Savings Bank Rate Cut - HFCs to Face More Competition in Mid-to-Large Ticket Housing Segment

India Ratings and Research (Ind-Ra) expects housing finance companies (HFCs) to face intense competition in the mid-to-large ticket housing (above INR3 million) segment, if banks were to reprice (downward) marginal cost of lending rate, following rate cut for savings deposits. HFCs would have limited manoeuvrability, considering limited weak tailwinds in terms of bond yields.

Also, HFCs might find it challenging to expand their portfolio in the large ticket housing segment amid increasing prepayment rates on account of portfolio transfers. The agency believes HFCs will face a margin contraction in this segment, limiting the spreads to absorb all the costs, while trying to generate reasonable returns. Ind-Ra estimates about one-fifth of the total HFCs' portfolio to be of ticket size higher than INR5 million.

 

The current spread between State Bank of India's ('IND AAA'/Stable) MCLR rate and a five-year AAA yield curve rate is 74bp (on 10 August 2017 as per Bloomberg). This will contract as the rating of the borrower goes down the curve. According to Ind-Ra's sensitivity analysis, MCLR can face downward revision up to 35bp for some of public sector banks (25bp for private sector banks).

Ind-Ra believes the increased pressure on the large ticket housing portfolio together with increasing opportunity in the small ticket housing space will increase HFCs' focus towards financing small ticket housing loans. This space is characterised by limited competition from banks and hence offers reasonable risk adjusted returns.

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