Favourable policy pronouncements and tax incentives for affordable housing haven’t just given a new lease of life to the housing sector, but the buoyancy has rubbed off on the housing finance sector also, and even begun to alter its market dynamics. The policy facilitations include the government’s ‘Housing for All by 2022’ and the Pradhan Mantri Awas Yojana (PMAY) initiatives, the grant of infrastructure status to affordable housing, allowing additional investment limits to debt mutual funds to invest in housing finance companies (HFCs), and lower risk weights for smaller-ticket housing loans.
The upshot? Startlingly, low interest payments on loans taken to buy affordable homes, which CRISIL defines as those with ticket sizes below Rs 15 lakh. Indeed, under the Credit Linked Subsidy Scheme of the PMAY, home loan EMIs could be up to 45 per cent lower for the economically weaker section and the low-income group.
No surprise, then that pure-play affordable housing finance companies (AHFCs) have seen their assets under management (AUM) rocket 50 per cent in the past financial year to Rs 23,000 crore as on March 31, 2017, compared with Rs 15,000 crore as on March 31, 2016. According to estimates based on the top 30 HFCs, the affordable housing segment was worth around Rs 1.6 lakh crore, constituting more than a quarter of all housing loans as on March 31, 2017.
What’s more, this surge is expected to sustain, with AHFCs expected to clock 40 per cent compound annual growth rate in AUM over the next four years, compared with 17-18 per cent expected for the housing finance sector as a whole.
With such high growth, it is but natural that the market share of these new pure-play players in the overall affordable housing finance sector should rise — from about 10 per cent as on March 31, 2016 to nearly 15 per cent as on March 31, 2017.
It is also natural that the market dynamics should stand altered, with existing players seeing capital infusion and more new players entering the fray as affordability improves for borrowers, shoring up demand.
While the overall sector remains concentrated, with the top four HFCs (with loan book greater than Rs 50,000 crore) having a share of around 79 per cent, their share was down around 600 basis points (bps) in two years to fiscal 2016, and is expected to have declined further by at least 500 bps in fiscal 2017.
The past couple of years have seen a large influx of new players, taking the number of HFCs from 55 in fiscal 2014 to 70 in fiscal 2016, with around 80 licences pending with the National Housing Bank. And many of these new entrants are focussed on the affordable housing segment.
To be sure, the underlying borrower profile in the affordable housing finance segment has led to sharply differentiated portfolio characteristics for these players, including a higher proportion of self-employed borrowers and borrowers with lower income levels. Accordingly, the origination practices adopted are also different with higher reliance on direct sourcing. Also, the average loan-to-value for these players is lower than that seen for the overall home loan segment.
The underlying borrower profile, coupled with limited financial flexibility of the borrowers leads to potentially higher volatility in portfolio performance. This is evident in the two-year lagged gross non-performing assets of about 3 per cent, compared with about one per cent for the overall housing finance sector. Nevertheless, higher returns compensate for these risks to a large extent.
To their credit, many of the new pure-play AHFCs are backed by private equity (PE) players or strong promoters. Over Rs 2,000 crore of capital has been infused into these AHFCs in the past five years, with the number of PEs investing more than quadrupling from four to 18. These AHFCs will need another nearly
Rs 1,500 crore of capital in the next three years to meet the growth estimates.
Clearly, the policy facilitations have spurred something of a boom in affordable housing finance. However, institutionalisation of appropriate origination, credit assessment and underwriting practices and human resources will be necessary for the fervour to sustain.
The writer is senior director, Financial Sector Ratings, CRISIL Ratings