The next big worry for the financial markets is how real estate players are going to service their loans; the mix of developer loans in total NBFC/HFC credit has inched up from 6.2% in 2014-15 to 10.7% in 2017-18. By all accounts, that share would have moved up further by now.
The somewhat reckless lending by NBFCs to promoters against shares of their companies is bound to take a toll on their balance sheets. Indeed, what is shocking is the nonchalance with which mutual funds—which are supposed to be investing the savings of small investors—have also lent to promoters against pledged shares. As share prices fall, and lenders sell the pledged shares in the market, they are becoming more vulnerable to losses. Some NBFCs are monetising other businesses to ensure their cash flows are not choked. Indeed, it is not clear whether mutual funds understand the risk associated with lending against equity shares. The fact is, smaller companies today are short of cash—since business isn’t exactly booming—and promoters are resorting to leveraging themselves. While the funds are being invested in their businesses, the practice is nonetheless worrying. Axis Capital has pointed out that the aggregate pledging activity by promoters within the BSE 200 hit an eight-year high in the October-December quarter.
The next big worry for the financial markets is how real estate players are going to service their loans; the mix of developer loans in total NBFC/HFC credit has inched up from 6.2% in 2014-15 to 10.7% in 2017-18. By all accounts, that share would have moved up further by now. Developers are in a tough situation due to sluggish sales, high unsold inventories, lengthening project lifecycles and slower price correction that has left affordability low. Some of these problems were hidden by the easy refinancing, but the severe shortage of liquidity over the past six months changes the situation completely. The liquidity deficit in the banking system shot up to nearly `87,000 crore in the week to February 15, the highest in seven weeks. While this may ease over time, the high level of borrowings by the Centre, states and PSUs is threatening to crowd out the private sector. The total value of developer loans is estimated at `6 lakh crore; of this, the vulnerable portion, which is the core developer book, is estimated at `3.4 lakh crore, or 60% of the total according to Credit Suisse. While this portfolio grew at just 4% for banks between 2014-15 and 2017-18, it grew at a whopping 46% for NBFCs/HFCs. As such, even a little bit of stress could have a big impact in the money markets.
To some extent, the forbearance extended by RBI on real estate loans, around seven years ago, is to blame. Since banks were allowed to restructure loans to builders, the developers were not forced to offload inventories at market-clearing prices. Even otherwise, the real estate business was on a sticky wicket since much of it was investment-driven and based on the premise that prices would trend higher. For their part, the developers used the collections from pre-selling apartments to buy more land instead of completing projects. The result is around 4 lakh units of inventory in India’s micro-markets and large dues to banks. By a conservative estimate, this amounts to around `2 lakh crore of liquidity. Today, buyers are unwilling to purchase homes in the expectation prices will fall and, so, inventories are getting cleared at a very slow pace. The chickens are coming home to roost.