The assets under management (AUM) of mortgage finance¹ loans is expected to grow at a healthy 16-17% in this fiscal and the next, compared with ~18% last fiscal (see Chart 1 in Annexure).

Trends in the sub-segments - home loans, loans against property (LAP) and wholesale loans, will vary. Over the current and next fiscals, home loans should grow at a reasonable pace of 13-14% which will be a slight dip from last fiscal (see Chart 2 in Annexure), while LAP growth is expected to normalise to 23-24% from the fiscal 2024 high of 37%. Wholesale loans, which were declining over the last 5 years will see a moderate expansion of 6-7% over the current and next fiscals.

In terms of AUM mix, home loans continue to form majority of the AUM at 60%, LAP forms 30% and wholesale loans the remaining 10%. Herein, housing finance companies (HFCs) constitute ~80% of overall mortgage finance and ~95% of total home loans.

Home loans growth is supported by structural factors such as rising urbanisation, better affordability on account of limited housing price increases in recent years and expected cut in interest rates.

Moreover, policy initiatives, such as reintroduction of the Interest Subsidy Scheme, albeit in a different form from that seen in the past, should support growth in affordable housing finance. However, while housing demand will likely remain strong, there is intense competition in the home loan segment with banks accounting for ~80% of the share. Meanwhile, with larger prime-focused HFCs turning to the affordable housing finance segment, this space continues to get more competitive.

LAP growth is expected to witness some normalisation, especially due to the principal business criteria (PBC)² requirement in the case of HFCs. Nevertheless, LAP will remain the fastest-growing mortgage financing segment for HFCs and non-banking finance companies (NBFCs) for a couple of reasons. One, this is a product which caters to micro, small and medium enterprises (MSMEs) and as economic activity remains healthy, so does credit demand in this segment. Two, lenders have greater comfort with this segment given better availability of information on MSMEs with increasing formalization of the economy and rising number of data sources, thereby supporting more rigorous credit underwriting.

But the high base of the previous fiscal will be a restricting factor for LAP growth, as will competition.

Further, for HFCs, adherence to the PBC will also be a constraint for LAP growth. Crisil Ratings has analysed 25 HFCs, forming ~80% of HFC AUM, and evaluated their buffer over the minimum PBC requirement.

Says Subha Sri Narayanan, Director, Crisil Ratings, “Many HFCs have managed to meet the PBC requirement, despite the high growth in LAP, through subsequent sell-down of their portfolios. Even then, almost half of the 25 HFCs analysed operate with a narrow cushion of sub-5%. Hence, the ability to sell down quickly after origination will be a determinant of growth in LAP for HFCs, especially with HFCs now required to demonstrate compliance to PBC on a monthly basis.”

Another reason for the likely moderation in LAP growth is the expected pick-up in growth of wholesale loans, primarily developer loans. These loans typically offer higher yields than LAP but need to be managed within the PBC limit. While the developer loan book was degrowing till recently, this trend is expected to reverse with real estate demand remaining robust prompting selective and cautious re-entry by some HFCs and as well as NBFCs, particularly towards high quality developers.

Says Aesha Maru, Associate Director, Crisil Ratings, “Going ahead, the ability to navigate regulations, such as PBC, will determine the ability of HFCs to grow in a diversified manner. While the HFC business model has its benefits, chief among which is access to refinance from National Housing Bank (NHB), the PBC requirement, coupled with greater regulatory alignment between NBFCs and HFCs, partially offsets this. This is especially true for larger HFCs with diversified funding sources and limited reliance on NHB refinance. As a result, we may see more HFCs converting into NBFCs or even merging with them.”

¹ Mortgage finance includes the mortgage portfolio of non-banking finance companies (NBFCs) and housing finance companies (HFCs)
² As per the regulatory requirement of PBC, housing finance assets need to form a minimum 60% of an HFC’s total assets