Real Estate: Asset Quality Issues Will Affect Performance of Real Estate-Focused Non-Banks Through FY2023: Study

Non-bank real estate assets under management (AUM), which recorded a 10% decline in 2021, are expected to contract further by 5-10% in 2022 and stabilize next year, according to a report.

The performance of non-banks (non-bank financial companies and housing finance companies) over the past few years has been marred by several challenges, with entities struggling with fundraising issues and asset quality issues, national ratings agency Icra Ratings said in a report on Monday.

The outlook for property-focused non-banks remains negative due to near- to medium-term asset quality pressures and subdued growth expectations, the agency said.

Non-bank real estate AUM contracted by 17.64% to Rs 2.8 lakh crore in March 2021 from Rs 3.4 lakh crore in March 2019.

“Icra expects the situation to contract further by 5-10% in the current fiscal year. It should stabilize in fiscal 2023 (0-5% decline),” said the agency.

Its Vice President and Sector Head (Financial Sector Ratings) Samriddhi Chowdhary said non-banks have seen a significant slowdown in growth since the second half of fiscal 2019, following the liquidity crunch, and consequently moderated their disbursements.

The impact was more pronounced on wholesale financials with large real estate exposures compared to their retail counterparts due to a prolonged period of risk aversion by investors and other stakeholders, a- she declared.

“Given challenges in fundraising, non-banks focused on real estate not only limited additional disbursements to this sector, but also attempted to reduce their portfolios by selling assets to bolster liquidity,” he said. said Chowdhary.

The agency said non-banks have also witnessed an accumulation of stress in the real estate portfolio since fiscal 2019, given the slowdown in the underlying segment.

Gross non-performing real estate assets (GNPA) for non-banks increased from 2.1% to 5.1% in March 2020 in March 2019 and have remained on the rise since then.

They increased further to reach 6.2% in March 2021 and 6.8% in September 2021.

The rating agency expects a 180 to 250 basis point (bps) increase in ARPGs in the real estate segment in fiscal 2022, Chowdhary said.

However, players with a diversified credit portfolio across all asset classes should see a relatively smaller increase in NPAs, she said.

The agency said real estate-focused non-banks have seen an improvement in their capitalization profiles since March 2018, driven by moderating growth in assets under management coupled with a sizeable capital raise aimed at strengthen their balance sheets.

The capital buffer for non-real estate banks is estimated to have increased by 4% between March 2019 and March 2021.

The current level of capitalization also provides the capacity to absorb losses.

The agency expects the earnings profile to contract slightly in the current fiscal year and stabilize in fiscal 2023, unless there are new trade restrictions induced by the pandemic. The ability of non-banks to control credit costs would remain critical, he said.

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