- Quite a lot of what looks like lending to NBFCs on the books of banks is actually indirect lending to the real estate sector
- RBI’s latest move allows real estate builders another year to meet their loan obligations
The Reserve Bank of India (RBI) has let non-banking financial companies (NBFCs) extend by a year the date for starting operations for loans to real estate projects delayed for reasons beyond the control of promoters. This won’t be treated as restructuring. Mint takes a look.Where did NBFCs get the money to lend?
In October 2016, total bank deposits stood at ₹99.3 trillion. On 8 November, the government demonetized ₹500 and ₹1,000 notes and these had to be deposited into banks. By December that year, the total deposits of banks were at ₹105.7 trillion, a jump of 6.5% in a span of two months. Banks couldn’t lend this money out in a hurry. Gradually, they ended up lending a lot of this money to NBFCs. The total bank lending to NBFCs as of December 2016 was ₹3.2 trillion. As of December 2019, it stood at ₹7.3 trillion, a jump of 128% in a period of just three years (see chart).
Haven’t banks always lent money to NBFCs?
Yes, but not at this pace. As of December 2013, total bank lending to NBFCs was ₹2.9 trillion. Three years later, in December 2016, it inched up to ₹3.2 trillion. But another three years later, in December 2019, it had surged to ₹7.3 trillion. So, following demonetization, banks ended up lending a lot of this money to NBFCs, which lent a good part of this money to real estate builders. Before NBFCs became aggressive lenders to the real estate sector, it was funded primarily by banks and people looking to buy under-construction properties, who ended up having to pay upfront for their purchase.
How much did NBFCs end up lending to real estate?
As Arvind Subramanian and Josh Felman write in a working paper, India’s Great Slowdown, published in December 2019: “In recent years most of the incremental lending has come from NBFCs, so much so that by 2018-19, NBFCs accounted for about half of the ₹5 lakh crore (trillion) in real estate loans outstanding." Bank loans to realty have barely moved up in that time.
What’s the problem with this lending?
As Subramanian and Felman write: “This funding was provided on the assumption that developers would be able to complete their projects, sell off their inventories, and then repay." The inventory of unsold homes of builders continues to run into hundreds of thousands. People are not willing to buy these homes at prices set by the builders. RBI’s latest move allows real estate builders another year to meet their loan obligations. This helps NBFCs, as the chances of builders defaulting on loans were high given the lack of new home sales.
What’s the central bank trying to do?
Quite a lot of what looks like lending to NBFCs on the books of banks is actually indirect lending to the real estate sector. In this scenario, if real estate companies don’t pay up NBFCs, the latter won’t be able to repay banks. Hence, an NBFC crisis might turn into a banking crisis, something RBI would like to avoid. On the other hand, the chances of real estate prices crashing just went down a tad. In economics, there is never a free lunch.
Vivek Kaul is a Mumbai-based economist.