Role of NBFCs in Real Estate Sector: Complete Overview

Ashish M. Shaji

29 May, 2021

Owning a house is everyone’s dream. To bring it into reality requires a lot of money which could be a person’s years of savings. Purchasing a new property is an investment where the value increases with the passage of time. However, one cannot afford to take out a massive amount of money therefore, people take loans. In some instances, banks are unable or not willing to make a sanction, and here come NBFCs in real estate sector.

What are NBFCs?

In simple terms, NBFCs or Non-Banking Financial Companies are financial institutions that provide banking facilities and financial solutions without meeting the legal classification of banks. These are the companies that are registered under the Companies Act 1956^[1]. They provide banking services such as advancement of loans, acquisition of shares, bonds, debentures, credit facilities, retirement plans etc.

What is the role of NBFCs in the Indian economy?

NBFCs meet various diverse financial needs of clients that are excluded by banks and provide financial solutions to new ventures, thereby helping them to grow.

NBFCs supplement the role of banks in meeting the financial needs of the nation, especially with the growing population. This includes extending credit to small businesses and to the unorganized sector.

Although NBFCs don’t operate like banks, they are bound by a similar set of rules as other banks. With an increase in demand for property purchase and a large sector comprising of middle class, NBFCs have become the most vital loan providers, especially in the case of real estate lending. Let’s now look at the role of NBFCs in Real Estate Sector.

What is the Role of NBFCs in Real Estate Sector?

The role of NBFCs in the Real Estate Sector can be best understood by the following points:

• NBFCs contribute heavily to the real estate sector in India;
• They help in attracting foreign investments, enhance the capital formation and also increase the mobilization of resources;
• It means that savings can turn into investments, thus resulting in more investments in the real estate sector;
• This shows that the demand for the real estate will peak in the coming years, and investments in property can offer much higher returns in the coming years;
• Since the prominent role of the Non-Banking Financial Companies is to lend to the infrastructural projects, they contribute largely to the real estate industry;
• In the previous few years, NBFCs are the ones that have been sought for infrastructural loans instead of banks;
• Therefore NBFCs are a great alternative to banks and continue to grant loans to its borrowers who look to invest in housing. 

With limited funding from banks that reduced to 2% on March, 2018 NBFCs accounted for 61% of commercial real estate borrowing in the country. With an increase in the population, there has been a great demand for the need of infrastructures like office and commercial spaces. The borrowing had grown to 50 % in the FY 2016-18.  

NBFCs in Real Estate Sector: RBI’s assistance

The reserve bank took certain steps to improve the efficiency and security of the NBFCs in India. In the year 2018, the IT Framework was issued for the NBFCs by the Reserve Bank. The IT framework was introduced to enhance security, safety and efficiency in the sector to function smoothly and offer benefits to their customers.

The role of NBFCs in sustaining the consumptions and capital formation in Micro, Small and Medium Enterprises can’t be overlooked.  The government has offered a single-use partial credit guarantee for 6 months to public sector banks to buy high-rated assets of 1 lakh crore rupees from NBFCs to tackle the increased pressure facing NBFCs.

NBFCs are great alternatives to banks in case of borrowing when your CIBIL score is low. Even though they are not called as banks but are just as reliable.

Conclusion

The existence of NBFCs in our country has allowed for hassle-free availability of finances to all, especially to the underbanked population. The mere fact that they lack the status of bank doesn’t make them unproductive, but they are vital as any full-fledged bank. As far as the growth of NBFCs in Real Estate Sector is concerned, it is common fact that as the economy stabilizes with time, such financial institution will witness developed credit demand. 

Read our article: An Outlook on Participation of NBFCs in Insurance Business