Cash Crunch Among Indian Developers Credit Negative For Banks: Moody’s
Altico Capital’s default reflects tight liquidity among developers, giving banks reason to worry, Moody’s said.
The default by Altico Capital India Ltd. last week is a sign of increasingly tight liquidity among property developers.
That’s according to Moody’s Investors Services, which said in a recent note the Rs 20-crore interest default by the foreign fund-backed non-bank lender is credit negative for Indian banks.
“Altico Capital is facing liquidity constraints because of a deterioration in the credit quality of its loans to real estate developers, which are facing difficulty in repaying and refinancing their maturing obligations as a result of slowing property sales,” the ratings agency said.
The non-bank financial services company was the latest to face crises in a stretch since late last year, when surprise defaults by the IL&FS Group sparked a credit crunch in Indian markets. Developers weren’t spared as they struggled to raise funds after non-bank lenders turned selective following the crisis. The government sought to stem the tide by announcing measures, including permitting banks to buy assets from non-bank lenders and a fund infusion.
Altico Capital’s woes, according to Moody’s, comes after Dewan Housing Finance Ltd.’s—which has significant exposure to real estate sector—defaults on its loan obligations in July because of insufficient liquidity, raising questions about its solvency.
And Yes Bank Ltd. and IndusInd Bank Ltd., which have the largest direct exposure to commercial real estate, would be susceptible to asset quality difficulties if the sector continues to slow, the ratings agency said. Banks also have indirect exposure to the real estate sector through their lending to non-bank lenders and housing financiers, which in turn lend to real estate, the note said.
The overall exposure of non-bank lenders and housing financiers to the real estate sector was about 6 percent of their total assets as of March, according to Reserve Bank of India data.
The government’s proposal to create an investment fund worth Rs 10,000 crore with equal contribution from entities such as Life Insurance Corporation, banks and development institutions is credit positive for the real estate sector, but its timeline and modalities aren’t yet known, Moody’s said, adding it’s unclear if it will help address the sector’s immediate liquidity constraints.
It won’t address the broader solvency constraints of real estate developers given the focus on only certain residential real estate projects, the note said.