The real estate sector is evolving and their dependency on the banking sector is decreasing year by year. Non-banking financial companies are providing lucrative and attractive financial solutions to consumers which are resulting profitable for the real estate players. NBFCs provide loans to lower-income group customers and fulfilling their dream of owning a home in their dream land.
About Non- Banking Finance Companies
Non-banking financial companies are those institutions that are registered under the Companies Act 1956 and fall under the financial sector. In simpler terms, NBFCs provides banking services and financial solutions. They are not banks. Their services include advancement of loans, acquisition of shares, bonds, debentures, credit facilities, retirement plans, and many more.
NBFCs Influence On Indian Economy
- NBFCs are the best alternatives of banks that meet the diverse financial requirements of clients that are neglected by the banks. They assist new ventures with affordable financial solutions to gear up their business at an early stage, NBFCs are crucial for small and budding businesses.
- NBFCs have an immense contribution to the Indian financial ecosystem as they played a key role as financial arbiters, management of savings and investments for small and retail sectors which is a large portion of the Indian financial ecosystem. It is the most viable option for non-banking sectors of the Indian economy.
- They played a significant role in boosting the economic development of India by elevating employment, Render long-term credit system, channelization of resources, enhancing the standard of living.
We looked at NBFCs role in the Indian economy and how it is playing its part in boosting our system. Now, we will understand the role of NBFCs in Real Estate and how it is impacting this sector, its viability and more.
How are NBFCs impacting growth in the real estate sector?
Let us understand the key roles of NBFCs in the real estate sector with the following points:
- NBFCs have a significant place in the Indian real estate sector, as per reports the NBFCs and housing finance companies HFCs have an overall contribution of total lending share to the real estate sector is at 63 per cent in India;
- NBFCs attracts foreign investments, improves capital formation, and also enhances the mobilization of resources;
- Foreign investments boost up savings that turn into investments, thus increases investments in the real estate sector;
- It also depicts that in coming years real estate sector will reach a height, and investments in real estate will offer ample net profit in upcoming years;
- They prominently provide loans for the infrastructural projects, which is the large portion of the real estate sector;
- As per reports, NBFCs have provided more financial services for infrastructural projects than banks;
- The banks have limited their fundings and reduced it to 2% in March 2018 while NBFCs reported 61% of commercial real estate borrowing in India.
The Reserve Bank Role In Empowering NFBCs in Real Estate Sector
The RBI took made strong decisions to enhance the efficiency and security of the NBFCs in India. In 2018, the IT Framework was released for the NBFCs by the Reserve Bank of India. The IT framework was introduced to improve security and efficiency in the sector to function efficiently and provides benefits to their consumers.
The GOI has rendered a single-use partial credit guarantee for a period of 6 months to public sector banks to buy highly rated assets of 1 lakh crore rupees or more from non banking financial companies to face growing pressure on NBFCs.
Rules for Governing NBFC Investment in Real Estate?
- For a longer duration, non banking finance companies have unravelled from being unorganised and disconnected, it was informally governed to being well regulated. Somewhat, NBFCs have adopted supreme practices in technology advancement, innovation, transformation and risk management. These are regulated by the RBI, under the framework of the RBI Act of 1934, Chapter III-B. NBFC registration is crucial in compliance with the RBI guidelines for registering.
- After the enforcement of the RBI Act, 1997, organizations with NOF of Rs. 1.25 lakhs and more have to list under the Reserve Bank of India.
- Laws regarding investments in the real estate sector by the non banking financial companies registered with Reserve Bank overlay the following points:
- To present the association of RBI with NBFC– The non-deposit and the affairs regarding the risks in its defined regulatory actions must be taken by RBI. There are certain regulatory measures taken on by the RBI such as capital sufficiency need and credit concentration norms, ALM reporting, maturity pattern of assets, liabilities, and reporting requirements for assets size above fifty crore rupees.
- To fetch fundamental investment companies, the grant allocated earlier was removed in 2010. Also, the non banking financial companies which take deposits are not authorized to provide payment for investment for the purchase of land, until or unless it is for their own usage.
- Both kinds of non banking financial companies (deposit-taking and non-deposit taking) which have assets of value 100 crore rupees or more are subjected to proclaim data of their declaration at the real estate.
- Investment is allowed for housing projects and to provide NOC, NBFC is required to have an agreement of disclosure of the brochures or ads in the name of the organization with the builder or associated entity with the subjected property.
- Moreover, while sanctioning loans under the Credit Risk Guarantee Fund Trust for Low Income Households, the MFIs are permitted to keep no risks.
- It is estimated that by the year 2040, the real estate market will reach the heights of 65,000 crores rupees from 12,000 crores rupees in 2019.
- The experts are anticipated that the real estate market size will grow 1 trillion US Dollars by 2030 and occupies 13% of the national GDP by 2025.
- Commercial real estate, hospitality, and retail sectors are growing remarkably, due to the rising infrastructure demand. As estimated, the Indian real estate sector will be boosted to 19.5% CAGR by 2028. These data indicate great potential growth for non banking financial companies in the Real Estate sector.
- Warehousing space is growing rapidly, about 247 million squares in 2020 and noted investment worth Rs. 50,000 crores in the financial year 2018-2020.
- In the year 2019, 2.61 lakhs of units of household properties were sold across 7 cities. The amount of private property in 8 prominent cities has reached 33,403 units in 2020 while, 9,632 units in the preceding quarter, depicts vigorous recovery post lockdown.
The above mentioned points strongly depict domination of non banking financial companies in real sectors and enhanced involvement as compared to the traditional banking sector.
It is noteworthy that there has been limited finance exchange from the traditional banks, which downfall to the 2% in March 2018, NBFCs reached 61% of commercial borrowing in India. With the expanding population, there has been a rising demand for the condition of infrastructures. The lending has been rising to 50% in the Financial Year 2016-2018.
The rapid expansion of nonbanking financial companies in the Real Estate Sector of India is concerned, the fact that states, the economy stabilizes with time, and these financial companies will evidently develop credit demand.
The Real estate sector has been keenly interested in NBFC for the past few decades. Real estate players have become more leaning towards Non banking finance companies in contrast to commercial banks and other financing services options. This might be due to reliability and benefits presented by NBFCs such as fast loan sanctions, the robust loan application process, and no minimum deposit, while commercial banks have comparatively tough processes.
NBFCs are better substitutes to traditional banks for borrowing in case an individuals CIBIL score is low. In recent times Government of India presented a proposal to expand the affordable housing division has attained steam, specifically in semi-urban and rural parts of India. This initiative has led to an increased demand for simple housing financing options. Adding to it, it has hugely encouraged the big real estate players like builders and investors by providing lucrative incentives to include in the real estate sector of India.
NBFCs as an alternative to banks have achieved a humongous amount of popularity among builders and low income group communities. They can now dream of buying a house at an affordable home loan without any tedious application process.
They have a lucrative quality of quick decision making, are prone to taking huge risks and reform and adopt better policies and apply services charges according to their customer and understanding their requirements of the clients.
It has been observed by analysing the current statistical data that NBFCs are playing a prominent role in growing the real estate sector in India and providing affordable housing to low income marginalised sections of the semi-urban and rural population of India. The government of India and the Reserve Bank of India is working in the direction to strengthen the non banking financial companies with great benefits and some relaxations. New policies framework has been released for the same.