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Housing Finance Companies (HFCs), a major source of funds for real estate developers, are becoming more cautious about lending for new construction projects. This shift comes after a period of high defaults and delays in past projects, leading to a build-up of stressed assets.
HFCs are concerned about a significant rise in stressed assets. These are loans where borrowers are struggling to repay or haven't made payments for a while. A recent report by CareEdge Ratings estimates that the builder loan mix of HFCs has shrunk considerably, falling from nearly 14% five years ago to just 6.7% as of March 31, 2023. This cautious approach stems from past experiences. Tribhuwan Adhikari, MD and CEO of LIC Housing Finance, highlighted in a recent media discussion that their non-performing assets (NPA) in projects are still high, at 34%. Housing finance companies (HFCs) are employing different strategies, such as negotiating with borrowers and legal actions, to recover these bad loans.
While HFCs are being cautious, it doesn't necessarily mean fewer homes will be built. Experts believe this shift could benefit homebuyers in the long run. With stricter lending practices, developers will likely focus on completing existing projects on time and may be less likely to over-leverage themselves financially (a contributing factor to past delays). This could lead to fewer delays and a more reliable home-buying experience.
The good news is that the situation is improving. The wholesale gross non-performing asset (GNPA) ratio of HFCs, which had been in double digits for the past three years (rising sharply from 3.85% in March 2019), has shown signs of recovery. As of September 2023, the GNPA ratio has improved to 10.3%, down from 15.6% in March 2022. This improvement can be attributed to factors like a better macroeconomic environment post-pandemic and the introduction of government regulations like RERA (Real Estate Regulation and Development Act).
As the stressed asset situation improves, HFCs might gradually return to disbursing loans for new real estate projects. However, they are likely to be more selective and focus on developers with a strong track record and financially viable projects. This could mean a more stable and balanced real estate market in the long run.
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