The market dynamics of housing finance, one of the nation’s more resilient sectors, has seen significant changes of late, with smaller players chipping away at the spoils. And if the buzz around affordable housing is any indication, the next few years would see even more changes, says CRISIL Ratings. It believes that banks’ home loan growth may outpace that of the HFCs for the first time in five years, though this competition could reduce as corporate credit demand picks up gradually.
The overall sector remains concentrated, with the top four housing finance companies or HFCs (with loan book greater than Rs 50,000 crore) having a share of around 79%. But their share was down around 600 bps in the two years to fiscal 2016, and is expected to have declined further by at least 500 bps in fiscal 2017. This, even as mid-sized HFCs (with loan book between Rs 5,000-50,000 crore) have increased their market share – up 600 bps to 17% at the end of fiscal 2016 – and smaller HFCs (with loan book below Rs 5,000 crore) have been able to hold on to their share.
The past couple of years have seen a large influx of new players, taking the number of HFCs from 55 in fiscal 2014 to 70 in fiscal 2016, with around 80 licences pending with the National Housing Bank (NHB). Interestingly, many of these new entrants are focussed on the affordable housing segment, where there is a lot of buzz today, thanks to regulatory and policy changes.
Overall advances growth of the sector is expected to remain healthy at 17% CAGR over the next three years. Advances are expected to almost double to Rs 12.7 lakh crore by fiscal 2020 from Rs 6.7 lakh crore as on March 31, 2016. However, the competition has intensified in the traditional home loans space, particularly from banks, which are being compelled by subdued demand and asset quality pressures in the corporate sector to focus on retail lending.
CRISIL Ratings expects banks’ home loan growth to outpace that of the HFCs for the first time in five years, though this competition could reduce as corporate credit demand picks up gradually. The increased focus of banks is also reflected in portfolio buyouts. Volumes of mortgage backed securities (MBS) and their contribution to overall securitisation volumes have been increasing over the past five years.
MBS volumes hit an all-time high of Rs 29,400 crore in fiscal 2016 – up a whopping 86% over the previous year – and are rising. In just the half-year ended September 30, 2016, volumes had surpassed 69% of the full-year fiscal 2016 volumes. Volumes in the third quarter were muted on account of demonetisation, but picked up again in the fourth quarter.
The HFC sector’s resilience has much to do with strong asset quality, with gross non-performing assets as low as 0.8%. This is supported by factors like the nature of the asset class, the customer profile (around 80% home loans are to salaried customer), practices like direct debit/ cheque being the primary mode of payment, and the fact that the average loan to value (LTV) is around 75%. This has enabled HFCs to maintain low credit costs and – coupled with low operating expenses – has helped keep profitability steady, with the return on assets (RoA) at 2.1%. The so-far-steady mortgage segment witnessed some ripples due to demonetisation, with developer financing and loan against property (LAP) segments affected by a slowdown in growth over the near to medium term.
In the LAP segment, there could be a risk build-up due to a potential drop in property prices. CRISIL, however, believes the strength of business cash flows will determine the ability of the borrowers to service these loans. CRISIL sensitivity analysis indicates that a 30% fall in property price will lead to ~20% of the LAP portfolio having a stretched collateral cover. If this situation were to pan out, assuming a recovery rate of 80%, credit costs could rise 200-300 bps spread over 20-24 months. Nevertheless, if the cash flows are not impacted, the risk of default will be low, especially in cases where the collateral is residential property.