HFCs are being pushed into it because of the higher focus of banks in the overall home loans segment on subdued credit demand from corporates and asset quality pressures
As against a 20 percent per annum overall increase in home loans during the last four years, loans to the self-employed segment has grown by 33 percent every year and the outstanding in this segment is likely to cross Rs 2 lakh crore by end of fiscal of 2018, warns a report by domestic ratings agency Crisil.
This trend, however, warrants caution because lending to self-employed is largely based on assessed income. Additionally, a section of borrowers have limited credit history or banking experience, are highly vulnerable to disruptions such as demonetisation, and see high volatility in cash flows in the event of exigency, says the report.
The report notes that many new and small housing finance companies are playing aggressively in the segment, while the larger HFCs are being pushed into it because of the higher focus of banks in the overall home loans segment on subdued credit demand from corporates and asset quality pressures.
Gross non-performing assets (NPAs) in the segment are estimated to have inched up by 40 basis points to 1.1 percent by the end of fiscal 2018, compared with 0.7 percent a few years back.
Loans to this segment have grown at a compound annual growth rate of 33 percent in the past four years, compared with 20 percent for the overall home loan segment. Home loans outstanding in the self-employed segment is expected to have topped Rs 2 lakh crore by the end of fiscal 2018, says the report.
Many new and small housing finance companies have been aggressively catering to the self-employed segment. What’s also pushing the larger HFCs into the self-employed segment is banks ratcheting up presence in the home loans segment because of subdued credit demand from corporates and asset quality pressures, it says.
“Several initiatives of both the government and the regulator in the recent past have led to fast growth in home loans taken by the self-employed. We expect such mortgages to continue showing good growth because of the sharp focus of smaller HFCs and increasing interest of the larger ones,” says Krishnan Sitaraman, Senior Director, CRISIL Ratings.
“The 2-year lagged NPAs in the self-employed segment, at ~1.8%, is much higher compared with ~0.6% in the salaried segment, where the portfolio quality has remained largely stable over the years,” says Rama Patel, Director, CRISIL Ratings.
Given that the self-employed segment is relatively riskier than the salaried segment, HFCs tend to demand higher yields to offset higher credit cost. Further, to surmount borrower data issues, HFCs are adopting practices such as offering lower loan-to-value ratio, higher in-house sourcing, and developing the expertise to assess un-documented income. While financiers are adopting risk-based pricing approach, long-term, the report had said.
A joint report by Moody’s and Icra had warned last year that intensifying competition and a higher share of lending to the self-employed segment may put pressure on affordable housing loans, warns. In a note on asset-backed securities (ABS) co-written with its parent Moody’s, the report said gross-nonperforming assets in the affordable housing segment have inched up to 1.8 percent as of September 2017.
Even though the asset quality has remained robust in the traditional housing segment, the non-performing assets in the affordable housing segment have inched up in recent times to around 1.8 percent on an average as of September 2017, it had said.
“While asset quality is expected to remain stable in the traditional housing segment, delinquencies could further build up in the affordable segment in the calendar year of 2018. This would be driven by factors like intensifying competition – resulting in some easing in lending standards – and a higher share of lending to the self-employed segment,” Vibhor Mittal, head, Structured Finance at ICRA Ratings had said.
