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India Ratings and Research (Ind-Ra) has maintained a stable outlook on affordable housing finance companies (HFCs) and a negative outlook on large HFCs for FY21. It expects the overall loan growth of HFCs to moderate to 6 per cent year-on-year in FY21.
Competition from banks
The credit risk assessor is of the view that the affordable housing finance segment remains margin accretive, as it faces moderate competition from banks and lenders.
The government-sponsored schemes such as credit-linked subsidy scheme and, in the case of self-construction loans, existing equity in land will help moderate loan-to-value ratio, thereby moderating default risk in the segment, it said in a report.
Ind-Ra opined that competition from banks will intensify in the large ticket housing space for HFCs, as margins shrink from the already modest levels. This is because elevated borrowing costsand challenges to mobilise funds through capital market borrowings have increased funding cost.
According to Ind-Ra analysis, the optimum return on equity possible for large ticket housing financers stands in the range of 14 per cent to 15 per cent, based on the proportion of non-housing portion in the overall mix.
Ind-Ra does not expect any significant impact of the recently introduced leverage caps in the medium term as most HFCs operate at moderate leverage levels. However, margin pressures, along with leverage constraints, will keep return on equity capped for HFCs in the medium to long term. Their ability to buffer the spreads through non-housing loans (that is construction finance, lease rental discounting, loans against property or institutional lending) will diminish, as these segments are facing their own set of challenges, said Jinay Gala, senior analyst, in the report.
Consolidation
There will be consolidation in the HFC space with larger and established players continuing to gain market share, Gala added.
As HFCs work on behavioural asset liability tenors, the report observed that incremental dependence on short-term borrowing needs to be monitored, as there could be a widening of gaps in the less-than-one-year buckets during stress times because prepayments that have been factored may moderate significantly.
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