With RBI's policy rate hike, housing finance firms to face tough time

With the Reserve Bank of India expected to further raise its policy rate (up 50 basis points thus far in FY19) amid macro hiccups, some non-banking finance companies might pass these on.

However, housing finance companies (HFCs) are expected to find this difficult, given stiff competition in their segment.

“With increase in interest rates and bond market pressure, their cost of borrowing will go up. Also, competitive pressure from public and large private sector banks restrict the pricing power of many HFCs,” says G Chokkalingam, head of Equinomics Research & Advisory.

The 10-year government bond yield has risen by 65 bps since the financial year began on April 1; it was 8.05 per cent on Wednesday. Bank/financial institution term loans and debentures (including other forms of securities) account for 70-85 per cent of the borrowing mix at many HFCs.

Public sector banks, under pressure due to elevated levels of corporate bad loans, are aggressively focusing on loans to individuals and on housing finance. The competitive pressure can also be gauged from the 34-39 bps year-on-year decline in return on interest-earning assets of three of the top five HFCs in the June quarter (Q1). This hit their spread (difference between yield on advances/assets and cost of funds) and net interest margin (NIM). The top five accounted for 83 per cent of overall HFC assets under management, as of end-March.

The fall in return on assets, experts say, could also be attributed to the time lag for higher lending rates to get reflected in the overall return on advances/assets. Many HFCs have raised theirs' in recent months.

HDFC, however, the largest HFC, had reported a 16 bps year-on-year fall in yield for the June quarter. With a 15 bps fall in cost of funds, its NIM and spread in Q1 remained almost at the year-before level of 3.5 per cent and 2.3 per cent, respectively “Our spread was in the target range of 2.2-2.35 per cent and we are confident that this should be maintained even in the future,” says Keki Mistry, chief executive.

Dewan Housing Finance had also reported a 13 bps year-on-year rise in NIM.

Yet, there would be near-term profitability pressure. "In the current environment where credit demand is improving, while banks’ deposit growth is somewhat on the lower side, the interest rate scenario is unlikely to ease immediately, increasing the cost of funds in the system. Also, competitive intensity has increased as new HFCs have entered the fray and banks are also focusing on retail (to individuals) credit,” says Vinay Sharma, fund manager at Reliance Mutual Fund. The fund is selective in the housing finance space.

Some HFCs are, however, expected to get some relief from retail deposits. Some experts also believe the margin pressure trajectory will get normalised after a quarter or two. The companies could also focus more on short-tenure products such as loans against property and the more profitable loans to developers. In that case, asset quality will be a key monitorable. While loan growth potential is strong, how the profitability is managed will be key.