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Kerala-based gold finance company Manappuram Finance has entered the housing finance segment, acquiring Jaypee Hotels’ Milestone Home Finance. The move is reflective of the huge interest in the housing finance space, owing to low loan defaults, a large untapped market and attractive returns on equity.
The Subash Chandra-promoted Essel group is also entering this space, as part of its plans to scale up activity in the financial sector. Private equity behemoth Warburg Pincus-backed Capital First Ltd has also forayed into this segment, through a subsidiary.
This financial year, the five companies, including city-based Aditya Birla Housing Finance and Aspire Home Finance and Chennai-based-Mamata Housing Finance, have applied for registration with National Housing Bank (NHB). HDFC, LIC Housing Finance, the Tata group and Repco Home Finance are also expanding in this space.
NHB Chairman R V Verma said there would always be healthy demand for housing. The stable and expanding credit market and the good quality of assets (low defaults) were attracting interest in this space, he added.
In the housing finance space, the proportion of bad loans to the total loan book is significantly low. At 0.72-0.87 per cent, gross non-performing loans have been stable between June 2012 and December 2013, according to rating agency Icra.
Various steps such as allowing housing finance companies to use the securitisation Act for recoveries, a central portal to share information among stakeholders, and setting up a mortgage guarantee fund and a residex (which shows the prices across 26 cities) have aided growth in the housing finance segment.
Opportunity to diversify
V P Nandakumar, managing director and chief executive of Manappuram Finance, said the home finance segment provided a good business diversification opportunity.
Earlier, the Reserve Bank of India had said it wanted large companies to diversify their portfolio, as a single business led to concentration risks.
Now, the NHB-registered Milestone will become a fully-owned subsidiary of Manappuram, which will be able to tap Milestone’s 1.5 million customers. The company will focus on the affordable housing segment (Rs 5-25 lakh). Initially, the company will focus in the southern regions, before widening its reach in two-three years.
Manappuram aims to build a housing finance portfolio of Rs 5,000 crore. Initially, the entire equity support to the housing finance company will be provided by Manappuram. Subsequently, it might rope in external investors.
Icra has said for the quarter ended December 2013, housing finance companies have been a 10-15-basis point fall in yields, owing to the fact that incremental growth was higher in the case of home loans at finer spreads and lower disbursements to non-housing segments.
Overall, the decline in net interest margins and a rise in credit provisions could lead to a 15-20-basis point fall in the profitability of housing finance companies in FY14. Return on assets is likely to stand at 2-2.2 per cent, with return on equity of 17-19 per cent, Icra said.
