Second Covid Wave: Housing Financiers See Stress Rising Across Retail Loans
The impact of the second Covid wave is being felt by Indian banks and non-banking financial companies across retail segments. From micro credit to vehicle loans and now home loans, even the most resilient portfolios saw a rise in defaults as a violent surge in infections led to both repayment and collection difficulties.
Gross non-performing loans rose for across each of the top housing financiers. Housing Development Finance Corporation Ltd., LIC Housing Finance Ltd., PNB Housing Finance Ltd. and Indiabulls Housing Finance Ltd. all saw an uptick in bad loans. LIC Housing and PNB Housing were the worst-impacted. Piramal Enterprises Ltd., which has a substantial real estate and home loan portfolio, does not report details for the segment separately.
The elevated stress levels in the housing finance segment, according to Shweta Daptardar, research analyst at brokerage firm Prabhudas Lilladher, is emanating mainly from lease rental discounting segment and home loans given to self-employed individuals.
Agreed, Pritish Kandoi, executive vice president and head-financials, investment banking at ICICI Securities. "We are seeing stress mainly emanating from under construction portfolio and loan against property."
Individual housing and LAP loans inclined towards self-employed customers, whose businesses have been impacted by lockdown restrictions, are contributors to the elevated stress in retail housing finance.Pritish Kandoi, Executive Vice President, ICICI Securities
For HDFC, which has over three-quarters of its loan book focused on individual loans, gross non-performing individual loans inched up to 1.37% while non-performing non-individual loans stood at 4.87% in the June quarter. In the retail segment, over 80% of HDFC's borrowers were salaried.
"The second wave of the pandemic has led to an increased strain on individual collections specially in the 30 days past due and 60 days past due buckets, leading to slippages in the first quarter," said Keki Mistry, chief executive at HDFC Ltd. during its earning conference call with analysts on Aug. 2.
Besides, as the courts remained shut for most part of the June quarter, lenders found it difficult to take legal recourse under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act for recovering loans sanctioned against property in the retail housing segment, said Daptardar.
Mistry agreed in an interview with BloombergQuint last week. "Whenever Sarfaesi gets reintroduced ... if we ever have to enforce our rights to the foreclosure law, the amount we will collect while auctioning the property will be much more than the outstanding loan amount," he said.
LIC Housing Finance
For LIC Housing Finance, gross non-performing assets shot up across all loan segments.
Gross NPAs as a ratio of total advances for project loans rose the highest to 24.4% of its total advances, compared to 18% in the preceding quarter. The other segments also fared poorly with gross bad loans for non-housing commercial loans at 18.9% and individual LAP at 10.9%. Individual retail housing saw bad loans rise to 2.6% from 1.9% in the previous quarter.
This, the company said, was mainly due to lockdown curbs in some states on account of the Covid second wave during the April-June quarter. "There has been a sharp increase in the delinquencies, mostly due to the economic activities being impacted in Q1 with lockdown restrictions in many states because of second wave of COVID-19," said Y Viswanatha Gowd, chief executive at the lender, during the company earnings call with analysts on July 30.
However, with improvement in economic activities and our increased efforts in recovery, we are confident of controlling the same and believe that this should mark the peak.Y. Viswanatha Gowd, CEO, LIC Housing Finance Ltd.
But securities research firm Emkay Global remains concerned about LIC Housing Finance's asset quality and inadequate provision coverage ratio of 33.5%.
"Though the housing loan book is safe, we do await resolution in developer book NPAs (~18.9% of the wholesale portfolio). NCLT resolutions and lending through the SWAMI scheme announced by SBI and LIC (parent) would be key things to watch out for in the near term," said Emkay Global in a July 30 note.
PNB Housing Finance
For PNB Housing Finance, the retail gross NPA ratio rose to 3.8% as of June 30, compared with 2.5% in the preceding March quarter, while corporate GNPA rose sequentially to 15.94% from 12.7%.
"The increase in the retail book gross NPA is primarily emanating from the self-employed moratorium book, which we had communicated during the Q4 results. Amongst all HFCs, we have the highest self-employed footprint. The team is closely monitoring the moratorium book for faster and quicker resolutions," said Hardayal Prasad, managing director and chief executive at PNB Housing in an Aug. 4 earnings conference call with analysts.
Indiabulls Housing Finance
For Indiabulls Housing Finance, retail mortgage loans formed about 58% of its total loan book as of June 30, while the remaining is commercial real estate and business loans.
Without giving the break-up between retail and non-retail gross NPAs, Gagan Banga, managing director and chief executive at the company, said in a port-earnings analyst call on Aug. 6, that the company's NPA percentages seemed optically higher on account of the large reduction in its loan assets.
"Had the company not to chosen de-grow its book in the past one year, the gross NPAs of 2.86% would have actually been at 2.45%," said Banga.
Restructuring Remains Elevated
Restructuring under the Reserve Bank of India's one-time debt recast scheme also remained elevated for most housing finance companies. However, the number of customers who applied for restructuring were lesser in the June quarter, compared to the previous three months for most lenders.
For HDFC, loans worth Rs 3,704 crore or 0.7% of its total loan book were restructured as of June 30, of which close to Rs 778 crore or 0.2% of its loan book is expected to be restructured under OTR 2.0 for individuals and small businesses.
"Out of the loans under OTR 1.0 and 2.0, 38% are individual loans and 62% are non-individual loans," said Mistry.
For LIC Housing Finance, loans worth Rs 5,353 crore were under restructuring as of June 30, 2021. However, Gowd said that the amount of restructuring in the April - June quarter was lower than the preceding three months.
PNB Housing restructured loans worth Rs 1,733 crore under OTR 1.0 and 2.0, but no restructuring was done in the June quarter.
"During the quarter, the restructuring scheme by RBI was extended up to 30th September '21. As on 30th June 2021, Rs 1,733 crores, which is about 2.9% of our loan assets has been restructured under the RBI resolution framework for COVID-19-related stress, this is OTR one and two. There is no restructuring done during the quarter," said Prasad.
Indiabulls Housing Finance, according to Banga, restructured loans worth Rs 84 crore or 0.1% of its loan assets until June. "But under the restructuring framework 2.0, the Reserve Bank has given time for smaller borrowers, till September 2021. We have thus engaged with all of our small borrowers, evaluating their request. At this point in time, I would like to clearly state we do not foresee any large amount of restructuring being required in the book," said Banga.
Outlook Not As Gloomy
Even as housing financiers are facing elevated stress levels, these companies may see a quicker rebound in asset quality.
Housing finance is a secured loan category, said Daptardar. "The option of recovery through liquidation of underlying property makes the asset class much more pandemic resilient than others."
Housing finance as an asset class has the lowest annual credit losses among all large financial asset classes, mainly on account of the collateral and the secured nature of the funding, said Kandoi.
Even Mistry of HDFC believes the asset quality challenges are short-lived.
"This is a short-lived problem, it may be there for another quarter or two. I do not know how long the impact of Covid will be there and whether there will be a third wave or not, but it is certainly not a long term problem," he told BloombergQuint.
As lockdown curbs are relaxed, vaccination programme increases its reach and business returns to normalcy, Kandoi said, the sector will be one of the fastest to recover as borrowers, even within the self-employed segment, will start normal repayments.
"Based on the previous trends, we believe that mortgage pools are expected to demonstrate better recovery, which is likely from Q2FY2022 onwards. The pace and extent of recovery, however, will depend on the borrower profile each lender is catering to," he said.