Affordable housing financiers get a RBI rate cut boost. But it may not last.
NEW DELHI
:
Affordable housing finance companies (HFC) are back in vogue since the Reserve Bank of India's (RBI) surprise 50-basis-point rate cut on 6 June. Their stocks rose around 6-7% in the last two trading days, before the broader financial services sector gave up most of its gains on Tuesday.
It's because in a low-interest rate regime, affordable HFCs are likely to offer better returns compared to prime or super prime lenders, according to experts.
'The affordable space is niche and relatively less competitive, as there are no banks present in that segment," Anusha Raheja, research analyst at Dalal & Broacha Stock Broking Pvt. Ltd told Mint. 'Hence, they will face lower NIM (net interest margin) pressures compared to the prime or super prime segments going ahead."
Nonetheless, Harsh Madhusudan Gupta, manager of Ionic Asset's PIPE fund, said the RBI's latest policy move should benefit most HFCs in general. 'It should be incrementally accretive for their earnings per share and book value per share estimates, despite the fact that the move is to some extent just front-loading the overall rate cuts."
Catering to prime or super-prime borrowers puts housing financiers in direct competition with banks, given that this is a relatively safer lending pool. Now that the RBI has slashed the repo rate to 5.5%, banks will also reduce their repo-linked home loan interest rates soon, compelling HFCs to follow suit even if their borrowing costs don't fall immediately. This will likely squeeze the profitability of prime and super prime HFCs a bit harder, Raheja added.
Affordable housing financiers' funding costs are high and they charge higher interest as they have a riskier borrower profile and lower quality of collateral. But since the National Housing Bank subsidizes most of their funding costs, they end up earning higher margins and higher return on their assets.
The government nudge
Moreover, the government's credit-linked subsidy scheme reduces borrowers' liabilities by subsidizing the principal portions of their loans. This reduces the credit risk for lenders, making the overall business model profitable.
The Union government announced the Pradhan Mantri Awas Yojna (PMAY) 2.0 in its 2025 budget to provide 20 million additional houses to the poor in the next five years. With renewed impetus from the government and the RBI's latest monetary policy move, the market now has enough liquidity to boost home loan volumes at a much faster pace in 2025-26.
"The affordable and mid-income housing segments are highly rate-sensitive, and borrowers here are quick to respond to lower EMIs," said Atul Monga, chief executive and co-founder of BASIC Home Loan, a fintech company offering home loans to semi-urban and under-served borrowers.
'With the repo rate cut translating into reduced home loan (interest) rates, we anticipate stronger traction in affordable housing loans compared to corporate or prime segments," he added.
Weak housing demand
However, experts also caution against an over estimation of incremental housing demand in response to the latest monetary policy actions, as residential housing demand has already been growing at a solid pace so far.
'Affordable HFCs have been growing at 30%-plus growth rates. I doubt if they will start growing at 40% after the rate cuts," Dalal & Broacha's Raheja said.
Apart from slashing interest rates to 5.5%, the RBI cut cash reserve ratio (CRR) by 100 basis points to 3%, which is expected to infuse an additional ₹2.5 trillion in the economy.
While this will partly offset NIM pressures arising from the latest repo rate cut and help in faster monetary policy transmission to the credit market, residential housing demand is likely to normalize on a high base, said Tanvee Gupta Jain, chief India economist at UBS.
'That said, we think the housing demand cycle could be extended based on mortgage rate cuts and improved consumer sentiment," she added.
However, Raheja noted that mortgage rate cuts might not always translate to commensurately higher loan volumes, as job security and income growth also remain key deciding factors in availing home loans, particularly for the poor.
To be sure, wage growth in urban India has been in a slow lane for a while now. Wage bill growth of BSE 500 companies was stuck between 4-6% year-on-year throughout 2024-25, against a 12% on-year rise in 2023-24, said a recent Nuvama Institutional Equities report.
IIFL Finance gets leg up
But as the market largely ignores any demand concerns for now, IIFL Finance emerged as an outperformer among all major non-banking financial companies (NBFCs), rising almost 7% in the last three days. Majority of IIFL's loan book is secured, comprising housing (40%) and gold loans (27%), and until recently its stock was trading at substantial discount to its peers.
This was mainly because the RBI had imposed a ban on its gold loan business back in March 2024, citing governance issues in the company. Even though the ban was lifted in September 2024, its stock price did not react sharply to the development back then.
Experts believe the RBI's latest monetary policy decisions might have triggered a potential re-rating of the stock.
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