We expect stranded inventory worth Rs2.8 tn [2.8 Lakh Crore] to put debt worth Rs1.2 tn (28% of total real estate loans in India) at risk. Adverse market dynamics and regulatory factors have strained the real estate sector over the past five years, leading to increased capital requirements and diluting return profiles, and in turn plunging ratings of around one-third developers to below investment grade. Covid-19 induced disruptions have dealt another crushing blow.
Real Estate Developer loans nearly doubled to Rs4.2 tn over the past five years. Buoyed by easy access to funding, NBFCs/HFCs aggressively captured this financing demand. Despite severe headwinds for the real estate sector putting about 28% of the loan book at risk, most wholesale NBFCs/HFCs have not reported any significant NPLs as a large proportion (40%) of the real estate book is under moratorium. However, rating-wise breakup of loans sanctioned exposes the poor underlying asset quality.
We estimate the real estate sector would need immediate capital infusion of Rs390-650 bn. While the recent (August 6)window provided by RBI for restructuring will augur well, long-pending NPL recognition of unviable stressed projects is crucial. Recognition of inter-creditor agreement under IBC to provide flexibility in structuring last mile funding.
We can’t quantify the impact on the real estate sector and its lenders, however a wave of consolidation in the sector is imminent. Asset quality challenges for new real estate lending players, now accentuated by higher NPL recognition, coupled with debt market consolidation will lead to the real estate lending business being consolidated with banks and select NBFCs.
