By Yashraj Erande | Gopal Sharma

India’s housing demand, particularly in the affordable segment, is set for rapid growth, driven by economic and demographic shifts. Despite low mortgage penetration (14% of GDP in India vs 67% in the UK), this figure is expected to rise to 21% by FY30. Rising affluence, an expanding middle class (15 crore households by 2030), and the nuclearisation of families are fuelling demand. Government initiatives like the Pradhan Mantri Awas Yojana (30 million houses sanctioned) further accelerate this trend. Notably, affordable housing will outpace the broader market, with its size projected to grow to Rs 32 trillion by FY30, aligning with a 12-15% annual home loan market growth. This shift underscores affordable housing as a key driver in India’s real estate sector.

The affordable housing loan market in India is currently estimated at Rs 13 lakh crore, with housing finance companies (HFCs) holding a dominant 53% share. Scheduled commercial banks (SCBs) account for the remaining 47%. Despite HFCs playing a crucial role in financing affordable housing, their dominance is likely to face increased competition from SCBs, which are expanding their presence in this segment.

With the growing demand for affordable housing and regulatory support, both HFCs and SCBs are expected to witness significant portfolio expansion. As access to credit improves, the segment is set to drive broader financial inclusion, enabling home ownership for millions across urban and semi-urban India. There has been a significant demand for affordable housing loans coming from tier-III and -IV cities on account of the rise in real estate prices in tier-I and -II geographies amid growing sales of mid-income and premium houses.

Tier-I and -II geographies currently account for 54% of the outstanding loans but have seen single-digit growth in the last three years with 5% and 8% compound annual growth rate between FY21 and FY24, thus underscoring the prominent demand arising out of tier-III and -IV geographies with strong presence of affordable housing-focused HFCs.

With expectations of strong growth, attractive post-tax returns on assets in the region of 2-3%, and a stable asset quality of sub-2% in this category, multiple banks of the stature are venturing aggressively into this space on the back of specialised teams and co-lending agreements.

The competition is more intense than ever. For HFCs to continue to dominate this space, they need to upgrade their strengths and further differentiate themselves. Apart from competitive pricing, reach, and strategic partnerships, a few other differentiations that will prove to be the key in this segment include:

Tailored credit assessment models: Such models must specialise in underwriting loans for self-employed and low-income groups with irregular cash flows, which are the major customer segments in this category. Advanced artificial intelligence/machine learning-driven credit scoring models that factor in non-traditional data (such as rent payments and utility bills) can help players underwrite better and faster.

Innovation and flexibility: Players must adopt product placement towards target segments, with flexible repayment terms, faster approvals, and digital processing for all the possible steps in the loan journey. This will offer an attractive proposition to customers and create distinction.

Strengthening digital capabilities: Enhancement in digital onboarding, mobile-first loan servicing, application programming interface-driven integrations to enhance efficiency, personalised dashboards for sales staff, etc. are some of the key capabilities which players need to build.

While banks have the advantage of lower-cost funds, HFCs can differentiate through agility, customer-centric solutions, and deep market penetration. By leveraging digital innovation, flexible lending models, and strategic partnerships, both categories of players can lead the next wave in the affordable housing finance space.

The writers are respectively India leader-Financial Institutions Practice & global leader-Fintech Practice, and director-Mumbai office & leader-Financial Institutions Vantage team, BCG India.

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