Tight Liquidity Brings Stress to the Fore for Real Estate Lenders

The current liquidity crisis has brought to the fore the importance of prudent funding structure and conservative liquidity policy for leveraged entities. The non banks (non-bank finance companies (NBFCS) and housing finance companies (HFCs)) have been disproportionately impacted by the ongoing liquidity tightness. The impact has been particularly hard on wholesale NBFCs especially non-banks operating in real estate lending space. Amid asset-side concerns in real estate lending, the lenders to NBFCs have tightened internal norms of exposure, resulting in tighter liquidity for the NBFCs. As the easy liquidity has dried up, NBFCs in turn slowed down both fresh funding and refinancing to developers.

This report highlights the risks emerging from the slowdown in funding by HFCs and real estate non-bank finance companies to developers, thereby leading to slowdown in construction. Also, continuing pressure on real estate sales could accentuate servicing challenges, largely by developers (excluding the top 15), leading to forced asset sales and joint development agreements with haircuts and even losses on exposure. This brings back the focus on real estate lenders to have control on single-party and group exposures by increasing granularity of the loan book and moderating leverage.

Ind-Ra expects significant equity and liquidity buffers to be maintained on ongoing basis for its rated issuers. The agency conducts stress tests on its issuers to understand the strength of equity and liquidity buffers under extreme stress scenarios. The agency would continue to assess the strength of buffers and take appropriate rating actions as warranted.