You are on page 1of 93

Analysis of Indian

Retail Finance Housing

Industry

1
• Underlying Asset Dynamics
• Analysis of Past Growth : 2001 to 2008
• Market Trends
• Future Growth Analysis
• Analysis of Out-standings and Prepayments
• Portfolio Risk Analysis
• Asset Quality Risks
• Player Profiles
 HDFC
 LIC Housing Finance
 Dewan Housing Finance Corporation Limited
2
Underlying Asset Dynamics

3
Several factors drive the growth of the housing industry.

ASSET DYNAMICS: DEMAND DRIVERS

Factors driving demand in the housing industry:


•Population growth
•Urbanisation
•Nuclearisation of families
•Affordability
Income growth
Availability of finance
Tax incentives

4
Population growth is a key determinant of housing demand.
Increasing working population will translate into greater demand
for housing
POPULATION GROWTH
•Currently, India is home to more than 1 billion people.
•This represented around 191 million households in 2001.
•The population growth is expected to slow down further to 1.5 per cent in
the current decade.
•Population growth has a direct bearing on the requirement for housing
units and, through this, on Financial Services Authority (FSA) requirements.
•Moreover, in the current scenario, population growth is actually occurring
•in younger age brackets.
•This translate into a tremendous increase in working population, thereby
translating into greater demand for housing.
5
Growing urbanization increases the demand in terms of number
of units.

URBANISATION
•The share of urban population has increased steadily in the past to around
27.0 per cent of total.
•It grew at 2.7 per cent, a little higher than the overall population growth of
2.3 per cent.
•Going forward, urbanisation is expected to accelerate.
•This is expected to translate into urban population growth of 2.2 per cent
until 2011 as compared to overall population growth of 1.5 per cent.
•Urbanisation has a twin impact on housing demand.
•On one hand, it reduces the area per household and on the other, there is
an increasing number of nuclear families, leading to the formation of more
number of households.
6
Nuclearisation though reduces the required area per household,
increases demand for overall household units.

NUCLEARISATION
•Nuclearisation refers to the formation of nuclear families from
joint families.
•Employment-related migration primarily drives nuclearisation.
•Nuclearisation like urbanisation has a twin impact.
•It reduces the area per household, but increases overall household
formation, thereby increasing demand for housing units.
•However, the fact that urban house prices are higher also leads to
buying of smaller areas in comparable income categories.

7
Income growth in the middle and higher income bracket increases
the per capita floor space area.

AFFORDABILITY : INCOME GROWTH


• There has been a steady movement of households into higher income
categories.
•The greater than five lakh and 2- 5 lakh income households in India are
estimated to have grown at a CAGR of 14 per cent and 11 per cent from 2002
to 2006.
•Urban households, with incomes above Rs 5 lakh, are further expected to
grow by 12 per cent in the next 5 years on an increased base.
•Floor space requirements increase with rising incomes.
•With increasing incomes, the per capita floor space area (PCFSA) increases
significantly.
8
Income growth in the middle and higher income bracket increases
the per capita floor space area.

AFFORDABILITY : INCOME GROWTH


• There has been a steady movement of households into higher income
categories.
•The greater than five lakh and 2- 5 lakh income households in India are
estimated to have grown at a CAGR of 14 per cent and 11 per cent from 2002
to 2006.
•Urban households, with incomes above Rs 5 lakh, are further expected to
grow by 12 per cent in the next 5 years on an increased base.
•Floor space requirements increase with rising incomes.
•With increasing incomes, the per capita floor space area (PCFSA) increases
significantly.
9
Interest rate hike in the last few years have dampened the housing
demand to some extent.

AFFORDABILITY : AVAILABILITY OF FINANCE


• Penetration of housing finance has been a key driver of housing.
•Low interest rates in the past, along with increasing housing finance
penetration, have driven the boom in house purchases.
•However, interest rates and property prices have seen an upward
movement in the past couple of years.
•As a response, banks and financial institutions have offered home loans
with increasing tenures.
•However, there is little leeway left in the extent to which the tenure could
increase.
•Further interest rate hikes or price increases, if any, will most likely bear a
•significant direct impact on household cash outflows, leading to a decline in
demand.
10
Tax benefits are given to borrowers on the interest payment and
principal repayment.

