Banks may bear the brunt as real estate sector's troubles continue

One after another, real estate firms are going bankrupt. News of how the sector is struggling to raise funds is on the rise. More importantly, barring commercial real estate in the office space, the rest of the sector – housing and other commercial projects such as malls and hotels, are far from seeing demand revival, with inventories piling up by the day. What this means for banks is that a potential asset quality trouble from this sector is in the making. These loans until now have been among the best performing assets for banks given their ability to generate higher yields. 

 

A report by Jefferies states that the exposure of private banks to real estate sector based on FY19 numbers is about 6.7 per cent, while the public sector banks have 2.4 per cent exposure of their total loan book to the industry. Clearly, should the trouble burst, the private banks may be more vulnerable. Jefferies, though, believes that the first order impact from developer defaults may not be material. However, the reality could be slightly different. 

Banking experts nail the probable cause of pain to non-banking finance companies (NBFCs) not funding real estate loans in the past 6–9 months. “Until now, real estate loans haven’t caused trouble for banks since they were accessing funds from NBFCs. With that window shut for more than six months, we need to closely monitor this space,” ­­­said a top executive for a mid-sized bank. Yet, banks say they are in no hurry to fill the void created by NBFCs. “We haven’t increased our exposure to real estate sector since December last year and even loans are being rolled over very selectively,” said another banker heading a private bank. 

 

However, real estate assets turning bad could have a twin impact on banks; their NBFC exposure too could be put to risk. With the Reserve Bank of India being very watchful over banks’ exposure to the real estate sector, banks  were comfortable lending to NBFCs who in turn were funding real estate projects. The ongoing fund crunch has already elevated delinquencies in the developer loans segment for NBFCs. Experts say it is about time that a similar trend shows up for banks as well. “Direct risk may not be significant given that banks don’t have a sizeable exposure to mid-sized and small real estate projects. These are the ones going belly up now. But, this has increased the indirect risk of NBFC loans turning bad for banks, which is a bigger concern,” said an analyst from a foreign brokerage. The September quarter commentary from banks in this regard will be critical for the Street to estimate the potential pain from loans given to the real estate sector.