As feared by industry experts, the NBFC liquidity crunch has started showing its impact on the real estate industry. The year 2019 will have its own demons to handle as the road ahead look bleak.
Traditionally, banks have been the primary financiers for developers. However, post the NPA crisis, there was a significant fall in the number of loans extended by banks to developers. NBFCs came as a boon and soon filled this gap. Over the last 5-6 years, these institutions aggressively lend to the real estate sector.
In fact, NBFC exposure to the real estate sector has more than quadrupled from Rs 0.4 trillion in the financial year 2010 to over Rs 2.2 trillion in the financial year 2018, Money Control reported. However, lately, banks have tightened lending to NBFCs which in turn has decreased the lending capacity of NBFCs and in turn, has impacted the fund flow to the real estate sector. Not only did developer finance take a hit, but home loans were also impacted.
Although the most challenging phase of NBFC crisis seems to be over, the crunch is expected to spill over in 2019 as well. This is how NBFC liquidity crunch will impact the real estate industry:
- Credit shortage would lead to a shortage of funds with developers to launch new or even complete the present projects.
- Supply in the real estate market is expected to take a hit.
- Low home loan disbursals would mean low sales, which would mean more inventory for developers.
- Project delays would attract penalties from RERA, further pinching the financially starved developer.
- Developers might be forced to resort to measures like borrowing from PEs at higher interest rates or reducing prices to offload inventory and generate cash flows.
- Several developers might dilute equity by bringing in a partner
The only silver lining in the whole fiasco stands for cash-rich big developers. Such realty bigwigs are expected to remain untouched and will continue their operations.