Credit Insights & Developer Financing- Indian Phenomena

1. Collateralized credit never did so badly in India. That does not mean that you will not have NPA in this segment. But NPA is not credit cost. Your credit cost is NPA minus recovery. There will be players who have 4-5% NPA & lower ROE and there will be efficient players with 0.5% NPA & high ROE.

2. Historically in India, NPAs are most common in project financing space due to the variety of reasons like undercapitalized/low equity funding, problems with execution risk etc. Until you get to operation stage, there is 50% chance for the projects to fail. Once it starts operating, projects are okay.

3. There are 2 structural changes that happened in developer financing:

Earlier, HDFC and Banks were doing developer financing. Now it is moved to NBFC for the variety of reasons.

Customer advances funded 75% of project costs (India & Brazil are 2 countries where construction happens with the help of customer advances. In other nations, you need to finish the project with higher developer finance & lower customer advances). Now it came down to 50% of project cost due to RERA. Hence structured credit from NBFC is funding the gap. So it is basically, one form of credit (i.e. customer advances) is getting replaced by another form of credit (i.e. structured credit).