Growth, Despite a Slowdown
BALAJI RAO explains how maintaining credibility is synonymous to growth in the current market condition. It is becoming increasingly evident that the Indian economy is going through a slowdown. Fortunately, slowdowns are a cyclical phenomenon and sooner or later, this one shall end and it will be business as usual again. But until it does, these shall be testing times for businesses in India. Indian businesses have already had a tough couple of quarters. The collapse of a major infrastructure finance company followed by the tightening in NBFC credit has put significant stress on cash flows in a number of industries. The real estate sector, in particular, has faced the brunt of the liquidity crunch. The lack of credit, coupled with the introduction of GST and the stopping of pre-sales under RERA, had left most developers struggling to find financial closure. Achieving growth in the current business environment is difficult but achievable, especially in real estate, which has benefitted from a number of measures introduced by the government to boost the sector. The greatest challenge that the slowdown presents for real estate is raising finance. In order to make the best of this situation, developers will have to ensure that their cash flows are maintained, enabling them to raise funds, complete and sell their projects. Triple threatFinance in general is supported by three things – liquidity, solvency and credibility. These three aspects are intricately connected and feed off of each other. In the past, the greatest risk during a slowdown was lack of solvency, with companies going bankrupt when their assets were insufficient to meet their liabilities. However, this time around, the greatest risk for businesses, more than solvency, is liquidity. In the current environment, lack of liquidity leads to a loss in credibility, and given that the cornerstone of all lending and borrowing is trust, a lack of credibility can have far-reaching and painful consequences. As things stand today, if creditors are not paid on time, they will more likely be unwilling to lend to a business, irrespective of potential future profits. If a business stays cash-strapped for too long, it may be unable to sustain its operations, leading to a potential solvency issue. Therefore, the topmost priority in order to achieve growth is to maintain liquidity. But given the slowdown in sales and the hesitance of investors, it is not easy to raise funds to ensure smooth cash flows.Resolving the impasseSo, what can be done to ensure liquidity? For cash-strapped lenders, the resolution of the liquidity problem requires support from institutions such as the RBI or NHB, among others. These institutions can create windows for liquidity. The government, in its Budget, announced a scheme to extend one-time partial credit to public sector banks for the purchase of pooled assets. This would be a step in the right direction. Lenders need an environment that encourages them to securitise their assets, that is, pool their assets, assess the risk of that pool, rate it accordingly and down sell it. Then the securitised portfolios can be purchased by both institutions and investors, which in turn can create sufficient liquidity to meet short term liabilities and maintain credibility. In order to make the securitised portfolio more marketable, it would be advisable to use enhanced credit tools, which again need to come from institutions, regulatory authorities and supervisory bodies to make them attractive to investors. This is particularly helpful for housing finance companies (HFCs) who have a lot of good, serviced loans in their books. NBFCs will also have viable pools of assets (especially real estate assets) that can be rated and down-sold and liquidity can be kick-started through securitisation, as long as solvency is not questioned. Where there is a threat to the solvency of a company, swift action needs to be taken by supervisory authorities to ensure that loan write-offs are taken in a fair and equitable manner. It may be necessary for existing stakeholders to take a hair-cut in such a case, but the business can still keep running. Once liabilities have been settled, the company’s balance sheet would need to be re-calibrated and solvency needs to be ensured or restored before turning to securitisation to create liquidity. A loss of credibilityIn the event of a complete write-off because of evident fraud or misappropriation in any sort of egregious event, it is better to close the business and cut the losses. Once credibility has already been lost, it is difficult for a business to win back the trust of the market and its customers. In such a scenario, the lenders should push to liquidate the assets and distribute whatever is available to the rightful creditors. In conclusion, the biggest threat to growth in this market would be loss of credibility. If credibility in any business, company or industry seems to be getting eroded, then ignoring the signs creates further complications. It needs quick, effective remedial action supervised by regulatory authorities or their appointed experts, as otherwise the rot can spread and the disease can prove to be contagious, malignant and destructive. About the author: Balaji Rao, Managing Director-Real Estate, Axis Asset Management Company, has an extensive career record of over three decades in both real estate and financial services, serving in organisations such as K Raheja, Standard Chartered, TCG and Starwood.