Affordable Housing Finance Market Remains Crowded Amid Fierce Competition

The affordable housing finance market in India continues to see healthy demand but faces intense competition, according to a new report by Incred Capital. The report highlights that while demand for affordable housing loans is expected to remain strong in Q2FY24, heightened competition between banks, small finance banks (SFBs) and non-banking financial companies (NBFCs) has led to margin pressures.

Incred analysts Jignesh Shial and Mayank Agarwal suggest that major lenders like Bajaj Finance and IDFC First Bank have been aggressively targeting salaried customers, while smaller players including AU Small Finance Bank, Ujjivan SFB, Cholamandalam Investment and Shriram Finance are focused on the self-employed segment.

The report notes that private banks are enrolling salaried customers by first offering them liability products like deposits, while public sector banks prefer co-origination partnerships to grow their portfolio. Bajaj Finance is said to be offering the highest loan-to-value ratios to attract young salaried borrowers. Among NBFCs and HFCs, Bajaj Finance and IDFC First Bank are seen as outliers in growth and competitive positioning.

Beyond interest rates and processing fees, the players are competing on multiple fronts – loan-to-value ratios, complementing housing loans with unsecured lending, and providing greater repayment flexibility through things like flexi loans. The level of competition differs across regions depending on the presence of major players.

While overall housing demand remains stable, the report flags rising employee attrition across organizations as a concern. With lending still an employee-driven business in semi-urban and rural markets, managing attrition remains a challenge that keeps operating expenses high.

The report notes that asset quality has remained steady for most HFCs despite the uneven monsoon, and delinquencies are not expected to see a major spike in Q2. Credit costs are expected to remain low going forward.

Among HFCs, Incred analysts continue to prefer Home First Finance over Aavas Financiers, owing to its faster growth, improving return ratios, and stable management. Home First Finance is expected to deliver 30% AUM growth by entering new states and deepening penetration in existing markets.

Aavas Financiers’ management has guided to ~22-25% AUM growth and ~15% Return on Equity by FY25-26. Incred has downgraded Aavas to HOLD on the back of sudden top management changes and rising attrition across levels. It prefers to wait and watch the new management’s execution capabilities.

The affordable housing sector has seen rising participation from banks and NBFCs, with many new players targeting the self-employed segment that has traditionally been the stronghold of HFCs. While demand remains robust, competitive intensity and margin pressures remain key monitorables going forward, Incred Capital added.

It remains positive on the long-term outlook for affordable housing finance companies that can differentiate through superior execution, digitization, geography expansion and stability in senior management. However, the sector dynamics point towards a more crowded competitive environment in the near to medium term.