Home truths: Signs are ominous for housing finance companies

When loan repayment ratios started to trip at an alarming pace, Udaipur-based SRG Housing Finance —lender in the hinterlands of south Rajasthan and Gujarat—devised a new collection strategy. They sought help from the sarpanch (village headmen), asking them to goad defaulting borrowers to “at least make part payments.”

It did the trick, apparently, as the housing finance company (HFC) managed to recover significant sums. “Peer pressure really works in areas where we operate,” says Sunaina Nagar, general manager, finance, SRG, which has an outstanding loan book of Rs 125 crore and 1.2% gross non-performing assets (GNPA). “We’re very cautious these days. We try to gather as much information as we can before assigning a loan.”

A loan was never a problem in India; getting the money back is. Average GNPAs of HFCs are hovering at 1.2% levels — a sharp spike from a healthier 0.5–0.65% maintained till last year. By end of the September quarter, close to Rs 10,500 crore of loans disbursed by HFCs have turned doubtful, as per data from CARE Ratings. Are HFCs sitting on a powder keg? No one wants to hazard a guess just yet but the signs are ominous. Bigger players remain relatively insulated, thanks to their heft and borrowing cost management. Many have sufficient capital and strong sponsors (banks or corporate houses).

Smaller players are vulnerable and could be in dire straits if their non-performing assets (NPAs) turn credit losses. They maintain a narrow capital base and have very little financial support. It’s no wonder several are forced to adopt unconventional means, petitioning the sarpanch or naming defaulters at an open gram sabha. A clean-up looks inevitable. There were just about 70 HFCs in mid-2016; a year later, this number had risen to 82. At present, there are 92 HFCs operating and 14 more waiting for approvals from National Housing Bank, their regulator.

“There are 40 small players in the market with average capital of Rs 10-12 crore,” says Gagan Banga, vice-chairman, IndiaBulls Housing Finance, one of India’s largest HFCs with loan assets in excess of Rs 1 lakh crore. “As a result of high funding (borrowing from banks) cost, they are forced to chase borrowers with poor credit profiles and lend at 12-12.5% interest rate. Some are in serious trouble because of reckless lending.”

The stress is seen more in the affordable housing segment, especially low-ticket size borrowers. “HFCs have not been able to predict borrowers’ cash flows,” admits Ramadasu Bandaru, AGM, CARE Ratings. His colleague, associate director Mitul Budhbhatti, chips in, “Several HFCs have expanded to untested markets without even properly assessing property values. A few have also given loans at high loan-to-value (LTV), which leaves lenders with slim collateral cover.”

DARK TRUTHS
India’s housing loan portfolio as of September 30 stands at Rs 15.1 lakh crore. Of this, HFCs, manage over Rs 6 lakh crore. As established HFCs grew, lending to retail borrowers for several years, they craved a share of the big boys’ (read banks) business pie. They created products to suit big-ticket borrowers’ needs — loans against property (LAP), corporate and developer loans, lease rent discounting buckets.

LAP eventually became the most effective weapon to bulk up assets. Most mid and large-sized HFCs lent cautiously at the beginning, but when more players jumped in, HFCs shifted from the restrictive tenets of prudent banking. The LAP book was 38% of total non-housing loans for the housing finance sector last fiscal. “LAP is a good product if valuation of collateral is right and loan is given on the basis of borrower’s cash flows. If collateral is not valued properly, LAP could be a very risky product,” says Keki Mistry, CEO, HDFC, India’s largest housing mortgage firm. “There have been instances of LAPs given on over-stated valuation certificates. Also, lenders are not in control of end-use of a LAP. No property is purchased with LAP funds in many cases.”

Several even lent money at high LTVs of up to 80%. So, for property worth Rs 1 crore (kept as collateral), some lenders loaned as much as Rs 80 lakh. Little did these lenders know that real estate prices would crash 15-30% in some micro-markets. “Delinquencies (in LAP buckets) have increased in north India…Lenders have taken excessive risk in these pockets,” says Ramadasu of CARE. “Delinquencies in non-housing loan books are higher than in housing loan books.”

An imminent danger to HFCs that have disbursed LAPs (at high LTVs) is a deeper correction in real estate prices. This is probably why some like IndiaBulls who were big on LAPs till a couple of years ago, have shrunk their books considerably. “Lenders who disburse LAPs after assessing repayment capacity of borrowers are safe. The ones that do asset-backed lending are in trouble,” says Banga of IndiaBulls.

Banga’s firm has seen a dip in GNPA levels from last fiscal, when it hovered at 0.85%. But the same cannot be said of others in the Big 5 club — LIC Housing Finance, DHFL, HDFC and PNB Housing Finance.

They have all seen an upswing in doubtful asset tabs. The Big 5 hold 90% of the industry lending book. Even HDFC logged a spurt in GNPA, from 0.72% last fiscal to 1.14% in H1 of FY18.

“The spike in our GNPA is because of just one account – Essar Steel. If not for that, our GNPA levels would be 0.82–0.84%,” says Mistry. “We lent money for their real estate… It was not given as a working capital loan. Our net NPA is negative as our provisions are far higher than statutorily required.”

