flexible capital, which is provided by an AIF platform, said Hemant Daga, president and head (asset management) at Edelweiss. “Global LPs, or limited partners, are looking for yield and our real estate lending strategy in our alternative asset management business is a good fit for such investors who have patient capital and want to participate in this.”

Last week, IIFL Wealth Management Ltd. and the Piramal Group announced a co-lending partnership in which they will provide last-mile financing to real estate projects in tier-1 cities through an AIF platform. With a target of Rs 2,000 crore, the Piramal Group will “seed the fund with existing loans” from its portfolio, while continuing to explore quality deals from the market in future, Khushru Jijina, managing director of Piramal Capital and Housing Finance Ltd. was quoted as saying in a statement.


The immediate reason behind the promoters of NBFCs looking to move real estate financing and other platforms is the disruption caused by the collapse of Infrastructure Leasing and Financial Services Ltd. While easier liquidity has brought down costs for retail NBFCs, lenders with real estate exposure have not benefited.

Banks also prefer to lend to NBFCs that focus on retail and small business loans as the credit risk is more granular, said a senior industry executive, who spoke on condition of anonymity. Given that there is risk-aversion among bankers and mutual fund investors, they are not comfortable lending to wholesale NBFCs that have concentrated lending to real estate projects, this person said.

In contrast, high net-worth investors in AIFs have the appetite for riskier investments.

“In the context of the last 18 to 25 months, most large, good developers continue to struggle and because there is a lack of capital in the market from banks, mutual funds and NBFCs, so there is a large opportunity to provide financing through different structures like AIFs,” said Saurabh Gupta, fund manager (real estate) at IIFL Asset Management Company.

In addition, the AIF model also gives greater flexibility to customise debt being provided to realtors, said Krishnan Sitharaman, senior director at CRISIL Ratings.

Since there is a moratorium on the principal repayments during the first few years for these loans, the AIF platform is better suited, Sitharaman said. “Scheduled repayments under the AIF platform can be customised and tailored to suit the cash flows of the developer,” he said. “On the other hand, an NBFC has borrowings which need to be repaid as per a specific schedule which may not be aligned to the borrower’s cash flows resulting in an asset-liability mismatch.”

Regulatory Shift

Shifting real estate financing from NBFCs to AIFs is also accompanied by a change in the regulatory environment. NBFCs are regulated by the Reserve Bank of India, while AIFs fall under the purview of the Securities and Exchange Board of India.

Unlike mutual funds, which pool retail investor money, category-II AIFs gather funds from high-net-worth individuals, corporate treasuries, overseas investors and domestic institutional investors. The minimum investment amount stands at Rs 1 crore, according to SEBI regulations.

However, SEBI specifies that these funds can only invest in debt or debt securities of listed or unlisted investee companies.

“It is important to note that SEBI has clarified categorically that category-II AIFs cannot give pure loans to the borrower, so they cannot be a vehicle for financing or lending activity,” said Anish Mashruwala, partner; and Sahil Shah, principal associate, J Sagar Associates. He added that SEBI has also made it clear that AIFs cannot finance stressed projects and cannot take over the role of a lender.

What these funds can do is pool investor money and invest in debt securities, which could be either non-convertible debentures, optionally-convertible debentures or structured credit notes of a portfolio company.

The market regulator has cracked down on AIFs that give term loans and has even directed several AIFs that gave term loans to borrowers to recall these loans and give an undertaking that they will not provide loans anymore, said Abhirup Ghosh, partner at law firm Vinod Kothari and Co. “SEBI’s stand is very clear that AIFs cannot give loans which is why they are asking all applicants to lay-down a broad range of debt securities the fund will invest in, upfront in the placement memorandum,” he said.

Despite those safeguards, the switch from NBFCs to AIFs could create a regulatory gap, said a lawyer, who spoke on the condition of anonymity. Financial entities with large real estate exposures can move their refinancing and roll-over loans using a private credit platform beyond RBI’s supervision, this person cautioned.

Enforcement of securities could also be tougher.

“The rules and clauses for enforcement in case of a default would depend on the investment document, but since AIFs are not a financial institution, they cannot go to the debt recovery tribunal under the SARFESI Act,” Mashruwala said. He said the appointed debenture trustee can enforce investors’ rights against the underlying collateral by approaching the civil courts only.

Imperfect Substitute

The move by financial services groups to pivot real estate financing away from NBFCs to AIFs may prove to be an imperfect substitute.

“It depends at what stage the developer is looking at funding, as at the construction stage borrowing through an AIF may be too expensive,” said Mathew Kurian, vice-president, ICRA Ratings. “Venture capital funds and AIFs have provided funding for land acquisition part of the project, rather than a replacement of construction finance.”

Kurian added that the lower cost of funding will make bank lending a preferred option and only those developers who are unable to access funds from traditional lenders may look at the AIF option. “If the developer is unable to access debt from bank or NBFCs then it may consider AIFs, particularly for last-mile funding where completion of the project may take priority over the cost of funds.”

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