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Despite concerns, HFCs bullish on affordable housing

Fresh housing requirement still the dominant demand driver for home loans.

housing, real estate
All the four AHFCs, on expected lines, experienced an increase to varying degrees in gross Stage 2 and Stage 3 assets during the pandemic. (IE)

Despite concerns over rising interest rates hurting the demand in the low-income affordable housing loan segment, housing finance companies (HFCs) are upbeat as they see higher appetite from tier-II and tier-III cities.

“Despite the pandemic-induced dry spell, the real estate industry has strongly bounced back, particularly due to the government’s focus on affordable housing and various policy initiatives. These have resulted in a surge in demand for affordable housing, particularly in tier-II and tier-III cities, which has put the sector back on the growth trajectory,” Girish Kousgi, MD and CEO at PNB Housing Finance, told FE.

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“We are committed to promoting last-mile financial inclusion and expanding access to housing finance to the under-served population in tier-II and tier-III markets across the country. The affordable housing segment is in a propitious position and will be a strong focus area for us to accelerate our growth story in near future,” the CEO said.

Under-penetrated market

According to a recent report by Morgan Stanley, India is likely to add 12 crore people to the world’s population between 2021 and 2031, and the per capita income is expected to increase 2.3x, from $2,278 in 2021 to $5,242 in 2031. Households with annual income of above $10,000 is likely to increase twofold by 2031. There can be requirement of 26-27 million additional houses between 2021 and 2031, the report said.

“India’s mortgage penetration is low at 10.5% and skewed, with only four states having a ratio better than the national average,” the report said. The average ticket size of home loans was Rs 2 million in FY22. In value terms, out of total home loan disbursements of Rs 6.75 trillion in FY22, Rs 2.3 trillion was for loans where the ticket size was less than Rs 2.5 million. Overall, 65% of loans disbursed in FY22 were towards new houses, indicating fresh housing requirement is still the dominant demand driver.

“The affordable housing segment is growing rapidly, driven by multiple factors such as urbanisation, industrialisation and an increase in per capita income. It will enjoy strong growth spanning several decades,” said Manoj Viswanathan, MD and CEO, Home First Finance.

Advantage smaller HFCs?

Smaller HFCs focused on the affordable housing segment such as Home First Finance, Aptus Value Housing Finance, Can Fin Homes and Aavas Financiers will likely have an edge over larger peers on account of higher margin of loans and more pricing power, the report said.

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“Unlike large HFCs, AHFCs (affordable housing finance companies) have pricing power. Large HFCs are typically vulnerable to rate cycles as they largely operate in the prime housing loan segments and are thus subject to intense competition from banks which have an inherent cost of funds advantage. However, AHFCs operate in a niche, difficult-to-assess customer segment and have significantly higher margins, enabling them to better navigate rate cycles and protect margins,” the report said.

All the four AHFCs, on expected lines, experienced an increase to varying degrees in gross Stage 2 and Stage 3 assets during the pandemic. All of them were able to contain credit costs at or below 1% after the pandemic and were also able to reduce stressed assets.

“The sentimental value that customers attach to their homes indeed helps to prevent delinquencies, and the secured and usually appreciating nature of the collateral aids in making recoveries and keeping losses from defaults to a minimum,” Morgan Stanley said. “We expect all four AHFCs to grow AUM strongly as demand continues to recover post-pandemic. Their customer cohorts (i.e. lower income levels) were particularly affected during the pandemic. However, we also assume some impact on margins as they will have to absorb higher borrowing costs in 4Q (January-March),” it added.

As per Viswanathan, smaller HFCs focusing on the affordable segment have the advantage of having a better understanding of customer needs. “They have the ability to provide customised solutions to their customers such as assessment of total family income, disbursal in tranches as per convenience of customer and easy prepayment via mobile app,” he said.

Larger HFCs, too, are equally bullish on the segment.

“Our competencies in the prime segment will help us achieve our overall business objectives in a balanced way. As one of the largest HFCs in India, it puts us in a favourable position as we are well-equipped to fulfil the home-buying journey for all consumer segments,” Kousgi said.

“Our strengths, including diversified product portfolio, wider reach, dedicated teams and solid industry expertise, allow us to offer a range of financing options to customers in this dynamic and evolving market. With increasing urbanisation, a growing middle class, and conducive policy support, we remain optimistic about the long-term potential of the affordable housing finance market in India,” he said.

Another official at a large HFC said they do not see smaller HFCs meaningfully taking away the market share from larger HFCs as the latter continues to grow their overall loan book in double-digit. While smaller HFCs may hold higher margins, they are more vulnerable to higher delinquencies because of lower-income customer base, the official said.

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First published on: 25-04-2023 at 01:00 IST