Strong Fundamentals Outweigh Turbulence In Housing Finance: CARE Ratings

The growth for the housing finance segment gained momentum last year with the sector growing at 11% y-o-y backed by low-interest rates and improvement in the overall macroeconomic situation, CARE Ratings has said in its latest report.

"While banks continued to dominate the housing finance space, the housing finance companies (HFCs) were able to regain some of their lost share in FY22. Growth in the large prime was supported by both retail as well as the wholesale segment. However, the loan against property (LAP) segment dominated the disbursements for the affordable. Going forward, we expect growth momentum to continue and the HFC portfolio to grow at around 12% y-o-y in FY23 driven by the steady growth in disbursements and improving macro-economic environment," the ratings agency has noted.

"In terms of profitability, high credit costs primarily on account of builder book continued to be a drag for the prime segment. However, the profitability profile of the affordable HFCs improved due to relatively higher net interest margins (NIMs) and controlled credit costs. Affordable HFCs were relatively slow in passing on the interest rate benefit to the customers which boosted their NIMs. Going forward, return on average assets for the overall HFC sector is expected to remain around 1.9%-2.0%, supported by controlled credit costs and largely stable NIMs," the ratings agency has said.

Asset quality, although improving for the retail segment, on an overall basis is still facing headwinds on account of wholesale exposure. Going forward, though the sharp rise in inflation may affect disposable income, the recovery trend is expected to continue. GNPA is expected to decline to around 3.1% for the sector in FY23. The capital structure for the sector continues to be modest, with the affordable segment operating at relatively low gearing as the risk appetite for the lenders was low and the market remained cautious.

Banks Continue to Dominate; HFCs Regain Some Lost Share Although the banks continued to dominate and accounted for 63% of the overall housing finance portfolio, HFCs outshined in FY22. After reporting modest growth for two consecutive years, HFC reported a double-digit growth rate in FY22 at 11% y-o-y surpassing the 7% growth rate reported by the banks. Consequently, the share of HFCs, which has been contracting for the past two consecutive years, improved in FY22 from 36% to 37%. Improvement in the macroeconomic environment, low-interest rate regime, and initial signs of recovery witnessed in the real estate sector were the key catalysts for the high growth.