Why outlook for real estate-focused NBFCs remains grim in the near term
The real estate assets under management (AUM) of non-banking financial companies (NBFCs) and housing finance companies (HFCs), which had been under pressure for the last two-three years, will likely continue facing headwinds in the coming year as well, according to credit rating firm ICRA.
The real estate AUM of NBFCs had recorded a growth phase till FY2019 due to easy access of capital and investor interest coupled with steady demand outlook. The liquidity crisis in September 2018, driven by the collapse of IL&FS, impacted the growth of NBFCs as their strategy shifted to shoring up the liquidity instead of increasing lending in the past. The real estate AUM contracted further due to business disruptions and uncertainties caused by the Covid-19 pandemic.
The real estate AUM of NBFCs declined to Rs 2.8 lakh crore as of March 2021 from Rs 3.4 lakh crore as of March 2019 and is estimated to fall by 5-10% in the current fiscal year, according to ICRA. The industry has also witnessed a build-up in portfolio stress since FY2019, given the slowdown in the underlying segment, and the asset quality pressures are expected to persist over the near to medium term.
The ratings firm said that gross non-performing assets (GNPAs) in the real estate segment for NBFCs increased to 5.1% as of March 2020 from 2.1% as of March 2019 and have remained on an uptick since then.
“The real estate GNPAs increased further to 6.2% as of March 2021 and 6.8% as of September 2021; adjusting for the sale of stressed loans to asset reconstruction companies (ARCs), the GNPA is expected to be over 9% as of March 2021,” according to ICRA. It added that it expects an increase of 180-250 basis points (bps) in the GNPAs in the real estate segment in the year ending March 31, 2022.
However, considering that NBFCs are also present in other asset classes like retail, the increase in the GNPAs on an overall AUM basis would be lower (60 to 120 bps increase in FY2022).
At the same time, the total real estate AUM of NBFCs is projected to once again decline, albeit by a slower pace, in the coming year and at best may end FY23 with flat numbers, the rating agency noted.
Nearly 10% of the NBFCs’ real estate book has been restructured or has been provided relief through the revision of the date of commencement of commercial operations (DCCO). This could have an overhang effect as the scheduled principal amortisation for the restructured/DCCO book is expected to commence from the first half of the coming financial year. This, coupled with the revised guidelines regarding asset classification, could have a bearing on the asset quality for this segment going forward.
While capitalisation buffers remain adequate, the earnings profile is expected to contract marginally in the current fiscal before stabilising in the coming year.
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