AHFC Assets to Grow Steadily by 22-23% Over the Next Two Fiscal Years: CRISIL

CRISIL

The assets under management (AUM) of affordable housing finance companies (AHFCs) are expected to grow solidly by 22-23% in this fiscal year and the next, though this is lower than the ~31% growth seen last fiscal year. The loans against property (LAP) segment, which has been a key contributor to overall performance in recent years, is likely to see growth normalize, while home loans should benefit from government policies, especially the interest subsidy scheme.

Asset quality is expected to remain under control compared to the past. With credit costs remaining stable, the return on managed assets (RoMA) should be healthy, despite some moderation as the interest rate cycle turns.

Historically, AHFCs have seen AUM grow faster than the overall mortgage finance sector for four reasons: relatively lower competition from banks compared to the prime lending segment, a low base, high growth potential due to rising urbanization, and supportive policies for affordable housing construction and financing.

Subha Sri Narayanan, Director, Crisil Ratings, says: "For the home loan segment, supportive macroeconomic and policy factors are favorable, especially with the launch of the interest subsidy scheme. The scheme is close to being fully operationalized, but with slightly different contours compared to the original Credit Linked Subsidy Scheme. This, along with likely lower interest rates, should improve affordability for borrowers and provide a boost to AHFC growth next fiscal year."

So, while home loan growth this fiscal will be somewhat lower than in fiscal 2024, next fiscal should see a rebound to ~24%. In recent years, the LAP portfolio has also been a growth driver, logging a cumulative annual growth rate of ~32% over the past three years, compared to an overall AUM growth of ~23% for AHFCs. This has been driven by a need to manage yields, with competition intensifying among non-banks in the home loan segment.

The LAP segment has had three key drivers: healthy demand from the micro, small, and medium enterprises (MSME) segment, easier access to information, and better underwriting standards that have supported growth. However, growth should normalize from ~45% last fiscal year to 22-23% over this and the next fiscal year, as AHFCs navigate more stringent principal business criteria (PBC), with monthly reporting norms limiting sell-downs after origination. As many as 10 out of the top 16 AHFCs have less than a 5% cushion in their PBC.

Asset quality is expected to remain stable, with a modest uptick in gross non-performing assets as portfolios season. Customer profiles do not vary significantly between these segments, so their delinquency trends may be similar.

However, yields could come under pressure as interest rates decline, because a large portion of the asset book of AHFCs is contracted on a floating rate basis.

Aesha Maru, Associate Director, Crisil Ratings, adds: "However, the potential impact on net interest margins could be partly offset by two factors. First, customers of AHFCs are typically less sensitive to interest rates, so downward pressure on yields would be less significant than in the prime lending segment. Second, bank funding, which is typically linked to floating rates, forms a substantial portion (~60%) of their overall funding."

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