Realty cos turn to NBFCs FM eyes new ways to deal with NPAs

■ Analysis shows that the cash flow cover falls with adverse movements

Housing finance companies ( HFCs) and nonbank finance companies ( NBFCs) are increasingly becoming the major funding sources to real estate as banks have moderated their lending to the sector. While the overall real estate loan book expanded at a CAGR of about 15 per cent between FY14 and December FY18, India Ratings and Research ( Ind- Ra) said the NBFC real estate book expanded at a CAGR of 60.9 per cent albeit on a smaller base.

During the period, the banks’ share in real estate funding has declined to 63.4 per cent from 77.1 per cent as the risk perception increased at a time when banks were struggling with asset quality and capitalisation issues.

NBFCs’ market share in real estate funding is expected to reach 17.8 per cent by FY20 from 13.7 per cent currently.

The rating agency noted that NBFCs’ loan growth has been underpinned by regulatory arbitrage advantage as banks and HFCs cannot finance land acquisition. This was further supported by large capitalisation base of some of the players that allowed them to take large single party exposures.

However, intensified competition among lenders amid slacking demand from greenfield projects has resulted in a sharp compression in yields in the last eight quarters raising concerns whether the risk is adequately priced in.

“The sharp slowdown in sales of under- construction properties both on account of limited expectation of price appreciation and adverse tax rules could necessitate revisiting the loan contracts by lenders. This is because lending agreements generally factor in sales velocity along with principal payments during the construction phase. However, as the sales velocity has reduced considerably, cash flow could be stretched more than expected,” said Ind- Ra.

Lending to the real estate sector according to the agency is typically backed by a cash flow cover, based on the certain assumption of sales velocity, price appreciation, timeliness of various approvals and completion schedule. However, Ind- Ra’s analysis shows that the cash flow cover falls significantly with adverse movements in these assumptions. New Delhi, May 13: The finance ministry is examining a proposal to find innovative ways for dealing with burden of NPA provisions by issuing provision shore- up certificates ( PSC) to banks.

With the help of this instrument, the operating profit of bank is saved from erosion and the lender would be able to focus on lending activities as being in financially good shape.

Under this scheme, the bank concerned will get PSC to the extent of its provision against the bad loans and conserve its capital, sources said, adding that this capital can then be used for expanding core business of lending.

This is at the “idea stage” and various aspects of this model are being examined, sources said.

This would be a kind of capital infusion not in one go but spread over various quarters.

A special trust would take over the underlying provisioned assets for monitoring, recovery and unlocking value, using the Insolvency and Bankruptcy Code, they said.

The instrument would be used only against NPAs and not for total provisions which also include those for employee benefit etc, sources added.

Besides, there is a fundamental difference between the proposal to set up a bad bank that takes over the entire stressed asset and the PSC mechanism. In the latter’s case, the bank only assigns the stressed assets and will receive PSCs only to the extent of provisions made.

The gross non- performing assets of all the banks rose to ` 8,40,958 crore in December 2017, led by industry loans followed by services and agriculture sectors.