AFFORDABILITY : TAX BENEFITS


Tax sops given to borrower of housing loans
•Tax sops on the housing sector have been instrumental in driving
growth in housing and housing finance sectors.
•As per Sec 24(b) of the Income Tax Act, 1961 annual interest
payments up to Rs 1,50,000 on housing loans can be claimed as a
deduction from the taxable income.
•Principal repayment of the home loan As per Sections 80C read with
section 80 CCE of the Income Tax Act, 1961 the principal repayment
up to Rs 1,00,000 on home loan is allowed as a deduction from the
gross total income.

11
Tax benefits are also provided to the lenders of housing finance.

AFFORDABILITY : TAX BENEFITS


Tax sops given to lender of housing loans
•Under Section 36(1) (viii) of the Indian Income Tax Act 1961, with respect to
any special reserve created and maintained by a financial corporation
engaged in providing long-term finance for construction or purchase of
houses in India for residential purposes, a maximum amount of 20 per cent
(prior it was 40 per cent) of the profits derived from such business (computed
under the head .profits and gains of business or profession.) and carried to
such special reserve is tax deductible.
•This deduction is available only up to twice the total amount of the
company’s paid-up share capital and its general reserves.
12
Analysis of
Past Growth – 2001 to 2008

13
Housing finance grew at an impressive 43% between 2001 to 2005
but the growth dropped thereafter.
GROWTH RATE : 2001 TO 2008
•Disbursements in the housing finance sector, which grew at a robust
43 per cent CAGR from 2000-01 to 2004-05, dropped to around 16 per
cent from 2004-05 till 2007-08.
•This initial growth was driven by the combined effect of a booming
economy leading to higher income levels, low interest rates and
steady property prices.
•However, during 2004-05 and 2007-08, housing prices and interest
rates moved up and reduced affordability, which has been a key
factor affecting disbursements.
•Housing finance disbursements are expected to register a flat growth
2008-09.
14
Apart from the general factors affecting housing demand, finance
demand is decided by key factors like ATS and No. of housing
loans.
FACTORS AFFECTING DISBURSEMENTS

15
ATV represent the value analysis and number of housing
represent the volume analysis.

ATS AND LTV


•Growth in housing finance is affected by average ticket size (ATS)
and the volume transactions financed by players in the underlying
property market.
•ATS is in turn affected impacted by factors like average area of the
house, average loan-to-value (LTV) ratio and price per square feet of
the house.
•Volume transactions financed is a function of finance penetration on
volume sales in the underlying property market.
•ATS represents the value analysis whereas the number of housing
loans represents the volume analysis.
16
Both ATS and volumes decelerated in 2008-09.

ATS AND LTV


•Historically, growth in the housing finance market was largely
dictated by the growth in the value, i.e., ATS, which was due to the
rise in property prices and growth in the average area of the house.
•Liberal underwriting standards like higher LTV ratio and higher
installment-to-income ratios (IIR) accelerated the growth in housing
finance disbursements.
•In 2008-09, however, both decelerating value and volume in the
housing finance market are estimated to affect the growth in the
housing finance market.

17
Factors affecting demand are expected to show improvement
during 2012-13.

EXPECTED BEHAVIOR OF FACTORS AFFECTING


DISBURSEMENTS

18
In September 2009, RBI took several measures which significantly
raised the interest rates.

ANALYSIS OF 2008-09 : HIKE IN INTEREST RATE


•It is critical to look at 2008-09 as a story of two halves, since both the
volume and value of disbursements have been affected by divergent trends
in the interest rate and the property price movements in the two halves.
•By mid-September 2008, housing loan interest rates nearly reached their
peak.
•However, post September RBI took several monetary measures like
reducing cash reserve requirement [CRR] (by 400 bps), repo rate (by 400
bps) and reverse repo rate (by 250 bps) to current levels of 5 per cent, 5 per
cent and 3.5 per cent, respectively.
19
Along with the interest rate hike, property prices fell but LTV
norms had increased which resulted in reduction in disbursements.

