Housing Finance Q3-25: Growth Beyond Metros, Affordable Housing The Big Opportunity
Affordable housing in Tier 2–4 cities, unlocking opportunities among underserved borrowers. Competition, margin pressure & operational challenges to drive next phase of growth
1. Key Trends
1.1 Robust Loan Book Growth Across Players
20–30% YoY AUM growth, with strong traction in disbursements.
1.2 Shift Towards Affordable and Emerging Segments
Companies pushing deeper into Tier 2–4 towns, targeting affordable housing and self-employed borrowers.
1.3 Strong Asset Quality Despite Growth
Gross NPAs mostly held in the 0.3%–1.5% range, and credit costs were largely contained at 15–30 bps, supported by proactive provisioning and early warning systems.
1.4 Healthy Profitability & Operating Leverage
NIMs remain strong, especially for players in the affordable segment (e.g., Aptus at ~13% NIM, Aavas at ~7.7%).
Companies are achieving high ROA (2.5–3.5%) and ROE (11–18%) through lean ops and high yield loans.
1.5 Stress in Low-Ticket/Informal Segment (Stage 2 Creep)
Multiple companies saw marginal increases in Stage 2 assets, attributed to stress in the informal/MFI-exposed customer base, and seasonal/festival delays in collections (especially Q3).
Expected normalization in Q4.
1.6 Geographic Issues (Karnataka, Andhra, Hyderabad)
Operational hurdles like registration delays, HYDRAA implementation, E-Khata challenges, and floods in TN impacted disbursements and collections.
1.7 Pressure on Spreads
New business yields are often lower than existing book, leading to gradual compression in spreads for players like LIC HFC and Bajaj HFC.
1.8 Intensifying Competition
Pricing competition from banks and large NBFCs is increasing, especially in the prime salaried segment and metro markets.
1.9 BT-Out Risk Remains
Companies are investing in retention analytics and teams, but balance transfers continue to be a risk. Some players are targeting BT-in and PMAY to counterbalance this trend.
2. Loan Book: Strong Growth
2.1 Strong Growth in Affordable and Tier 2–4 Markets
Most players are driving growth through:
Self-employed and informal segments
Expansion in semi-urban and rural geographies
Aggressive investment in branch expansion and digital sourcing
2.2 Retail-Focused Players Outperform
Companies like Aptus, Aavas, and PNB HFL posted strong growth due to exclusive focus on retail secured loans and avoidance of wholesale risk.
2.3 Growth Headwinds for Traditional Players
LIC HFL’s growth at 6% was the lowest, citing operational issues in Bangalore & Hyderabad (tech issues, HYDRAA), despite a large book.
2.4 PMAY and Government Schemes Provide Tailwinds
Players expect loan book acceleration in FY26 driven by PMAY 2.0, particularly in affordable housing.
2.5 Cautious Approach in Prime/Metro Segments
Prime salaried loans and metros are seeing intense competition and yield pressure, limiting growth appetite for some like LIC HFL and Bajaj HFC.
3. Asset Quality: Stable with Uptick in Stage 2 Assets
3.1 Stable to Improving GNPA Across the Board
Most companies reported either flat or improved GNPA figures compared to previous quarters.
LIC HFL and Aadhar expect further cleanup in Q4.
3.2 Mild Uptick in Stage 2 Assets
Marginal increases seen in companies like Aadhar, Aavas, and Aptus — attributed to:
Festive season cashflow mismatch
Tech/registration disruptions (e.g., HYDRAA in Hyderabad)
Some overlap with MFI or informal borrowers
3.3 Strong Collection Efficiency
Ranges from 98% to 99.5% across the board.
Even players exposed to informal/self-employed customers maintained <4% 1+ DPD.
3.4 Technical Write-offs Rising (as per policy)
Aptus and others are following 24-month policy-based technical write-offs, but continue recovery efforts.
Write-offs are matched by recoveries in several cases, offsetting credit cost impact.
3.5 High Provision Coverage Maintained
Players like Aptus, PNB HFL, and LIC HFL maintain >80% PCR on Stage 3 assets.
Several also carry management overlays for cushion.
3.6 Outlook
Most players expect Q4 to show improvement in asset quality.
