Beena Parmar
Moneycontrol News
Aggressive lending practices and possible job losses may restrict repayment capacity of home loan borrowers, according to country’s largest home financier HDFC.
HDFC – Housing Development Finance Corporation – in its annual report said, “Recent analysis by various credit rating agencies has indicated increased stress in the asset quality of loans against property. This stems from aggressive lending practices, intensifying competition and an inability to correctly assess repayment capacities of borrowers.”
Some housing finance companies (HFCs) focusing on the affordable housing segment have shown an above-average increase in delinquencies with gross NPA at 4-5 percent, said a CRISIL report.
HDFC also observes, “Key risks for the housing finance business include possibilities of widespread job losses, which could make servicing of the home loan difficult and a sharp deterioration of asset quality, particularly in the case of non-individual business.”
HDFC’s non-individual loans constitute 27 percent of its total portfolio, which stands at 3.59 lakh crore.
There is an ongoing debate on the number of jobs created in the country. Although, there is no accurate source of new jobs data at present, as per the Employees’ Provident Fund Organisation (EPFO), 3.9 million jobs were created between September 2017 and March 2018. Similarly, data for the National Pension Scheme (NPS) for the same period (September 17 to March 18) showed that 465,000 new accounts were created.
Even as HDFC’s non-performing assets (NPAs) are at a lower base, the ratio of net NPAs to net advances increased to 0.80 percent as on March-end 2018 from 0.54 percent a year ago. NPAs of rival HFCs such as Indiabulls Housing Finance remained stable at 0.34 percent as compared with 0.36 percent.
Ashwini Kumar Hooda, Deputy Managing Director, Indiabulls Housing Finance had told Moneycontrol in April that delinquencies in loans up to Rs 2 lakh will force lenders to improve their underwriting.
As per an RBI study, in the up to Rs 2 lakh housing loans slab, NPAs of public sector banks and HFCs collectively stood higher at 10.4 percent in FY17 against 9.8 percent in FY16.
An ICRA report released in June 2018, gross NPA for only HFCs in the sub-segment deteriorated from 3.3 percent as on March 31, 2017 to 4.1 percent as on March 31,2018 driven by greater portfolio seasoning, entity-specific factors in some cases and external events such as demonetisation and implementation of Goods and Service Tax (GST) impacting the cash flows of the borrowers.
“While growth prospects remain good, given that the borrower profile is more vulnerable to income and external shocks, lenders would have to maintain good origination and lending processes as they expand in this segment” Supreeta Nijjar, Vice President, and Sector Head, Financial Sector Ratings, ICRA.
Watch-out lending practices
Deepak Parekh, Chairman of HDFC also pointed out the growing practice of housing finance players picking loans off each other’s balance sheet needs to be carefully monitored.
“With the regulators prohibiting prepayment charges on most home loans, no one gains in this game, except the agent who keeps collecting commissions. Lenders do incur costs while originating loans," Parekh said.
He added, “It is thus logical that there be some compensation to a lender -- especially when a customer is poached within a timeframe of say, less than two years. To my mind, regulators should not encourage ‘lazy housing finance’.”
According to analysts, housing finance companies don’t have adequate pricing power to pass on the entire rise in the cost of funds as they operate on relatively narrow margins in a competitive market.
A fallout of which could be, as a Motilal Oswal report highlighted, a trend it noticed was the migration of assets toward high-risk non-core housing loans (which yield 200-400 bps or 2-4 percentage points more than home loans) for a few players, notably LICHF (LIC housing finance) and DHFL (Dewan Housing Finance Corporation Ltd), two large players in the housing finance market.
HDFC’s annual report also pointed out other concerns including unanticipated changes in regulations which could impact the operations of the company.
Reserve Bank of India (RBI) has already decided to tighten norms in the low-ticket affordable loans of up to Rs 2 lakh by increasing the loan to value (LTV) ratio and increasing the risk weight to address rising bad loans.
“It has been observed that the level of NPAs for the ticket size of up to Rs 2 lakh has been high and is rising briskly. Banks need to strengthen their screening and follow up in respect of lending to this segment in particular," RBI said in June.
Of around 100 housing finance companies, 15-20 are active in the low-ticket-size segment.
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