Why the NBFC squeeze matters to real estate developers

When the NBFCs started feeling the squeeze, the first sector to take a hit was the realty sector. Most realty stocks have seen violent correction. What is this correlation all about?

Why realty got hit?

If you look at the chart above, one thing clearly emerges that NBFCs have now become the preferred source of funding for realty companies. Out of the total lending portfolio of Rs.400,000 crore to developers, the NBFCs accounted for 55% while the banks accounted for just 45%. In 2009, the banks had a 75% market share while the NFBCs just had a 25% market share. Since then,  this share of banks has been consistently dipping and 2017 was the first year when the NFBC market share actually exceeded that of banks. With banks tightening lending to realty projects and the pressures of RERA, NBFCs have been the natural choice for most realty companies in India.

Is it all about subvention?

Let us start off with a bit of a back-ground on subvention. A scheme that offers a property at 10:70:20 is a subvention scheme where you book a house with just 10% payment and then bank funds the balance. When this scheme had come to light, RBI had barred banks from lending under the subvention scheme. That is when the subvention schemes were renamed as Zero EMI till Delivery schemes and were funded by NBFCs. The spurt in NBFC lending to realty in the last few years has been largely driven by such quasi subvention schemes. Now with NFBCs finding it hard to raise funds in the market and roll over their CPs, there is a worry that these subvention schemes may come under stress. It is this worry that is pulling most of the realty stocks down. This is more acute for level-2 realty companies that do not have access to bank credit. It could be interesting times ahead!