Motilal Oswal Home Finance’s Journey From Carefree Growth To Clean-Up

The lure to cash-in on the government’s ‘Housing For All’ initiative drew the Motilal Oswal Group to the business of affordable home loans in 2014.

For most of its 33-year history, the group had been focused on capital market-related businesses. But the buzz around affordable housing prompted it to launch its only pure-play lending business. And so, Aspire, as the unit was christened, came into existence in May 2014.

The business hit the ground running. Within a period of four years, the loan book expanded from Rs 357 crore in 2014-15 to a peak of Rs 4,863 crore in 2017-18. But as is common with such quick build-ups in lending, reported bad loans also rose to a peak of Rs 405 crore or 9% of advances by March 2019.

The clean-up began thereafter and it is only now that the group, and the re-christened Motilal Oswal Home Finance, is beginning to emerge from the shadows of the crisis.

FY20: A Year Of Kitchen Sinking

Information published in the Motilal Oswal Home Finance annual report suggests 2019-20 was a year of clean-up.

The housing finance business reported a net profit of Rs 39 crore for the year ended March 31, primarily due to a write-back on provisions it made against bad loans. A year ago, it reported a net loss of Rs 137 crore.

Motilal Oswal Home Finance sold down Rs 595 crore worth bad loans to Phoenix Asset Reconstruction Company Ltd. for Rs 293 crore, at a discount of 51%, the annual report shows. The sale helped the company write back provisions worth Rs 177 crore against these loans.

If the company had not sold these loans to Phoenix ARC, its gross NPA ratio could have been as high as 14%, well above industry standards.

By the company’s own admission, it sold these loans to the ARC as recovery prospects were either bleak or too long drawn out.

In an email response to queries sent by BloombergQuint, the company said it brought down its gross non-performing asset ratio to 1.8% as on March 31 through this sale. It also said it has a provision coverage ratio of 66% to shield itself against further worsening of loan quality.

Along with a sell-down of legacy bad assets, the company also reined in growth considerably. In the two financial years since March 2018, the housing finance company has reported incremental loan disbursals worth only Rs 375 crore compared with over Rs 1,400 crore disbursed in 2017-18 alone.

Up Against A Sceptical Market

The decision to sell down a large chunk of bad loans came amid scepticism around the business in banking circles.

According to three public sector bankers, who spoke on the condition of anonymity, Aspire Home Finance’s loan book had issues ranging from poor financial records to plots remaining unconstructed even after loans were granted.

The first of the three bankers said that it is unusual for a housing finance company to have high bad loans in the initial years of operations. Also housing loans are considered to be a relatively safe bet within retail lending segments. Some small- and mid-sized housing finance companies, however, have been actively lending to customers with weaker scores against inadequate documentation. This, in turn, has led to a surge in bad loans at some of these lenders, the banker said.

According to a study by BCG and TransUnion CIBIL, released in 2018, the affordable housing finance industry had an overall bad loan ratio of 2.1%. Lower ticket-size loans, however, reported double-digit default rates.

In the case of Motilal Oswal Home Finance, the higher default rate also included some cases of alleged fraud, which showed poor underwriting standards, the banker quoted above added. Moreover, smaller real estate developers have been facing liquidity problems for the last three years, which has resulted in higher rates of default in the developer portfolio of some housing financiers.

Motilal Oswal Home Finance said that it had “witnessed higher delinquencies in past on account of seasoning of legacy portfolio, coupled with delay in setting up collection organisation”. In addition to these legacy problems, external shocks such as demonetisation and implementation of the goods and services tax also affected borrowers’ ability to repay the company, it said.

There were some cases of under construction or plot loan or composite loan where we fund for the purchase of plot and construction of house on that plot. In under-construction cases, some of the builders were not able to complete the project due to external or their internal constraints, in such cases we have seen some defaults from customers. We, however, have filed legal litigation against builder as well as customer for the collection of dues.

Motilal Oswal Home Finance Response To BloombergQuint Query

The National Housing Bank’s rules state that a house must be built within three years of availing a loan to purchase land, failing which the loan will not be treated as a housing loan but a commercial loan.

According to Supreeta Nijjar, vice president, ICRA Ltd., affordable housing as a segment is more prone to income shocks among borrowers, which leads to a higher default rate than the ordinaryl housing finance business. This would mean that lenders will have to be doubly careful before they grow exponentially.

“In the case of affordable housing the borrowers are not your typical salaried individuals and lenders cannot always tie up with a prominent builder to ensure quality. Lenders are required to do stringent checks on the property title and the borrower’s repayment capabilities before approving a loan,” Nijjar said. There is a need for these lenders to do tougher monitoring of borrowers after they sanction loans and not to overfund at the beginning, she said.

What Lies Ahead

Apart from the clean-up of the loan book, the group has also overhauled management and changed the name of the business.

After a few quick top management exits, in 2019, the Motilal Oswal group took charge of the situation and hired group veterans Vijay Kumar Goel as chief executive officer and Shailbhadra Shah as chief financial officer. Former COO of Dewan Housing Finance Corp., Vivek Kannan, was appointed as chief operating officer as well.

In May 2019, the company’s name was changed to Motilal Oswal Home Finance, so it could leverage the strong promoter backing.

The promoter also helped the housing finance company with capital through private placement of non-convertible debentures.

According to charge documents filed with the Registrar of Companies, Motilal Oswal Wealth Management Ltd. participated in private placement of non-convertible debentures worth more than Rs 251 crore in 2019-20. Motilal Oswal Home Finance also raised Rs 200 crore from SBI Mutual Fund through a private placement in March.

Attempts to secure liquidity via securitisation, a common route for NBFCs, has not worked for Motilal Oswal Home Finance. The bankers quoted above said this is because of lingering concerns over quality of the loan book. The company, however, denied this and said it has enough liquidity and has not had to depend on securitisation transactions.

The next step for the housing finance company is to bolster its recovery process. Over the last financial year, the company has set up a 450-member collections team to cover the geographies where it has grown its business.

Nearly 40% of Motilal Oswal Home Finance’s loan book is concentrated in Maharashtra. It also has presence in Gujarat, Madhya Pradesh and Tamil Nadu. To aid the collections team, the company has also formed a 25-member legal team which is pursuing all available legal remedies to ensure better recovery, it said. Having sold stressed loans to Phoenix ARC last year, the company’s collections efficiency has improved to 98%, the company said.

It has also made investments to bolster its underwriting capabilities over the last two years, to ensure that future loan growth is of better quality. According to the company, in the loan book generated since April 2018, gross NPAs stand at only 0.09%, indicating that the incremental lending book is strong.

“We have already taken appropriate measures to arrest the asset quality concern and this has yielded results as well, which can be seen with significant improvement in asset quality and profitability,” the housing finance company said.