NBFC Crisis in Real Estate Industry

Before the Budget the Finance Ministry personnel do rounds of meeting with various Industry heads to understand their needs for fueling growth both in terms of policy and in term of taxation and compliance Real Estate Industry is a very important contributor to our GDP both by virtue of Employment Generation and Driving Consumption

Since our country is facing an employment crisis because of which demand and consumption have badly hampered the government and the policymakers are burning the midnight oil to find a solution and put the economy back on a fast growth path. I have been reading and listening to various Real Estate Industry veterans. Below I am stating the demands/wish list industry has put forth the Finance Minister

1. Industry Status for Real Estate to ease access to funds

2. SOPs for affordable housing

3. Stress Fund of about 10,000 cr for helping complete projects which are about 90 % complete

4. Increase in tax exemption limit on the purchase of a house

5. Single window clearance

6. An incentive to boost consumption

These are some of the demands put forth to finance ministry NBFC crisis and liquidity crunch has hurt the real estate market and developers with high debt are unable to raise fresh funds. The slowdown in real estate has hurt the industry and we have seen many big names default and more in line.

HERE IS MY CONCERN ………… I FAIL TO UNDERSTAND WHY ARE WE IN SUCH SAD STAGE OF AFFAIRS WHY DID NBFC DEFAULT ??? HAVE YOU EVER WONDERED ??? NBFC helped developers with funds to buy Land Parcels. There was a time when the industry was performing well and investors were able to make big returns. The sales velocity was high and cash rotation was high too.

NBFC Crisis in Real Estate Industry

Developers with CREDIBILITY, who did well during that stage went on to raise VERY LARGE CAPITAL from NBFCs and started buying LARGE LAND PARCELS: 100 Acres, 200 Acres, 300 Acres ….. The NBFCs funded these developers at high rates and developers projecting that they would be able to monetize these land parcels in that stage of the economy would make big profits Nobody had a backup plan on account of SLOWDOWN This whole business model has a lot of flaws. What is the business model ???

Business Model :

1. NBFCs, Private Equity Funds go to HNIs, Banks and other corporates and institutions to raise funds

2. Then the NBFCs lend to developers on high coupon rates

3. Developers start monetizing land by virtue of development projects and revenue is generated through sales at prices which account the interest charged by NBFC All looks good …… HNIs are getting bigger returns than Bank FDs, NBFC is able to make a big arbitrage and the developer is making big money on the debt he raised from NBFC

But did the NBFCs account for :

1. SLOWDOWN because of various reasons like unemployment, lack of demand, etc

2. When lending to the developer did the NBFCs independently do a thorough feasibility study of the project ??? was the infrastructure ready where the developer was buying land ??? was there a demand for housing or commercial ???. If the answer is YES then there should be no crisis

3. When LARGE FUNDING was done when the developer was buying 100, 200, 300 Acres ….. did the NBFCs realize that such large parcels cannot be monetized in 3-4-5 years and the developer will never have the cash flow to manage the debt repayments ???

These are some of the major reasons for default of developer to the NBFC and default of NBFC to the principal from whom the money was raised AND TODAY WE ARE LOOKING AT RESOLUTION. I am sure the govt and the policymakers will show us a path and ease liquidity because this is the need of the hour.

These are some of the major reasons for default of developer to the NBFC and default of NBFC to the principal from whom the money was raised AND TODAY WE ARE LOOKING AT RESOLUTION. I am sure the govt and the policymakers will show us a path and ease liquidity because this is the need of the hour.

MY PRAYER to NBFCs is to audit the process of lending.

Let us not “CREATE CRISIS and then PRAY FOR RELIEF”.