ANALYSIS OF 2008-09 : DECREASE IN PROPERTY PRICES


•Housing prices in major residential markets peaked in the last
quarter of 2007-08 and remained stable by mid- 2008-09, after which
they moved south.
•In the third quarter, prices declined on account of discounts offered
by builders.
•However, organized and key builders held on to their prices in
anticipation of a revival in affordability
•Prices in 2008-09 fell by around 20-25 per cent with builders being
unable to sustain their high inventory levels and tight cash flows.
20
Along with the interest rate hike, property prices fell but LTV
norms had increased which resulted in reduced ATS.

ANALYSIS OF 2008-09 : DECREASE IN PROPERTY PRICES


•With the prospect of a fall in prices, financiers too have increased
the borrower equity contribution.
•Financiers have become more stringent and have reduced their
LTV ratios.
•Thus, with a decline in property prices and increase in borrower
equity contribution, growth in ATS is estimated to have declined in
comparison to last year, which in turn is estimated to contribute to
the decline in growth of housing finance disbursements.

21
Disbursements volumes also decreased in 2008-09 due to stringent
finance norms and postponement of purchase by the customers.

ANALYSIS OF 2008-09 : DECREASE IN VOLUMES


•Along with the reduction in property prices, disbursements also declined
due to a decline in the number of housing loans.
•Volume transactions in the underlying property market slowed down
substantially in the third quarter of 2008-09 with customers postponing
demand in anticipation of a further decline in property prices and interest
rates.
•On the financier side, higher rejection rate due to stringent credits norms
and underwriting standards impacted the volume transactions being
financed.
•Skepticism in terms of the borrower’s ability to repay higher EMIs in the
current uncertain economic environment.
22
Market Trends

23
Rates declined from a high of 12% to around 10.5% to 11.5% in 2008-09.

INTEREST RATE TRENDS


•In 2004-05, interest rates on housing loans hit a trough, and thereafter
began to rise.
•The increase in liquidity and credit off-take led the Central Bank to
take preventive measures to curtail growth.
•Consequently, housing loan rates rose and reached a high of 11-12 per
cent in mid-2007.
•In 2007-08, the interest rates reached their peak at around 12 per cent.
•However, RBI has taken steps (post September 2008) to improve the
liquidity situation and reduce interest rates through the reduction of
repo, reverse repo and CRR by 400 bps, 250 bps and 400 bps.
24
Rates declined from a high of 12% to around 10.5% to 11.5% in 2008-09.

INTEREST RATE TRENDS

•These measures taken by the RBI have started showing their


cascading effects.
•Thus, interest rates moved south in 2008-09, and the rate of interest
on home loans in 2008-09 was around 11.5 per cent.

25
Fixed rate loans are priced higher than the floating rate loans, since the
financier has to bear the interest rate risk.

TYPES OF INTEREST RATES

•Housing loans are offered for an average tenure of 13-15 years.


•There are two types of interest rate loans available in the market: fixed and
floating interest rate loans.
•In a fixed interest rate loan, the interest rate remains constant over the
tenure of the loan, whereas in a floating interest rate loan, the borrower has
to pay a rate linked to the benchmark prime lending rates of financiers.
•Moreover, as floating rate loans are reset as and when the cost of funds for
financers increases, they carry a lower interest rate risk.
• Therefore, fixed rate loans are priced higher than floating rate loans, since
the financer has to bear the interest rate risk.
26
Proportion of floating loans has been increasing since 2004-05 and
accounted for about 92% of the total loans in 2008-09.

PROPORTION OF FLOATING RATE LOANS

27
Increase in floating loans is due to 2 factors – higher rates in fixed loans
and customer’s anticipation that interest rate may reduce.

REASON FOR INCREASE IN PROPORTION OF FLOATING RATE


LOANS
•Ever since 2004-05.when interest rates began to rise, the proportion
of floating rate loans has been increasing.
•This sudden popularity of floating rate loans was primarily on
account of the indirect push from players by way of a higher spread
between fixed rate loans and floating rate loans, which in some cases
was as high as 275 bps.
•Moreover, the rising interest rate scenario made borrowers opt for
floating rate loans in the anticipation that interest rates might
stabilise going forward.
28
Increase in floating loans is due to 2 factors – higher rates in fixed loans
and customer’s anticipation that interest rate may reduce.

