The Rise and Promise of Affordable Housing Finance in India

The Indian housing finance market has been on a healthy growth trajectory, expanding at a CAGR of ~13% (growth in loan outstanding) over FY19-FY23 to reach ₹29 lakh crore. This growth is fueled by rising disposable incomes, increasing demand from smaller cities, attractive interest rates, and the government’s push for housing.

This trend is expected to continue in the coming years, with home loan outstanding projected to grow at 13-15% CAGR over FY23-FY26.

Market Share and Untapped Potential

Public Sector Banks (PSBs) currently dominate the home loan market with a 40% share, followed by Housing Finance Companies – HFCs (34%), Private Banks (20%), Others (4%), and NBFCs (2%). However, HFCs are significant players with a growing presence. This growing competition benefits borrowers by potentially driving down interest rates and improving loan terms.

India has a low penetration rate for housing finance compared to other emerging markets, reflected in its low mortgage-to-GDP ratio of 12.3%. Other BRICS countries like China and South Africa have 28% and 21% respectively.

This indicates significant potential for growth in the Indian housing finance market. Cultural preferences for owning property outright, limited access to mortgage finance in the past, and historically high interest rates have contributed to this lower ratio. However, the low penetration rate presents an opportunity for HFCs and other lenders to expand their businesses, and the government’s focus on affordable housing could further increase mortgage finance penetration in India.

Addressing the Housing Shortage

India faces a significant housing shortage, estimated at 100 million units,, with the majority of the need concentrated in the lower-income segment. Meeting this demand translates to a potential loan requirement of ₹58 lakh crore, a significant opportunity for the housing finance market.

A substantial portion of the home loan market caters to the lower ticket size segment (loans less than ₹15 lakh). This is where PSBs face increasing competition from HFCs. The growing focus on affordable housing finance, with new HFCs entering the market and existing ones prioritizing this segment, is positive news for potential homebuyers in the Low Income Group and Economically Weaker Section categories.

Defining Affordable Housing

India’s mortgage market can be broadly divided into two segments: loans with a ticket size above ₹15 lakh (normal mortgage market) and loans with a ticket size of ₹15 lakh and below (Affordable Housing). Affordable Housing focused loans constituted around ₹4.3 lakh crore as of March 2023, representing approximately 15% of the overall housing finance market 

Understanding the Affordable Housing Customer

Housing financiers focused on the Affordable Housing segment typically target underserved customers – low-income or mid-income individuals who may be salaried, working in the informal sector, or self-employed running small businesses. HFCs in this segment often utilize a “hub & spoke” model, with retail branches in urban areas functioning as hubs and smaller kiosks set up near construction sites to reach potential customers. Additionally, they spread awareness in rural areas by setting up kiosks at gram sabhas and organizing loan melas. Some players also cater to customers in tier-2 and tier-3 cities who require credit for self-construction of their houses.

New-to-Credit and First-Time Homebuyers

The share of New-to-Credit (NTC) customers in affordable housing finance was more than double that of the normal housing segment (ticket size of more than ₹15 lakh) in FY23. Furthermore, first-time home loan customers accounted for 58% of home loan disbursements within the Affordable Housing segment compared to a share of around 49% in home loan disbursements above ₹15 lakh ticket size. This suggests that affordable housing loans are opening doors for many first-time borrowers and those with no credit history who may not have qualified for traditional loans.

Why are there more NTC customers and first-time homebuyers in affordable housing?

• Lower loan amounts required for affordable housing make it easier for borrowers to qualify.
• Government schemes offer subsidies or incentives for affordable housing loans.
• Increased focus of HFCs on financial inclusion and reaching underserved customers.

What are the implications of this trend?

• Affordable housing finance can be key in promoting financial inclusion and homeownership in India.
• It is important to ensure that NTC borrowers receive proper financial literacy and guidance to manage their loans effectively.

Affordable Housing Finance Companies (AHFCs) have carved out a strong niche in the market due to several factors:

• Strong Focus on Target Segment: They cater specifically to low-income customers seeking housing loans below ₹15 lakh. This targeted approach allows them to tailor their products and services to the unique needs of this segment.
• Deep Understanding of Micro-Markets: AHFCs often operate in smaller towns, semi-urban areas, and the outskirts of larger cities. This focus on micro-markets allows them to gain in-depth knowledge of the local customer base and property values.
• Limited Product Portfolio: Unlike traditional HFCs, AHFCs typically don’t offer a wide range of products like Loans Against Property (LAP) and developer loans. Instead, they focus on affordable housing loans, allowing them to streamline their operations and potentially reduce costs.
• Direct Sales Teams: AHFCs rely heavily on their own direct sales teams to source home loans. This approach gives them more control over the customer relationship and loan origination process.

The Lucrative Model of AHFCs

While AHFCs face challenges, they also benefit from a lucrative model:

• High Yields: They enjoy relatively higher yields on their loans compared to traditional HFCs due to catering to a segment perceived as more risky, so lenders charge a higher premium.
• Less Interest Rate Sensitivity: Unlike borrowers with larger loans, AHFC customers are less sensitive to interest rate fluctuations. This allows AHFCs to pass on rate hikes more easily.
• High Return on Assets (RoA): As of FY23, HFCs focused on affordable housing had a high RoA of around 3%. This profitability is driven by the factors mentioned above.

Challenges:

• Higher Cost of Funds: AHFCs rely heavily on term loans from banks, which typically have a higher cost of funds compared to other sources. Hence AHFCs typically have a higher cost of funds compared to traditional HFCs. This can put pressure on the former’s profitability.

Asset Quality Risk: There is significant variation in asset quality among AHFCs. Small HFCs, in particular, have a higher GNPA (Gross Non-Performing Assets) ratio, indicating a greater risk of defaults.

Conclusion

The affordable housing finance market in India is a dynamic and promising sector with the potential to empower millions of low- and middle-income families to achieve homeownership. As we’ve seen, this market is characterized by a significant housing shortage, a growing focus on reaching underserved customers, and the rise of specialized Affordable Housing Finance Companies (AHFCs). By addressing the challenges and capitalizing on the opportunities, this sector can play a critical role in promoting financial inclusion, social mobility, and economic development across the country.

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