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NBFCS and Real Estate. Pros and cons of NBFC investment in real estate sector and its future outlook

Mani Dahiya Mani Dahiya | Fintech Compliance Professional | Updated

Conventionally, India has always had a bank conquered the financial sector. Nonetheless, since the time Non-Banking Financial Companies (NBFC) has come into the picture, they have been providing finance primarily to the unorganized markets. NBFC have been successful in providing infrastructure finance. When we talk about providing medium-term capital, they enjoy more of flexibility than the banks, which gives them an edge over the banks.

 

NBFCs as substitutes to banks have gained a lot of popularity among the builders. They have an extravagant quality of making quicker decisions, take greater risks and modify their services and charges in more accordance with the needs of the clients. Other recompense takes in higher product lines, lower cost, broader and effective reach, vigorous risk management abilities to verify and control dire debts and proper understanding of their client segments. The real estate sector and the construction industry are identified by their exclusive financing set-up. Funds are given by every potential source, state governments, banks, NBFC, housing finance companies, microfinance industries, private capital or by individuals.  However, financing is inadequate due to the increasing composite requirements of the sector.The latest regulatory changes by the apex banking institution of India, the Reserve Bank of India has allowed NBFC to admittance foreign capital via peripheral commercial borrowing and channels it to infrastructure projects.

 

Pros of NBFC over the commercial banks

The Real estate sector has been in the interest NBFC in the past few years. Real estate developers have become more tending towards them as compared to commercial banks and other financing options. This is due to assured advantages presented by them like quick loan sanctions, the easier loan application process, and no minimum deposit, unlike commercial banks. Also, the recent government’s proposal to increase the affordable housing segment has obtained steam, especially in semi-urban and rural areas. This has led to a growing demand for easy housing finance. Plus the infrastructure status and the incentives given to affordable housing have encouraged builders and investors to include in this sector.

However, the Indian banking sector has been vigilant towards investing in the real estate sector due to increasing bad loans. These factors have altogether provided a mature opportunity to NBFCs in providing economical funds in the low-risk section and expect high returns in accordance to its demand. Private Equity funds and commercial banks have been continuing to serve as major sources of finance for the development of real estate sector in India. NBFC lending started acquiring thrust as the major contributor, while banks’ share kept dropping.

 

Regulations governing NBFC investment in the real estate sector

Since a very long time, NBFCs have unfolded from being disjointed and casually governed to being well regulated. At many circumstances, they have adopted supreme practices in technology, innovation and risk management as well as domination. These are regulated by the Reserve Bank of India in India, within the framework of the RBI Act, 1934, Chapter III-B. After the enactment of RBI Act 1997, those with NOF of Rs. 1.25 lakhs and above have to register with the RBI. The Board for Financial Supervision and the RBI began governing them from July 1995.

 

Regulation on investment in real estate by the NBFCs registered with Reserve Bank coat the following:

  1. In order to present the association of RBI with NBFC– The non-deposit and the issues relating to risks in it certain regulatory measures taken by RBI have come into the picture. There are some of the regulatory measures undertaken by the RBI such as capital sufficiency need and credit concentration norms and ALM reporting, maturity pattern of assets and liabilities and reporting requirements for assets size above than Rs fifty crore.
  2. In furtherance, to fetch core investment organizations or companies, the allowance held earlier was removed in 2010. Also, the NBFC that takes deposits is not allowed to give an amount for investment or investing for purchase of land, unless it is for its own use.
  3. Both kinds of NBFCs whether deposit-taking and non-deposit taking that have assets of value Rs hundred crore or above are required to show data of their disclosure to real estate.
  4. It has also been pragmatic that for allowing investment for housing projects and to give No Objection Certificate, NBFC is needed to have the agreement of revealing the brochures or advertisement of the name of the entity with builder or developer associated with the property.
  5. Furthermore, while giving loans under the Credit Risk Guarantee Fund Trust for Low Income Housing, the micro-finance institutions are permitted to keep zero risks.

 

Regulations connecting NBFC and banks

The NBFCs have been experiencing the issue of increasing bad debts. In perspective of this issue, the NBFC with assets of over Rs fifty crores have now come in the ambit of the SARAFAESI Act of 2002. This Act helps the financial institutions and banks in improving the loans by auctioning a property. There have been many attempts by the RBI to bridge the gap between regulations administering NBFCs and commercial banks. For example, in November of 2014, the RBI regulated its framework balancing the relations between NBFC and commercial banks.

 

Also, the Union Budget of 2016-17 presented a decrease in the overall income of the NBFC sector in reference to the proviso of risk related debts. This step was taken to ensure status equality on tax-related problems between NBFCs and Banks. This budget came with certain regulatory frameworks connected to NBFC such as the allowance of FDI in activities related to the regulation of the financial sector by way of automatic route.

 

Future outlook

The NBFC segment has presented an upgrading trend in its assets as a percent of Indian GDP. After manifold regulations of RBI obligated for NBFC, an increase in their assets and profitability has been pragmaticed to be quite notable. The profitability is observed to be considerably elevated than the commercial banks. Also, RBI regulations ordinary to NBFC and banks have fostered a stronger relation between them. However, they are open to challenges with the dynamic regulatory framework of RBI such as acceptance of new ways of performing operations. In order to defeat these challenges, they need to accept measures that will abridge their operational process

 

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