REASON FOR INCREASE IN PROPORTION OF FLOATING RATE


LOANS
•However, even in the current scenario borrowers may opt for
floating rate loans in the anticipation that interest rates may decline
further, going forward.
•However, as interest rates start to fall by 2012-13, we expect more
disbursements with the fixed rate structure but form only 15 per
cent of the overall portfolio.

29
Average contractual tenure has been increasing since 2004-05 and this is
expected to continue till 2012-13.

AVERAGE CONTRACTUAL TENURE

30
Tenures are influenced more by the property prices than the interest
rates.

TREND IN CONTRACTUAL TENURE


•Even in the decreasing interest rate scenario, tenures showed an
upward trend.
•This represents that contracted tenures are more a function of
housing property prices than of interest rates.
•Since property prices were on the upswing, tenures also have been
increasing.
•An increase in tenure decreases the EMI and consequently,
borrowers can avail of a higher loan amount.
•Although property prices are expected to slowdown in 2008-09 and
2009-10, the tenures are estimated to rise to match the slow growth in
income levels and improve EMI affordability.
31
Average age of borrowers have shown a drastic reduction over the last 2
decades.

AVERAGE AGE OF BORROWERS

32
Higher income growth among young people and the tax breaks on home
loans will continue to keep the average age of borrowers low.

AVERAGE AGE OF BORROWERS


•From 1999-00 to 2007-08, salaries are estimated to have increased at a
higher rate than the rise in property prices.
•This made houses more affordable to individuals.
•Also, the growth rate in salaries has been higher for those in the younger
age bracket than the people closing retirement.
•This, coupled with tax incentives announced by the government, has
prompted an increasing number of young people to buy houses.
•Going forward too, the average age of the borrower is expected to decline
slightly, as the profile of outstanding age mix would shift in favour of a
younger age mix as seen in the last few years.
•This would also be supported by the growth in salaries and the preference
for accumulating assets to enjoy tax benefits.
33
Future Growth Analysis

34
•Following are covered in the analysis of future growth:
 Expected Future Growth in CAGR
 Disbursement Mix by
 Product Type
 Rural vs Urban
 Location
 Affordability
 Average Ticket Size
 Loan To Value
 Volume Transactions
 Finance Penetration
35
The growth of housing finance is expected to slowdown to 5%
between 2007-08 to 2012-13.

FUTURE GROWTH : 2007-08 TO 2012-13

•Housing finance disbursements is expected to slowdown and


register a CAGR of 5 per cent from Rs 1,185 billion in 2007-08 to Rs
1,503 billion in 2012-13.
•The housing finance market turned negative 1 per cent in 2008-09
and degrow further in 2009-10 by around 12 per cent.
•Post that, the growth in housing finance might elevate owing to the
factors like increase in affordability with rise in income levels,
change in socio-demographic factors as well as underlying asset
price movement

36
Cautious approach of the financiers will lead to lower LTV and
IIR.
FACTORS TO AFFECT DISBURSEMENTS : 2007-08 TO 2012-13
•Decline in the finance penetration in 2008-09 and 2009-10 because of an
increase in rejection rate.
•The rejection rate is expected to rise further in 2009-10 as financiers may
tighten eligibility norms with respect to housing loans.
•Declining GDP estimate growth for 2009-10 and expected job cuts and
curtailments in salary increments also may affect the eligibility of aspiring
home loan borrowers and thus lead to postponement of demand.
• A cautious lending approach by players through the adoption of stringent
credit norms in the form of lower LTV and IIR would affect the
disbursements in 2008-09 and 2009-10.
• Financiers may resort to this approach in order to safeguard their portfolio
from the declining property prices and reduced income level growth.
37
Resale proportion in the overall disbursement mix is expected to
increase from 14% in 2007 to 19% in 2012-13.

DISBURSEMENT MIX BY PRODUCT TYPE

38
Increase in the proportion of resale properties is due to both
demand side and supply side factors.

REASON FOR INCREASE IN RESALE PROPORTION


Resale house purchase is seen as a cheaper option by buyers due to:
Demand side factor
Area of existing units are much lower as compared to new construction,
and the lower prices of the resale units make them affordable
No completion risk as in the case of buildings under construction
Outgoings, i.e., monthly maintenance charges are much lower compared to
new construction.
Supply side constraint
Individual investors who had invested in properties in anticipation of
booking profits with a further rise in property prices are facing pressure as
the property prices are on a downward trajectory.
39
Urban disbursements will continue to account for more than 85%
of the home finance industry.

