The third wave of the Covid-19 pandemic could slash as much as 200 basis points (bps) off CRISIL Ratings’ base case estimate of 9-11% compound annual growth rate (CAGR) in the assets under management (AUM) of housing finance companies (HFCs) for fiscals 2022 and 2023.

Growth would still be higher compared with average of ~2%¹ over fiscals 2020 and 2021 (see Chart 1 in Annexure), though slower than the broad-based 24% logged between fiscals 2011 and 2019, with a near two-fold increase in the number of HFCs over that decade, fuelled by easy availability of equity and debt capital.

Growth this time around will largely stem from players with better credit profiles. Organic consolidation, which started in fiscal 2019, will continue.

Of the total HFC AUM of Rs 13.2 lakh crore as on March 31, 2021, home loans were the largest segment (71%), followed by wholesale loans (18%) and loans against property (LAP; 11%).

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “Home loans will be the fastest-growing segment, as lenders continue to be selective in the non-housing segment (comprising wholesale and LAP loans). After relatively low growth in recent years, the home loan segment is expected to clock 12-14% CAGR over fiscals 2022 and 2023. This will be driven by improving sales, better affordability, and a preference for home ownership and larger homes. That said, the pandemic’s third wave could shave off 100-200bps of this growth depending on its spread, intensity and duration.”

With this pick-up among HFCs, the market share gain by banks in home loans will hit a speed breaker (see Chart 2 in Annexure). Banks had gained a 300 basis points (bps) share over the three years through fiscal 2021.

The non-housing loan segment is expected to continue witnessing subdued growth. Between fiscals 2011 and 2019, non-housing loans grew at a faster pace (~27% CAGR) compared with housing loans. However, default in debt servicing by a large infrastructure financing conglomerate in September 2018 and the consequent skewed funding environment triggered a shift in strategy among HFCs.

Even now, growth in non-housing loans is expected to be low at 2-3% and their share in HFC AUM is likely to shrink. Within non-housing loans, while LAP growth has tapered, wholesale loans ― comprising real estate finance and corporate loans ― de-grew ~2% in fiscal 2021 due to a steep fall in disbursements and sell-down of these loans by some lenders.

Among HFCs, specialised affordable housing financiers² (AHFCs), are projected to clock 15-20% CAGR through these two fiscals, far outpacing the sectoral average. This will be driven by economic revival and a higher proportion of home loans in the portfolio, with favourable demand dynamics at play.

Says Subha Sri Narayanan, Director, CRISIL Ratings, “Affordable housing finance is a niche segment, requiring different underwriting and risk management practices than traditional home loans. While AHFCs’ growth moderated to ~15% and ~13% in fiscals 2020 and 2021, respectively, from a CAGR of ~40% between fiscals 2017 and 2019, it remains higher than that of traditional players. However, competition in this segment has intensified, as traditional HFCs are increasing disbursements in this segment and AHFCs are expanding their geographical footprint.”

Meanwhile, an important structural shift seems to be playing out. HFCs are resetting their business models to focus on AUM growth rather than balance sheet growth; a trend that is true for the overall NBFC sector and not just HFCs. On the retail side, HFCs, especially the mid-sized and emerging ones, are evaluating funding-light business models and entering into co-lending arrangements with other financiers for home loans and LAP, though this is still at a nascent stage. But for wholesale lending, the fund platform is likely to be the way ahead, as a limited number of HFCs are lending on their own balance sheets in any meaningful way.

In this milieu, CRISIL Ratings will continue to monitor trajectory of the pandemic’s third wave and its impact on HFCs.

¹ Growth would have been higher at ~5.7%, excluding HFCs that have recently been part of resolution processes. Such HFCs have been excluded from all analysis, for a like-to-like comparison
² HFCs with average loan ticket size of <Rs 15 lakh