Any downward trend in the economy may impact the housing finance sector also. Owing to the simplicity and safety of business models, Mortgage lenders have been the toast of local investors for many years. Fault lines in financial engineering and opacity of the real estate market have made them unattractive for serious investors. The housing finance industry is very competitive. Banks have the advantage of low-cost deposit. Growth of the housing finance sector has slowed down in the previous year due to liquidity crunch.
There is no doubt about the fact that the housing finance sector has slowed down in the last one year due to various factors. One of the most crucial reasons for the same is the liquidity crunch. Another important point to note here is that housing finance companies have reduced their disbursements. However, these companies have raised their portfolio sale via securitization for repayment of debt obligations.
Banks have increased their retail home loan portfolio by double-digit percent while housing finance companies could only grow by single-digit last financial year. However, banks have used this opportunity to expand in the retail segment.
- As per the experts, the market is differentiated between strong and weak housing finance companies. Though banks, mutual funds, insurance companies are eager to lend to stronger housing finance companies. Weak Housing finance companies are facing liquidity issues.
- On the liability side, as long as risk aversion continues, the small, mid-sized HFCs will have to look at co-originating loans and selling loans. This model will need to be followed for weeks to months until risk aversion goes away.
Change in borrowing profile, maintaining additional liquidity buffer, the repricing of debt, maintaining additional liquidity buffer and slowdown in growth will impact profitability. It is expected that banks will put pressure on housing finance companies. Housing finance companies have always relied on redemption of commercial papers, borrowing from newer sources to support liquidity.
Any business model changes with the situation. As per experts, in the current situation, there is a demand for affordable housing. This is interesting to note that the government has taken various stringent initiatives to promote the scheme and are incentivizing individuals and developers.
- Affordable housing under Pradhan Mantri Awas Yojana is expanding and projects catering to affordable housing segment are achieving liquidity. Tax breaks on interest paid on loans for affordable housing are extended for the next two years. The deduction that can be claimed for interest paid on loans taken for affordable housing has been increased.
In case the liquidity situation does not improve, housing finance companies may start seeing stress in the commercial real estate segment. As per the experts, this is a common scenario that can be observed in the coming years to come.
- Stress faced by many developers with delayed under-construction projects is going to show up in the asset quality parameters of housing finance companies. Under-construction projects sold by builders under subvention are primarily facing difficulties in delivering. New projects, with existing sanctions, are already finding it difficult to get new loans.