Exclusive | ADIA investment key to penetrating deeper into affordable housing, says IIFL Group’s Nirmal Jain

Abu Dhabi Investment Authority (ADIA) will invest Rs 2,200 crore for a 20 percent stake in IIFL Home Finance, which had Assets Under Management of Rs 23,617 crore as of March-end. The deal the sovereign wealth fund signed with IIFL Finance, the parent of IIFL Home, marks one of the biggest investments in the affordable housing segment in India.

In an exclusive interview with Moneycontrol,  Nirmal Jain, founder of IIFL Group, said ADIA’s investment would be used to penetrate deeper into the affordable housing segment and target under-served markets in Tier 4 or Tier 5 markets.  

Home loan rates can rise by another 75-to-100 basis points at the industry level, assuming the rate hike cycle by the Reserve Bank of India, will continue for some time, Jain said. He also spoke about the impact the merger of Housing Development Finance Corporation (HDFC) and HDFC Bank will have on smaller housing finance companies. 

Edited excerpts: 

 What would the proceeds of the ADIA investment be used for? 

IIFL Home Finance has been growing at a fairly good pace... The market opportunity is big because in the affordable housing finance segment there are not too many players. This is a huge under-penetrated market and affordable housing finance is something which even banks have not been able to capture - people who are self-employed or those in the informal sector, where documents are not fool-proof. There are so many smaller towns and places in India where credit still has to go deeper. And this is what we would want to target now that we have the investment from ADIA. We want to grow the business across the country. 

Which new geographies are you looking to tap? 

There are many districts that we need to penetrate deeper. Right now, housing finance is operating in 230 cities across India. When we say new markets, we mean that we would want to target the under-served markets in Tier 4 or Tier 5 towns and cities. We will go deeper in these markets. 

What is your outlook on branch expansion? 

Right now, we are present across 16 states and two Union territories with 230 branches. We will continue to expand branches. IIFL Finance, which is the holding company, will set up 300 new branches in FY23. 

How will the rate hikes impact demand for housing loans?  

Rising interest rates will definitely have a negative impact on the demand. But at this point in time, demand has been very strong. There is pent-up demand.  Interest rate hikes worth 50-to-100 basis points at this stage can be absorbed, but if they go up further by another 100 bps, there will be an impact on home loan demand; it will slow down. It is a function of two things — one, economic activity and second is the interest rates. One good thing is that housing prices, in nominal terms, have grown at a much slower pace in the last 20 years compared with the income. But I agree that if interest rates further go up, there will be some impact on demand.

By how much will home loan rates rise across the industry given that the rate hike cycle is expected to continue? 

Currently, across the industry, home loan rates have gone up by 75-to-100 bps. These rates are for a period of one year and these are floating rates. I think the rate increases in the shorter end of the G-Sec yield curve will get passed on, and we may see rates rise by another 75-to-100 basis points at the industry level, assuming the rate hike cycle will continue for some time. If RBI is compelled to take more rate hikes, then housing demand, which is very robust, will see some moderation. 

What is your outlook on interest rates? 

Any guess at this point in time looks difficult. It will largely depend on the trajectory of crude oil prices, economic environment in developed countries and inflation. 

How do you assess the impact of RBI’s rate hike on the affordable housing market? 

This is a hugely under-penetrated market and I think the relative impact of rate hike will be less in the affordable housing segment. Since the loan amount is small, the rate hike can be absorbed. At the same time, we also have to see that our cost-to-income (ratio) should be efficient enough to absorb some of the cost. This segment is very large. Some of the housing finance companies that cater to this market have scaled back or wound up. So competitive intensity for this has reduced and the demand remains strong. 

What would be the impact on your margins? 

We won’t have much of an impact on our margins because we are able to pass on the rate hike to our customers. Almost the entire loan book is linked to external benchmarking or floating rate. We do not have a fixed rate for long-term loans. We normally do not lend for a very long term. If you lend for a long term, then you do not have the flexibility to increase the tenor. So, instead of increasing the EMI (equated monthly instalment), most lenders, most housing finance companies, tend to increase the tenor. This helps in repayment and collection. 

Do you have any growth target for Assets under Management (AUM) in FY23? 

It is difficult to make a forward-looking statement at this point. But, if the industry is growing at 15-to-20 percent, our AUM should be able to grow slightly faster than that. 

How has asset quality panned out for IIFL Home Finance? 

This quarter what has happened is that all the moratorium and restructuring that was offered is over. We are seeing that most customers have started to make the scheduled payments or else they are classified as delinquent or Non-Performing Assets (NPA). 

What is the outlook on NPAs? 

We expect asset quality trends to improve from here. Our NPA ratios will improve; after the third COVID wave, collections have also been improving. Our target is to bring down the gross NPA ratio to below 2 percent of our loan book in this financial year. We also aim to have more than 100 percent coverage on these. Home loan NPAs will be brought below 1 percent of our loan book in FY23; that is our target. 

How will the HDFC-HDFC Bank merger impact smaller players in the industry? 

Since it is a merger behemoth, we expect them to focus more on large, premium customers. They would probably look for co-lending or partnership arrangements for affordable loans or small ticket segments. So, it may not impact us much.