Tailwinds far outweigh turbulence in housing finance industry

The importance of housing as a sector cannot be overstated in an economy that needs an urgent kick-start. Every ₹1 lakh invested in housing leads to an addition of ₹2.9 lakh to the GDP, owing to inter-linkages with nearly 270 ancillary industries. Consequently, promoting housing finance gains strategic importance.

The turn of the century saw banks shift their sights towards mortgage lending. Hitherto, the sector had been dominated by Housing Finance Companies (HFCs). Regulatory directives, coupled with statutory incentives around increased qualifiers for priority sector lending, helped the cause.

Mortgage-to-GDP ratio moved from 3.4 per cent in 2001 to an impressive 7.25 per cent by 2005. Banks increased their market-share from about 40 per cent to just under 70 per cent in a very short period.

Youngsters lead

A significant part of this growth came from lending to young affluent who saw their incomes rise, thanks to the services sector boom. The average borrower age dropped to 36-38, a far cry from home purchase being a pre-retirement event. The affordability index (property price/average annual income) moved from around 11 in 1997 to around 5 in 2005. The index remained stagnant for the next several years despite rising incomes because real-estate prices also moved upwards in tandem. This made the asset class attractive for investors. However, home ownership gradually crept out of reach for the masses, especially in the metro cities.

The second decade saw an aggressive focus towards promoting HFCs, especially in the affordable housing segment. The Pradhan Mantri Awas Yojna (PMAY) has been an impactful initiative, providing impetus to borrowers and lenders alike. The number of licensed HFCs nearly doubled in this period. Most of them carved out niche geographies or segments and addressed borrowing requirements of a hitherto unbanked segment.

Nearly 40 per cent of these borrowers had no prior credit history. The period also saw a sharp growth in internet usage and a phenomenal rise in digital payments (8 per cent in 2010 to about 40 per cent in 2020). This enabled newer lenders evaluate alternative data sources to assess creditworthiness. The socio-economic impact of these players was palpable albeit sub-scale. The industry continued to be asymmetric, with the top 5 lenders having 50 per cent market-share despite an influx of several new players.

Improved affordability

The third decade of this century sees us at a very interesting cross-roads. A phase of economic slowdown, followed by a prolonged pandemic, has made lending riskier. Retail portfolios are seeing stress across the board and the jury on recovery is still out. Weak property prices have acted as dampener for speculators and investors, especially in metro cities. Adverse events in certain large NBFCs have led to increased regulatory scrutiny and tightening. Debt is scarce, especially for some of the smaller HFCs. We see the following trends as we look at the years ahead:

The next 4-5 years are likely to see flat real-estate prices, especially in the larger cities. Demand is set to be overwhelmingly driven by end-users, especially if low-interest rates continue to prevail. The affordability index is now down to 3.3, making the purchase proposition even more attractive for end-users. The pandemic has opened the floodgates for remote working opportunities. It has also compelled large organisations to examine the de-centralisation of operations for risk mitigation. Both these developments augur well for demand in smaller towns.

Larger lenders are likely to continue increasing market share by leveraging their interest rate edge because of surplus liquidity. The relatively greater focus on ramping up secured assets will lead to disproportionately higher investments in distribution capability. Risk appetite is likely to stay moderate. There is significant opportunity in ramping balance-sheet by focussing on salaried borrowers using price advantage.

Smaller HFCs are set to benefit from the relative demand increase in tier 3 and 4 towns. Many have invested in acquiring deep institutional capability in micro-markets. They also enjoy cost and service delivery efficiencies, owing to the deployment of nimble, contemporary operating systems. Smaller HFCs are likely to solve their liquidity challenges using a combination of co-lending, securitisation, and credit guarantees. The stage is set for each of these initiatives and calibrated execution will define success.

The government’s affordable housing focus has not been mirrored yet in the PSBs’ lending patterns. This is set to change as many of them are fine-tuning strategies. PSBs have a long-standing presence and deposit relationships with individuals across the length and breadth of the country. This will be a huge source of competitive advantage. The key will lie in product design. Some PSBs are likely to opt for the co-lending model to dip their toes in untested segments.

Credible underwriting

The high share of new-to-credit borrowers in the affordable housing sector makes credible underwriting tougher. Many of them are employed in the informal segment or have small businesses with low percentage of documentary verifiability. This provides a meaningful opportunity for using artificial intelligence to augment credit assessment. Globally, use cases have initially emerged in payments and unsecured products. The secured lending ecosystem has already begun piloting numerous tools.

Adoption is likely to be slow but steady. The immediate need is in the form of reliably aggregating alternative data for risk interpretation. The underwriting process is hamstrung by the inherently offline nature of legal due diligence and asset valuation. The former needs urgent government intervention by aggressively digitising land and title documents to facilitate online fulfillment. The valuation process is already seeing forward-looking startups take the necessary steps in the right direction. This is bound to get adequately refined over time.

The tailwinds far outweigh any turbulence that the housing finance industry might face in the short term. The housing sector is poised for robust growth once there is a slight turnaround in consumer sentiment, which has been impacted by the pandemic. The sheer breadth of the industry will ensure profitable growth segments exist for players across categories depending on their strategic intent. This, in turn, will provide the much-needed buoyancy for economic growth.

(The writer is CEO, India Mortgage Guarantee Corporation)

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