With non-bank financial companies (NBFCs) and housing finance companies becoming risk-averse towards lending to real-estate sector, developers are likely to face a liquidity crisis, says a report.
Majority of the developers with a weak balance sheet depend on the parallel banking sector for funds. These players are likely to be affected the most if the situation persists.
"Liquidity risk is increasing for the country's real- estate developers, as non-bank financial institutions (NBFIs; including housing finance companies) are shying away from lending to the sector," global rating agency Fitch Ratings said in a report.
Defaults by two NBFIs - Infrastructure Leasing & Financial Services (IL&FS) in September 2018 and Dewan Housing Finance Corporation (DHFL) in June 2019 - have contributed to the sector-wide liquidity squeeze, as investors have become more risk averse.
NBFCs have disproportionately increased their share of real-estate sector credit in the previous few years, owing to heightened risk aversion by banks.
Banks' low appetite for lending to real-estate developers is due to the usually high-risk weights attached to such loans.
The report said NBFCs are also shying away from refinancing the maturing debt of even large, proven developers to limit concentration risk to the sector, which is pushing developers towards alternative funding channels, such as private equity.
"The availability of such funding could be more limited than the value of maturing debt and may only be available to established developers with sufficient unpledged assets," it said adding that it would also come at a higher cost.
The availability of unencumbered assets among large developers may be of limited use, as NBFCs are looking to shed their already-high exposure to the sector, especially to large borrowers, the agency said.
Developers that are focused on high-end projects may face higher risk, as sales of such projects have slowed in the last two years.
It said the government has announced measures to improve NBFC-sector liquidity, but their efficacy remains to be seen.
"We believe the government's July 2019 announcement to provide a first-loss guarantee of 10 per cent on securitised assets issued by NBFCs to banks could ease funding pressure for NBFCs in the short term," the report said.
However, the provision refers only to financially sound issuers and there is a lack of clarity about the duration of the guarantee and the definition of what comprises a 'financially sound' entity, it said.
The report said substantial bank recapitalisation to increase lending capacity could benefit NBFCs as well as real-estate developers, subject to the banks' risk appetite, although a structural improvement in NBFC asset books would take time.