Default by real-estate focussed NBFC credit negative for banks, says Moody’s

The recent default by a real estate focussed non-banking finance company (NBFC), which signals increasingly tight liquidity among property developers, is credit negative for Indian banks given their significant exposure to the real estate sector, said Moody’s Investors Service.

Among the banks that Moody’s rates, Yes Bank and IndusInd Bank have the largest direct exposure to the commercial real estate (CRE) sector and would be susceptible to asset quality difficulties if the real estate sector continues to slow, the global credit rating agency said in a report.

Other rated private-sector banks, such as ICICI Bank and Axis Bank are also significantly exposed to the sector, with commercial real estate loans making up more than 5 per cent of their overall loans. On September 12, real-estate-focussed Altico Capital India Ltd defaulted on a scheduled interest payment on a loan because of insufficient liquidity.

“Although Indian banks’ exposure to Altico Capital is fairly modest and accounts for less than 0.1 per cent of total banking system loans, the default signals increasingly tight liquidity among property developers, a credit negative for Indian banks given their significant exposure to the real estate sector.

“We believe Altico Capital is facing liquidity constraints because of a deterioration in the credit quality of its loans to real estate developers, which are facing difficulty in repaying and refinancing their maturing obligations as a result of slowing property sales,” said Alka Anbarasu, VP-Sr Credit Officer, Graeme Knowd, MD-Banking, and Randall Ho, Associate Analyst, Moody’s Investors Service, in the report.

Altico Capital’s default comes after Dewan Housing Finance Ltd, with significant exposure to the developers, defaulted on its loan obligations in July because of insufficient liquidity, raising questions about its solvency, Moody’s said. Indian banks also have indirect exposure through their lending to NBFCs and HFCs (housing finance companies), which also lend to real estate developers.

Based on data from the Reserve Bank of India, the overall exposure of NBFCs and HFCs to the real estate sector was only about 6 per cent of their total assets as of 31 March 2019. However, some NBFCs and HFCs are more exposed than others, making them vulnerable to a slowdown in the sector.

Referring to the announcement made by the Government on September 13 that it would create an investment fund to provide soft loans to residential developers unable to access new funding to complete partially constructed affordable housing projects aimed at low-middle income earners, Moody’s said the creation of this fund is credit positive for the sector.

“But its timeline and modalities are not yet known and it is unclear if it will help address the sector’s immediate liquidity constraints. In addition, it will not address the broader solvency constraints of real estate developers given its narrow remit of targeting only certain residential projects,” the report said.

The government will contribute Rs 10,000 crore to the fund and expects a similar-size contribution from entities including the Life Insurance Corporation of India, Indian banks and development institutions.