DISBURSEMENT MIX (RURAL VS URBAN)

40
Top 7 cites account for more than half of the disbursements.

DISBURSEMENT MIX BY LOCATION

41
Top 7 cites account for more than half of the disbursements.

DISBURSEMENT MIX BY LOCATION

Top 7 cities are:


•Mumbai
•Delhi
•Bangalore
•Kolkata
•Chennai
•Hyderabad
•Ahmedabad

42
Affordability levels are expected to improve due to the reduction
in property price to income ratio.
AFFORDABILITY : 2008-09 to 2012-13
•The property price to income ratio measures the affordability of the buyer
for purchase of a house at his current income level . the lower the ratio, the
higher the buyer’s affordability.
•The affordability levels are estimated to improve as property prices are
expected to decline by around 24-26 per cent in 2008-09 and by around 5-10
per cent in 2009-10.
•Income levels are estimated to grow by around 3-5 per cent in 2008-09 and
2009-10 as against the CAGR of 7-10 per cent during between 2002-03 and
2007-08.
•Affordability levels deteriorated during 2005-06 to 2007-08 as the growth in
property prices superseded the growth in income levels by larger difference.
43
Average Ticket size is set to improve from 2008-09 to 2012-13.

AVERAGE TICKET SIZE : 2008-09 to 2012-13

44
LTV is set to increase between 2009-10 to 2012-13 both in urban and
rural disbursements.

LTV : 2008-09 TO 2012-13

45
Incremental volume transactions in the urban areas to grow at a CAGR of
1.6 per cent and that in the rural areas to grow at a CAGR of 2.1 per cent.

VOLUME TRANSACTIONS : 2008-09 TO 2012-13

46
Housing finance penetration to improve slightly and reach 38 per cent in
the urban areas and 6.5 per cent in the rural areas by 2012-13

FINANCE PENETRATION : 2008-09 TO 2012-13

47
Several factors contribute to the low finance penetration levels in
rural areas.

REASON FOR LOW PENETRATION IN RURAL AREAS


The penetration in rural areas is lower at about 7.2 per cent in 2007-08
and is estimated to decline further to 6.6 per cent and 6 per cent in the
year 2008-09 and 2009-10, respectively, as a result of the following:
Private banks are yet to set up a good branch network in these
areas
The income of a majority of the people comes from agriculture,
which is seasonal in nature
High risk on the resale value of collateral in case of a default as it
requires considerable local knowledge
Agriculture loans are major drivers of the priority sector in these
areas.
48
Housing finance is expected to turnaround after the slump 2009-10
and expected to register a slower overall growth of 5% CAGR
between 2008-09 to 2012-13.
CONCLUSION

•Housing finance disbursements are expected to rise as affordability


levels increase from the year 2010-11 due to improving income
growth.
•Thus the 5 per cent CAGR growth over the next 5 years would
mainly be driven by the change in income levels, changing socio-
demographic factors as well as the underlying asset price
movements.
•Increase in income levels over the next five years might increase the
population eligible for home loans, thus increasing the volumes in
the housing finance market.
49
Housing finance is expected to turnaround after the slump 2009-10
and expected to register a slower overall growth of 5% CAGR
between 2008-09 to 2012-13.
CONCLUSION
•Expected positive growth in the property prices post 2009- 10 might
also increase the ATS over the next five years.
•With changing socio-demographic factors like nuclearization,
urbanisation and shifting population in the lower age bracket would
still drive the underlying asset demand and growth in the housing
finance market.
•Housing, being one of the low risk asset classes for financiers. would
continue to be the major contributor to their retail lending portfolio.
•Moreover, a higher proportion of floating rate loans, which help
financiers manage their interest rate risk, would give a boost to
disbursements.
50
Analysis of
Out-standings and
Pre-payments

51
•Analysis of out-standings and pre-payments cover the
following:
 Age mix of disbursements
 Factors affecting out-standings
 Types of prepayments
 Structural vs Cyclical pre-payments
 Pre-payments Trends till 2012-13
 Out-standings Trends till 2012-13.

