Mortgage lenders have been the toast of local investors for more than four years, given the simplicity and safety of their business models. Since last September, however, they have virtually been toasted to a crisp. Even though many of these lenders are trading at multi-year lows, the fault lines in their financial engineering and opacity of the real estate market have made them rather unattractive for serious investors.
The housing financeNSE -2.02 % sector growth has slowed down in the last one year due to liquidity crunch. Housing finance companies (HFC) lowered their disbursements and raised portfolio sale through securitisation for repayment of debt obligations. Banks increased their retail home loan portfolio by 19% while HFCs grew by 9% last financial year, as banks used this opportunity to expand in the retail segment.
SEPARATING WHEAT FROM THE CHAFF
“Now, the market is differentiating between strong and not-so-strong HFCs,” said Keki Mistry, vice chairman, HDFC. “There is no constraint whatsoever as far as liquidity is concerned for strong HFCs. There is plenty of liquidity. There is complete eagerness from banks, mutual funds, insurance companies to lend to stronger HFCs. The not-so-strong HFCs are facing liquidity issues. On the liability side, as long as risk aversion continues, the small, mid-sized HFCs will have to look at co-originating loans and selling loans, keeping spread in the middle. This model will need to be followed for weeks to months until risk aversion goes away.”
The Centre and the Reserve Bank of India (RBI) have taken several steps to ease liquidity. The RBI has relaxed the minimum holding period for which the asset needs to stay on the book before it is eligible for securitisation. Due to this change, additional assets worth Rs 40,000 crore have become eligible for selling down.
“Steps taken by the government and RBI will yield results gradually,” said Sidhartha Mohanty, MD and CEO, LIC Housing FinanceNSE 1.16 %. “In the coming two quarters, we will see improvement compared with the previous two quarters.”
National Housing Bank has enhanced the refinance limits that can be accessed by eligible HFCs to tide over temporary mismatches, it has started monitoring the weekly liquidity position of the top 15 HFCs, which account for more than 95% of the total asset size of all HFCs.
The RBI has infused liquidity in the system by conducting open market operations, enhanced the single-borrower limit for exposure of banks to NBFCs, and reduced the minimum average maturity requirement for external commercial borrowings (ECBs) in the infrastructure space to three years from five years.
Change in borrowing profile, repricing of debt, maintaining additional liquidity buffer and slowdown in growth will impact profitability. Banks moving to external benchmark will put pressure on housing finance companies.
In the past one year, housing finance companies relied on securitisation, redemption of commercial papers, and borrowing from newer sources to support liquidity. Their share of CP borrowing overall has fallen to 6% compared to 10% a year ago.
“We are in housing finance industry where fierce competition is there, and we have to remain competitive,” said Mohanty of LIC Housing Finance. “My rates will be competitive.”
Banks have the advantage of low-cost deposit and RBI’s repo window. HFCs raise funds from banks and such fund-raising is not based on an external benchmark.
Housing finance companies sell affordable, retail, developer, construction finance, loan against property and LRD. “Some of the large NBFCs / HFCs have aggressively grown their real estate-linked loan book over 45% CAGR over the past five years,” said Morgan Stanley in a report. “HDFC has delivered a controlled 15% CAGR with even slower growth in the more riskier portfolios — construction finance and corporate term loans.”
HFCs with 7-9 times leverage of debt to equity will have to raise capital to grow.
“Lower leverage will put pressure on profitability,” said Karthik Srinivasan of Icra. “Proportion of fee income should go up because of co-origination. But it will depend on scale.”
STRESSED ASSET QUALITY
Stress faced by many developers with delayed under-construction projects are going to show up in the asset quality parameters of housing finance companies. As of Q3 2019-end, 6.56 lakh units were unsold across the top 7 cities, according to a report by Anarock Property Consulting.
Under-construction projects sold by builders under subvention are primarily facing difficulties in delivering. Projects, with existing sanctions, are finding difficult to get fresh loans.
The stress in housing is beginning to show. LIC Housing Finance reported NPA of 2.38%, a deterioration of 40 basis points from last year due to 4-5 lumpy developer loan accounts turning bad.
The share of non-mortgage loans portfolio in total loans for top 5 HFCs increased from 29% in March 2016 to 46% in December 2018 as per the data made available by National Housing Bank (NHB).
While spreads on high quality individual loans are below 2%, industry level delinquency in the individual mortgage portfolio in 2018-19 was running at about 1.5-1.7%.
“Given the fact that non-mortgage portfolios are inherently riskier, funding of such portfolios with both short-term CPs and shorter maturity debt has liquidity risk implications during times of uncertainty,” said RBI in a report.
Any business model changes with situation. In the current situation, there is demand for affordable housing. The government has taken various initiatives to promote the scheme and are incentivising individuals and developers.
Affordable housing under Pradhan Mantri Awas Yojana is growing and projects catering to affordable housing segment are getting liquidity. Tax breaks on interest paid on loans for affordable housing are extended until 2020. Deduction that can be claimed for interest paid on loans taken for affordable housing has been increased by Rs 1.5 lakh to Rs 3.5 lakh per annum for houses valued up to Rs 45 lakh.
THE CO-ORIGINATION MODEL
In case the liquidity situation does not improve, HFCs may start seeing stress in the commercial real estate segment.
“About 65-70% of the loan book that NBFCs have is still under moratorium where interest payment is happening, and principal payment will start from the first half of the next fiscal year. Delinquencies may increase on a case to case basis,” said Pankaj Naik, associate director, India Ratings and Research. “The pace at which refinancing was happening has come down. Not many players are optimistic in taking fresh exposure in the real estate space, which will lead to an increase in credit costs.”
Co-origination has to pick up scale for the practice to become successful. Right now, banks and HFCs are entering tie-ups to cooriginate loans. Banks will depend on HFCs to service those portfolios.
“The efficacy of the scheme will be known when volume will pick up in the model,” said Karthik Srinivasan of Icra.
The housing finance sector is integrated into the broader financial sector and into the broader economy. Any downward trend in the economy may impact the housing finance sector also.
“There are blips on the way, but the market knew that HFCs will have to address ALM mismatches, whether through securitisation or other means of financial engineering,” said RV Verma, former chairman, National Housing Bank.