RBI policy a positive surprise for housing finance cos; expect rate cuts

Lower provisioning and risk weights to drive further rate cuts in home loans

Building on the middle-class dream

While the Reserve Bank of India (RBI) kept policy rates unchanged in the second bi-monthly policy of this financial year, a key positive was reduction in risk weights assigned to home loans lent on or after June 7. Risk weights help banks and non-banking financial companies (NBFCs) to assess the risk associated with different loan segments and provide for them accordingly. Acknowledging that delinquencies have been rather low in the home loans segment, the RBI reduced risk weights for home loans. Risk weights on home loans above Rs 75 lakh has been reduced from 50 per cent to 35 per cent. Analysts expect some rate cuts from the National Housing Board, which lends to housing finance companies (HFCs). 

This, in turn, will lead to further rate cuts in this segment. 

Suresh Ganapathy, banking analyst at Macquarie Capital, says, "Reduction in risk weights on home loans is a positive. We estimate rates could reduce anywhere between 15 and 50 basis points (bps) across various home loan products. We continue to be positive on HFCs, which will grow well due to the regulatory support." 

Policy springs positive surprise for HFCs

HFCs, in particular, have benefited from the government's push to affordable housing through various schemes such as the Pradhan Mantri Awas Yojana (PMAY). Given the sound asset quality and continued demand, most banks, too, have stepped up their focus on this segment. The RBI also reduced the standard asset provisioning on home loans to 25 bps from 40 bps, a positive move for all these players. 

"HFCs with sizeable exposure to large-ticket housing like HDFC, Indiabulls Housing and PNB Housing would benefit out of this measure, to reduce risk weights on home loans. They may be able to leverage a little more and improve their return ratios by a small margin," says Digant Haria, banking analyst at Antique Stock Broking.

Overall, most analysts continue to be positive on HFCs, given their strong visibility on growth, resilient asset quality, high margins and return ratios. HFCs gained two-six per cent after the announcement of the credit policy. Given the run-up over the past year, valuations are on the higher side and investors can consider quality names when they witness some correction.