Asset quality issues affecting NBFCs with massive real estate exposure: ICRA

The rating agency said the situation is expected to stabilize in FY2023 (0-5% decline).

The performance of non-banks in recent years has been marred by a number of concerns as institutions grapple with fund raising challenges and asset quality issues. However, non-banks saw a growth phase in the real estate segment by the first half of FY19 (September 2018), characterized by easy access to capital and substantial investor interest along with a stable demand outlook.

“Non-banks witnessed a significant slowdown in growth since the second half of FY19 following the liquidity crisis, and consequently restrained their disbursements. The impact was more pronounced on wholesale financiers with massive real estate exposure than their retail counterparts due to longer periods of risk aversion by investors and other stakeholders. Given the challenges of raising funds, real estate-oriented non-banks not only limit incremental disbursements in the sector, but also try to reduce their portfolios through asset selling to increase liquidity. Choudhary, Vice President and Sector Head – Financial Sector Ratings, ICRA.

ICRA said non-banks have also seen a build-up of tension in the real estate portfolio since FY19, given the slowdown in the underlying segment. The domestic real estate sector was facing a prolonged slowdown, with declining sales and a resultant inventory overhang, resulting in a build-up of debt. The disruption in business due to the COVID-19 pandemic further compounded the issues. ICRA said that the real estate industry has witnessed some green shoots in the recent quarters, especially large developers, a sustained pickup in sales across geographies/regions will be crucial for a meaningful recovery in the sector.

Real estate gross non-performing assets (GNPAs) for non-banks rose to 5.1% as of March 2020, from 2.1% as of March 2019 and has remained bullish since then. They increased to 6.2% by March 2021 and 6.8% by September 2021; Adjusting for the sale of stressed loans to asset reconstruction companies, GNPA is expected to exceed 9%.

“ICRA expects a 180-250 basis points (bps) growth in GNPA in the real estate segment in FY22. However, players with diversified credit books across asset classes may see a relatively small increase in NPAs. However, the asset quality will be dependent on the performance of the restructured book as well as any other disruptions caused by the rise in Covid-19 infections,” Choudhary said.

At the industry level, a major part of the non-bank real estate book has been restructured and/or relief has been provided through revision of the date of commencement of commercial operations. The performance of the restructured book is watchable in the near term, as the stipulated principal amortization for this book is expected to commence from Q1/Q2 FY2023. This, with the effect of revision in income recognition and asset classification guidelines, will further impact the asset quality of the segment.

However, the rating agency said that it should be noted that at the aggregate level, real estate accounts for less than 20% of the total ledger of real estate oriented non-banks, and thus the impact (as a percentage) on the reported asset quality in) AUM) will be less.

Real estate financiers have noticed a decrease in mutual fund participation in incremental lending programs along with an increase in cost of funds since the first half of fiscal year 2019. However, institutions backed by ‘AAA’ rated corporates or banking houses were able to withstand these pressures better than peers, as evidenced through their ability to consistently raise funds from the capital markets despite lower volumes. could. Conversely, other non-banks have demonstrated greater reliance on bank funding as well as other channels (including securitization of retail assets) and have added to their resource and investor profiles by adding products such as issuance of market-linked debentures and retail bonds. Trying to diversify. ,

Despite this, non-‘AAA’ corporates/bank backed non-banks continue to have a higher risk premium despite moderation in rates. The spread between the average cost of financing for corporates/bank backed entities and other real estate oriented non-banks increased by around 100 bps in FY 2019-2020 and further increased in FY21, thus creating a sustained high perceived Pointed to the risk profile.

Real estate-oriented non-banks have seen an improvement in their capitalization profile since March 2018, driven by moderation in AUM growth, coupled with larger capital raises to strengthen their balance sheets. The capital cushion for real estate-oriented non-banks is projected to grow by 4% from March 2019 to March 2021. The current capitalization level also provides the ability to absorb losses. The agency said the income profile is expected to contract marginally in the current fiscal and stabilize in FY2023 unless further pandemic-induced trade restrictions are in place. The ability of non-banks to keep credit costs under control will continue to be critical.

ICRA said the outlook for real estate-oriented non-banks remains negative, given asset quality pressures and sluggish growth expectations in the near to medium term.