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Last Updated : Jan 10, 2018 04:58 PM IST | Source: CNBC-TV18

Growing delinquencies in affordable housing: Here's what experts have to say

Even as a thrust is being given to the affordable housing segment, a Moody's-ICRA report has flagged concerns about the growing delinquencies in loans given to the affordable housing segment, which are expected to continue in 2018.

CNBC TV18 @moneycontrolcom

Even as a thrust is being given to the affordable housing segment, a Moody's-ICRA report has flagged concerns about the growing delinquencies in loans given to the affordable housing segment, which are expected to continue in 2018.

In an interview to CNBC-TV18, Karthik Srinivasan, Group Head-Financial Sector Ratings at ICRA and R Varadarajan, MD of Repco Home Finance spoke about the latest happenings in the sector.

Srinivasan said housing as an asset class has faced various cycles in terms of delinquencies.

He further said that we are seeing an increase in competitive pressure in affordable housing segment.

According to him, many new players are entering the affordable housing financing sector.

Large ticket home sales have been slow, tier-2, 3 cities are doing better, he added.

He mentioned that loan against property (LAP) segment showing higher delinquencies versus home loans.

Repco's Varadarajan said that delinquencies were less in Q2 and collections were better in affordable housing segment.

According to him, FY19 is looking bright for affordable housing on the back of extended subvention scheme.

We expect delinquencies in loan against portfolio segment to return to normal, he said.

We don’t expect cost of funds to rise in the near future, he added.

Goods and services tax (GST) and demonetisation had early hiccups in the LAP portfolio, he mentioned.

Below is the verbatim transcript of the interview.

Latha: What you said in that report if I remember right was a little scary. You said that delinquencies compared to the traditional sector are seven times more.

Srinivasan: Let me just correct that. What we had said in that report was not particular sentence which you are referring to; it was a comment on the analysis of some of the pools that we have rated. The pools that we have rated as compared to the ones which have been on the traditional home loans, there as we speak, the reported delinquencies and 90 plus have been significantly lower as compared to that of the affordable housing pools that we have done. So it is only a small segment of the entire industry volume, so, it is not really a right comparable.

Though we do agree that at a broader sense, housing asset class is something which stood quite a number of cycles, the delinquencies have been low. However, when we talk of affordable housing segment, the customer profile gets different. The ability of this profile of customers to absorb any economic shocks, whether it is demonetisation or Goods and Services Tax (GST), or anything else could be vastly different as compared to the other set of borrowers. So, it is always imperative that this segment could definitely see a higher delinquency as compared to the other class.

This was not clearly visible over the last couple of years because the portfolio was growing and with this events of demonetisation and GST, we are seeing some rise in delinquency in the last two quarters. Maybe a right trend would emerge after a few more quarters when the impact of GST or demonetisation are relatively lower or when that is almost getting factored in fully.

Sonia: The other point you make in your report is that lending standards have been eased. We actually posed this question to Keki Mistry yesterday and he said that he does not see any compromise yet on the quality of affordable housing loans given out. So what led you to believe that lending standards have been eased for the sector as a whole?

Srinivasan: What we are seeing out there is the competitive pressures in this industry is definitely increasing quite a bit. There are more number of players entering the segment. Consequently we are seeing, when we say dilution, we are seeing a slight inch in the loan-to-value (LTV), the FOIRs which is the fixed obligation to income ratios, we are seeing a bit of tweaks which is happening as entities look to scale up to amortise their opex and turn profitable. It is the deterioration in underwriting and it is partly also driven by the increasing competitive landscape in the industry.

Latha: More generally are you worried about the quality of the housing finance companies? Some of them have shown a steamy growth of 40 percent, while when you enquire with real estate companies, they are not speaking about so many home sales. So, are you worrying about housing finance company financials only because of affordable housing or because of loan-against-property (LAP), or maybe even LAP loans getting disguised as home loans?

Srinivasan: It is a combination of all. While we do hear that home sales are going down but that is what we understand is in select markets in larger ticket transactions. Our own interactions with a lot of players, tier – II, tier – III cities, the traction still continues. Second, when we say home loan sales slowing down, we also need to understand that there is a huge resale market also which is there in India. We don’t have the statistics so can’t exactly compare and state the numbers.

What we have also seen is as compared to home loans the LAP is definitely showing a bit of more delinquencies as compared to the traditional home loans and the number varies across players. Very generally if one was to make a statement, the LAP delinquencies are definitely higher for almost all the players as compared to their traditional or the home loan segment.

Sonia: Are you forecasting the gross NPAs in the affordable housing segment to go up in the near future? As of now they are less than 2 percent, as of September, but do you think it could edge up higher?

Srinivasan: It could. As of September they stood at about 1.8 percent for the affordable housing segment. We think it would go up, maybe to 2.5 percent. We don’t think it should materially increase from those levels.

Latha: Now today the old 10-year bond is at 7.42 percent, and the new 10-year bond also gone up. Basically I mean yields are higher, probably because of crude. Is this going to be a fresh problem for any of these or will they be able to pass it on and tide it?

Srinivasan: I guess with 10-year going up, obviously chances of a rate cut goes down. So to that extent probably we are at the end of the lending rate cut cycle by any lending institution. To that extent, we could see some rise in the lending rates by all players, but probably wait and watch in case of any other measures taken by the government or the regulator to sort of negate the recent uptick in the yields.

Latha: The ICRA report, we wanted to check with you on the ground are affordable housing loans a little more troublesome than other loans?

Varadarajan: No. Traditionally if you see affordable housing and particularly the non-salaried, sometimes they will not be able to pay the EMI on the dotted lines. Therefore when it crosses 90 days, technically we classify it as an NPA. However, what we have seen in the past, for about past 17 years we have been in the field, we found subsequently they come and pay. Therefore there is no credit loss. There may be credit cost temporarily, but there may not be any credit loss. However, even in the current scenario post demonetisation, and post GST, in Q2 we found things were improving in the field, delinquencies are less and we were able to collect the money.

For entire discussion, watch accompanying video.
First Published on Jan 10, 2018 01:39 pm

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