- Overview of the housing finance sector in India
- Key players dominating the segment and their dynamics
- Factors driving aggressive demand for housing
The housing finance market in India is served by both Scheduled Commercial Banks (SCBs) as well as Non-Banking Financial Corporations (NBFCs) such as Housing Finance Corporations (HFCs), these have different dynamics and are governed by separate laws. However, the percentage of the market share for HFCs is growing vis-à-vis the SCBs. Over the past 5 years, HFCs home loan portfolio to individuals grew at a CAGR of 20% (FY12-18) as compared to 16% CAGR growth for SCBs. This led to an overall sectoral home loan portfolio growth of 18% CAGR.
The top four spots in the housing finance market are equally distributed among SCBs (SBI and ICICI Bank) and HFCs (HDFC and LIC Housing Finance). SBI (State Bank of India) is India's largest mortgage provider with a market share of over 32%, it is closely followed by the HDFC.
The motivation and intent for each of these two set of entities have been different while operating in the housing segment:
Home mortgages in the past were of low priority for banks owing to ample credit demand from corporates/businesses. However, with the economic slowdown, revocation of licenses for players from few industries (mining, telecom, iron and steel) as well as stalled projects, the Indian banking industry was getting marred by a slew of bad loans or stressed assets (non-performing assets [NPAs] and restructured loans). Currently, the stressed assets occupy 12.2% (~Rs. 10 trillion > GDP of at least 137 countries) of the total loans in the Indian banking system (mainly public sector banks) of which the top-10 businesses alone have to repay Rs. 5 trillion and others like Vijay Mallya, Nirav Modi, etc. have been declared as willful defaulter by banks. This has paved a way for banks to pursue retail assets such as home mortgages that offer relatively stable returns with low risks and carry potential cross-selling benefits that other products lack. Further, the capital consumption is less for mortgages, making these a lucrative form of lending.
Thus, mortgage banking is shaping up to be a high growth, profitable business for Indian lenders, which is capturing a bigger share of their balance sheets, accounting for 13.2% of non-food credit outstanding in India.
The public sector banks are pushing to capture a greater market share in mortgages. For instance, SBI has been targeting mid-income individuals with a low ticket size of Rs. 20-30 lakhs by offering them fairly attractive interest rates on their existing mortgage loans. Furthermore, the government's $13 billion capital injection for state-run banks should help boost provisions for troubled loans.
The non-banking housing finance market in India is fragmented with over 92 HFCs. However, the top five players command over 3/4th of the market share. The top two players HDFC and LIC, each have assets over Rs. 1 trillion and command 56% of the overall market (source: ICRA). Moreover, DHFL, IBHF and PNBHFL with a book size of Rs. 0.15-0.5 trillion each have a market share of 26%.
In addition, unlike banks, the HFCs are governed by National Housing Bank (NHB), a subsidiary of the RBI (Reserve Bank of India). As HFCs cannot accept deposits from consumers in normal circumstances, they have less stringent regulations vis-à-vis banks. The HFCs gained prominence when the retail housing segment was neglected by banks, with many small consumers unable to fulfil the stringent documentation requirements of banks. Although the interest rates charged were higher than that of banks (due to a higher cost of funding), but this did not deter small consumers to pursue the same in terms of a clear lack of alternatives. Thus, in the last few years, there has been a large influx of new players, taking the number of HFCs from 55 (FY 2014) to current 92, with 14 more awaiting approvals from the National Housing Bank.
HFCs can incorporate stamp duties and registration costs into the home values to fix the maximum allowable loan on a property and in turn, allow these to lend more to home buyers as compared to banks. Further, with banks having switched to marginal-cost-based lending rates (changing from base rate regime) in 2016, the interest rates may creep higher with funding costs, thereby, reducing the gap in rates offered by banks and HFCs. DHFL offered mortgages at a much attractive rate than market leader SBI (as of June 2018). Thus, despite banks’ larger scale and funding advantages, they have been losing out to the HFCs.
