MUMBAI: The Reserve Bank of India (RBI) has asked non-banking finance companies (NBFCs) with loans predominantly made to real estate companies to bring down their exposure to this sensitive sector. The central bank is looking at applying concentration risk norms — similar to banks — to the finance companies.
In the finance sector, the National Housing Bank has been keeping a watch on lending to developers by mortgage companies. Banks too have scaled down their lending to this segment. In the NBFC sector, real estate exposure to total assets came down to 6% from 6.7%. However, the problem is in some finance companies that have a larger ratio of developer loans to total loans than even housing finance companies (HFCs).
“The problem with taking an industry-wide approach is that it gives a misleading picture as no two companies have a similar risk profile. Companies are very specialised — either infrastructure, consumer durables, small business or commercial vehicles,” said a banking source. Because of this, sectoral limits have not been enforced and there are finance companies specialising in areas like infrastructure.
On Thursday, a report by property consultant JLL said that in 2018-19, net disbursals by NBFCs/HFCs to real estate developers declined by almost half from about Rs 52,000 crore in 2017-18 to an estimated Rs 27,000 crore.
Despite facing a credit crunch, some NBFCs were seeking to raise funds to on-lend to real estate projects, which were stuck for want of additional funding. These projects will now have to look for other lenders as the RBI does not want this risk to be passed onto banks’ balance sheets. The fear is that the troubled projects could multiply the problem for the financial sector as banks and HFCs are already exposed to them through under-construction home loans.
Last year, with capital markets drying up for real estate companies, many of them turned to bank finance, and when banks reduced their exposure, they increased their dependence on finance companies. A large chunk of the funding to NBFCs came from banks.
According to RBI data, bank lending to NBFCs stood at Rs 6.23 lakh crore as on May 24, 2019 — an increase of 40% over the Rs 4.43 lakh crore outstanding on May 25, 2018. This does not take into account the accommodation provided through bonds and money market instruments.
Meanwhile, industry association Ficci said in a report that nearly 80% of the institutional investment in real estate is accounted for by private equity (PE) investors. “The industry has observed a significant decline in bank credit which, until recently, was considered to be the key channel for funding requirement. This can be attributed to factors such as rise in non-performing assets, coupled with increasing losses in the real estate industry,” the Ficci report said. The report said that the drying up of funds through these avenues, consequently, led the PE players and NBFCs to step in to provide finance to the real estate industry.
Source- Times of India.