About Housing Finance Company and Industry Outlook:
The launch of “Housing-For- All by 2022” scheme in 2015 heralded a new era in the housing finance sector. It delivered much-needed boost to the real estate and housing finance industry by creating an enabling and supportive environment for expanding credit flow and increasing home ownership.
The year saw launch of new campaigns by HFCs to raise awareness about the home loans and innovative new products for the customers in the low income bracket.
With the recent notification, 41 housing finance companies are now approved under The Securitisation and Reconstruction of Financial and Enforcement of Security Interest Act (SARFESAI) which is a significant step towards bringing HFCs at par with banks by enabling speedier loan recovery. The year also saw grant of new licences to six new entities focussed mainly on the affordable housing segment. This will add to the 60 active HFCs in the market and will take us closer to realising the ‘Vision of Housing for all by 2022.
Despite the double digit growth and the recent move by government to address key policy bottlenecks, the housing finance industry in India remains under- developed by global standards.
We expect the next 24-36 months to be an action packed year for real estate and housing finance sector in India on the back of significant push to create conducive environment for investment by undertaking major policy reforms. The year is also likely to witness significant progress in the Housing for All by 2022 scheme and Smart Cities Project.
During the period FY09-13, Housing Finance Companies (HFCs) have been more aggressive than banks in increasing their credit off-take. Factors driving the penetration of housing finance are: demographic (rising per capita income, expanding middle class, trend of nuclear families); fiscal (income tax deduction on interest and principal of housing loan) and macro-economic (urbanization, GDP growth). HFCs operate under different regulatory environment and have greater flexibility in operational matters, freedom to lend independent of priority- sector targets as compared to banks and other financial institutions. This has helped HFCs focus on, and expand their presence in, the housing loan market space. However, despite its past double-digit growth rate, mortgage to GDP ratio stands at ~9% for India as against ~60% in the developed nations. In addition, HFCs are likely to also focus on other loan products like Loans against Property, Builder Loans, Lease Rental Financing and others. With the rates cycle likely to turn, HFCs could benefit from lower costs of borrowings in the medium term.
The National Housing Bank (NHB) vide its circular of January 2016 has revised the interest rate and the on-lending cap under the Rural Housing Fund (RHF) with immediate effect. For loans up to Rs. 15 lakh (or Rs. 1.5 million), the interest rate has been revised to 6.12% to 6.87% and the on-lending spread cap has been increased from 2.0% earlier to 3.5%. In ICRA’s view this is a positive development for the sector, especially for HFCs operating in the small ticket housing loans in the rural areas. The earlier spread caps had made the RHF unattractive for HFCs, as the spread was inadequate to cover the relatively higher cost to serve required for this segment. This note contains a brief on the key terms of RHF schemes and also ICRA’s assessment on the possible return on equity (ROEs).
Over the last couple of years, NHB has launched various refinance schemes to promote financing to the rural and urban low income housing segments. Some of these include Rural Housing Fund (RHF) and Urban Housing Fund (UHF), Special Refinance Scheme for Urban Low income Housing.
Since 2008-09, Government has been extending support to the sector through allocations under the RHF and UHF to NHB, which NHB then on-lends to HFCs/Banks based on the eligibility.
Stocks of housing finance companies have seen a turnaround in fortunes in the domestic market after the Budget. The Budget showered a lot of incentives on the layman under the government’s affordable housing push to encourage home buying. First-time home buyers will get deduction of additional interest up to Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned in 2016-17, where the cost of the house does not exceed Rs 50 lakh.
National Housing Bank, the central nodal agency for the implementation of Pradhan Mantri Awas Yojana-Credit Linked Subsidy Scheme, said the bank is on course to disbursing about ₹20,000 crore this financial year.
In line with ICRA’s estimates, the total housing credit outstanding in India as on September 30, 2015, crossed Rs. 11.4 trillion as against Rs. 10.5 trillion as on March 31, 2015, indicating an annualized growth of 17% H1FY16. There has been some pick-up of growth in Q2FY16 vis-à- vis the 14% annualized growth in Q1FY16 supported by disbursements on construction linked loans, growth in the small ticket affordable housing segment and demand from Tier II/III cities and some increase in primary sales during the festive season.
If we were to segregate the market based on various types of participants there would broadly be two sets – banks (constituting 63% of the overall market) and HFCs/NBFC (37%).
– While the overall banking sector credit growth remains muted, housing credit growth for banks has been higher than previous years (17% annualized in H1FY16), driven by the increased focus of banks on retail loans such as housing given the asset quality related challenges in their corporate loan books and their ability to offers loans at relatively competitive interest rates leading to higher balance transfers from HFCs to banks.
– The growth for HFCs and NBFCs (16% annualized in H1FY16) has largely been driven by the higher growth in the portfolio of the smaller HFCs (Assets under management less than Rs. 450 billion), which are operating in the high growth segments like low income/affordable housing and self employed segment.
– Over the last 3-4 months various regulatory changes have been announced, starting with the lowering of risk weights (further from 50%) for housing loans, 41 HFCs getting SARFAESI license, as well as the revision in interest rate and the on-lending cap under Rural Housing Fund (RHF) and Urban Housing Fund (UHF), which are likely to support growth in the low ticket affordable housing segment.
