Asset quality issues to hit NBFCs with sizeable real estate exposure: ICRA
Premium- The ratings agency said that the situation is expected to stabilise in FY2023 (0-5% degrowth).
The real estate assets under management (AUM) of non-banks (non-banking financial companies and housing finance companies) contracted by 17.64% to Rs. 2.8 trillion as of March 2021 from Rs. 3.4 trillion as of March 2019. It is expected to contract further by 5-10% in the current fiscal, ratings agency ICRA said on Monday.
The ratings agency said that the situation is expected to stabilise in FY2023 (0-5% degrowth).
The performance of non-banks in recent years has been marred by several concerns as entities have grappled with fund-raising challenges and asset quality issues. Non-banks, however, had witnessed a growth phase in the real estate segment till H1 FY2019 (September 2018) which was characterised by easy access to capital and ample investor interest coupled with a steady demand outlook.
“Non-banks witnessed a significant slowdown in growth since H2 FY2019, following the liquidity crisis, and consequently moderated their disbursements. The impact was more pronounced on wholesale financiers with sizeable real estate exposures compared to their retail counterparts owing to a prolonged period of risk aversion by investors and other stakeholders. Given the fund-raising challenges, real estate oriented non-banks not only limited incremental disbursements to this sector but also attempted to scale down their portfolios through asset sell-down to shore up liquidity," said Samriddhi Chowdhary, vice president & sector head – financial sector ratings, ICRA.
ICRA said that non-banks have also witnessed stress build-up in the real estate portfolio since FY2019, given the slowdown in the underlying segment. The domestic real estate sector had been facing a prolonged slowdown, with subdued sales and consequent inventory overhang, resulting in debt build-up. The business disruptions on account of the Covid-19 pandemic further exacerbated the issues. While the real estate industry has witnessed some green shoots in recent quarters, particularly larger developers, a sustained pickup in sales across geographies/segments would remain critical for a meaningful recovery in the sector, ICRA said.
Real estate gross non-performing assets (GNPAs) for non-banks increased to 5.1% as of March 2020 from 2.1% as of March 2019 and have remained on an uptick since then. They 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, GNPAs are expected to exceed 9%.
“ICRA expects an increase of 180-250 basis points (bps) in GNPAs in the real estate segment in FY2022. However, players with a diversified credit book across asset classes are likely to witness a relatively lower increase in NPAs. The asset quality would, however, remain dependent on the performance of the restructured book as well as any further disruptions caused by a surge in Covid-19 infections," Chowdhary added.
At the industry level, a large share of the non-bank real estate book has been restructured and/or provided relief through the revision of date of commencement of commercial operations. The performance of the restructured book is a monitorable in the near term, as the scheduled principal amortisation for this book is expected to commence from Q1/Q2 FY2023. This, coupled with the impact of the revision in the income recognition and asset classification guidelines, would have a bearing on the segment’s asset quality going forward.
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However, the ratings agency said that it is to be noted that at the aggregate level, real estate accounts for less than 20% of total book of real estate oriented non-banks, and thus the impact on the reported asset quality (as a percentage of AUM) would be lower.
Real estate financiers have witnessed an increase in the cost of funds as well as reduced participation of mutual funds in incremental borrowing programmes since H1 FY2019. Entities backed by ‘AAA’ rated corporate or banking houses were, however, able to withstand these pressures better compared to peers, which can be evidenced through their ability to consistently raise funding from capital markets, albeit a lower quantity. In contrast, other non-banks have exhibited greater reliance on bank funding as well as other channels (including securitisation of retail assets) and are also attempting to diversify their resource and investor profiles through the addition of products like market linked debentures and retail bond issuances.
This notwithstanding, non-‘AAA’ corporate/bank-backed non-banks continue to carry an elevated risk premium despite the moderation in rates. The spread between the average cost of funding for corporate/bank-backed entities and other real estate oriented non-banks increased by nearly 100 bps over FY2019-2020 and widened further in FY2021, thus pointing towards a continued high perceived risk profile.
Real estate oriented non-banks have witnessed an improvement in their capitalisation profiles since March 2018 driven by the moderation in the AUM growth coupled with sizeable capital raise in a bid to strengthen their balance sheets. The capital cushion for real estate oriented non-banks is estimated to have increased by 4% over March 2019 to March 2021. The current capitalisation level also provides the ability to absorb losses. The agency said that the earnings profile is expected to contract marginally in the current fiscal and stabilise in FY2023 unless there are further pandemic-induced business restrictions. The ability of non-banks to keep the credit costs under control would remain critical.
Given the asset quality pressures over the near to medium term and the muted growth expectation, the outlook for real estate oriented non-banks remains negative, ICRA said.
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