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Real estate developers may face liquidity crunch on NBFC woes: Fitch
Aug-19-2019

Global rating agency Fitch Ratings in its latest report has said that Indian-based real-estate developers may face liquidity crunch as non-bank financial companies (NBFCs) and housing finance companies (HFCs) becoming risk -averse towards lending to real-estate sector. It pointed out that majority of the developers with weak balance sheet rely on the parallel banking sector for funds and these players are likely to be affected the most if situation continues.

According to the report, NBFCs have excessively increased their share of real-estate sector credit in the past few years, due to heightened risk aversion by banks. It also said banks' low appetite for lending to real-estate developers is due to the usually high risk weights attached to such loans. It noted that NBFCs are also shying away from refinancing 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.  It pointed out that 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 added that it would also come at a higher cost.

Rating agency further said 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. It stated 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 also said that the government has announced several measures to enhance liquidity access for NBFC sector, but their efficacy remains to be seen. It believed that the government's recent Budget 2019-20 proposal to provide a first-loss guarantee of 10 percent on securitised assets issued by NBFCs to banking entities could ease funding pressure for NBFCs in the short term.

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