Why IL&FS Default Could Create a Domino Effect

Value investor- India mid & small caps

Bhaskar Chakraborty

Thematic (Sector/Industry)

India Financials / Thematic (Sector/Industry)

<ul>
<li>10% of total NBFC book lent to Real Estate</li>
<li>Industry estimates that 3/4<sup>th</sup> of all maturing real estate debt is refinanced primarily by NBFCs with the balance 1/4<sup>th</sup> only repaid from project cashflows</li>
<li>With continued pullback in loans to developers, refinancing looks increasingly difficult</li>
<li>
<a href="https://www.smartkarma.com/entities/8142" target="_blank" data-smartkarma-citation="entities:8142:1">Dewan Housing Finance (DEWH IN)</a> and <a href="https://www.smartkarma.com/entities/13086" target="_blank" data-smartkarma-citation="entities:13086:1">Indiabulls Housing Finance (IHFL IN)</a> together have Rs1.05tn of portfolio consisting of builder finance, construction financing and LAP. Both players have been missing from the CP market since the liquidity problems erupted in late September. If refinancing lines from PSU banks prove inadequate, we see high risk of default.</li>
<li>Mortgage financiers have been actively securitizing their mortgage portfolios to private and PSU banks. But this leaves them with inferior quality portfolios with larger share of builder loans, corporate finance and construction loans that should result in ratings downgrades, higher cost of funds and lower growth in the near future.</li>
</ul>


10% of total NBFC book lent to Real Estate
Industry estimates that 3/4th of all maturing real estate debt is refinanced primarily by NBFCs with the balance 1/4th only repaid from project cashflows
With continued pullback in loans to developers, refinancing looks increasingly difficult

Dewan Housing Finance (DEWH IN) and Indiabulls Housing Finance (IHFL IN) together have Rs1.05tn of portfolio consisting of builder finance, construction financing and LAP. Both players have been missing from the CP market since the liquidity problems erupted in late September. If refinancing lines from PSU banks prove inadequate, we see high risk of default.
Mortgage financiers have been actively securitizing their mortgage portfolios to private and PSU banks. But this leaves them with inferior quality portfolios with larger share of builder loans, corporate finance and construction loans that should result in ratings downgrades, higher cost of funds and lower growth in the near future.


India NBFCs: Risk of Default in Real Estate Exposure Remains Elevated