Housing financiers will focus on expanding in pricier non-housing segments like loan against property and construction finance to aid their margins, said India Ratings in a report on Wednesday.
This, when rising competition from banks and higher cost of funds is expected to put the net interest margins of housing financiers under pressure, say experts.
The growth momentum in the housing finance segment is expected to slow down in the medium term due to higher interest rates and rising property prices. In addition to this, high inflation will impact borrowers’ savings and this will dent the affordability of homes, say experts.
Home loans have become pricier in recent months, in line with the 250 bps hike in the current cycle, which was kicked-off by 40 bps rate hike in an off-cycle meeting in May. Home loans, which are largely linked to external benchmark linked rates, have moved upwards along with a rise in the repo rate.
So far, housing financiers have been able to maintain their net interest margins as the re-pricing of loans occur at a faster pace than liabilities. In certain cases, a higher increase in spreads on non-housing products has also cushioned the margins.
But, a further hike in the external-benchmark linked lending rate may not necessarily lead to an uptick in home loan lending rates as banks could adjust credit risk premiums or spreads over the benchmark to absorb the impact partially or fully. This implies that the margin pressure for housing finance companies especially large entities is likely to continue in the near to medium term, say experts.
The large-ticket home loan providers would be more incentivised to focus on non-housing segments than affordable housing companies as the latter already charge a higher interest rate on their borrowers, say experts.
“The impact on NIM would vary from players to payers because everybody loan composition is different. But non-housing segments lift the margins of housing financiers by 100-150 basis points in comparison to pure housing segments. Also, one does not need to incur a high operating expenditure to run this business. So, these are high return-on assets yielding businesses for housing financiers,” said Jinay Gala, associate director, India Ratings and Research.
India Ratings and Research has maintained a “neutral” outlook on housing finance companies for 2023-24 (April-March) due the likely moderation in overall affordability of homes.
But an increased urge among borrowers to own homes and continued home upscaling will ensure that the growth of housing financiers remains strong in 2023-24, the credit rating agency said.