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Testing Time For HFCs

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Testing Time For HFCs
Krishnan Sitaraman - 03 September 2020

Potential home buyers, shelving plans with the pandemic, will exacerbate the already weakening growth in Assets Under Management (AUM) of Housing Finance Companies (HFCs) this fiscal. AUM growth will decline for the industry and even turn negative for some HFCs, on heels of a tepid 5 per cent growth in fiscal 2020, diving all the way from 27 per cent in fiscal 2018.  Home sales are expected to drop sharply this fiscal. Further, prices are expected to fall across segments, with luxury segment the most impacted, leading to lower loan ticket size, hence, reduced disbursements. With funding access remaining a challenge, players are focussing on maintaining higher liquidity, which will also impact disbursements.

That said, not all sub-segments of HFCs will perform the same - while home loans AUM is expected to witness low single digit growth, the non-housing portfolio - primarily developer loans and loans against property - is expected to contract.

Many other shifts and changes in trends are in the making, not all negative. What could support AUM, despite lower disbursements, is the slower rundown in outstanding home loans stock due to the longer tenure of this asset class, and 20-30 per cent of the retail book and 80-90 per cent of the wholesale book being under moratorium. Capitalisation of accumulated interest would also support AUM levels. Meanwhile, fallingq interest rates on home loans in the near to medium term and home prices moving south, come as a reprieve for HFCs, by raising affordability. We have already seen many new as well as established players focussing on affordable housing loans. This segment should continue to be a key contributor to home loan disbursements.

At the same time, the Reserve Bank of India’s long-term repo operations window, partial credit guarantee, and National Housing Bank’s refinance schemes have eased funding access in the last couple of months. But these have served as a one-time push and a sustained pickup in fund raising through traditional routes remains to be seen. 

Banks too are expected to gain share in the home loan market, given their lower funding cost and greater access to resources. Banks have already been giving HFCs a run for their money in this segment in recent years. In fiscal 2019, home loans growth of banks crossed that of HFCs for the first time in the last five years.

HFCs have been put to test on several fronts in recent times. Even before the pandemic hit, housing sales were under pressure and continued funding access challenges and focus on conserving liquidity were only reducing business growth. Competition from banks is expected to intensify. Tighter underwriting processes to prevent sharp asset quality deterioration is leading to a lower but sharper growth focus only on retail segment. 

The key for HFCs to maintain their position and tide over current challenges will be to strengthen their capital base, manage funding access prudently and keep credit costs under check. Conservative asset liability maturity management and liquidity preservation would help stabilise HFC balance sheets. These would be the important monitorables for key stakeholders of HFCs.

Those with strong parentage or part of large corporate groups, are expected to fare relatively better on fundraising and disbursement, navigating the current environment with less pain.

 

The author is Senior Director, CRISIL Ratings

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