The liquidity challenges that followed the debt default by Infrastructure Leasing & Financial Services (IL&FS) in September 2018 pulled down growth in assets under management (AUM) of housing finance companies (HFCs) in the second half of fiscal 2019, a CRISIL study shows.

With funding access being affected, non-banks, including HFCs, were forced to curtail disbursements and focus instead on conserving liquidity.

Fiscal 2019 was a year of two contrasting halves. The first half saw stable growth and comfortable access to funding, with assets under management (AUM) growing at an annualized rate of ~21%. However, the second half - brought a reversal of sorts with AUM growth plunging to ~10%.

The industry AUM stood at Rs 12.4 lakh crore as on March 31, 2019, up 16% year-on-year.

Among the HFC segments, the distinction between the two halves was the sharpest for non-housing loans – primarily developer loans and loans against property (LAP), which comprised a third of the total AUM of HFCs as on March 31, 2019 – that saw growth print around 5% (annualized) in the second half, compared with ~28% in the first. Housing loans held up better, growing at close to 13% (annualized) compared with 18% in the first half.

Given the HFCs’ growth slowdown, banks managed to gain market share in home loans. Indeed, for the first time in at least five years, banks, supported by portfolio buy-outs, outpaced HFCs in home loans and grew at 19% in fiscal 2019.

With banks’ continued focus on retail growth, especially in this segment, and HFCs keen to conserve liquidity, the trend is expected to continue for a few quarters more.

Over fiscals 2020 and 2021, CRISIL expects growth to revive to 12-14% for HFCs, though this would still be lower than levels seen in the past. This growth will be supported by mid-teens growth for the two largest players, constituting more than 50% of the industry AUM.

According to Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Access to funding will determine the growth prospects for HFCs. As of now, lenders and investors seem to be differentiating between HFCs -- preferring those with strong parentage and credit profiles and going slow on those with a large wholesale portfolio. This will be reflected in business growth differing for these entities.”

To be sure, limited ability to raise funds through commercial papers (CPs) and cautious call by a few players to reduce dependence on short term borrowings led to a decrease in the share of CPs in total on-book borrowings to ~7.5% as on March 31, 2019, down almost 450 bps from ~12% as on September 30, 2018.

Instead, many players resorted to securitisation to meet their liquidity requirements. In fact, the securitisation and direct assignment of mortgages more than doubled to ~Rs 93,000 crore in fiscal 2019 from ~Rs 35,700 crore the previous fiscal. External commercial borrowings also gathered pace, albeit in a limited way.

From an asset quality perspective, the sector saw overall gross non-performing assets (NPAs) inch up to ~1.4%, from 1.1% in fiscal 2018. That said, CRISIL believes two-year lagged gross NPAs are a better indicator of asset quality in mortgages because of their long tenures. That number stood at ~2.1% on March 31, 2019, which is around 50 bps higher than that as on March 31, 2018.

While the reported NPAs in the developer financing portfolio have been low till now, they have been primarily supported by long moratorium periods and exits provided by refinance.

According to Subha Sri Narayanan, Director, CRISIL Ratings, “In recent months, with incremental funding towards real estate coming off, asset quality concerns in the developer financing book have increased. The impact of refinancing slowing down will need to be monitored given that the ability of lenders to recover, in case of default, through liquidation of assets has not been tested in any material way till date.”

LAP is another segment that remains a monitorable, given the rise in delinquencies that have already beenwitnessed.

While the long-term growth prospects for HFCs remain intact, asset liability maturity management and liquidityconservation would remain front and centre for the next few quarters. The regulatory environment is also expectedto evolve - National Housing Bank has recently tightened the permissible leverage levels and capital adequacyratios for HFCs; further action could be expected from the regulator on the liquidity front with Reserve Bank ofIndia already having issued draft guidelines for non-banking financial companies (NBFCs) on liquidity riskmanagement framework. Nevertheless, CRISIL believes HFCs with strong parentage and those with robust riskmanagement systems and processes will be able to navigate the current environment better.