A supply crunch in real estate and slower execution of projects are responsible for the sector’s problems, Rashesh Shah, chairman and CEO, Edelweiss Group, told Shritama Bose and Malini Bhupta.
A supply crunch in real estate and slower execution of projects are responsible for the sector’s problems, Rashesh Shah, chairman and CEO, Edelweiss Group, told Shritama Bose and Malini Bhupta. The current crisis of confidence in the debt markets could be a good opportunity to overhaul it, he added. Excerpts:
Do you see the reset in the NBFC space being actually as painful as it is being said to be?
Every industry goes through a re-engineering or a recalibration. In every industry, cycles are inevitable. I would treat this as a cycle in the NBFC evolution and in the cycle, there is a cyclical element and a structural change element. What will change structurally is that NBFCs will no longer be asset-heavy and longer-tenure entities. Very large asset books will not be supported by the liability profile. Also, in the asset book, tenures will come down. That is why models like co-origination make sense, because you are not increasing your balance-sheet size, but you are using your origination and collection skills.
You have a sizable exposure to real estate, which is a sector that has run into trouble. What exactly is happening there?
It (the stress) is mainly because asset values are not falling. Cash flows have tightened because a lot of project implementation has slowed down, but in the last four-five months, things have actually not got worse. Commercial real estate is doing well. As for housing, it’s been eight years since house prices went up in India. In the last one year, no new project has come about. Even in existing projects, execution has slowed down. There was a lot more supply than demand in housing. Now, slowly, supply is getting crunched and this is the market’s way of crunching supply. Hopefully, demand will stay. The tax cut improves profitability. In that sense, the key in real estate is that the projects should get completed.
A large part of our book is in the Rs 50 lakh-Rs 80 lakh category of apartment prices. There, it’s a fast-moving item. A year down the line, the demand-supply situation will also improve. The real estate book is just roughly Rs 11,000 crore and is only 25% of our total credit book. About half the capital employed is in retail credit currently and in the coming years, the percentage of the retail credit book is expected to grow to 70-75%.
How do you see the credit markets emerging from the current crisis?
Credit markets will have to evolve. In the last few years, any instance of an inability to repay has come to be seen as a scam because that faith in the debt market is not there. We can’t distinguish between a genuine risk call that went wrong versus something not kosher. Things have been smoothened out in the equity markets and I think it will happen in the debt markets as well in the next five to 10 years. This is a catalytic point for the debt markets, like what happened in 1992-94 in the equity market. Earlier, there were no research reports on equity but now we have them.
For the debt markets also, we will have to do those things and the current crisis might force us to do that. Appraisal requirements will go up, covenant enforcement will also go up and that is what every market has gone through. We need to catalyse the debt market.
The credit infrastructure of this country is currently clogged because it has evolved only in fits and starts. First we had PSU banks, then came private banks, then NBFCs and now we have the AIFs. It has not been planned growth. As a result, we have this liquidity cholesterol, which gets cleared up over a period of time. So, a crisis like this is a great opportunity. Eventually, each category of players will have its own risk and product profiles.