52
Last 3 years. disbursements comprise about 64 per cent of outstanding in
2008-09.

AGE MIX OF DISBURSEMENTS (2008-09)

53
Out-standings are influenced by repayment, prepayment and
disbursements.

FACTORS AFFECTING OUTSTANDINGS

54
Prepayments can be classified as Structural or Cyclical.

TYPES OF PREPAYMENTS

55
Structural pre-payments increase if there is overall increase in income
while cyclical pre-payments increases during increase in interest rates.

STRUCTURAL VS CYCLICAL

•Prepayments are classified as structural prepayments and


cyclical prepayments.
•Structural prepayments are an outcome of an increase in the
income of the borrower, who then decides to prepay the loan.
•Cyclical prepayments are those that happen due to changes in
interest rate environment.
•In an increasing interest rate environment, cyclical payments
could turn negative, indicating a portion of the principal amount
being pushed to later years.
56
Total prepayments are expected to be in the level of about 5-6% between
2012-13.

PRE-PAYMENT TRENDS : TILL 2012-13

57
Outstanding estimated to grow at a CAGR of 12 per cent between 2007-
08 to 2012-13 to reach about Rs. 7300bn.

OUTSTANDINGS

58
Portfolio Risk Analysis

59
•Portfolio risk analysis covers:

• Trend in portfolio risks

• Instalment to Income Ratio

• Asset prices and Income Levels

• Borrower’s Debt Burden

60
Risk profile has increased due to increased competition which made
financiers to be liberal with the disbursements..

PORTFOLIO RISK TREND

•Over the past few years, increasing competition forced financiers


to resort to aggressive lending by adopting liberal underwriting
standards to increase their market share.
•An analysis of the outstanding portfolio of total housing finance
market indicates the increase in the proportion of portfolio moving
towards higher IIR and higher tenure.
•Borrowers with long-tenure loans (tenure in excess of 15 years)
and high-IIR loans (IIR in excess of 50 per cent) are likely to be
more susceptible to default.

61
Risk profile to further increase as the proportion of portfolio with higher
IIR is expected to increase.

INSTALMENT TO INCOME RATIO (IIR)


•The current outstanding portfolio (estimated for March 31, 2009) is likely
to be skewed more towards high IIRs and long tenures as older loans
mature and newer loans form a larger proportion of the overall portfolio.
•The portfolio at the end of 2008-09 is expected to have a higher proportion
of portfolio with higher IIR as the growth in income levels are estimated to
decline.
•Simultaneously, a majority of the housing loans may have been disbursed
at higher tenures to make EMIs affordable when both the interest rates and
the property prices were on a rising trajectory post 2006.
•Thus, the risk on overall portfolio for housing finance is susceptible to
higher defaults with a decline in the growth of income levels.
62
Decrease in property rates also increases the risk profile and may make
many loans into negative equity.

ASSET PRICES AND INCOME LEVELS


•Property price decline, change in interest rates and decline in the level of
income increase the risks.
•In the last few years, with the industry moving towards higher LTV, higher
IIR and longer tenures, underwriting standards have transformed.
•This indicates that the housing finance industry has started moving
towards a higher level of risk at origination.
•Property prices has declined significantly by around 20-25 per cent in 2008-
09 and by around 10-15 per cent in 2009-10.
•With this significant decline in property prices, there is a risk of the loan
principal outstanding being greater than the new market value . also termed
as negative equity.
63
An increase in the interest rate increases the borrower’s debt burden if
EMIs are increased.

BORROWER’S DEBT BURDEN


•An increase in interest rates necessitates an upward revision in
mortgage rates, which can be done by increasing:
the number of instalments .that is, the tenure of the home loan, or
by increasing the instalment size or
the equated monthly instalment (EMI), or
both, for existing floating rate borrowers.
•Historically, lenders in India have resorted to first raising the tenure
of the loan within a reasonable limit for operational ease and then, if
required, to increasing EMIs to pass on the hiked interest rate.
•If the latter option is exercised, the IIR of the borrowers could go up
and may affect their ability to service the loan.
•This could make borrowers susceptible to defaulting on their
monthly payment obligations.
64
Between 2004-05 and 2008-09, EMIs of certain loans have increased more
than 30% which has significantly increased the borrower’s debt burden..

