AFFORDABLE HOUSING FINANCE

INDUSTRY OVERVIEW

The Indian Home loan Market grew at a healthy rate of 13% CAGR from FY19-FY23 to Rs 29 tn on the back of increasing disposable income, government initiatives for Housing for all, attractive interest rates, demand from smaller cities during COVID etc.

The growth in AUM between FY19-23 was led by growth in higher ticket size segment i.e over 15 lacs. The share of the higher ticket size increased from 76% as of March 2018 to 85% as of March 2023 in terms of value. However, majority of the housing loan share in terms of volumes is still dominated by the lower ticket size segment (less than 15 lacs), which accounted for 52% of housing loans outstanding as of March 2023.

Home Loans outstanding projected to grow at 13-15% over FY23-26 (Rs Tn)

Of the total Housing Finance market in FY23, Public Sector Banks (PSBs) has highest share of 40% followed by HFCs (34%), Private Banks (20%), Others (4%) and NBFCs (2%). Banks generally cater to salaried segments whose income sources; credit history can be easily assessed and many HFCs cater to informal and new to credit segment. For HFCs, understanding of customer behaviour and micro market dynamics is essential for success. Banks also have lower cost of funds allowing them to offer attractive rates to customers with good credit history. Also, HFCs face strong competition from public sector banks in lower ticket size (7.5 lakh – 15 lakh).

India’s Mortgage penetration is lower than other economies and improved affordability over the years provides a huge opportunity for growth over the years

Mortgage penetration in India is far lower than other emerging economies due to lower per capita income and higher proportion of informal employment in India. However, CRISIL MI&A believes rising urbanization, growing disposable income, favourable demographics and government measures will lead to increasing ?mortgage penetration going forward.

Estimated shortage of ~100mn houses in India in 2022

According to the RBI committee report on the Development of Housing Finance Securitization Market from September 2019, the housing shortage in India was estimated to increase to approx. 100 million units by 2022, with the majority of the demand coming from the Lower Income Group (LIG) and Economically Weaker Sections (EWS). This will create demand shortage of around Rs 50-60 trillion and to give an idea about the opportunity, as of March 2023, the total outstanding home loans, excluding those under the Pradhan Mantri Awas Yojana (PMAY), amounted to approximately Rs 31.1 trillion. This highlights large opportunity size for the Housing Finance company to grow. The overall value required to meet the entire housing shortage is estimated at around Rs 149 trillion, with an estimated Rs 58 trillion constituting the total loan demand for housing.

AFFORDABLE HOUSING

India’s mortgage market is divided into two main segments: loans exceeding Rs 15 Lakh (the standard mortgage market) and loans of Rs 15 lakh or less (affordable housing). According to RBI, Industry faces a housing shortage of 45 million units in the Economically Weaker Sections (EWS) and 50 million units in the Lower Income Group (LIG), representing 95% of the total housing deficit in India. As of March 2023 ,Affordable housing loans amounted to approximately Rs 4.3 trillion, contributing 15% to the total housing finance market (based on CIBIL data). Public Sector Banks (PSBs) held the largest market share in the affordable housing sector at 41% (outstanding loans of Rs 1.8 trillion), ?Housing Finance Companies (HFCs) accounted for 28% (Rs 1.2 trillion in outstanding loans), followed by Private Banks with a 21% share (Rs 0.9 trillion in outstanding loans). Other groups, including multinational corporations (MNCs) and Small Finance Banks (SFBs), collectively held a 7% market share in affordable housing loans.

While the market has grown at a slower pace over the past three years, CRISIL MI&A expects the industry to pick up gradually with a 8-10% CAGR over FY23-FY26 to reach Rs5.4-5.7trn by March’26.

Initiatives and Factors Driving Growth in Affordable Housing

Business Model of Affordable Housing Financiers

Housing financiers focused on low-income housing segment typically serve the underserved category of low-income or mid income customers who may be salaried, working in the informal sector or self-employed running a small business with inadequate documentation to serve as a proof of income.

High cost of serving this category of customers has led financiers to adopt innovative models to source and underwrite business. An HFC targeting this segment of customers usually has a hub and spoke model where retail branches of the HFC operate as ‘hubs’ in urban areas, while small kiosks are set up near areas where construction activity is taking place to source customers.

Usually, close to 70% of the overall business of HFCs focused on low-income housing segment is sourced through direct sales teams. Direct customer contact through these teams enables better visibility and helps limit fraud, thus making for reliable customer assessment. Moreover, all critical functions like origination, verification and credit appraisal are performed in-house, while certain non-core activities like loan documentation and document processing may be outsourced. This allows HFCs in this segment to allocate more internal resources towards vital aspects of lending such as verification, credit appraisal and credit assessment.

Who is catering to Affordable Housing segment?

?Differences between HFCs focused on Affordable Housing vs. other HFCs

Share of first-time credit customers in housing finance focused on low-income housing segment are more than double as compared to normal housing (ticket size more than ? 1.5 million) in Fiscal 2023. The declining share of first-time credit customers from fiscal 2022 to fiscal 2023 also indicates better availability of loan repayment records of customer while assessing them for credit underwriting.

?

Success in Affordable housing finance segment can be defined through efficient management of 4C’s i.e ?clear understanding of micro markets, Understanding customer risk, Collateral Risk assessment and collection efficiency

?

HFCs have 38% market share in terms of housing finance disbursement and 29% market share in term of outstanding focused on low-income housing segment in the nine months ended December 31, 2023. They have established a strong market position through strong origination skills and focused approach, creation of niche in terms of catering to customers, strong understanding of customer segment, and non-salaried customer profile.

?Operational parameters of AHFCs vs. normal HFCs

PEER BENCHMARKING

Most of the Affordable Housing Finance players are growing at a higher rate given its low base. AHFCs generate higher spreads compared to other housing Finance players given the niche areas they target and use proprietary underwriting methods to underwrite and maintain the asset quality.

As with the case of banks where CASA is one of the major source of funds, AHFCs have to depend on term loans from banks and other NBFC. NCD borrowing from the market is lower given they have to raise funds at higher rates given their credit rating. Most of the affordable housing players are well capitalised given their books are yet not fully leveraged which is also impacts their RoE metrics

De-rating of P/B Multiple over 3 Years for the sector

Over the years, Affordable Housing Finance players have seen de-rating in terms of P/B valuation multiple. However, Affordable Housing players have large opportunity size and runway for growth for a long period of time. Going ahead. As book leverages, we can see NIM compression given increasing interest expense and decreasing RoA. But Compression in RoA wont impact RoE which will be offset by increase in leverage.