HFCs To Concede Market Share To Banks Despite Growth Uptick: CRISIL

Assets under management (AUM) of housing finance companies (HFCs) is expected to increase 10-12% this fiscal versus 8% last fiscal, driven by home loans, which could grow 15% on-year, CRISIL has stated.

Growth in developer financing and loans against property (LAP) will continue to be muted. However, affordable housing financiers are likely to grow relatively faster at 18-20%.

Last fiscal, HFC growth was a story of two halves: stunted to just about 2% (annualised) in the first half because of the second wave of the pandemic, and a V-shaped 14% (annualised) growth in the second half.

The home loan segment (~72% of AUM) grew ~11% last fiscal. It benefited from better affordability, improved income visibility after resumption of economic activity, higher demand in urban areas (bolstered by migration of service sector workforce back to base locations), and increased preference for home ownership.

In other segments, growth was flat with only large and well-capitalised HFCs active in wholesale financing. LAP was yet to rebound in a big way given fine pricing amid potential risks.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, "Structural factors driving end-user housing demand remain intact this fiscal despite the impact of rising real estate prices and interest rates. This should drive 13-15% growth in the home loan segment. And despite the recent hikes, interest rates remain below previous cycles and haven't impacted customer interest materially."

Despite the growth, HFCs are expected to continue losing home-loan market share to banks amid stiff competition. While access to funding is not a big challenge for most HFCs, competitive borrowing cost is crucial versus banks, which benefit from low-cost deposit funding. HFCs have already conceded 400 basis points market-share to banks over the past four fiscals resulting in banks' share rising to ~62% as of March 2022 (see Chart 2 in annexure).

This trend is unlikely to reverse in the near term. Banks are expected to gain market share further with HDFC Ltd, the largest HFC, set to merge with HDFC Bank next fiscal.

The ability of HFCs to compete with banks in the traditional salaried-home-loan segment remains a challenge given their relatively higher funding costs. And in the non-home loan segments (developer financing and LAP), which have been yield kickers, HFCs' exposure has reduced in the past few years, which has put pressure on overall spreads.

Thin spreads, tightening regulatory conditions, and lack of depth in the corporate bond market have meant HFCs will need to realign their business models. HFCs are expected to increasingly partner with banks and leverage each other's strengths to grow their books. Some HFCs are already moving in this direction. Therefore, asset/on-book growth is likely to be lower compared with AUM growth.