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Four things to know about the housing finance sector
The housing finance sector has been on the fast lane. It has been growing at 18% in the last seven years, according to the 2017 India Housing Finance Report. But the sector still has ample room to grow. The home loan-to-GDP ratio in India is currently at 9% but the inclusion of affordable housing finance is likely to make its presence felt even more.
So, let’s run the rule over the housing finance sector and take stock of what’s really brewing here:
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Affordable housing for all
The Pradhan Mantri Awas Yojana (PMAY) aims to build over 2 crore affordable homes across 305 rural and urban centres.
Under this scheme, which is a part of the Housing for All vision, people can avail interest subsidy of 4% on loans up to Rs 9 lakh and 3% for loans up to Rs 12 lakh. There is also a 3% interest subsidy on a Rs 2 lakh loan for a new home in the rural areas.
The subsidies, which have made home loans affordable for the low-income group, have greatly helped people working in the unorganised sector, according to Arvind Hali, chairman of ART Affordable Housing Finance.
The government help has also resulted in housing finance companies disbursing more loans. To lend perspective, loans up to Rs 2 lakh witnessed the maximum year-over-year (Y-O-Y) growth of 10.4% in FY 2016-17.
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Rising NPA
There may be a growth in loan disbursement in the affordable housing category, but the amount of bad loans, also known as non-performing assets (NPAs), has risen sharply.
Data suggest that the NPAs have risen starkly in the affordable housing sector. The NPA for Rs 2 lakh loan segment rose to 8.6% in FY2018 from 6.1% in FY2016; the Rs 5 lakh loan segment saw NPA rise to 4%.
The primary reason for the alarming spike in NPAs in this particular sector is that most people work in the unorganised sector. Their incomes are irregular and the implementation of Goods and Services Tax (GST) has curtailed their cash flow, according to ICRA Ltd, a credit rating agency. These factors have increased the number of loan defaults.
Meanwhile, the rate of NPAs in the traditional segment, which includes the mid-income and premium housing segment, has been comparatively subdued. The credit collection ratio (CCR) in this segment is around 98%.
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Risk of increasing borrowing rate
The housing finance sector could experience some headwinds if inflation rates are increased. There are indications that inflation will rise over the medium-term, which will subsequently have an impact on this sector.
That’s because when interest rates are low, more people opt for a home loan and there are few loan defaults. But things play out differently when inflation picks up. In times of high inflation, lenders also up their interest rates. A higher interest rate keeps potential borrowers at bay and the chances of loan default also rise.
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Impact of RERA
Implementation of the Real Estate Regulation and Development Act (RERA) was a big step in streamlining the real estate sector. However, new home projects took a big hit. Launch of new projects was down by 41% across the country, according to a July 2017 report by Knight Frank, a real estate consultant firm. A slowdown in new projects would consequently result in lesser people taking home loans. But most experts feel the RERA jolt is temporary and would be resolved over the medium-term.
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78%
The Indian housing finance sector may consists of more than 80-plus players. But the industry is dominated by a few select. They are: HDFC, Dewan Housing Finance, Indiabulls Housing Finance, PNB Housing Finance Limited and LIC Housing Finance. Together, they command a 78% market share.
