The liquidity challenges that followed the debt default by Infrastructure Leasing & Financial Services (IL&FS) in September 2018 pulled down growth in assets under management (AUM) of housing finance companies (HFCs) in the second half of fiscal 2019, says a research note.
In its report, ratings agency CRISIL says, "Fiscal 2019 was a year of two contrasting halves. The first half saw stable growth and comfortable access to funding, with AUM growing at an annualised rate of about 21%. However, the second half brought a reversal of sorts with AUM growth plunging to around 10%. With funding access being affected, non-banks, including HFCs, were forced to curtail disbursements and focus instead on conserving liquidity."
The industry AUM stood at Rs12.4 lakh crore as on 31 March 2019, up 16% from same period a year ago.
Krishnan Sitaraman, senior director at CRISIL Ratings, says, “Access to funding will determine the growth prospects for HFCs. As of now, lenders and investors seem to be differentiating between HFCs -- preferring those with strong parentage and credit profiles and going slow on those with a large wholesale portfolio. This will be reflected in business growth differing for these entities.”
Among the HFC segments, the ratings agency says the distinction between the two halves was the sharpest for non-housing loans –primarily developer loans and loans against property (LAP), which comprised a third of the total AUM of HFCs as on March 2019 that saw growth print around 5% (annualised) in the second half, compared with about 28% during the first half. Housing loans, on the other hand held up better, growing at close to 13% (annualised) compared with 18% in the first half.
Banks outpaced HFCs in home loans, given the HFCs’ growth slowdown, CRISIL says, banks managed to gain market share in home loans. "Indeed, for the first time in at least five years, banks, supported by portfolio buy-outs, outpaced HFCs in home loans and grew at 19% in fiscal 2019. With banks’ continued focus on retail growth, especially in this segment, and HFCs keen to conserve liquidity, the trend is expected to continue for a few quarters more."
Over fiscals 2020 and 2021, the ratings agency expects growth to revive to 12%-14% for HFCs, though it feels this would still be lower than levels seen in the past. This growth will be supported by mid-teens growth for the two largest players, constituting more than 50% of the industry AUM, it added.
To be sure, CRISIL says, limited ability to raise funds through commercial papers (CPs) and cautious call by a few players to reduce dependence on short term borrowings led to a decrease in the share of CPs in total on-book borrowings to about 7.5% as on 31 March 2019, down almost 450 basis points (bps) from around 12% as on 30 September 2018.
"Instead," it says, "many players resorted to securitisation to meet their liquidity requirements. In fact, the securitisation and direct assignment of mortgages more than doubled to around Rs93,000 crore in fiscal 2019 from about Rs35,700 crore the previous fiscal. External commercial borrowings also gathered pace, albeit in a limited way."
From an asset quality perspective, the sector saw overall gross non-performing assets (NPAs) inch up to around 1.4%, from 1.1% in fiscal 2018. That said, CRISIL says it believes two-year lagged gross NPAs are a better indicator of asset quality in mortgages because of their long tenures. That number stood at about 2.1% on March 2019, which is around 50bps higher than that as on March 2018.
While the reported NPAs in the developer financing portfolio have been low till now, they have been primarily supported by long moratorium periods and exits provided by refinance.
“In recent months, with incremental funding towards real estate coming off, asset quality concerns in the developer financing book have increased. The impact of refinancing slowing down will need to be monitored given that the ability of lenders to recover, in case of default, through liquidation of assets has not been tested in any material way till date,” says Subha Sri Narayanan, director, CRISIL Ratings.
According to the ratings agency, LAP is another segment that remains a monitorable, given the rise in delinquencies that have already been witnessed.
It says, while the long-term growth prospects for HFCs remain intact, asset liability maturity management and liquidity conservation would remain front and centre for the next few quarters.
The regulatory environment is also expected to evolve. National Housing Bank has recently tightened the permissible leverage levels and capital adequacy ratios for HFCs; further action could be expected from the regulator on the liquidity front with Reserve Bank of India (RBI) already having issued draft guidelines for non-banking financial companies (NBFCs) on liquidity risk management framework.
"Nevertheless, we believe HFCs with strong parentage and those with robust risk management systems and processes will be able to navigate the current environment better," CRISIL concluded.