In the 2019 fiscal year, housing finance companies will require additional funding of about Rs 4 lakh crore.

According to ICRA’s most recent research update on housing finance companies, the rising affordability for first-time homebuyers, supported by government incentives like the Pradhan Mantri Awas Yojana (PMAY), is expected to push housing credit growth to 17 percent to 19 percent in the financial year 2019.

According to ICRA estimates, the mortgage penetration (housing credit as a percentage of GDP) reached the double-digit mark of 10% as of March 31, 2018, with steady housing credit growth of 16% in FY2018 (9.5 percent as on March 31, 2017).

Over the next five years, ICRA anticipates a further 300-500 bps increase in mortgage penetration levels. As of March 31, 2018, the Gross NPA for all HFCs was 1.1%, remaining stable overall asset quality indicators (1.2 percent as on December 31, 2017, and 0.8 percent as on March 31, 2017). ICRA anticipates that the overall gross NPAs for HFCs will continue to fluctuate between 1.2 percent and 1.5 percent.

The recent cabinet ordinance to treat home buyers as financial creditors is likely to be advantageous for the retail home loan asset quality of HFCs, according to ICRA.

“HFCs would need to secure an additional $4 lakh crore in funding to meet their growth objectives and replace their maturing liabilities in FY2019. Due to their capital restrictions, banks, particularly PSBs, will provide less incremental funding in the future. The proportion of funds raised through the ECB route will depend on the competitiveness of these ECBs’ overall landed costs as compared with domestic borrowing rates, according to Supreeta Najjar, Vice President, and Sector Head, of Financial Sector Ratings, ICRA. The RBI has relaxed the requirements for ECBs, allowing HFCs to diversify their funding mix and increase their investor base.

Newer HFCs in the affordable housing segment kept expanding faster than the 39 percent industry average. The gross NPA in the sub-segment, however, worsened from 3.3 percent as of March 31, 2017, to 4.1 percent as of March 31, 2018, as predicted by ICRA in its earlier reports on the HFC sector. This decline was caused by increased portfolio seasoning, entity-specific factors in some cases, and outside events like demonetization and the implementation of the Goods and Service Tax (GST), which had an impact on the borrowers’ cash flows.

While growth prospects are still favorable, lenders must continue to use sound origination and lending procedures as they expand into this market because the borrower profile is more susceptible to income and outside shocks.

The HFCs’ ability to seize the properties and promptly sell the repossessed assets, which is largely untested at this point, would determine the final credit losses in the affordable housing segment. Despite the small ticket sizes, the process might take longer, and the recovery costs might also be high in comparison to the loan amount, which would lower the lender’s overall recovery.

ICRA predicts that over the medium term, HFC gearing levels will stay at roughly 8.5 to 9 times, supported by adequate internal capital generation and easy access to capital. For the following three years, an additional capital expenditure of between Rs 7,700 and Rs 12,000 crore is anticipated. ICRA anticipates that the HFCs will continue to maintain adequate capitalization levels in the future given the strong investor interest in the sector.