NBFC crisis: Real bad loan tripled in real estate

Non-banking financial companies (NBFCs) are under acute pressure as their real bad loan is higher than reported, especially in real estate. A sharp slowdown in real estate and automobile sectors has raised fears that bad loan of NBFCs will almost double in the financial year 2021, rating agency CRISIL has warned.

The real bad loan-level was almost thrice at 10 per cent on September 30, 2019, upon excluding moratoriums and Lease Rental Discounting (LRD).

CRISIL has estimated that bad loan level will rise to around 10 per cent instead of 3.3 per cent as reported. The bad loan in real estate has increased from 1.8 per cent to 3.3 per cent in six months as on September 30, 2019. But in real terms, this lousy loan level is around 10 per cent.

Of the 40 per cent loan books under moratorium, around half is expected to come out of it by March 2021 which will result in incremental slippages. Refinance for the segment has also slowed down in the current environment, thus aggravating matters further, said Krishnan Sitaraman, senior director, CRISIL Ratings.

In this context, the Rs 25,000 crore support fund for the real estate sector announced by the government could provide a breather for stuck projects, though the timeliness of this remains critical. Given the headwinds being faced by this sector, incremental funding in these segments is expected to come mainly from newer sources such as alternate investment funds, Sitaraman added.

Financial institutions, who themselves are in a major financial crisis, are under acute pressure for their sinking loan money as developers failed to sell their inventory and amid a sharp slowdown in economy.

The loans against property (LAP) segment, which comprise about 9 per cent of the loan portfolio of NBFCs, have also faced bad loan heat. The level of lousy loan in LAP has been doubled in the last 18 months as on September 30, 2019, data shows.

After real estate, the second major loan finance area of NBFCs, i.e. automobile sector, is also facing bad loan pressure. These are mainly in commercial vehicles, cars and utility vehicles portfolios, where there is high co-relation of delinquencies with the economic environment, the CRISIL report explained.

A financial institution reports it as delinquent rate, a measurement of failed loan percentage of the total loan. When banks have reduced their credit to the real estate sector, NBFCs started financing it aggressively. But the real estate market slumped due to overvaluation and structural problem, and NBFCs’ finances were dealt a severe blow.