Is India’s Home Finance Juggernaut Slowing?

Housing finance has been among the most predictable of loan segments in India. Demand, often from first-time buyers, has grown consistently thanks to the Indian obsession with owning a home. Often, loans are taken for homes that are being used by the borrowers themselves, which means that defaults are among the lowest in this category.

This combination has attracted many. As corporate loan growth has slowed over the last few years, most banks, private and public, have reoriented their books towards housing finance. Non-banking finance companies have done the same.

For a while, it looked like the market was strong enough to take everyone along. It still may be. In the long term. In the short term, though, there is a slowdown emerging in the home loan segment which is worth noting and analysing.

Data provided by the Reserve Bank of India shows that growth in bank lending to the housing segment slowed to 10 percent year-on-year in the month of July. Still well above the overall credit growth of 5-6 percent, but well below the range of 17-18 percent seen last year.

The slowdown in loans to the housing segment comes against the backdrop of sluggish activity in the real estate market. In a June report, real estate consultancy Knight Frank said that new residential real estate launches had fallen 41 percent to a seven-year low. Sales volumes had dropped 11 percent compared to a year ago.

There could be a couple of factors at play here which are worth looking into:

• There could be some adverse base effect.
• Loan demand could be shifting from banks to NBFCs.
• Or there could be a slowdown in demand.

Behind The Data

The first thing to note is that the slowdown in year-on-year growth does not appear to be entirely linked to an adverse base effect. Sequential growth has slowed as well. For instance, between April and July this year, bank credit to housing has grown by a mere 0.4 percent compared to 4.7 percent in the same period last year.

The premise that bank credit to housing may be slowing because NBFCs are taking away a larger piece of the pie also doesn’t completely hold true.

Data from a September 4 report by rating agency ICRA shows that overall housing credit growth has also slowed from 18-20 percent two years ago, to about 14 percent now. “The total housing credit growth slowed down to 14 percent for the 12 months ended June 2017 (16 percent in FY 2017) taking overall housing credit to Rs 14.6 lakh crore as on June 30, 2017,” said rating agency ICRA in its report.

Is The Slowdown For Real?

Those in the industry say there is no significant slowdown in demand.

Keki Mistry, vice chairman and chief executive officer of HDFC Ltd., said the company had not seen any slowdown in demand. In the April-June 2017 quarter, individual loan disbursements grew 21 percent at HDFC Ltd. Strong but slower than the 26 percent growth seen in the April-June period of 2016.

Sudhin Choksey, chief executive officer of Gruh Finance Ltd., which is present in the lower end of the market, also said that there was no slowdown visible in the segments that they lend to. Choksey said that much of the slowdown over the last two years has been seen in the luxury housing segment. However, other segments have seen some impact due to uncertainties emerging out of the implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA), Choksey said, adding that this may impact growth in the July-September period.

Rohit Inamdar, group head of financial sector ratings at ICRA, told BloombergQuint over the phone that while there may not have been a slowdown in the lower and middle-income segments, high-end investment demand for real estate has slipped over the last 12-18 months. Since it is the demand for high-value properties that has been impacted, the aggregate value of home loans given out is growing slower than before. Volumes may not be impacted as much as value, said Inamdar, adding that other factors like the transition to RERA and GST have also played a role.

Inamdar said that since banks were bigger participants in the higher end of the market, the slowdown in bank credit to housing is more pronounced than the slowdown across housing finance companies.

State Bank of India, the country’s largest lender, for instance, saw growth in home loans slip to 14 percent in the first quarter of financial year 2018 compared to 21 percent in the comparable period last year.

No Clause For Alarm But Reason To Temper Expectations?

Along with slower growth, another factor to watch is the slight upturn in stressed assets across housing finance companies. While the asset quality has remained resilient across cycles, there has been an increase in the share of riskier sub-segments like non-housing loans, self-employed and affordable housing in the overall portfolio, noted ICRA in its report.

ICRA expects these firms to report gross non-performing assets of 0.9-1.3 percent in the financial year 2018. Risks such as relaxation of loan-to-value ratios, increased loan tenures and ballooning of repayments could impact asset quality indicators negatively over the medium term, said the rating agency.

The RBI’s decision in June to reduce risk weights on some home loans and bring down the standard asset provisioning against these loans could also emerge as a risk factor, cautioned Moody’s Investors Service in a note when the announcement was made. “Lower capital requirements will weaken banks’ protection from the housing sector, which has grown rapidly in recent years and will encourage greater lending,” Moody’s analysts Alka Anbarasu and Jason Sin had said in a note dated June 15.