Availability of cash or liquidity or exposure to real estate and other corporate groups where recovery would be slow?
I would like to start off by saying that though Edelweiss has NBFC business but we are a diversified group. We have asset management, wealth management, ARC and a lot of other. We also have retail credit in NBFC. We have always been focussed on being a diversified company. To answer your question, availability of credit has been fairly okay.
It has come down from last year but in our case, since we are not overall growing the book, we have a stated strategy that half our credit book is wholesale and half is retail. Whatever repayments are coming in wholesale, we are using it to grow retail. What we are doing is that the overall book is not expected to grow but the wholesale retail mix will go more and more in favour of retail. So the availability of liquidity has been fairly okay. In fact, this quarter, for most NBFCs the partial credit guarantee scheme will get operationalised and our expectation is about Rs 35,000-40,000 crore of the asset portfolios of NBFCs will be bought by banks.
Sp, there will be a huge release of liquidity because the scheme was announced three months ago in the budget but it has taken three months to operationalise it. Even now, it is just in the finalisation stage of operationalisation. Once it gets operationalised, about Rs 35,000-40,000 crore will flow from banks to NBFCs and that will give a lot of additional liquidity to NBFCs.
I would think that once that starts, the credit cycle should start coming back because liquidity has improved. RBI has pumped in a lot of liquidity but the transmission has been slower but I hope that this quarter is one when transmission happens. If you are not overall trying to grow, then you do not need much liquidity.
On the other hand, the corporate book and wholesale book and all the cash flow stress has been there for one year. The only good news is that everybody has understood and readjusted the cash flow assumptions and there is no unknown any more. Everybody knows what sort of cash flows can be expected and everybody is aligned with that.
On that count and also the RBI easing liquidity is helping the system in a slow and steady manner. In another three to six months, a lot of things should be back to normal for liquidity in the economy as a whole.
When the IL&FS crisis was unearthed, NBFCs like yours were growing at more than 30%. You came out and said the heydays of growth is behind us, we need to contract. You consciously started slowing down your business. That disturbed the market and led to stock re-rating. Second, post the IL&FS crisis, a lot of corporate groups were caught with their pants down because of cash flow mismatch. In this quarter, given that the Essel crisis is not solved, HDIL is in mess, ADA Group has not recovered completely and there are some specific loans which have turned out to be bad loans, should the market be wary?
Until last quarter, there was an apprehension that stress will increase as the economy was slowing down, but as I said, the government has taken a lot of measures and eased liquidity. The good news is that the public sector banks have got capitalised, capital has come for them and they have started stepping up on the credit delivery in the economy. Overall, while credit was frozen around April, May, June, the banking system, especially the PSU banks have opened up the credit flow into the economy.
On that count, I am more optimistic now than maybe I was three months ago. There is a liquidity crunch in a few accounts that you mentioned. But we should remember that Indian banking industry has gone through five years of NPAs of almost Rs 12-13 lakh crore. A large part of that is behind us and if we look at steel and roads and power, there were Rs 2-3 lakh crore stressed assets in each of these industries. We have gone through that. Fortunately, when the IL&FS crisis hit, a lot of the NPA crisis was behind us because the quantification and the provisioning had happened.
On the whole, the banking system is on a much better footing to ensure that the economy does not freeze up and make sure that the free flow of credit continues. That is what we have started seeing post August since September. If you look at a lot of high frequency data for the economy, September things have started inching up a little bit.
It is still early days but all these are the green shoots and I am hoping that with RBI cutting rates, liquidity will continue. PSU banks are in a strong position and the government is also making sure that all the reform action and the push is there. In the next three to six months we should at least see things getting normalised and then improvement should start. At least, they have stopped getting worse in the last four-five weeks.
One of the key concerns within the real estate space is the stress there is likely to continue into the next few years. Is that a big concern?
There is a liquidity stress across all the projects in India, whether it is real estate projects or other projects because project funding has started to dry off. The only good news is that this has been going on for one year and so there is no new unknown.
A year ago, everybody knew that liquidity availability for real estate projects is going to be slow. The other good news is that these are all housing projects and experience has shown in India that if the project gets completed, than usually recoveries and sales are not a problem. So, the current effort is to make sure the projects get completed. There is another good news, but it will play out may be a year from now, that the demand supply equation in housing has started to correct. We always had oversupply, but in the last one year as liquidity has dried up, very few new projects are getting launched and as a result, the supply of inventory will slowly and steadily get crunched and as the demand comes back with interest rates coming down and banks pushing home loans, we should see the demand supply equation getting corrected.
The most critical part in any project is to make sure the project gets completed and the other good news is there are more than 5,000 projects in India where NBFCs and banks have funded housing and real estate. At a project level, your exposure is a much smaller amount for any entity because it is spread over so many projects and the projects are not as much related. A project in Bangalore and a project in Mumbai have no correlation with each other. So unlike a steel project or a power project — which are Rs 5,000-40,000 crore, an average housing project costs between Rs 200-1,000 crore. As a result, exposure of NBFCs and banks is spread over a lot of projects and the projects that get completed will not have to face haircut or loss or stress.
When it comes to your own NBFC, what is the percentage of exposure to real estate and how much of that percentage is actually under stress?
Our real estate book is about Rs 11,000 crore on a balance sheet of approximately Rs 55,000 crore. So, real estate is about 20% of our balance sheet as a whole and that is why I always highlighted that we are a very diversified company. At a balance sheet level, real estate is about 20% but even at a P&L level, we have a lot of earnings from asset management, wealth management, ARC and all which are non-NBFC related.
We have a retail credit business, SME loans and all all those are not affected. So, we have a fairly well diversified P&L and a balance sheet. Out of the Rs 11,000 crore, the book is spread over 160-odd projects and we have that in our investor presentation also. We have highlighted that this book is fairly granular because it is spread over 160 projects.
Out of that 160 projects, all along for the last 8-10 years, about 10 to 20% of your portfolio is always under watch because of some intervention, some help, some handholding is required to make sure the project execution happens and those parameters have not worsened. They have been the same for the last 10 years. One of our core capability has been to make sure we provide oversight and liquidity to get the projects completed because that is the only panacea that if the project gets completed, your risk can be fairly contained.
We also have a lot of experience with ARC because in ARC we acquired NPA from banks and we have resolved quite a few of them last year with Rs 7,000 crore worth of recoveries in the ARC business. This year, we are aiming for a Rs 12,000 crore recoveries in the ARC business. If the underlying asset is good and economically viable, converting that into value will take effort but can be done and you can manage your risk in that way. That has been our approach.
So, we are very well diversified, we have an earnings stream which is also non-NBFC related and on top of that, we also raised equity in the NBFC business as well as the advisory business. We have been very quick to move. A year ago, we said may be, things will slow down, but we will become stronger. We have done all of this to make sure that we adapt to the environment. I think the worsening of the environment is over and at least in the last few weeks we are starting to see stabilisation coming in.
If we just keep calm and then say that let us allow the economy to recover and let the government and RBI actions start bearing fruit so that India gets back on growth. Once growth returns, a lot of these issues will be easier to handle.