BENGALURU: The large-ticket housing loan segment (primarily ticket size above INR5 million) is likely to face disruption, as housing finance companies (HFCs) would be forced to realign their strategies in view of a sharp reduction in lending rates by banks, says India Ratings and Research (Ind-Ra).
“This may affect business growth for HFCs, on account of increased competitiveness of banks. This could act as a double blow for HFCs already reeling from the slowdown in core housing loan portfolio growth. About 20% of the housing portfolio of large HFCs could be higher than Rs 5 million in ticket size,” said Prakash Agarwal director and co-head financial institutions India Ratings and Research.
The competition between HFCs would have implications for profitability, especially in view of limited manoeuvrability of such companies with regard to the expansion of leverage or high-yield non-core portfolio. Moreover, playing on the yield curve (short-term borrowing to save on tenor premium while lending largely remains long-term) would expose HFCs to liquidity and refining risks.
The fall in lending rates by banks is likely to incentivise borrowers to shift their portfolio from high-cost HFC loans to bank loans. Housing loans from banks do not involve prepayment charges, if borrowing is undertaken on a floating rate.
Ind-Ra believes that the impact of the fall in lending rates on small-ticket loan providers is unlikely to be significant, as borrowers are generally less price-sensitive. Furthermore, HFCs in this segment have a superior pricing power due to limited competition from banks.
Ind-Ra also believes that housing loan segment, albeit the best performing asset class in the last 15 years, could come under some pressure, if underlying loan collaterals witness material price correction. Loans where underlying property is under construction would especially be vulnerable.