Credit cost guidance is stable at 15–30 bps range.
Companies are leveraging AI-driven early warning systems and data analytics to monitor risk.
4. Demand: Strong in affordable and underserved markets
4.1 Strong Structural Demand in Affordable Housing
Demand for housing loans from low- and middle-income (LMI) and informal/self-employed segments remains robust.
Players like Aptus, Aavas, and PNB HFL are doubling down on Tier 3/4 city penetration.
4.2 Positive Policy Tailwinds
PMAY 2.0, SWAMIH Fund, and income tax reliefs (₹12L income exemption) are expected to boost housing demand in FY26.
Several companies mentioned early signs of traction in PMAY-linked applications and disbursements.
4.3 Localized Disruptions, Not Demand Weakness
Issues in Hyderabad (HYDRAA), Bangalore (registration tech), and Maharashtra (elections) affected Q3 disbursements, but demand remained intact.
LIC HFL, PNB HFL, and Aptus all expect strong Q4 bounce-back.
4.4 Self-Construction and Small-Ticket Housing Demand
Self-built homes, small-ticket housing, and first-time buyers are key growth engines.
Players are tailoring products for <₹15L ticket size, where demand is most resilient.
4.5 Developer Activity Slower, But Buyer Demand Stable
Bajaj HFC noted lower launches, but good absorption wherever launches happened—no inventory overhang.
LRD (lease rental discounting) and LAP (loan against property) are also stable in demand.
4.6 Forward Guidance / Growth Targets
Most companies project:
Disbursement growth: 20–30% YoY
AUM growth: 20–26% YoY
Especially in affordable and near-prime verticals
The consensus across all earnings calls is clear and confident:
Demand for housing loans—especially in affordable and underserved markets—is strong and likely to accelerate further in FY26, supported by structural drivers and positive policy tailwinds
5. Funding & Liquidity Trends: Cost of Funds Stabilizing
5.1 Cost of Funds Stabilizing After Peak
Cost pressure is easing due to stabilizing interest rates, improved credit ratings, and selective access to concessional sources (like NHB refinance).
5.2 Diversified Borrowing Mix
Most HFCs are actively diversifying funding sources to reduce reliance on bank loans.
Aavas: Raised ₹630 Cr via IFC green bonds – largest ever NCD for the company
Aptus: Issued NCDs to mutual funds (₹325 Cr); NHB and IFC also part of funding mix
PNB HFL: Secured ₹5,000 Cr NHB line, $350 Mn ECB sanctions
5.3 NHB Refinance: Still Relevant, but Selective
NHB refinance, especially under the Affordable Housing Fund (AHF), remains a low-cost source (~5.5–7%).
NHB funds are still valuable, but eligibility is more restrictive, prompting HFCs to build alternate buffers.
Aadhar HFC received AHF allocation covering ~25% of its NHB drawdown
LIC HFL mentioned that only ~25% of NHB funding qualifies under AHF.
5.4 Liquidity Buffers Remain Healthy
HFCs are maintaining 10–15% of loan book as liquidity to manage short-term obligations and meet regulatory LCR norms.
Many companies are now proactively managing liquidity, rather than reacting to market shocks (as seen in COVID era).
5.5 Floating Rate Book Well Matched
Most players reported a balanced mix of floating-rate liabilities and assets, reducing interest rate mismatch risk.
Interest rate movements (up or down) are mostly passed through without significant spread volatility.
5.6 Co-Lending & Alternative Funding Channels Emerging
HFCs like Aavas are exploring co-lending partnerships with PSU banks to expand reach without balance sheet strain.
ECB routes being tapped more actively by larger players with good credit standing.
6. Challenges Across Segments
6.1 Rise in Stage 2 Assets
Short-term delays in repayment due to festivals (Diwali, Dussehra), elections, or seasonal cashflow mismatches among informal/self-employed borrowers.
Impacted Players:
Aadhar Housing, Aavas, Aptus, and PNB Housing flagged mild increases in Stage 2 buckets.
Mostly in the 30–60 and 60–90 DPD buckets, not full-blown NPAs.
Expect normalisation in Q4 with improved recoveries and collection efficiency.
