Amid conditions of business de-growth for the housing finance companies (HFC)s, the affordable housing finance companies (AHFC)s have been continued to grow, albeit at a slower pace. As per the latest ICRA report, the total portfolio of the new AHFCs in the affordable housing space stood at Rs. 55,061 crore as of September 30, 2020, and registered a moderate year-on-year (Y-o-Y) growth of 9% compared to the sector’s overall negative growth. Although the growth is much lower than the 3-year average of over 30%, as per the rating agency, the long-term growth outlook for AHFC remains favorable, supported by several factors. At this current size, AHFCs accounted for around 5% of the overall Indian HFC market as of September 30, 2020.
Giving more insights, Ms. Manushree Saggar, Vice President and Head – Financial Sector Ratings, ICRA, says, “Given the target borrower profile (largely self-employed and middle-to-low-income borrowers), the impact of the pandemic on earnings and savings could be high, leading to the deferment of home purchases for some time by such borrowers. Thus, the growth numbers for FY2021 could be much lower at 8-10%. However, the long-term growth outlook for the sector remains positive given the largely underserved market, favorable demographic profile, housing shortage, and Government support in the form of tax sops and subsidies. We expect that the growth would pick up to 12-15% in FY2022.”
Over the last decade, several new players have emerged in the housing finance space, focusing primarily on the affordable housing segment. The property cost in this segment is usually below Rs. 20 lakh and borrowers have relatively low income and usually do not have any formal income proof. Earlier, most large players did not cater to this segment. However, over the last couple of years, even large HFCs have set up dedicated verticals focused on the affordable housing segment. While banks are also present in the smaller-ticket home loan market, their lending to the economically weaker section (EWS) and low-income group (LIG) segments and borrowers without any formal income proof is limited. These specialized HFCs are trying to tap this underserved market segment.
As for the key parameters, the asset quality indicators for AHFCs registered a marginal improvement with a reported gross NPA% of 3.1% as of September 30, 2020 (3.6% as of March 31, 2020), supported by the standstill on the bucket movement during March 2020-August 2020 and the adjustment of the EMIs received during the moratorium period against past overdue. Nevertheless, the asset quality numbers remained weaker than the industry levels (2.40% as of September 30, 2020), reflecting the inherent weakness associated with the segment. However, adjusting for two AHFCs who have higher NPAs, the gross NPA%/Stage 3% was lower than the gross NPA% of all HFCs at 1.5% as of September 30, 2020, but comparable to the gross NPA% of 1.4% for the home loan segment of all HFCs. This was partly attributable to the relatively lower portfolio seasoning and the higher share of home loans in the portfolio of AHFCs compared with larger peers.
“ICRA estimates that the overall reported asset gross NPA% could increase to 3.6%-3.9% by end of March 2021 from 3.1% as on September 30, 2020, and stay at similar levels in FY2022 assuming growth is in line with its expectations. Over the long term, however, the ultimate losses to the lenders could be limited, given the secured nature of the loans through the recovery time could get extended further. These lenders have strengthened their balance sheets through additional Covid-19-related provisions and higher expected credit loss (ECL) provisions in FY2020 and H1FY2021,” Ms. Saggar added.
On the funding side, these entities were traditionally dependent on the banking channel and larger non-banking financial companies (NBFCs) for meeting their funding requirements. However, in H1 FY2021, the share of funding from capital markets in the form of non-convertible debentures (NCDs) and National Housing Bank (NHB) refinance increased to about 36% of the total borrowings as of September 30, 2020, primarily driven by special funding schemes of NHB to support the liquidity of HFCs and the targeted long-term repo operations (TLTROs) of the RBI. The liquidity profile of these entities is also supported by their relatively moderate gearing and substantial balance sheet liquidity (~13% of total assets as of September 30, 2020).
While the net interest margins (NIMs) of these AHFCs were largely stable in H1FY2021 and the operating ratios moderated due to lower business-related expenses owing to the lockdowns, the lower fee income due to curtailed loan originations and income from direct assignment (DA) transactions led to stable profitability (return on assets (RoA) of 2.3% for H1 FY2021).
“ICRA expects the profitability indicators of these HFCs to be lower with ROAs of 2.2%-2.4% in FY2021, given the expected impact of the pandemic on new business (cost-to-income ratios could remain elevated) as well as the asset quality (higher credit costs). Over the long-term, the ability of companies to improve the operating efficiencies and control the credit costs would be imperative to improve the return indicators,” said Ms. Saggar.
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