ICRA: HFCs to maintain growth rate, asset quality expected to remain rangebound


As per ICRA’s estimates, the total housing credit outstanding in India grew by 19% in FY2016 to Rs. 12.5 trillion as on March 31, 2016 (18% growth in FY2015) .

While both banks and HFCs grew at a similar pace of 19% during FY2016, the banking sector growth increased driven by their increased focus retail lending including housing.


Trends in Housing Credit Growth over the years

Within HFCs/NBFCs space, the home loan growth for large HFCs (HFCs with Assets under management greater than Rs 450 billion) was lower at 15% (19% in FY2015) vis-a-vis home loan growth of 36% for their smaller counterparts (37% in FY2015) during the same period leading to an overall growth of 19%. The portfolio growth of small HFCs was driven by several new entrants and their increased focus on faster growing and niche segments like affordable housing finance and the self-employed borrower segments.

The affordable housing segment for HFCs, grew at a fast pace (28% during FY2016) taking overall portfolio to Rs. 957 billion as on March 31, 2016. As per Mr. Karthik Srinivasan, Co-head Financial Sector Ratings, “Opportunities for growth are high for the segment given the current low penetration levels as well as the government thrust on the affordable housing segment. However, there could be increased competition in the segment with new HFCs and MFIs entering this business. There could also be additional competition from the newly licensed small finance banks as the small ticket home loans could also be a target segment for them.”

The large number of new entrants in the housing finance market has constributed to increased competition in the industry. This trend, coupled with nil prepayment penalties is leading to rise in balance transfers. Further, there has been some relaxation in lending norms (for example, relaxation of Loan To Value Ratio(LTVs)/Fixed Obligation to Income Ratio(FOIRs) or higher top-up loans and introduction of new products), which could increase portfolio vulnerability.

So far, the asset quality indicators remain comfortable with Gross NPAs of 0.73% as on March 31, 2016, however, given that the overall portfolio vulnerability is increasing due to rising share of relatively riskier segments (affordable housing, self employed, non housing loans), ICRA believes that asset quality indicators could weaken going forward. Nevertheless, the strong monitoring and control processes, borrowers’ own equity in the properties and a large proportion of self-occupied properties are mitigants for the concerns on asset quality to some extent. Overall, ICRA expects or Gross NPAs% for HFCs to be around between 0.8% – 1.2% over the medium term.

In FY2016, the larger HFCs continued to be more reliant on debt market instruments and fixed deposits for meeting their funding requirements. As for small HFCs, while debt market instruments continued to have a sizeable share at 37% in the overall funding mix, they also accessed NHB funding. As for the incremental fund requirement, factoring in an estimated credit growth of HFCs 20-22% in FY2017, and the re-financing requirements, ICRA estimates that HFCs would need to mobilize ~Rs. 2.2 – 2.6 trillion during FY2017.

The aggregate gearing level for HFCs has remained at around 8.2 times as on March 31, 2016. ICRA expects the aggregate gearing level for HFCs to remain at around 8-9 times over the medium term. Mr. Karthik Srinivasan, added, “HFCs will require around Rs 186-286 billion of external capital (30-50% of the existing net worth of the HFCs) to grow at a CAGR of 20-22% for the next three years at internal capital generation levels (post dividend), of 15-16%. Within this given the higher expected credit growth of smaller HFCs, capital requirement of smaller HFCs expected to be around Rs 100-155 billion (100-150% of existing net worth) to grow at (27-35% 3 year CAGR). Favorable investor sentiments, steady profitability and growth prospects are likely to help the small HFCs in raising the required capital”.

HFCs continued to report good profitability indicators with a return on equity of 21% in FY2016 (20% for FY2015). ICRA expects the spreads to decline marginally by 10-15 bps owing to the high competitive scenario, which could lead to dilution in incremental spreads. Non-interest income could also reduce due to lower processing fees charged from the customer. However, profitability is likely to be supported by stable operating expenses and credit costs and as per ICRA’s estimates, HFCs will generate good returns (ROE of 17-19%) for FY2017.


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