Fall in housing finance companies’ loan growth can have spillover effects

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The deceleration in loan disbursements by housing finance companies (HFCs) could have a spillover impact on both retail home loan borrowers and property developers, according to India Ratings and Research (Ind-Ra). In Q3FY19, the loan growth moderated to 14.0% y-o-y and 3.5% quarter-on-quarter (q-o-q), way below the historical growth of a compounded of 19.0% for the last five years.

The housing finance sector has been facing challenges, which have led to contraction in spreads, a rise in funding cost and an increased spotlight on their asset-liability mismatches.

India Ratings has observed that the systemic rise in market borrowings rate has affected the housing loan business. The borrowing cost for some large HFCs could be upwards of banks’ marginal cost of funds-based lending rate (MCLR) which has led to shrinking of margins in mid-to-large ticket housing loans, where banks are highly competitive, they added.

Indiabulls Housing Finance reported a 62.7% year-on-year (y-o-y) drop in loan disbursements for the March quarter to `7,000 crore. Can Fin Homes posted de-growth in new approvals and disbursements of 4.1% y-o-y and 0.2% y-o-y, respectively, in the March quarter.

Housing Development Finance Corporation (HDFC) reported a sequential decline of 30-40 bps in margins for the March quarter and attributed it to the lower mix of corporate loans. The management said post the results it “specifically went slow on the corporate/developer loans, given the unfavourable lending environment, tight liquidity conditions, over leverage and corporate debt rating downgrades leading to heightened risks across the corporate sector”.

The management of PNB Housing Finance, during analysts call for Q4FY19 results, said yields on construction finance loans were relatively lower than the industry.
To mitigate the margin risk, many HFCs expanded their non-housing books at a significantly higher rate than pure housing loan books. For instance, PNB Housing Finance’s non-housing disbursal grew 2% y-o-y while developer disbursal fell 16% y-o-y in Q3FY19.

Moreover, funding to developers has been significantly tightened. If the tightening continues, there could be a material impact on construction progress, thereby putting asset quality pressure on HFCs in medium term.

There could also be a double whammy if HFCs have dual exposure to developers and home loan borrowers with common exposure to underlying projects, the agency said.

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