Muted Profitability for Housing Finance in FY21: India Ratings

India Ratings and Research (Ind-Ra) has maintained a stable outlook on affordable housing finance companies (HFCs) and a negative outlook on large HFCs for FY21.

India Ratings expects the overall loan growth of HFCs to moderate to 6% yoy in FY21. The agency believes the affordable housing finance segment remains margin accretive, as it faces moderate competition from banks and lenders in these segment have pricing power as they lend to informal borrowers. The government sponsored schemes such as credit linked subsidy scheme and, in case of self-construction loans, existing equity in land help moderate loan to value ratio, thereby moderating loss given default risk in the segment.
India Ratings believes competition from banks would intensify in the large ticket housing space for HFCs, as margin shrink from the already modest levels. This is because elevated borrowing costs, both on account of the recalibration of funding mix, i.e. reducing short term borrowings, and challenges to mobilise funds through capital market borrowings, have increased funding cost. As per India Ratings analysis, the optimum return on equity possible for large ticket housing financers stands in the range of 14%-15%, based on the proportion of non-housing portion in the overall mix.
India Ratings does not expect any significant impact of the recently introduced leverage caps in the medium term, as most HFCs operate at moderate leverage levels. However, margin pressures along with leverage constraints would keep return on equity capped for HFCs in the medium to long term. Their ability to buffer the spreads through non-housing loans (viz. construction finance, lease rental discounting, loans against property or institutional lending) will diminish, as these segments are facing their own set of challenges.
Having said that, there would be consolidation in the HFC space, with larger and established player, with strong parentage, growing granular book, adequate vintage and funding would continue to gain market share. As HFCs work on behavioural asset liability tenors, incremental dependence on short-term borrowing needs to be monitored, as there could be a widening of gaps in less than one year buckets during stress times, because prepayments which have been factored could moderate significantly. (Share Manthan, February 13, 2020)

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