Credit growth of HFCs likely to shrink on liquidity crisis, tough competition: ICRA

Domestic housing finance companies (HFCs) may witness some slowdown in their housing credit growth in the second half (October 2018 to March 2019) of FY2019 due to factors such as tight liquidity, intense competition, and other risks, according to credit rating agency ICRA.

The agency cautioned that this may affect the overall growth of HFCs during FY2019, and lead to an increase in bad loans in the medium term.

Supreeta Nijjar, Vice-President and Sector Head, Financial Sector Ratings, ICRA, said: “While the long-term prospects for the segment continue to remain good, tight liquidity, which impacted disbursements of HFCs, is likely to pare the growth in H2 to 12-14 per cent, leading to moderation in the overall housing credit growth of 14-16 per cent for FY2019.”

She observed that a modest shift in market share is also likely with HFCs slowing down fresh disbursements in the third quarter of (October-December) FY19 and banks growing their portfolios at a faster pace through portfolio buyouts.

Asset-quality impact

While gross non-performing assets (stage-3 assets as per revised Ind-AS) as of September 30, 2018, were 1.3 per cent (similar to June 2018 levels, though slightly higher than 1.1 per cent as on March 31, 2018), tight liquidity and slowdown in growth could impact the asset quality in the non-housing loan segment, the agency said.

Within the housing loans segment for HFCs, the share of self-employed segment has increased to 29 per cent as on September 2018.

Though some of the larger HFCs can compete with banks in the salaried home loan segment, most of the HFCs target self-employed customer segments, or the affordable housing segment to optimise their yields.

While the self-employed segment offers good growth potential, ICRA said the asset quality in this segment is inferior with a GNPA of 1.5 per cent as on September 30, 2018 (1.1 per cent as on March 31, 2018), compared with the salaried segment’s GNPA of 0.5 per cent as on September 30, 2018 (0.4 per cent as on March 31, 2018).

Competition

The agency assessed that with a rise in the number of players in the market, there has been an increase in the competitive intensity in the industry, which has led to dilution in lending norms.

Overall, the portfolio vulnerability of home loans has increased owing to a rise in the share of riskier sub-segments such as self-employed and affordable housing within the housing portfolio of HFCs.

Further, the share of portfolio lent at higher tenures and fixed obligation to income ratio has also increased, which could impact the asset-quality indicators of HFCs over the medium term, said the agency.

Also, for around 15 per cent of the portfolio, ICRA cautioned that the loan-to-value ratios were higher than 80 per cent, which could lead to higher losses, in case delinquencies were to crystallise/property prices were to correct.

These risks partly get mitigated by the strong monitoring and control processes of HFCs, borrowers’ own equity in the properties, and the large proportion of the properties being financed for self-occupation, especially in the affordable segment.

Gross NPAs

In ICRA’s opinion, gross NPAs for HFCs in home loan segment could increase to around 1.1-1.3 per cent over the medium term, from the current level of 1 per cent.

Moreover, higher gross NPA percentage on the non-housing loan segment could lead to an increase in gross NPAs for HFCs to around 1.4-1.8 per cent over the medium term.

“The ability of HFCs to implement timely collection and recovery efforts in respect of the delinquent loans – repossess the property, wherever necessary, and sell the same in a timely manner – will be a key monitorable,” said Nijjar.

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