Ind-Ra: Affordable Housing Finance- INR6 Trillion Opportunity

Affordable housing finance (largely for loan ticket size up to INR1.5 million) will become a large segment for housing finance companies (HFCs) in the next five years, with the estimated share to increase to around 37% in FY22 (FY17: 26%) says India Ratings and Research (Ind-Ra). The accelerated urbanisation on account of fast economic growth over the last decade and a half has created massive need for affordable housing.

Multiple tailwinds underpinning growth of the sector: The agency anticipates a demand for 25 million homes (4x of the entire current housing finance stock) over FY17-FY22 in the Medium Income Group (MIG) and Lower Income Group (LIG) categories. A combination of factors such as: 1) government financial and policy thrust, 2) regulatory support, 3) rising urbanisation, 4) increasing nuclearisation of families, and 5) increasing affordability is converting latent demand into a commercially lucrative business opportunity. Ind-Ra expects the sector to attract over INR200 billion of equity inflows over FY17-FY22 which would support growth.

Built-for-scale models required to compete with entrenched incumbents: Ind-Ra's analysis reveals that on operating cost metrics, the new entrants with their pan-India ambitions would need to build scale quickly to compete with the incumbents whose regional-focussed models have helped maintain tight opex ratios in addition to their funding cost advantage. This entails building up the book at a rapid pace and hence will lead to high proportion of unseasoned portfolio at any point in time. To offset this it would necessitate having the right 'people with adequate skill-set' (who have seen various cycles and scale) and the right 'processes' (building a scalable credit funnel and robust underwriting platform) while getting the 'pricing' (risk and opex adjusted spreads) right. These would be the key differentiators for the new age HFCs. Informal credit assessment remains the crux for the segment, and hence reasonable assessment of instalment paying ability while keeping sufficient margin for income volatality over lifecycle would be of prime importance.

Key risks and possible mitigants: Aggressive expansion without ensuring appropriate credit assessment could be a risk for the segment especially in view of limited financial data available and possibly less financial savvy customer segment. Also, the segment requires high customer connect, therefore, attracting and retaining people with on ground connect would be of prime importance. HFCs would need to build a sense of ownership, as well as develop a right incentive structure to manage this risk. Operationally, managing liquidity, mainly in view of long tenure nature of assets would be key consideration. Ind-Ra expects a prudent asset liability tenure management by HFCs.

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