With interest rates declining, the home loan sector, which had bucked the trend of declining asset quality evident for lenders in all other asset classes, is likely to face headwinds on the margin front. Most home loan sector borrowings are on a fixed rate. According to a latest story by rating agency ICRA, almost 40-45 per cent of housing finance companies’ (HFCs) borrowings were at fixed rates of interest.
This could pose an interest rate risk for these players in a declining rate scenario. “However, the risk is somewhat mitigated by the fact that these borrowings are not very long dated (average maturity of around three to five years) and/or have reset clauses, thus giving the HFCs some flexibility to reset rates,” the report said. At the same time, asset liability mismatch will continue to remain a challenge for HFCs, since they have limited sources in long-term funds to match the tenure of home loans (average maturity of 8-10 years, including prepayments). The home loan market has seen 17 per cent annualised growth for the first nine months of 2014-15 and crossed the Rs 10 lakh crore mark. However, the top five players captured 60 per cent of the market, which includes State Bank of India, ICICI Bank and HDFC — the largest mortgage financier of the country. “Governments focus on affordable housing , favourable regulations could push overall housing credit growth to 20-22 per cent FY16 onwards , which could lead to improved mortgage penetration from current levels of 8.2 per cent,” the report said. The rating agency estimates HFCs will need external capital of Rs 18,000-28,000 crore to grow at 20-22 per cent annually over the next five years, assuming an internal capital generation of 16 per cent while maintaining capitalisation at current levels. “Part of this capital could also be in the form of mortgage guarantee,” it said. “Investor sentiment for the housing sector has also improved as reflected by the recent capital infusions to the tune of Rs 17,800 crore in various HFCs in 2014-15, with some more capital infusions expected over the next quarter HFCs and they are expected to report gearing levels of 7.5-8 times by March 31, 2015,” the report said. Asset quality has remained stable for home financiers with gross non-performing assets at 0.74 per cent of gross advances, as on December 31, 2014. ICRA expects gross non-performing asset to remain range-bound between 0.7-1.1 per cent.