Affordable housing may grow 8-10% in FY21: ICRA

NEW DELHI: Affordable housing finance (AHFC) industry may grow by 8-10 per cent in FY2021, according to ICRA Ratings, a ratings agency. The total portfolio of the new AHFCs in the affordable housing space stood at Rs 55,061 crore as on September 30, 2020 and registered a moderate year-on-year (year-on-year) growth of 9%. The growth is much lower than the 3-year average of over 30%.

At this current size, AHFCs accounted for around 5% of the overall housing finance companies (HFC) market as on September 30, 2020.

Manushree Saggar, vice president and head (Financial Sector Ratings), ICRA said, “Given the target borrower profile (largely self-employed and middle-to-low-income borrowers), the impact of the pandemic on earnings and savings could be high, leading to the deferment of home purchases for some time by such borrowers. Thus, the growth numbers for FY2021 could be much lower at 8-10%. However, the long-term growth outlook for the sector remains positive given the large underserved market, favourable demographic profile, housing shortage and Government support in the form of tax sops and subsidies. We expect that the growth would pick up to 12-15% in FY2022.”

Over the last decade, several new players have emerged in the housing finance space, focusing primarily on the affordable housing segment. The property cost in this segment is usually below Rs. 20 lakh and borrowers have relatively low income and usually do not have any formal income proof.

While banks are also present in the smaller-ticket home loan market, their lending to the economically weaker section (EWS) and low-income group (LIG) segments and borrowers without any formal income proof is limited. These specialised HFCs are trying to tap this underserved market segment.

As for the key parameters, the asset quality indicators for AHFCs registered a marginal improvement with a reported gross NPA% of 3.1% as on September 30, 2020 (3.6% as on March 31, 2020), supported by the standstill on the bucket movement during March 2020-August 2020 and the adjustment of the EMIs received during the moratorium period against past overdues.

Nevertheless, the asset quality numbers remained weaker than the industry levels (2.40% as on September 30, 2020), reflecting the inherent weakness associated with the segment.

“ICRA estimates that the overall reported asset gross NPA% could increase to 3.6%-3.9% by end of March 2021 from 3.1% as on September 30, 2020 and stay at similar levels in FY2022 assuming growth being in line with its expectations,” said Saggar.

On the funding side, in H1 FY2021, the share of funding from capital markets in the form of non-convertible debentures (NCDs) and National Housing Bank (NHB) refinance increased to about 36% of the total borrowings as on September 30, 2020 primarily driven by special funding schemes of NHB to support the liquidity of HFCs and the targeted long-term repo operations (TLTROs) of the RBI.

While the net interest margins (NIMs) of these AHFCs were largely stable in H1FY2021 and the operating ratios moderated due to lower business-related expenses owing to the lockdowns, the lower fee income due to curtailed loan originations and income from direct assignment (DA) transactions led to stable profitability (return on assets (RoA) of 2.3% for H1 FY2021).

“ICRA expects the profitability indicators of these HFCs to be lower with ROAs of 2.2%-2.4% in FY2021, given the expected impact of the pandemic on new business (cost-to-income ratios could remain elevated) as well as the asset quality (higher credit costs). Over the long-term, ability of companies to improve the operating efficiencies and control the credit costs would be imperative to improve the return indicators,” said Saggar.