What is NBFC & How are they different from traditional banks?
NBFC stands for Non-Banking Financial Companies. These are organizations that offer multiple banking services such as loans, currency exchange, retirement planning etc., but do not have a banking license. They are not allowed to take traditional deposits from customers such as deposit funds in a savings account which separates them from traditional banks. Companies that provide mortgage services, money market funds, insurance, private equity funds are a few examples of NBFCs.
How does NBFC impact the Real Estate Industry?
As a customer, when we decide to go ahead and buy an apartment for ourselves and search for apartments in Bangalore or any other city for that matter, we also search for financing options for the same and most customers end up taking a loan to buy their dream home. As a result of the above, the builder does not receive the complete payment, but only a down-payment (a certain percentage of the property value) as the booking amount from the customer – at the time of booking for the bought home, and the rest of it in parts, from the bank the customer has taken loan from – as per construction progress, which leaves them with no choice but to go for debt financing options.
Debt financing (loans) options for real estate developers have always been limited which include:
1. Traditional Banking systems
2. NBFCs and
3. Housing Finance Companies
Traditional Banks have been the primary source of finance for the developers, but the default of the Non-Performing Assets has affected their transactions making developers depend heavily on NBFCs which funded this industry by raising funds from the bank as well as mutual funds. NBFCs heavily contribute to the real estate sector in India by helping in attracting foreign investments, an increase in capital gain and movement of resources which means savings can turn into investments, in turn, getting more investments for the real estate sector. Since the primary role of NBFCs is to lend to infrastructural projects, they largely contribute to the real estate industry. Considering the scenario with traditional banks, the sector has been dependent on NBFCs for infrastructural loans.
With limited funding from traditional banks, which reduced to 2 percent as of March 2018, NBFCs accounted for 61 percent of commercial real estate borrowing in the country justifying the dependency of the sector on NBFCs.
However, even in this scenario, post the default of ILFS, the market suspected a crisis in the NBFC sector as well. As a result, banks started restricting their funds to the NBFC sector which in turn affected the capital flow in the real estate industry. This created a liquidity crunch leading to a halt in construction and delay in delivery of the projects. The scenario majorly affected the small players compared to the bigger ones.