BORROWER’S DEBT BURDEN INCREASED BETWEEN 2004-05 AND


2008-09

65
Asset Quality Risks

66
Till now NPAs for the industry to be about 0.3 per cent till 2007-08.

NON PERFORMING ASSETS

67
Three types of risks could affect the NPAs in the medium term.

FACTORS NPAs IN THE MEDIUM TERM


•Key factors affecting asset quality risks and thereby the future
NPAs are:
 Origination risk
 Concentration risk
 Asset price risk

68
Origination risks relates to the underwriting standards while
concentration risks relates to the portfolio age.

ORIGINATION RISK
•It pertains to the underwriting standards of financers.
•Over the past few years, the credit risk metrics have been made lenient,
Thereby pushing the LTV, IIR and tenure to higher levels.
•This increasing risk appetite in the housing finance sector raises
delinquency-related concerns.
CONCENTRATION RISK
•The analysis of the outstanding portfolio at the end of 2008-09 reveals that
the portfolio is highly skewed towards last 3 years’ disbursements.
•The last 2 years. disbursements form more than 50 per cent of the
portfolio.
•Therefore, as this portfolio ages, NPAs could increase.
69
Asset price risk relates to the movement in property prices and income
levels.

ASSET PRICE RISK


•A sharp fall in prices might result in negative equity, which denotes that the
loan amount outstanding is higher than the property prices. This could push
up delinquency rates.
•For the overall industry, 4-5 per cent of the outstanding portfolio at the end
of March 2004 was estimated to have had an IIR above 50 per cent and tenure
above 15 years.
•This proportion had increased at the end of March 2006 to 7-8 per cent,
which led to an increase in absolute values of NPAs.
•But, NPAs have not increased in percentage terms due to high growth in
outstanding over the years. However, the main factor determining the
movement of NPAs would be property prices - if property prices drop, NPAs
may increase.
•At the same time the decline in the growth of income levels might increase
the IIR and increase the probability of default.
70
Major financiers have revamped their credit appraisal process to reduce
any risk of future NPAs.

MEASURES TAKEN BY FINANCIERS TO CURB RISE IN DELINQUENCIES


•In recent times, the asset quality in the housing finance portfolio of players
has deteriorated but has not assumed alarming proportions.
•But with changing market conditions, with the expected decline in property
prices, decline in growth in income levels, financiers need to be selective
about customer profiles as well as the underlying asset being financed for
managing credit risk.
•Lending businesses need to manage credit risk pre- as well as post-
acquisition of customers.
•One of the foremost steps required to ensure lower delinquencies is better
credit selection.
•In the housing finance industry, better credit selection not only refers to
better selection of customer profiles but it also inherently means being
selective about the underlying asset that is being financed.
•Major financiers have tightened their credit selection process since 2008-09.
71
Player Profiles

72
HDFC

73
HDFC is the largest provider of housing finance and has very extensive
distribution network.

COMPANY BACKGROUND
•HDFC is India’s largest provider of housing finance, primarily
focusing on retail housing.
• The company has widened its distribution network to 254 offices in
India.
•It also covers over 90 locations through its outreach programme,
which has helped the corporation disburse housing loans in more
than 2,400 towns and cities in India.
•It has also supplemented the distribution channel through the
appointment of direct selling agents (DSA).
•More than 70% of the shares are held by foreign institutional
investors/foreign
74 direct investments and 11% by individuals.
The company has close to about 300 outlets in India and also has
branches outside India.

DISTRIBUTION NETWORK

•HDFC has a larger distribution network which is close to 300

outlets.

•HDFC has branches across all major Indian cities and abroad,

including countries like Kuwait, Qatar, Saudi Arabia, Sultanate of

Oman, Singapore, UK and the UAE.