6.2 Localised Disruptions in Disbursements
Karnataka (E-Khata registration issues)
Slowed loan disbursement in urban and semi-urban areas.
Hyderabad (HYDRAA authority rollout)
Property registration & approval delays caused temporary disbursement freeze.
Bangalore (Tech system glitches)
Impaired property registration systems halted ₹600–800 Cr worth of disbursals for players like LIC HFL.
Andhra & Maharashtra
Weather events (floods), election-related administrative slowdowns.
These were temporary issues, but impacted Q3 loan growth for several players like LIC HFL, PNB HFL, and Aptus.
6.3 Competition-Induced Spread Compression
Banks offering lower rates on prime home loans, leading to:
Increased balance transfer (BT) outflow
Yield pressure, especially on new originations
Impacted Players:
LIC HFL, Bajaj HFC, and PNB HFL acknowledged that yields on incremental lending are 40–50 bps lower than book yields.
Strategy Response:
Shifting focus to affordable/self-employed segments for better pricing power.
Building retention teams and AI-powered early warning systems to manage BT-out.
6.4 Developer Lending Risk (Selective)
Some companies like Bajaj Housing Finance are growing in developer loans (up 59% YoY), which could expose them to project delays and cyclical stress.
Management, however, indicated that:
Most projects are already launched and cash-flowing.
No significant DCCO (Date of Completion for Commercial Operations) extensions were given.
6.5 Operational Risk from Rapid Expansion
Companies like PNB HFL, Aptus, and Aavas are aggressively expanding into Tier 3/4 towns with 30–50 branch additions.
Risks:
Credit underwriting quality in new markets
Staff productivity and control
Strain on collection infra in new geographies
Most players are investing in predictive analytics, tech platforms, and training to mitigate these risks.
6.6 Credit Cost Volatility from Technical Write-Offs
Players like Aptus and PNB HFL reported increased technical write-offs (e.g., loans >24 months in NPA).
While recoveries from written-off pool are ongoing, it creates optical spikes in credit cost in certain quarters.
6.7 Funding Cost Pressure
Though stabilising now, funding cost rose during tight liquidity in earlier quarters.
LIC HFL and Aadhar Housing noted incremental cost of funds of 7.8–8.3%, which impacted spreads.
NHB refinance rates are rising slightly as AHF (affordable housing fund) allotments are capped.
6.8 Mitigating Factors
Strong provisioning buffers (e.g., Aptus with 80% PCR, PNB HFL with ₹1,700 Cr write-off pool)
AI/ML-based early warning systems for collections and BT-out risk
PMAY 2.0, SWAMIH 2.0, and budget support expected to improve demand and mitigate pressure
7. Conclusion: Positive Outlook with Strategic Adjustments
7.1 Massive Addressable Market
Long-term structural demand ensures a multi-decade runway for growth
Housing shortage of ~25 million units in India, especially in urban low-income segments.
Only ~11% of India’s population has access to formal housing finance.
Tier 2–4 cities are underpenetrated and represent the next wave of home ownership.
7.2 Strong Government Tailwinds
Policy support cushions risk and drives volume visibility for lenders.
PMAY 2.0, income tax reliefs, and infrastructure-led urbanization are directly boosting demand.
SWAMIH Fund 2.0 supports completion of stalled projects, improving developer viability.
Push for “Housing for All” is bipartisan and budget-supported.
7.3 Diversification from Traditional Banking Exposure
Investing in housing finance provides thematic exposure to:
Real estate recovery
Financial inclusion
Urbanization
Infrastructure growth
Ideal for satellite allocation in financial services, distinct from banks or insurance.
7.4 Risk Mitigation Is Strong
Downside protection, even in economic stress scenarios.
Conservative LTVs (typically <65%)
Collateral-backed lending
Real-time monitoring through tech (AI for collections, risk scoring)
High provision coverage ratios (>70–80%) and overlays in place
7.5 Industry Consolidation Ahead
Stricter regulation + capital requirements = exit of weaker players
Larger, well-capitalized HFCs can gain share organically or via M&A
Co-lending, fintech tie-ups, and asset-light expansion strategies emerging
Early entry into platforms that can consolidate the market over the next 5 years.
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