Overall the housing industry is slated to continue its high growth trajectory owing to structural growth opportunities in India (presented below) as well as government’s push for ‘Housing for All’ by 2022 under the ‘Pradhan Mantri Awas Yojana’. Let us analyse this one by one:
Push towards affordable housing: due to government’s determined push (providing infrastructure status and other benefits in budget 2017-18) on affordable housing, the segment is expected to be the next big thing in the Indian investment scenario. Developers have shunned the segment’s initial down-market image and have started showing interest in the low-cost housing opportunities (estimated at $1.2 trillion). The government’s ‘Housing for All’ project (to provide homes to all urban poor by 2022) is slated to create a huge demand for affordable housing. The project aims to provide 2.6 million new houses with each in FY 2019 and FY 2020, and 3 million each in FY 2021 and FY 2022. According to the latest data from NHB, 78% of the loans disbursed (2017-18) were for the purchase of houses costing less than Rs. 25 lakhs.
Per capita home ownership is one of the lowest in India: the mortgage market penetration is very low in India as compared to peers in the developed and the developing economies. This provides ample opportunities for housing growth in India. The rise of population, shift towards nuclear families, government’s push on the affordable housing coupled with an acute shortage of housing is expected to drive the housing demand.
Affordability: rising per capita disposable income and affordable mortgage rates (rates have come down due to competition as well as government’s ‘credit linked subsidy scheme’) have made home buying easier for common Indians. Further, the government tax incentives have also helped lower the effective borrowing rates. According to a large metro-city survey by HDFC, the affordability ratio fell to a record low of 3.7 in March 2018 from 22 in 1995. Though the property prices have increased sharply in the last 15 years, the average income levels have grown even faster.
Urbanisation: the demand for new houses is steady as the pace of urbanisation is expected to accelerate with the government’s focus on building new smart cities as well as a focus on Tier 2 and Tier 3 cities. Thus, surging growth and employment in these cities will prove a powerful magnet for people in the rural and semi-urban areas to shift to Tier 2 and Tier 3 cities.
Demand from the rural and semi-urban sector: with rising rural incomes and the government investing heavily in enhancing the rural demand, there could be a big demand from the rural and semi-urban areas as well.
Young demographics bode well for housing loans: India has a large and young working population, with ~70% of the people under the age of 40 (as of 2017), this provides favourable demographics for home loans and is conducive for strong credit demand. Home ownership accounts for a high degree of social status. Thus, a majority of housing loans are used for self-occupied houses rather than investments for reputation and sentimental reasons. It is due to this factor that self-occupied houses are least defaulted upon by individuals.
New Real Estate Regulation Act (RERA): RERA seeks to enhance the transparency and accountability in the real estate market and aims to set right many shortcomings that currently plague the housing market. The new law aims to pin the responsibility on developer so that houses are delivered on time, this will ease the burden on lenders as well as improve asset quality of the mortgages.
Housing has developed as a safe asset class: based on the RBI data, 1.6% NPA for mortgages compare favourably to 19.3% for industrial loans and 5.7% for the services segment. Hence, lower capital consumption coupled with lower risk weightings has led to mortgages becoming more profitable for lenders in India vis-à-vis other loans. Furthermore, India has relatively low household leverage (consumer credit as a proportion of the GDP) as compared to its peers and this makes it less prone to an adverse credit cycle, thereby, reducing the risk of default.
It is due to all the above factors that the housing industry is poised to grow aggressively in the near future. The housing finance penetration in India is quite low than the global average and players in the industry are gearing up to take part in the Indian growth story. Although the interest rates charged by HFCs and SCBs have almost converged, the HFCs are expected to dominate the low-cost housing, the banks are also aggressively trying to move into this space.
However, the fundamentals of SCBs remain strong, HFCs went for a dream run when the government announced ‘Housing for All’ scheme stretching well beyond their fundamentals (trading twice the P/BV [price to book value] of SCBs). Thus, HFCs run the risk of liquidity constraints (leading to a higher cost of funding) in the case of macro events, which may directly impact their profitability and their ability to compete. Additionally, since the bulk of low-income individuals work in the informal sector and do not possess reliable documentation for income, therefore, caution needs to be exercised while disbursing loans, otherwise, the NPAs could shoot up exponentially in such cases. Further, a slump in real estate prices (esp. after demonetization) resulted in negative equity for borrowers, which is the normal case for any default.
Only time will tell howsoever the growth unfolds and whosoever gets the maximum benefits from the same. But this uptick in new housing activity will address two key issues in India: employment and availability of rental housing. As most people buying houses are shifting out of rented accommodations and are thus freeing up the rental stock. Addedly, the construction of these homes either through self-construction (personal involvement in the construction process) or small apartment buildings requires a large number of low-skilled/unskilled labour, which, in turn, provide the much-needed employment. Thus, this offers a win-win situation for all.