75
The company’s disbursements and outstandings had grown 7 times
between 1999-00 and 2007-08.

DISBURSEMENTS GROWTH

76
The company’s interest income is expected to reach about Rs. 14000
crores in 2011.

FINANCIALS

77
NPM has been steady and growing due to improvement in the spread
and reduction in operational expenses.

PROFITABILITY ANALYSIS

78
NPM has been steady and growing due to improvement in the spread
and reduction in operational expenses.

PROFITABILITY ANALYSIS

•Spread for HDFC has been fluctuating within a narrow band for
majority of the past years.
•NPM showed a growth of around 50 basis points as it increased
from 2.2 per cent in 2006-07 to 2.7 per cent in 2007-08.
•Operating expenses, as a percentage of the average outstanding
loans, have also declined during this period, especially due to a
decline in employee expenses.

79
Both the top-line and the bottom-line are expected to grow at CAGR of
17% to 20% between FY-09 to FY11.

GROWTH METRICS

80
LIC Housing Finance

81
LIC Housing Finance began operations in 1989 and has a market share of
about 5%.
COMPANY BACKGROUND
•Belonging to the LIC group, LIC Housing Finance Limited (LICHFL) was
incorporated in 1989.
•The company mainly provides housing loans, where it provides long-term
finance to individuals for purchase/construction/repair and renovation of
new/existing flats/houses.
•The company also provides finance on existing property for
business/personal needs and gives loans to professionals for
purchase/construction of clinics/nursing homes, diagnostic centres and
office space.
•In 2007-08, it disbursed loans to the tune of 70.71 billion and held a market
share of about 5 per cent.
• It is listed on the BSE, NSE and theLuxembourg Stock Exchange.
82
LIC Housing Finance has a strong distribution network within India and
also in Gulf countries.

DISTRIBUTION NETWORK
•The company has close to 800 branches.
•As of March 2008, the company had total staff strength of 1,445.
•The company has 16 back offices in the country that conduct the
credit appraisal and administrative functions.
•The company has also set up a representative office in Dubai for
catering to the non-resident Indians (NRIs) in gulf countries covering
Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia.

83
The company’s outstandings has more than trebled between 2001-02 and
2007-08.

DISBURSEMENTS GROWTH

84
The company’s interest income is expected to be about Rs. 3708 crores in
FY-11.

FINANCIALS

85
The company’s interest income is expected to grow at an average CAGR
of 25% between FY09 to FY11.

GROWTH METRICS (ALL IN %)

86
NPM has been improving since 2005-06 due to reduction in operational
expenses and marginal improvements in spread.

PROFITABILITY ANALYSIS

87
NPM has been improving since 2005-06 due to reduction in operational
expenses and marginal improvements in spread.

PROFITABILITY ANALYSIS
•LIC’s spreads have been on a decline since 2002-03.
•In 2007-08, however, spreads revived as they increased from 2.18 per
cent in 2006-07 to 2.54 per cent in 2007-08.
•The increase in spreads also led to a slight improvement of 36 basis
points.
•The company has been able to control operating expenses, which had
been rising until 2004-05.

88
Dewan Housing Finance
Corporation Limited

89
COMPANY BACKGROUND

•Dewan Housing Finance Corporation Limited (DHFL) was


founded in 1984 to provide financial access to the lower and
middle-income segment of society.
•DHFL provides housing loans to individuals and personal
loans to its existing housing loan customers.
• It is listed on the BSE and NSE.

90
The company has branches both in India and the Gulf region.

DISTRIBUTION NETWORK
•DHFL has a network of 59 business operates in 175 locations;
comprising 59 main branches, 83 service centres, 31 camp
locations across India and two overseas representative offices.
•DHFL also caters to a large section of Indians working in the
Middle East through its overseas branch in Dubai.
•The company’s subsidiary, DHFL Vysya Housing Finance
Limited (DVHFL), is a housing finance firm registered with NHB
and has operations primarily in Karnataka, Andhra Pradesh,
Tamil Nadu and Maharashtra.

91
It is one of the fastest growing housing finance companies and has
grown 9 times between 2001-02 and 2007-08.

DISBURSEMENT GROWTH

•Disbursements of DHFL have grown at a CAGR of 44.2 per cent, while


outstanding loans have recorded a CAGR of 45.7 per cent between 2001-
02 and 2007-08.
•The company is targeting the middle and lower income households
across the country, as opportunities in this segment are expected to grow
substantially
92
The company’s spread for the last 3 years has been stable. Its net
margins, which had dipped in 2003-04, haves hown signs of recovery
since 2006-07.
PROFITABILITY ANALYSIS

93