Housing financiers on a high

A labourer loads cement bags onto an improvised motorized rickshaw at the construction site of a residential complex on the outskirts of Kolkata
At a time when real estate markets across the country remain in doldrums, continuing healthy growth in the loan books of housing finance companies (HFCs) is surprising. What explains this divergent trend and will growth rates remain healthy for HFCs going ahead?

Online real estate advisor PropTiger’s India Realty Report FY16 reveals housing sales across the top nine cities fell as much as 33 per cent, even as prices saw a marginal increase of only two per cent during the year. Real estate in the Delhi national capital region (NCR) market was the most affected, with sales down 51 per cent in FY16.

This slowdown, though, is not fully reflected in the books of HFCs, which are registering healthy double-digit loan growth. Analysts believe higher growth in loan against property (LAP) book is a key differentiating factor. “LAP is helping HFCs post healthy loan growth. But if these lenders go slow on LAP, growth might slow down,” Anil Agarwal, managing director and head of Asian financial research at Morgan Stanley, recently told Business Standard.

LAP is a loan extended by banks and financial institutions against existing commercial or residential property of a borrower. The borrower can be an individual or company and can use this loan for any end purpose - marriage, child’s education, medical expenses, working capital, etc.

Krishnan Sitaraman, senior director at Crisil Ratings, says, “Strong momentum in the LAP market continued in FY16 with the segment growing at 33 per cent, higher than the overall AUM (assets under management) growth of 17 per cent for the non-bank sector as a whole. LAP as a proportion now constitutes 13 per cent of the AUM vis-à-vis eight per cent three years ago.”

Home financiers such as LIC Housing Finance (LIC HF), Indiabulls Housing Finance (Indiabulls), Dewan Housing Finance (DHFL) and even diversified financial companies such as Bajaj Finance have tapped the LAP route to aid their loan growth. HDFC, though, has consciously kept its exposure to LAP lower at an estimated sub-five per cent level of its loan book. Keki Mistry, vice-chairman and CEO of HDFC, says: “Our individual loan book is bound to grow in the coming years. Growth is coming especially from the periphery of big cities such as Mumbai, Delhi NCR, Chennai, etc as well as from Tier-II and Tier-III cities.”

HDFC’s loan book grew 15.1 per cent in the quarter ended March 2016 led by individual loans portfolio.

LIC HF’s loan book expanded 15.5 per cent in the fourth quarter (Q4) of FY16 with individual loans growing 15 per cent. However, if one breaks down the individual loan book between home loans and LAP, one can see that the former has grown 10 per cent while the latter has jumped 120 per cent. In fact, LAP now forms 8.8 per cent of LIC HF’s loan book, up 240 basis points sequentially, estimate analysts at Motilal Oswal Securities. The trend holds true for Indiabulls as well, which saw a strong 31 per cent year-on-year growth in its LAP book in Q4. The proportion of LAP in its loan book, though, has hovered around 25 per cent in the past few years, says Gagan Banga, vice-chairman and managing director, Indiabulls Housing Finance. He believes the company’s LAP book will grow at 25-30 per cent in FY17 –similar to the growth in overall loan book, while home loans will grow faster at 30-35 per cent.

Echoing this view, Harshil Mehta, CEO of DHFL, says home loans will grow at a faster pace going forward given the strong demand in the outskirts of metros as well as in Tier-II and Tier-III cities. In case of DHFL, LAP grew nine per cent in Q4. LAP forms 16-18 per cent of DHFL’s loan book and the management intends to maintain this level going forward. Mehta, however, believes the loan growth could moderate a bit from 18-21 per cent earlier to 16-20 per cent.

While most analysts believe it is LAP which is driving HFC’s growth, the managements insist it’s the traction in affordable housing that’s fuelling their growth. Analysts say most HFCs club their LAP portfolio either with individual or small and medium enterprise loans. The general perception is that the LAP book carries higher asset quality risk. However, the jury is still out on this. Some analysts believe the higher risk is taken care of by the lower loan to value of such loans.

Nonetheless, most companies are now more cautious in growing their LAP book given the heightened competition and aggressive pricing. “Yields have declined by more than our earlier expectations with deals at sub-12 per cent being reported,” adds Sitaraman of Crisil Ratings.

Suresh Ganapathy, financials analyst at Macquarie Capital, adds: “We have already started seeing a slowdown in LAP portfolio of some companies such as Bajaj Finance. We believe the overall loan growth for HFCs will slow down from hereon.” Siddharth Purohit, financials analyst at Angel Broking, seconds this view. “HFCs have passed on some benefit of the lower cost of funds to borrowers, which have aided loan growth. However, private banks have been aggressive and this might result in increased competition.”

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