By Deo Shankar Tripathi
The entire housing sector performed very well till August 2018 due to comfortable liquidity as well as demand. Housing finance companies (HFCs) recorded robust growth from 2015 to 2017 as banks were struggling due to mounting NPAs. However, from 2017 banks increased their focus on retail more particularly on home loans in a big way. The housing sector was growing at the rate of 18 per cent to 20 per cent and there were some HFCs, growing at a much faster pace till August 18.
IL&FS default on September 18 suddenly caused panic in the financial system resulting in a crisis of confidence. The flow of funds from mutual funds and banks to HFCs and NBFCs were almost stopped. Fearing an imminent liquidity crisis, almost all HFCs and NBFCs stopped lending for individual loans as well as developer loans from the last week of September 2018. However, from November 2018 the banks gradually started funding to top rates HFCs. Overall borrowing costs of HFCs/NBFCs have gone up by 75 to 125 bps due to an increase in the lending rate for existing and new loans.
RBI and the government came to rescue by advising banks to extend support to buy loan pools. Securitization guidelines of minimum 12 months retention are reduced to 6 months and system liquidity provided by RBI to facilitate pool buys out by banks. This helped most of HFCs and NBFCs to manage liquidity for contractual repayment of liabilities. The government placed Rs 20,000 crore housing funds to NHB to provide liquidity support to HFCs. However, only a few HFCs were able to resume disbursement at lower than the projected level, while many small HFCs could not do. As a result in the second half of FY 2018-19, growth was only 9 per cent as against 18-20 per cent earlier.
In the interim, the government took many measures with an annual budget to revive sentiments and to improve the liquidity of NBFC and HFCs. Some of the steps were – Liquidity Infusion Facility(LIFT) for HFC through NHB, Rs 30,000 crore affordable Housing Fund, partial credit guarantee scheme for purchase of loan pools by PSBs up to Rs 1 lakh crore ( the scheme is subsequently modified to cover most of HFC/NBFC), nudging banks to support, reducing GST for affordable and non-affordable housing, increasing tax exemption up to Rs 3.50 lakh interest on housing loans. RBI modified external commercial borrowing norms for overseas borrowing, substantial reduction of policy rates, linking of home and other retail loans to external Benchmark from 1st October 2019 for better transmission of reduced rates, etc.
The real estate sector which was already struggling with huge unsold inventory in 7 top cities, was the worst hit. Till last year, NBFCs and HFCs were the major providers of loans to builders. Now very few NBFCs can provide loans to developers that too in small ticket size. The nonavailability of construction loan on one hand and low sale of flats on the other due to depressed demand and liquidity problem of HFCs adversely impacted the sector with reduced new launches. There is a large number of stalled projects across the country; blocking huge financial resources, causing enormous suffering to home seekers and an increase in default to their lenders mainly HFCs/NBFCs.
The government took the most timely initiative to revive the struggling real estate sector, by setting up a stress fund of Rs 25,000 crore, to begin with, to provide last mile funding to all stalled projects at any stage of construction excluding those in liquidation process by NCLT. The scheme is covering 1600 stalled projects with 458000 dwelling units. The carpet area of a dwelling unit is restricted to 200 sq meter and a maximum of 400 cr to one project. 80 per cent of projects are expected to get support. The scheme is already set in motion and once the flow of funds for completion of projects begins, the overall sentiments will revive.
This will gradually see the revival of the real estate sector, end the uncertain wait of home seekers in getting their booked flat and more importantly lift the economy as well as create huge job opportunities. It is expected to take around 12 to 24 months for the revival of the real estate market and flow of normal funding to the real state sector.
Compared to the previous financial year, the situation has certainly improved to some extent. Most HFCs can get some funds from the banking system but still, the lower-rated small HFCs, exclusively engaged in low-income affordable housing, are struggling for funds. NHB refinance to all eligible HFCs out of the Rs 30,000 crore affordable housing fund is good support. Banks are supporting through a buy-out of a pool under a partial guarantee scheme as well as through a normal securitization route. HFCs, which have a good pool, can sell it and get funds. The debt capital market has also become active. The overall funding situation is gradually becoming normal except for small HFCs.
There has been a visible contraction in demand for housing due to distress in the economy which is also reflecting a slight uptick in NPA across NBFC/HFCs. The contraction in overall housing growth was about 6 per cent in the first half in comparison to the last year. The positive impact of various measures of government and RBI is expected during the second half of the year. The growth for 2019-20 is likely to be 13-14 per cent for the entire banking and HFCs together with relatively lower growth for HFCs.
While the government has already announced a host of measures for the sector, there are a lot of expectations from the upcoming budget. The industry expects the government to stimulate demand by providing additional tax benefits to home buyers under Section 80C of the Income Tax Act. Another big concern is Real estate loans worth $10 billion falling due for repayment in the first half of 2020, as per an estimate by Fitch Ratings.
The sector is in recovery mode but not healthy enough to service the loans. The fallout of default could extend to mainstream banks and may cause big jolt. RBI and the government should announce measures in the budget to mitigate the risks of an imminent default by permitting a one-time restructuring of such loans. Real estate players are also expecting the government to accord the infrastructure status to the entire industry in the budget which is presently available to affordable housing.
The outlook for the residential sector looks good for the next financial year. The low-interest-rate environment following multiple rate cuts by the central bank and the number of measures by the government to give an overall push to the economy is expected to revive the demand for housing and its supply. The housing sector is poised to grow from 14 per cent to 16 per cent from 2020 to 2024. The major growth is expected in affordable housing from smaller cities.
According to industry experts, the commercial real estate will continue to witness strong demand in 2020. Stable demand from IT companies, start-ups, and co-working companies will drive demand for commercial spaces. In 2020, the real estate sector is predicted to attract total investments worth $6.5 billion, a growth of 5 per cent over 2019. The commercial office space, which constitutes just 12-15 per cent of the total property market, will be the primary driver for investments.
The overall year 2020-21 looks much better than what we have seen after September 2018 onwards. Various regulatory measures announced by RBI and expected guidelines on securitization etc will strengthen HFC and NBFC to become more strong and resilient to support the economy.
( The author is MD and CEO of Aadhar Housing Finance)