Mistry raises a very pertinent point — the notorious devil in the detail — when he says HDFC did not lend money as working capital to the stressed Essar. Several midlevel and large HFCs did precisely that; lending to corporate groups and developers in stress. This was a good strategy, had the money come back on time. But in many cases, it did not. The only ‘soft option’ for the lender was to add the sum to the GNPA counter, create a provision and pray. “Our corporate loan book has shrunk over the past couple of years. Now, it’s just 6% of our total assets,” says Mistry.

“The shrinkage is partly because of our cautious approach and partly because no good corporate has approached us.”

A few HFCs have fallen prey to unscrupulous builders, who introduce ‘dummy borrowers’ (for a fat commission) as prospective customers. The builder gets bulk low interest funds (at retail rates) from the lender. The builder then tries to find a genuine buyer to sell down the apartment at matching or higher prices. Only if he succeeds, does he repay the HFC.


POINTS OF STRESS
The top five smaller players, which have outstanding loans worth about Rs 15,500 crore, have seen GNPAs rising from 0.49% in 2014, to 1.24% in March 2017 and 2.15% in the first half of fiscal 2018.

“Our customers were badly affected by demonetisation… Many lost their livelihood at the time. So they could not pay us,” explains Sujan Sinha, CEO, Shriram Housing Finance, which manages assets worth Rs 1,700 crore. Sinha loans to the underserved segments of society, especially those in tier II-III cities. Close to 75% of his customers are self-employed, non-professionals such as drivers, maids, rickshaw pullers and other such work profiles.

“The current NPA stress is mainly on account of demonetisation; disruptions such as GST have also reduced the repayment capabilities of our borrowers,” Sinha adds. Shriram reported GNPA of 4.93% at end of the fiscal’s first half, up from 2.5% in the previous fiscal.

“We’ve become more cautious now, restricting our lending a bit,” Sinha confesses.

“But our borrowers had no mala fide intent when they defaulted on EMI payments. They just did not have enough to pay us after their daily needs. These people need some hand-holding and nursing to come out of their financial stress.”

Moderately capitalised mid-sized HFCs too are not in a position of strength. Their plan to bulk up assets by doling out generous LAP and builder loans has, prima facie, backfired. The top five mid-sized HFCs, with an aggregate loan book of Rs 71,997 crore, have reported a spike in GNPAs from 0.63% in March 2017 to 0.83% in the first half of this fiscal.

“GNPA in HFCs are at elevated levels but it is not a matter of grave concern as yet. We’ll get a clearer picture once year-end numbers are out,” says Sudhin Choksey, managing director, Gruh Finance, which runs a loan book in excess of `14,300 crore and logs GNPA of 0.67%, up from 0.31% last fiscal. “The smaller HFCs are facing an NPA problem… stemming from poor lending practices. We too lend to small-ticket borrowers, but we maintain a good balance between salaried and non-salaried.”


AFFORDABLE HOUSING TRAP
There is a shortage of about 19 million housing units in urban and 15 million in rural India. Affordable housing numbers are astounding, so much so that they present themselves as an opportunity for moneyed entities to throw their nets in. It’s the hot seller too, for most. As per a recent RBI report, the industry (including banks) disbursed housing loans amounting to Rs 42,990 crore in the ‘(up to) Rs 10 lakh borrower’ category last fiscal.

The central bank has also highlighted concerns on rising NPAs in lower ticket loan categories. Among all slabs, loans up to Rs 2 lakh has seen the highest NPA level, states an RBI report dated January 2018. NPA position in this bracket has surged from 6% in 2015-16 to 8.6% last fiscal. Anil Nair, deputy managing director, Aspire Home Finance, mentions a slew of external factors. “Demonetisation has impacted low income earners severely. RERA implementation has stalled several affordable housing projects. People have not got their homes till now and many have stopped paying EMIs.”

Aspire’s GNPA jumped from 0.58% at FY17-end to 2.84% in the first half of this fiscal. ET also sought views from Motilal Oswal Financial Services, Aspire’s parent. CMD Motilal Oswal and MD Navin Agarwal felt that Aspire’s NPLs were higher but not alarming, as their loans are backed by solid assets. “Delay in setting up a dedicated collection team also impacted our asset quality,” they believe. Tamil Nadu and Delhi-NCR have higher delinquencies. NPA stress in Delhi-NCR is attributed to project delay while Tamil Nadu is reeling under political instability and the overhang of demonetisation, industry sources opine.

For newer HFCs desirous of making a mark in affordable housing, the focal group is clearly low-income rural earners with limited documents to prove eligibility (salary slips). Over 52% of borrowers from small HFCs are self-employed nonprofessionals. Mid- and large-sized HFCs have 33-37% of their borrowers from the non-salaried category.

“Lending to lower income groups can be a very profitable business, provided you have risk mitigants in place,” says Mini Nair, CEO, Essel Home Finance, a recent entrant. “You have to assess cash flows of prospective borrowers by sitting with them while they’re doing their business.” Many are first-time borrowers — a ‘minus-1 customer’ in credit scoring parlance. For them, HFCs simply follow hunch and hope.


“Borrowers from rural India only borrow what they need… It’s never wantbased borrowing,” says Anuj Mehra, MD, Mahindra Rural Housing Finance, which reported a GNPA of 13.26% at draw of September quarter.

“These borrowers would never default on a housing loan, unless they are pushed to extreme financial stress. And this stress maybe on account of a bad crop year or a drought or flood… They may delay payments, which may spike up NPAs in lender books; but it’s too early to deem these as credit losses,” says Mehra, who runs a loan book of Rs 6,500 crore.