We believe a cut in standard asset provisioning and relaxation of risk weights on new higher ticket loans by RBI is a positive for housing finance segment. While government’s interest subsidy scheme was aimed at boosting home loans in the low-mid ticket segment, the change in norms announced should lower capital requirements on mid to higher ticket home loans. HFCs focusing on higher ticket loans may be able to increase leverage, which could also boost RoE.
RBI has cut risk weights for: a) housing loans with Rs 3.0-7.5 million ticket size with LTV 75%-80% to 35% from 50%; b) housing loans with over Rs 7.5 million ticket size to 50% from 75%. The cut in risk weights would be applicable to new home loans. RBI has reduced the standard asset provisioning to 0.25% from 0.4% which should reduce capital costs. While the notification is applicable to banks, we expect NHB to implement similar guidelines for Housing Finance Companies.
Positive for Housing Loans in higher ticket size segment: Over 50% of home loan disbursal by HFCs and PSBs have ticket size of over `2.5 million. The benefit would be higher for home loans of above Rs 7.5 million ticket size. For loans in `3.0-7.5 million ticket size segment, only loans with 75-80% LTV would benefit incrementally. Avg. LTV at origination for LIC Housing, DHFL, Repco are below 65%, while that of HDFC, PNB Housing and Indiabulls is higher.
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Gains for LIC Housing may be relatively low: Average ticket size for LIC Housing’s loan is `2.2 mn. We understand around 15% of LIC Housing’s disbursal may be of over `7.5 million ticket size. While a large proportion of LICHF’s loans are in the `3.0-7.5 million segment, average LTV on new loans is low at 45%.