New business models will see HFCs enjoy double-digit growth in FY21: Brickwork report

Housing finance companies (HFCs) will begin to see double-digit growth next fiscal, aided by reworked business models, a steady pace in loan securitisation and adoption of new strategies such as co-lending with banks, according to a report by Brickwork Ratings (BWR).

HFCs grew at a CAGR of over 20 per cent during 2013-18, but their lending considerably dropped in the second half of FY19 to less than 10 per cent. This sharp decline was a result of the sector undergoing a severe bout of liquidity crisis as investor confidence dipped post IL&FS fiasco in September 2018.

However, with HFCs redefining their business models in terms of reducing exposure to wholesale lending, reliance on short-term borrowings, a higher quantum of securitisation and exploring co-lending with banks, they will return to the growth path next fiscal, said the report. Also, government measures in terms of a partial credit guarantee scheme to improve liquidity and support for the affordable housing segment will further accelerate growth, it added.

“We expect growth in HFCs to rebound to double-digit figures in FY21 to 10-12 per cent after a difficult FY20, wherein loan growth is estimated to be as low as 2 per cent,” the BWR report said.

Securitisation on the rise

While HFCs with a strong parentage continue to get funding from banks, standalone HFCs with a high proportion of non-housing loans and small HFCs have been the worst affected by the liquidity crunch. With the fall in traditional borrowing routes, HFCs have begun to obtain a large portion of their funding through the securitisation route.

“We have seen an unprecedented rise in loan securitisation by HFCs from the second half of FY19 and expect the quantum of securitised pools outstanding to cross the ₹2-lakh-crore mark by the end of March 2020. This, along with government measures such as a partial credit guarantee scheme, is expected to help improve liquidity and enable HFCs to better manage their asset-liability profile,” said Rajat Bahl, Chief Ratings Officer, BWR.

Co-lending model

Adopting the co-lending model can be win-win for all stakeholders. Banks can leverage HFCs’ geographic reach and benefit from their origination and servicing capabilities without incurring much additional operating cost. Furthermore, HFCs will get access to better-profile clients, require lower capital for deployment, and improve liquidity and profitability, given the fee-based nature of the business, the BWR report observed.

The affordable housing space, which accounts for roughly 15 per cent of the overall portfolio of HFCs, is generating good interest in banks, and co-lending in this space will also drive growth, given the government push to the segment.

Although HFCs are reworking their business models, asset quality has been adversely impacted by the stress witnessed mainly in the wholesale loan portfolio.

A huge housing inventory pile-up coupled with refinancing risks faced by realtors and stress in the SME sector could result in higher NPAs for HFCs in their non-housing loan portfolios, the report said.

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