MUMBAI: Housing Finance companies (HFCs) are reducing their exposure to the high-yielding builder loans due to the build-up of stressed assets in the segment. A recent report from CareEdge ratings estimates that the builder loan mix of housing finance companies fell to 6.7% as on March 31 from nearly 14% in five years ago.
“…as far as project loans are concerned, yes, we are cautious going by our bad experience in the past. My non-performing assets in the project side still stand at 34%, which is way too high,” Tribhuwan Adhikari, Managing Director and Chief Executive Officer, LIC Housing Finance said in a recent media round table. LIC Housing Finance is using various methods to recover bad loans including negotiating with borrowers, and deploying legal recourse.
The wholesale gross non-performing asset(GNPA) ratio of housing finance companies has been in double digits in the last three years, rising sharply from 3.85% in March 2019.
The high stressed assets in the segment can be attributed to overleveraging by real estate developers, some of whom used cash flows from under construction projects to start new projects. Many of these developers had a high proportion of early stage funding which was subject to regulatory and legal risks like necessary approvals not coming on time, say experts.
On the other hand, many housing finance companies funded big-ticket size township-led projects with a delivery period of five to seven years.
“…the challenge was quite significant because a lot of funding happened pre-COVID, where the sales momentum was quite slow. In that sense, the developer was largely facing cash flow challenges during that period,” Jinay Gala, Director- FI Ratings, India Ratings and Research said.
He added that since pre-COVID demand was weak, a lot of projects were also at risk of not being completed on time. Typically, there are multiple factors that impact a project’s viability like high cost debt or low promoter equity.
In recent years, housing finance companies have adopted a wide range of measures to resolve stressed assets in the segment. These companies have been helped by an improvement in the macroeconomic environment post COVID-19 as well as structural factors such as the introduction of Real Estate (Regulation and Development) Act (RERA).
Specifically, experts contend that RERA has helped retain cash flows within the project which is supportive for timely completion.
“HFCs have resorted to various strategies such as facilitating partnerships with other developers for faster completion of projects through Joint Development Agreements, revenue sharing mechanisms, and bringing in co-investors such as AIFs for additional funding,” Subha Sri Narayanan, Director, CRISIL Ratings said, adding that for instance, the government’s Special Window for Affordable and Mid-Income Housing(SWAMIH) Investment Fund has funded many stuck projects. Further, many housing finance companies have also sold down assets to asset reconstruction companies in a bid to resolve stressed assets.
As a result of these measures, the wholesale GNPA ratio of housing finance companies has improved to 10.3% as on September 2023 from 15.6% in March 2022. In such a scenario, many housing finance companies are entertaining the thought of resuming corporate loan disbursals.
In a recent interview, PNB Housing Finance MD and CEO Girish Kousgi told FE that the company may resume corporate lending this year for the sole purpose of fuelling growth in the retail segment.
Developer finance is specifically lucrative for HFCs because the margins can be up to 300 basis points (bps) higher than home loans and loan against property. Nevertheless, experts contend that NBFCs are currently better placed to manage asset quality stress as the cash flow of developers has witnessed an improvement post Covid, which has led to completion of a few projects. Further, lenders are also fine-tuning their underwriting processes and strengthening their monitoring mechanisms.
“Earlier, the ticket size for a single developer used to go above Rs 200 crore. Now, these have fallen to Rs 50-100 crore. Lenders are not only focusing on a few large names but are diversifying across developers,” Gala said.
Going ahead, HFCs are expected to grow their builder finance portfolios as the recovery and resolution of stressed assets improve. CareEdge expects the share of builder loan mix to rise to 10-12% in the medium term as financiers focus on “cautious” growth.
Source: The Financial Express
