The total housing credit growth slowed down to 14% for the twelve months ended June 2017 (16% in FY2017) taking overall housing credit to Rs. 14.6 trillion as on June 30, 2017.
Trends in Housing Credit Growth
According to Rohit Inamdar, Group Head Financial Sector Ratings ICRA, “The growth in the sector was impacted by a slowdown in new project launches and buyers and investors deferring their home purchase decisions in expectation of a decline in real prices. In addition disruptions in the real estate market owing to implementation of Real Estate Regulation and Development Act (RERA) and; Goods and Service Tax (GST) and preference of end users for finished inventory /RERA approved projects also resulted in a slowdown“.
There has been deterioration in asset quality indicators for HFCs in Q1FY2018 with the gross NPAs increasing from 0.84% as on March 31, 2017 to 1.15% as on June 30, 2017, largely attributed to the increase in non-housing book NPAs. Deterioration in asset quality indicators of some players in the affordable housing segment was also witnessed owing to seasoning of portfolio as well as some impact of demonetization. While the asset quality of HFCs has remained resilient across cycles, of late there has been an increase in the share of riskier sub-segments like non-housing loans, self-employed and affordable housing in the overall portfolio. ICRA expects HFCs’ gross NPAs to remain range bound between 0.9% and 1.3% for FY2018 as some of the risks such as relaxation of LTVs/FOIRs, increased loan tenures and ballooning of repayments could impact asset quality indicators negatively over the medium term. These risks will partly get mitigated by the strong monitoring and control processes of HFCs, borrowers’ own equity in the properties and the large proportion of the properties being financed for self-occupation especially in the affordable segment.
As for funding requirements, large HFCs continued to rely more on debt market instruments and fixed deposits while small HFCs depended largely on bank borrowings and debt market instruments. Small HFCs were also able to draw substantial NHB funding. The cost of funds for HFCs continued to moderate with around 6 bps in Q1FY2018, from 8.10% in Q4FY2017 to 8.04% in Q1FY2018 vis-a-vis a 40 bps reduction in Q4FY2017.
The reported capital adequacy by HFCs remained comfortable, given the relatively lower risk weights for home loans and commercial real estate loans. Overall HFCs gearing level remained at around 8.0 times as on June 30, 2017. As per ICRA’s estimates, HFCs will require around Rs. 90-160 billion of external capital (11-19% of their existing net worth) to grow at a CAGR of 20%-22% for the next three years with internal capital generation levels (post dividend) of 15-16% and gearing levels of 8-9 times. Most of this incremental capital requirement HFCs would be for the small HFCs including those operating in affordable housing space.
On another parameter, sharper decline in yield on advances vis-à-vis the cost of funds has led to a decline in net interest margins from Q4FY2017 levels. HFCs nevertheless, continued to report good profitability with overall ROE of 16.7% in Q1FY2018. Says Inamdar, “Despite being supported by the rising share of higher yielding non-housing loans, the lower incremental lending rates in the home loan segment are likely to result in the net interest margins of HFCs shrinking by 10-15 bps in FY2018. Overall, we expect a 5-10 bps reduction in profitability (PAT/ATA) for HFCs in FY2018. Nevertheless, ICRA expects HFCs to report good returns (ROE of 17-19%) for FY2018.”
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