NBFCs and their Impact on Real Estate in India

One of the essential milestones that everyone wants to achieve is owning a house. Whether or not one is living in their property, even as an investment, a piece of property has its sense of security. However, not everyone can afford to pay total cash and purchase a property. This is when the need for availing a loan arises. While banks are the go-to option for a home loan, in some instances, they are unable or unwilling to make a sanction. This is where NBFCs come into the picture.

What are NBFC’S?

NBFCS in simple terms are institutions that provide financial solutions and banking facilities without meeting the legal classification of a bank. These establishments are registered under the Companies Act, 1956. The primary function of these establishments is providing banking services such as advancement of loans, acquisition of shares, securities, stocks, debentures, bonds, credit facilities, retirement plans, etc. 

The Role of NBFCs in the Indian Economy

NBFCs cater to the diverse financial needs of clients that are excluded by banks and provide solutions to new ventures, thus helping them grow. 

NBFCs supplement the role of banks in meeting the increasing financial needs of the country, especially with the ever-growing population. This also includes giving credit to small businesses and the unorganized sector.

Although these do not function as banks, they are bound by the same set of rules and regulations as other banks. 

With an increasing demand for property purchase and a large sector comprising of the middle-class, NBFCs have now become one of the most important loan lenders when it comes to real estate lending.

The primary role of NBFCs in Real Estate Development

NBFCs heavily contribute to the real estate sector in India. They help in attracting foreign investments, increase capital formation and also increase mobilization of resources. This means that savings can turn into investments, leading to more investments in the real estate sector. This indicates that the demand for real estate will see its peak in the forthcoming years, and hence property investments have the potential to offer much higher returns in the future. 

Since the primary role of NBFCs is to lend to infrastructural projects, they largely contribute to the real estate industry. In the last few years, NBFCs have been sought after for infrastructural loans as opposed to the banks. 

Hence, they continue to grant loans to borrowers who are looking to invest in housing and are a great alternative to banks.

Impact on real estate investments 

With limited funding from banks, which reduced to 2 per cent as of March 2018, NBFCs accounted for 61 per cent of commercial real estate borrowing in the country. With an increase in population, there has been a rising demand for the need of infrastructure such as office and commercial spaces. 

The borrowing had grown up to 50% in the financial year 2016 – 2018.

What's next?

The Reserve Bank of India has taken steps to improve the security and efficiency of NBFCs in India. In 2018, the Information Technology Framework was issued for the NBFC by the RBI. This IT framework is to augment security, safety and efficiency in the sector to work smoothly and provide benefits efficiently to their customers. 

The role of NBFCs in sustaining consumptions and capital formation in MSMEs cannot be overlooked. Hence, the government has provided a single-use partial credit guarantee for six months to public sector banks to buy high-rated assets worth INR 1 lakh crore from NBFCs in order to tackle the increased pressure that the NBFCs have been facing. 

NBFCs make for a great alternative to banks when borrowing in case your CIBIL score is low. Even though they are not termed as banks, they are just as reliable.