For housing finance companies (HFCs), loans to self-employed borrowers1 have increased to ~30% of their overall home loan portfolio compared with ~20% four years ago, primarily driven by government impetus to affordable housing.
But the flipside is, delinquencies are also rising.
Gross non-performing assets (NPAs) in the segment are estimated to have inched up by 40 basis points to ~1.1% by the end of fiscal 2018, compared with ~0.7% a few years back. To be sure, this is not a broad-based affliction – most lenders are not seeing a significant increase in asset quality pressure.
Loans to this segment have grown at a compound annual growth rate of ~33% in the past four years, compared with ~20% for the overall home loan segment. Home loans outstanding in the self-employed segment is expected to have topped Rs 2 lakh crore by the end of fiscal 2018.
Many new and small HFCs have been aggressively catering to the self-employed segment. What’s also pushing the larger HFCs into the self-employed segment is banks ratcheting up presence in the home loans segment because of subdued credit demand from corporates and asset quality pressures.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Several initiatives of both the government and the regulator in the recent past have led to fast growth in home loans taken by the self-employed. We expect such mortgages to continue showing good growth because of the sharp focus of smaller HFCs and increasing interest of the larger ones.”
This trend, however, warrants caution because lending to self-employed is largely based on assessed income. Additionally, a section of borrowers have limited credit history or banking experience, are highly vulnerable to disruptions such as demonetisation, and see high volatility in cash flows in the event of exigency.
Says Rama Patel, Director, CRISIL Ratings, “The 2-year lagged NPAs in the self-employed segment, at ~1.8%, is much higher compared with ~0.6% in the salaried segment, where the portfolio quality has remained largely stable over the years.”
Given that the self-employed segment is relatively riskier than the salaried segment, HFCs tend to demand higher yields to offset higher credit cost. Further, to surmount borrower data issues, HFCs are adopting practices such as offering lower loan-to-value ratio, higher in-house sourcing, and developing expertise to assess un-documented income. While financiers are adopting risk-based pricing approach, long-term sustenance will depend on the strong credit and underwriting practices.
1 Self-employed borrowers refers to the non-salaried borrowers