Housing finance companies (HFCs) have not had it easy amid the pandemic. Loan disbursements that had halted during the lockdown months took time to recover. Loan growth for most lenders decelerated sharply in the first half of FY21. Analysts said loan growth may likely be in single digits for FY21. Given the weak disbursement outlook, as well as the increased stress on borrowers, HFCs had shifted their complete focus to collections and conserving capital this year. A troubled real estate sector has also not helped.

However, all that is now taking a turn for the better, with loan disbursal looking up for most lenders. The pick up in real estate activity on the retail side has cheered HFCs. Media reports suggest that home registrations have surged in select cities and home sales in the affordable housing is looking up. This augurs well for HFCs when it comes to disbursements. However, the real edge for home loan lenders, among other non-banking financial companies (NBFCs), has been easy funding. HFCs have kept funding costs from rising for them despite the pandemic. One factor has been that a housing loan is seen as secured lending with loans being collateralized and safe. Another reason has been RBI’s liquidity measures, which has kept liquidity at a surplus for a long period.

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Source: Emkay Global Report

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Source: Emkay Global Report

Indeed, the surplus liquidity has brought corporate bond yields down sharply. The spread over government bonds has also narrowed, suggesting favourable credit perception. According to Nomura Financial Advisory and Securities (India) Pvt. Ltd, spreads for AAA rated finance companies are at 5-7 year lows. Within HFCs, bigger players may gain at the cost of small lenders. “While the competitive intensity from banks is increasing, top HFCs should benefit from the widening of the funding cost gap vs tier-2 NBFCs/HFCs,” wrote Nomura analysts in a report.

Even for the smaller lenders, alternative sources, such as securitization, may support funding plans. “The securitization market is expected to see increased activity and it is a popular means for NBFCs to free up capital,” said an analyst. According to rating agency CRISIL Ltd, strong collection efficiency in home loans has resulted in large payouts from securitized mortgage loans. This has meant getting investors for such deals at reasonable cost was easy.

Nevertheless, the biggest source of funding for HFCs is the bond market. While any pressure on government bond yields can drive up yields on corporate bonds, overall spreads are expected to stay stable. RBI has reiterated its commitment to keep policy accommodative even into FY22 which indicates that surplus liquidity is here to stay. How fast HFCs are able to grow their loan books would depend on the speed of recovery in the economy. However, growth won’t suffer for the want of funding next year.

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