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According to CareEdge Ratings, the individual housing finance market which is valued at Rs.33 trillion, is expected to grow at a CAGR of 15-16% between FY25-30 to INR 77-81 trillion.

CareEdge Ratings believes that this growth will be driven by robust structural elements and favourable government incentives, making housing finance an attractive asset class for lenders. It says that the residential properties market remains buoyant, a key driver of the housing finance industry, witnessing absolute growth of 74% since CY19 to 4.6 lakhs units in CY24. While sales performance in CY24 normalised, it still reflected sustained buyer confidence.

Over FY21-24, banks (Including the effect of HDFC Ltd merger) have grown at a compounded annual growth rate (CAGR) of 17% in the housing loan space while Housing Finance Companies (HFCs) have grown by 12%. Though, banks continued to dominate the housing loan market (market share of 74.5% as on March 31, 2024) facilitated by cost of funds advantage, reach, portfolio buyouts and co-lending arrangements, CareEdge Ratings believes that both banks and HFCs have ample space to grow, given the growth potential of the housing finance market. The market share of HFCs was stable at ~19% as on March 31, 2024, and this trend is expected to continue.

In FY24, the loan portfolio of HFCs grew by 13.2% to Rs.9.6 trillion, aligning with CareEdge Rating’s growth estimate of 12-14%. For FY25 and FY26, CareEdge Ratings anticipates a Y-o-Y growth of 12.7% and 13.5%, respectively, driven by robust equity inflows and capital reserves. The retail segment remains the primary growth driver for HFCs, with cautious growth observed in the wholesale segment.

Geeta Chainani, Associate Director, CareEdge Ratings said, “HFCs primarily operate in ticket sizes of less than Rs.30 lakhs, which accounted for 53% of total AUM as of March 2024. However, there is a gradual rise in the proportion of AUM with ticket sizes ranging between Rs.30-Rs.50 lakhs and a decline in proportion of AUM less than Rs.30 lakhs ticket size (proportion of AUM with ticket size of Rs.30-Rs.50 lakhs increased to 27% as on September 30, 2024, against 23% as on March 31, 2024). This aligns with the premiumisation trend witnessed in the residential property market. Notably, ticket sizes for HFCs are not growing at the same rate as that for residential property launches, suggesting that the demand for higher ticket size loans is likely being fulfilled by banks and partly self-funded by the buyers.”

In line with growth trends, asset quality of HFCs has seen a sharp improvement with gross non-performing assets (GNPA) of 2.2% as on March 31, 2024, against the peak of 4.3% as on March 31, 2022. The improved asset quality trend is largely due to improved wholesale GNPA and stable retail GNPA. 2-year lagged GNPA, and stage 2 gross assets are also not reflecting any significant stress, making CareEdge Ratings believe that asset quality of HFCs remains comfortable.

Despite a healthy AUM growth for HFCs, the gearing level of the sector was largely range bound as of March 31, 2024, at 6.0 times and declined to 5.5 times as of September 30, 2024. Like NBFCs, HFCs have also experienced deleveraging following the liquidity crisis and the shock of the pandemic. Post pandemic, the sector has attracted healthy equity pools due to the secured nature of lending and low credit costs.

Sanjay Agarwal, Senior Director, CareEdge Ratings said “Though the cost of funds for HFCs rose to 7.6% in FY24 [PY.: 7.2%] on account of rate transmission via banks and capital markets, the NIMs improved to pre-pandemic levels at 3.7% in FY24 due to increased credit demand and increased yields by HFCs across various credit cohorts. As HFCs expand into the affordable housing segment to protect their spreads, operating expenses as a percentage of average total assets increased to 1.0% in FY24, up from 0.8% in FY22, aligning with pre-pandemic levels. Supported by improving asset quality and provision write backs for a few large HFCs, credit cost reached an all-time low at 0.3% for FY24 [FY22: 0.7%] and reduced further to 0.1% for H1FY25. Therefore, led by better NIMs and reduced credit costs, return on assets (ROTA) stood at 2.2% for FY24 and improved further to 2.3% for H1FY25, aligning with pre-pandemic levels.”

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