The housing finance sector has seen improvement in asset quality despite a sharp rise in interest rates over the past one-and-a-half years, with rising income levels helping offset higher monthly instalments.
There are no signs of stress also from an affordability point of view with rise in housing prices and higher interest rates, according to industry veterans and analysts tracking sector.
While these are floating-rate loans, the impact on the borrower is through tenor extension rather than an increase in EMI (equated monthly instalments), which would probably help explain a lower delinquency in the portfolio, Kotak Institutional Equities said in a note.
When interest rate rises, lenders either extend the tenure of the loan or increase the equated monthly instalment.
“We don’t see any challenge in terms of repayment collection despite sharp rise in interest rates and rising construction cost,” said PNB Housing Finance managing director Girish Kousgi. “Even today, the interest rates are much lower than what used to be before Covid. Therefore, there is no impact on repayment capacity,” he said.
PNB Housing Finance, which entered the affordable housing finance space just about 11 months back, has 97% of its retail loan assets of Rs 58500 crore below Rs 1 crore ticket. It has raised lending rates by 225 basis points since the beginning of the rate tightening cycle in May last year. One basis point is equal to 0.01 percentage point.
Housing affordability has risen with the expansion of middle-income households, sectoral experts said. The middle class more than doubled in FY2021 compared with 14% of the households in the financial year 2005.
PNB Housing Finance’s gross non-performing assets ratio improved to 1.78% at the end of September as compared with 3.39% a year back while the ratio for LIC Housing Finance was 4.33% against 4.91%. For State Bank of India, the country’s largest lender, merely 0.74% of its Rs 6.72 lakh home loan portfolio is sticky loans.
The Reserve Bank of India raised the repo rate by 250 bps between May 2022 and February 2023 while it kept the rate unchanged for the last five times in a row.
There has been a sharp increase of about 175 bps in housing loan yields for banks and the pass through has been higher, with interest rates on housing loans linked to repo rate, which is the external benchmark lending rate, said the Kotak report on housing loans for banks. Housing loan yields appear to have stabilized for the past few months.
“We look at the housing loan market from three broad perspectives to measure affordability. We don’t see an immediate reason to turn negative though we do agree that it has changed marginally to the negative, with a marginal increase in prices in real estate and higher interest rates,” the report said.
The growth in larger-ticket loans suggests that the focus of lenders remains on the upper half of the income population, it added.
