Mumbai: Indian-based real-estate developers face increased liquidity risk as nonbanking financial institutions hold back on lending to the sector, Fitch Ratings said.

Builders that rely on refinancing from NBFIs with weak financial profiles will be the most affected if these conditions continue, Fitch said.

“The availability of unencumbered assets among large developers may be of limited use as NBFIs are looking to shed their already-high exposure to the sector, especially to large borrowers,” the ratings company said.

NBFIs had increased their lending to the real-estate sector disproportionately over the previous few years as risk-averse banks stayed away, cutting down on advances due to their own funding challenges. Domestic bank exposure fell to 2.3% of loans in the financial year ended March 2019 from 2.8% in FY16.

“NBFIs are now also shying away from refinancing maturing debt of even large, proven developers to limit concentration of risk to the sector,” Fitch said. “This is pushing developers towards alternative funding channels, such as private equity.”

Developers of high-end projects may also face greater risk because sales of these properties have slowed over the past two years.

The government has announced measures to improve NBFI-sector liquidity. The provision of a first-loss guarantee of 10% on securitised assets issued by NBFIs to banks could ease funding pressure for NBFIs in the short term.

“Most of the actions by the authorities to alleviate the liquidity squeeze will benefit the largest and least risky NBFIs and is unlikely to address the pressure on the more property-focused players,” the ratings company said.

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Defaults by Infrastructure Leasing & Financial Services Ltd. in September 2018 and by Dewan Housing Finance Corporation Ltd. in June 2019 have contributed to the sector-wide liquidity squeeze as investors have become more risk-averse.





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