THE real estate and infrastructure sectors in India face major funding challenges over the coming months, with the country’s ‘shadow banking’ segment itself facing a huge crisis.

The latest incident coincides with the tenth anniversary of the collapse of Lehman Brothers in the US — which triggered the global financial crisis in 2008 — and is a warning to the massive exposure of the infrastructure and real estate sectors to shadow banking in India.

The crisis in the shadow banking sector was triggered by Infrastructure Leasing and Finance Services (IL&FS), part of the IL&FS group, defaulting on repayment of loans to lenders thereby triggering panic in the markets and in the infrastructure sector in the country.

Not surprisingly, after the unravelling of the IL&FS crisis, the real estate stock index has plunged by more than 25 per cent.

Shobhit Agarwal, managing director and CEO, Anarock Capital, a leading real estate advisory consultancy, says that what began as a singular event with one of the heavyweights — IL&FS — failing to repay its commercial dues, has blown up into a liquidity crisis for the entire non-banking financial company (NBFC) spectrum.

What began as a singular event with Infrastructure Leasing and Finance Services failing to repay its commercial dues has blown up into a liquidity crisis for the entire NBFC spectrum

“As an immediate aftermath, NBFCs’ stocks went into free fall,” he notes. “The top 15 NBFC companies cumulatively lost over Rs750 billion in just two initial trading sessions.”

NBFCs and housing finance companies (HFCs) emerged as the sole source of funds for cash-strapped developers in India after the freeze on real estate funding by banks due to their rising non-performing assets, he points out.

“The current NBFC crisis can have a cascading effect on the real estate sector’s growth forecasts, which were already nebulous on the back of the liquidity crisis created by rising defaults and non-performing assets in banks,” warns Agarwal.

According to Anarock data, more than 575,000 residential units are running behind schedule across the top seven Indian cities since their launch in 2013 or before. “The major factor contributing to this delay is the liquidity crunch developers are experiencing to the backdrop of tepid sales,” he says.

According to a report by Credit Suisse released this month, NBFCs, which dominate shadow banking, will experience a severe cash crunch because of the near-term maturity of commercial papers.

“For NBFCs, large upcoming maturities in the next two months is a challenge, given they have mutual funds constituting 25pc-40pc of their borrowings,” says the report.

The Credit Suisse report points out that the exposure of NBFCs to the real estate segment could be as high as Rs2 trillion. With most banks refusing to lend to the real estate sector, NBFCs have had to step in and extend loans.

NBFCs and HFCs account for about a third of the incremental overall credit. A Reserve Bank of India (RBI) report notes that the share of NBFCs in total credit shot up from less than 10pc in March 2009 to more than 17pc in March 2018.

Interestingly, while bank credit growth in India over the last two years averaged at around seven per cent, the Credit Suisse report points out that NBFC credit ballooned by more than 20pc in the same period. The report also refers to the fact that developer loans make up 21pc of NBFC’s loan books, as compared to just seven per cent for private banks and a mere three per cent for public sector banks.

THE shadow banking sector in India has seen phenomenal growth over the past few years as lenders have aggressively been extending loans. But today, the sector is itself saddled with a large portfolio of stressed assets.

Loans by NBFCs shot up by 21.2pc in fiscal 2017-18, more than double the rate at which bank loans grew. Worse, according to Credit Suisse, more than 40pc of borrowings of NBFCs will be maturing over the next six months and any liquidity pressures will only add to the refinancing risk of these instruments.

UBS Securities notes that NBFCs have seen a much higher per cent of system credit growth in the last few years, so a slowdown would hurt macro growth and consumption.

A recent report by the RBI had warned that a majority of shadow banking in India involved making long-term loans against short-term funding.

The International Monetary Fund (IMF), in its recently released Global Financial Stability Report, had also warned of systemic risks associated with shadow banking practices, which could spill over to the regular banking sector.

The crisis that has rocked the sector has seen a sharp fall in the price of scrips of real estate companies, NBFCs and HFCs.

Many of these companies — including CanFin Homes and PNB Housing — are owned or controlled by public sector banks including Canara Bank and Punjab National Bank, and have 15pc to 30pc of their liabilities through short-term borrowing instruments including commercial papers, which usually have maturity periods of between seven days and a year.

Many of the NBFCs take short-term loans to fund long-term projects (including housing loans), creating asset liability mismatches and impacting their performance.

With the crisis triggered by IL&FS posing a serious threat to the Indian economy, senior government officials were in talks with top officials of the RBI in Mumbai last week.

The central bank has already eased lending norms relating to NBFCs, allowing banks to allocate up to 15pc of their lending to those not involved with infrastructure funding (as against 10pc earlier).

The government has also raised the refinance limit to the National Housing Bank, which funds HFCs, to Rs300bn from Rs240bn.

Published in Dawn, The Business and Finance Weekly, October 29th, 2018