Indian retail banks could claim bigger share of housing loan market in 2020

NBFCs and HFCs have reduced disbursement rates.

There is a window of opportunity for Indian retail banks to increase their share in the housing loan market in 2020, as non-bank financial companies (NBFCs) and (HFCs) have reduced their disbursement rates due to tight liquidity conditions and higher borrowing costs, according to Care Ratings.

The housing credit portfolio dominated retail and personal credit from FY10-19, growing at a CAGR of 16.2% during the period and making up 53.2% or $173.52b (Rs 12.53t) of total personal credit as of H1 2020.

Rising disposable income, tax incentives and affordable interest rates; improved affordability despite increasing property prices; a favourable demographic, with more than 50% of India’s population is below 30 years of age; and increasing urbanization in India all helped drive expansion in the segment.

The government’s push for affordable housing via schemes such Pradhan Mantri Awas Yojana, lower rate loans, and higher income have helped increasing the demand for housing loans in smaller cities/towns (tier I, II, III cities), noted Care Ratings.

But growth slowed in the latter part of the decade due to increased competition from NBFCs, HFCs and new banks. Housing credit as a share of retail/personal credit fell between 51.1% to 52.2% from FY18-19 from hitting 53.6% in 2016.

Weak employment creation, low salary growth and doubts over sustainability of elevated property prices in major markets also weighed in on housing credit growth.

The local funding situation for NBFCs could play out in favor of retail banks. More NBFCs are expected to look overseas in 2020, according to an earlier report by Fitch Ratings. Wholesale and housing finance companies (HFCs) were also identified amongst the most vulnerable in 2020 given their higher leverage, weaker asset-and-liability maturity (ALM) profiles and higher concentration risks.

But retail-focused NBFCs could still outpace banks in the medium term as they continue to benefit from limited direct competition from the banks, funding demand from underserved customers, and loan books that are shorter term and more granular, according to a separate report by Fitch Ratings.