Liquidity stress in realty a credit negative for banks, says Moody’s

‘Altico’s default signals cash crunch among developers’

Credit rating agency Moody’s has said that the increasing liquidity stress among real estate developers would indirectly hit Indian banks and is thus credit negative for the domestic lenders.

“On September 12, real estate-focussed non-banking financial company (NBFC) Altico Capital India Ltd., defaulted on a scheduled interest payment on a loan because of insufficient liquidity. Although Indian banks’ exposure to Altico Capital is fairly modest and accounts for less than 0.1% of total banking system loans, the default signals increasingly tight liquidity among property developers, a credit negative for Indian banks, given their significant exposure to the real estate sector,” Moody’s said.

“We believe Altico Capital is facing liquidity constraints because of a deterioration in the credit quality of its loans to real estate developers, which are facing difficulty in repaying and refinancing their maturing obligations as a result of slowing property sales,” it said.

Moody’s said Altico Capital’s default came after Dewan Housing Finance Ltd. defaulted on its loan obligations in July because of insufficient liquidity, raising questions about its solvency.

“Among the banks we rate, Yes Bank, IndusInd Bank have the largest direct exposure to the commercial real estate (CRE) sector, and would be susceptible to asset quality difficulties if the real estate sector continues to slow,” it said.

Other rated private sector banks such as ICICI Bank and Axis Bank are also significantly exposed to the sector, it said.

Indirect exposure

Indian banks also have indirect exposure to the real estate sector through their lending to NBFCs and HFCs, which also lend to real estate developers. Based on data from the Reserve Bank of India, the overall exposure of NBFCs and HFCs to the real estate sector was only about 6.0% of their total assets as of March 31, 2019.

However, some NBFCs and HFCs are more exposed than others, making them vulnerable to a slowdown in the sector.

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