Affordable housing sector starting to show early signs of distress

With public banks dominating the segment, RBI's revised PSL cap may push banks towards higher-ticket loans, as underwriting costs stay the same regardless of loan size or risk

Is affordable housing (AH) finance turning out to be a matter of concern? While granular data on bad loans in housing finance is not publicly - even the National Housing Bank’s (NHB’s) annual reports don’t mention it - a Crisil report from December 2023 notes that in the low-income housing segment, which is a sub-segment of AH, gross non-performing assets (GNPAs) are higher than in the normal housing segment. This was because of the higher share of surrogate usage, difficulty in credit profile assessment, and more self-employed customers led to a higher GNPA ratio of 3.3 per cent in FY23 compared to 1.5 per cent in the normal housing segment.

 

 

The Crisil data mirrors a May 29, 2019, observation by the Committee on the Development of Housing Finance Securitisation Market, which had Harsh Vardhan, senior advisor, Bain & Co, as its chairperson. That report, referring specifically to AH financing, had pointed out that NPAs in the segment have been consistently higher than the overall NPA level of HFCs. From a gross NPA (GNPA) level of two per cent in FY14, it peaked at five per cent in December 2018. Some improvement was seen later, with the ratio dropping to 4.7 per cent in FY19. “However, this improvement was largely supported by write offs and sale of NPAs by some HFCs”, it added. It also mentioned that in terms of composition, home loans comprised 62 per cent of the AH portfolio, while loans-against-property and construction finance comprised 20 per cent and 15 per cent, respectively.

 

Six years later, industry watchers are again starting to take notice of signs of distress. “We are starting to observe early warning signals, particularly in AH. But I wouldn’t necessarily classify it as stress just yet”, said Mahesh Misra, managing director and chief executive officer, the Indian Mortgage Guarantee Company (IMGC).

According to Praxis, the overall AH finance market stood at $10.7 trillion in FY24, constituting around 33 per cent of the overall housing finance market. State-run banks dominate the segment with a market share of approximately 45 per cent followed by HFC at 27 per cent and private banks at 24 per cent. Even though the share of state-run banks is the highest, HFCs and private banks’ assets have been increasing at a higher rate every year.

There has also been some change observed in the wider housing finance market. The Report on Trend and Progress of Banking in India FY24 notes that the share of HFCs in total credit to the housing sector (banks, HFCs and other non-banking financial companies combined) was 34.1 per cent in FY23; however, following the merger of HDFC Ltd with HDFC Bank, the share of HFCs slipped to 19.9 per cent in FY24.

 

AH has been a key objective of the government. In FY19, the Affordable Housing Fund (AHF) was set up with a corpus of Rs 10,000 crore to provide refinancing assistance to target segments in rural and urban areas. In the subsequent three financial years, a budget of Rs 10,000 crore per financial year was allocated to the NHB. In FY23 and FY24, an allocation of Rs 5,000 crore each was made under AHF. Under the AHF, the NHB had disbursed Rs 49,952 crore till June 30, 2024 benefiting 5.24 lakh dwelling units.

 

However, a critical issue is that AH has higher unit economics -- underwriting a Rs 2 lakh loan costs almost the same as underwriting a Rs 45 lakh loan, despite lending to a riskier segment. It also requires a specific set of underwriting skills that banks don’t necessarily have or want to develop such as assessing cash flows instead of declared incomes. Understandably, HFCs are doing much of the heavy lifting in the segment.

 

This is evident from the NHB’s annual report for FY24 - which is the latest available data - which shows the slab-wise outstanding individual housing loan of HFCs. Nearly 48 per cent of the loans fall in the category of up to Rs 25 lakh. Currently, the average ticket-size for a housing loan from state-run banks is around Rs 30 lakh. The technical issue here is that the Reserve Bank of India (RBI) has revised banks’ priority sector lending (PSL) guidelines -- raising the cap for PSL-eligible housing loans to Rs 50 lakh from Rs 20 lakh. Given this, it may lead to a situation wherein banks opt to give more of the higher ticket loans to quickly meet their PSL targets with HFCs taking on more of the smaller loans in affordable housing.

 

 

         

     

 

The Crisil report of December 2023 noted that between FY18 and FY23, the growth in low-income housing segment remained subdued, with the segment witnessing a compounded annual growth rate (CAGR) of three per cent after growing between FY2015 and FY2018, as compared to overall housing loans, which grew by 13 per cent during the same period. This can be primarily attributed to a slowdown in economic activity, funding challenges due to the NBFC crisis, and the Covid-19 pandemic. The rise of the hybrid work model and working from home also led to an increase in demand for bigger residential homes. As a result, the sale in affordable housing took a beating whereas mid- and high-end segment housing gained the maximum in the last couple of years. The industry is expected to see a moderate growth with a CAGR of 8-10 per cent between FY23 and FY26.

 

* A report by Praxis says the overall affordable housing (AH) finance market stood at $10.7 trillion in FY24, or around 33 per cent of the overall housing finance market

* PSBs dominate AH with a market share of approximately 45 per cent

* AH has higher unit economics - underwriting a Rs 2 lakh loan costs almost the same as underwriting a Rs 45 lakh loan.

* Under the Affordable Housing Fund, NHB had disbursed Rs 49,952 crore till June 30, 2024 benefiting 5.24 lakh dwelling units

* RBI has revised banks’ priority sector lending guidelines, raising the cap for PSL-eligible housing loans to Rs 50 lakh from Rs 20 lakh