As per the recently published RBI Data, loan growth in India has averaged at around 11% from 2012 to 2018 with a steady shift of share from traditional banking channels towards non-banking financial companies (NBFCs). As on March 2018, while the total outstanding of bank loans to corporate grew by 6% year-on-year, the NBFCs witnessed an on-year growth of a steep 27%.
Notwithstanding the current market situation which is more an aberration due to confidence related issues in the financial sector, NBFCs have been able to achieve high growth figures by leveraging on the challenges faced by borrowers in raising credit from traditional banking sources. While growth rates for NBFCs may taper down due to the current market situation, most of them have been able to create a niche for themselves by creating unique in-house credit appraisal models to identify the right clientele that have been traditionally overlooked by banking channels.
This has contributed immensely to the government’s initiative of overall financial inclusion by extending credit facilities to newer sectors and categories of borrowers. However, corporate delinquencies are on the rise, and as a result, most financial institutions are looking to diversify their exposure into retail and SMEs (small and medium enterprises). Similarly, in real estate, banks have reduced their exposures to wholesale lending substantially and shifted the focus to retail loans as a precautionary measure against rising bad loans and default.
The shift is clearly towards stable funding to create books that are sustainable in the long term. Diversification coupled with a thorough governance mechanism shall help in building trust which is the foundation of any business in the financial sector. The current phase of correction has affected most of the NBFCs in the listed space and has also raised questions on asset liability mismatches. But with the Government stepping in and RBI taking necessary steps to revise the borrowing-lending norms, normalcy is set to prevail soon in the business.
In the real estate space, over 50% of the total debt portfolio, estimated to be around Rs 4 lakh crores, is contributed by the non-banking sector which makes the market’s dependency on them very crucial. While banks have a slow reducing loan book in real estate, fresh loan disbursal towards the real estate have dropped drastically over a period of 2-3 years. This has worked in favour of non-banking institutions that have come to the rescue of the sector reeling under pressure to raise more funds with the exposure to increased costs in the RERA and GST regime.
The real estate sales cycle has undergone a complete shift post the introduction of GST. Consequently, most of the buyers delay their purchase decision until a project receives OC (Occupancy Certificate) to avoid an incremental cost of around 12% towards GST on under construction properties. RERA, on the other hand, has abolished the concept of pre-sales which used to be a major fund-raising mechanism for developers. All these have left developers, even those with prime projects, with a funding gap till the project receives an OC.
Most of these projects have sufficient room for lenders to take a security cover against sold and unsold receivables. Along with the right product configuration and price, these projects present a huge opportunity for Non-Banking Companies, if one can make the right selection of a developer and the security package. The industry needs to complete the property cycle; with flexibilities in providing payment moratoriums and structured products, non-banking institutions will play a pivotal role in getting the real estate industry back on its feet.
Exposures to relatively weak markets and Tier II locations have also led to stress in wholesale lending for a few lenders. The market consolidation and RERA & GST has led to strong balance sheets for few developers with their capability to raise capital. Most of such developers also have marquee assets against which Flexi LRD (Lease Rental Discounting) allows NBFCs offer funding solutions.
On the other hand, Retail Housing Finance has been growing at a rate upwards of 30% for most of the financiers, owing to demand from mid-income and affordable category. With multiple incentives from the government on promoting sales to first-time buyers and the increasing number of launches in the affordable category, the mortgage penetration as a percentage of GDP also witnessed an increase of around 50 bps in FY2018, which is an indication towards a maturing market.
This also indicates the immense opportunity that lies ahead for the housing finance business. Here again, the share of non-banking companies has been growing steadily with almost 40% of the total loan book now residing with non-banking institutions.