Despite a surge in delinquencies, lenders are increasingly focusing on the self-employed segment to fuel home loan growth but there is a need to tread cautiously in this risky segment given the massive spike in the bad loans in the segment, warns a report.
The composition of self-employed borrowers in the overall book has increased to 30 per cent for the housing finance companies now, up from 20 per cent just four years ago, domestic ratings agency Crisil said today.
However, gross non-performing assets have more than doubled to 1.1 per cent from 0.40 per cent in the same period, it said, admitting that the affliction is not broad-based.
The two-year lagged NPAs for home loans to the self- employed segment stands at 1.8 per cent, which is exactly three times that of the 0.6 per cent for the salaried borrowers, its director Rama Patel said.
A senior director Krishnan Sitaraman said government initiatives and the regulator have caused the surge in the growth, and expected this trend to continue as both large and small housing finance companies focus on this segment.
"This trend, however, warrants caution because lending to self-employed is largely based on assessed income," they said, commenting on the higher propensity to lend to the self-employed borrowers.
As against a 20 per cent per annum overall increase in home loans during the past four years, loans to the self- employed segment have grown by 33 per cent every year and the outstanding will likely cross Rs 2 trillion by March 2018.
It said many new and small HFCs are playing aggressively in the segment, while the larger HFCs are being pushed into it because of the higher focus of banks in the overall home loans segment on subdued credit demand from corporates and asset quality pressures.
Lending to the self-employed is riskier than to the salaried segment, and HFCs typically have lower loan to value ratios, higher interest rate, higher in-house sourcing and develop the ability to assess undocumented incomes to take care of the risks, it said.
While financiers are adopting risk-based pricing approach, long-term sustenance will depend on the strong credit and underwriting practices, the report concluded.