For the purposes of this study, HFCs have been divided into three categories ; Large, Mid and Small. Large HFCs (accounting for 84% of the total HFCs' AUM) have exhibited steady performance in terms of business growth. The incumbent HFCs have accumulated portfolio in certain geographies including Maharashtra, Tamil Nadu, Delhi, Karnataka and Andhra Pradesh/Telangana, keeping in sync with spread of urbanization. On the other hand, Small HFCs most of which are recent entrants having focus on affordable housing finance, are lending in the peripheries of the large urban centers, and expanding their presence in the small towns with lower competition intensity. The borrower composition has also been different for all three categories, with Mid and Small HFCs focusing more on the self-employed category. The large HFCs in-turn have diversified into other segments including Loan Against Property (LAP), Lease Rental Discounting (LRD), construction finance or developer loans to keep their yields and profitability intact in a highly competitive environment.
Large HFCs have been able to maintain yields by changing composition of the portfolio (including corporate lending segment), whereas Small HFCs have resorted to charging higher interest rate to offset high operating expense, credit cost and cost of funds to maintain ROTA. The ticket size and profile of borrower are key determinants of operating expenditure for HFCs. Borrowers of the Large HFCs have loans of higher ticket size and higher LTVs in contrast to lower ticket size and lower LTVs of the borrowers of Small HFCs. This is largely due to the fact that Large HFCs have higher proportion of borrowers from the salaried class as compared to Small and Mid HFCs.
Historically, the delinquencies have been stable for Large HFCs; with the ratio of Gross NPAs at 0.7% for the past four years. However, the NPAs have shown an increasing trend for Mid and Small HFCs and stood in the range of 1.2% to 1.4% as on Mar'17. The delinquencies have been higher in the self-employed category and Non-home Loan category for the HFCs. In terms of delinquencies across geographies, Tamil Nadu and Delhi have higher delinquencies as compared to the industry average. In terms of ticket size, loan amount of less than Rs.10 lakh have shown higher delinquencies.
CARE Ratings expects that the next phase of growth will come from regions or states, where 70% of the country's population resides and it will depend on the government's thrust on housing and economic growth in these regions. The portfolio in the states like UP, MP and Rajasthan and already increased is expected to drive the future growth for HFCs.
In recent times, HFCs (mainly Small and Mid HFCs) focusing in the affordable housing segment have expanded their lending operations with focus on self-employed and low ticket size loans. They operate in geographies where marketability of repossessed properties is yet to be tested. Thus, going forward, CARE Ratings expects the credit cost for Large HFCs to continue to be at the current levels while that for Mid and Small categories are likely to be higher. Hence, to limit credit cost, the adoption of stricter underwriting standards by Small and Mid HFCs will be the key differentiating factor for individual entities. Historically, HL as a product has seen lowest delinquencies vis-vis other retail asset classes. Going forward, increasing gearing levels for HFCs operating in the affordable housing space might not be an appropriate strategy given that credit costs are expected to be higher.
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