– Lower risk weights on low ticket home loans could encourage lenders to lend more to the small ticket home loan segment, as it would help them in conserving capital. However, from a risk perspective, this may be negative as the target borrower’s credit profile is weaker and more vulnerable (owing to limited cushion for exigencies and to absorb income shocks) compared to prime salaried home loan borrower.
– Coverage under SARFAESI is positive from a recovery perspective though it might be difficult to get self-occupied properties vacated. Nevertheless it could be an important recovery tool for HFCs and would help them minimize the loss, given default.
– Revision on the lending spread cap by NHB under RHF & UHF from 2% earlier to 3.5% is a positive for the sector especially for HFCs operating in the small ticket housing loans segment. However the relatively established players who have achieved a reasonable scale of operations are likely to benefit more vis-a- vis the newer players given that the new entrants in the affordable housing finance space are scaling up operations and hence have high operating expenses (4-5% in relation to average assets) vis-a- vis the traditional higher ticket prime home loans segment and thus will require operating at a spread of atleast 6-7% to be able to report reasonable returns.
Over the last few years the housing finance markets has continued to report robust growth despite challenges in the economy, which has made this segment attractive for both banks as well as non-banking finance companies (NBFC). Consequently, there have been a large number of new entrants in the market – some HFCs have been floated by existing NBFCs while others are new companies started by new entrepreneurs supported by private equity players. This coupled with a prolonged slowdown in the real estate and hence lower primary sales have led to increased competition in the industry. Further, a significant share of sourcing from direct sales agents whose commissions are based on incremental disbursements files sourced, nil prepayment penalties are encouraging balance transfers along players as lenders typically charge lower interest rates to new borrowers and offer incentives in terms of lower processing fees and some relaxation in lending norms (for example – relaxation in terms of LTVs/FOIRs or higher top-up loans). While so far the asset quality indicators continue to be good (Gross NPA% of 0.78% as on September 30, 2015), given the increasing portfolio vulnerability owing to competitive pressures as well as increased focus of some of the players on riskier products (like LAP and builder loans), and a change in the borrower profile towards the self-employed and low-income segment (where income streams could be more volatile). Nevertheless, the strong monitoring and control processes, borrowers own equity in the property and the large proportion of borrowers staying in self-occupied property could reduce the impact of the above mentioned concerns on asset quality to some extent. Overall ICRA has revised the projection for Gross NPA% for HFCs to be around between 0.8% – 1.2% for FY16.
The investor sentiment for the housing sector remains good as reflected by the recent capital infusions to the tune of Rs. 45 billion in YTD FY16 (Rs. 26 billion in FY15). In ICRAs estimates, HFCs will need an external capital of around Rs. 185-280 billion (30-50% of the present net worth) to grow at 20-22% over the next years, assuming an internal capital generation of 16% (post dividends) while maintaining the capitalisation levels at current levels. Part of this capital could also be in the form of mortgage guarantee. As for the incremental fund requirement, factoring in an estimated credit growth of 20-22% in FY16, and the re-financing requirements, ICRA estimates that HFCs would need to mobilize Rs. 1.9-2.1 trillion during FY16. Assuming HFCs maintain a similar borrowing mix incremental fund requirements from banks (including NHB refinance) would be to the tune of Rs. 800-900 billion, while fresh NCD issuances would be at Rs. 950-1000 billion. In terms of key performance indicators, HFCs continued to report good profitability indicators with an Return on Equity (ROE) at 18.76% in H1FY16 (20% for FY15). 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 FY16. At present, there are more than 66 active HFCs in the market. According to rating agency ICRA, HFCs’ loan portfolio grew 22 per cent to Rs 5,23,800 crore in March 2015, from Rs 4,29,800 crore in March 2014. In line with the Centre’s ambitious plan to provide housing for all by 2022, Delhi- based National Housing Bank (NHB) is gearing up to spawn 80 new housing finance companies (HFCs). The focus will be on financing affordable houses.
If the goal of housing for all by 2022 is to be reached, the number HFCs in the region should be more than 150, up from the current more than 66. Affordable housing finance is a rapidly growing niche segment. NHB is giving a fresh look to ways for taking equity stake into HFCs and create some form of new instruments to help them. According to rating agency ICRA, the overall market size is Rs 67,800 crore. The portfolio of new players in the affordable housing segment stood at Rs 6,500 crore as on March 31, 2015. This segment could continue to grow at a compounded annual growth rate of 50 per cent over the next three-to- five years. With buyers in the affordable homes segment poised for higher tax relief, these lenders are set to benefit from higher loan growth. When demand for real estate is stagnant or moderating across many cities, the finance minister raising the tax benefit for new home buyers with a budget of Rs 50 lakhs augurs well for not only the developers but also for housing finance companies (HFCs). Over the next five years, housing finance disbursements are projected to grow at a faster pace than in 2014-15, as loan offtake continues to be driven by the government’s impetus to the affordable housing segment and lower interest rates. Lenders’ outstanding loan portfolio is expected to grow at a slightly slower pace as income growth and low interest rates will spur a rise in prepayment rates.