AHFCs growth outlook: Seizing opportunities and overcoming challenges

Affordable Housing Finance Companies (AHFCs) have demonstrated remarkable resilience and growth, rebounding from a period of subdued performance in FY20 through FY22. In FY23, they experienced a robust expansion of 27% year-over-year, marking a significant turnaround. Looking ahead, it can be projected a continued growth trajectory, forecasting a 29% expansion in FY24 and an additional 30% in FY25 for AHFCs.

Key Trends and Projections:

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Increase in Non-Housing portfolio share: 

AHFCs are diversifying their portfolios to navigate competitive landscapes and maintain margins. The share of the non-housing portfolio has risen from 17% in March 2019 to 26% in March 2023. This upward trend is expected to persist, reaching 27% by March 2024.

Trend in Priority Sector Lending (PSL): 

AHFCs have opportunities to expand their portfolios as the proportion of PSL-compliant home loans within the overall banking sector has been declining. This trend creates room for co-lending or direct assignment transactions.

Moderation in profitability: 

Increased cost of funds in FY24 is anticipated to impact net interest margins (NIM), leading to a moderation in Return on Total Assets (RoTA) to 3.23% in FY24 and further to 3.04% in FY25, down from 3.8% in FY23.

Stable asset quality: 

Enhanced collection efficiency and strategic write-offs contributed to improved asset quality metrics in FY23. The Gross Non-Performing Assets (GNPA) ratio is expected to remain robust, stabilizing around 1.2% as of March 31, 2024.

Exposure to vulnerable borrower segments: 

AHFCs primarily serve self-employed customers, making them susceptible to income volatility during economic downturns, posing higher credit risk.

Robust capital structure: 

The sector’s capital structure is anticipated to remain robust, supported by healthy internal accruals. The gearing ratio is expected to be approximately 2.9x as of March 31, 2024, with banks continuing as a primary funding source.

Challenges and Opportunities:

Funding challenges:

While AHFCs encountered funding challenges in the past, their capacity to penetrate unorganized market segments and adept appraisal skills positions them favorably for growth.

Macro-economic landscape:

AHFCs’ rebound in FY23 was influenced by an improving macroeconomic landscape. Despite challenges in FY20-FY22, AHFCs emerged as the most rapidly growing segment in the housing finance domain.

Regulatory considerations:

With regulatory thresholds for housing finance portfolios in place, AHFCs need to carefully manage their non-housing portfolio growth to comply with regulations.

Interest rate dynamics:

Net Interest Margins (NIM) have seen improvement, but with anticipated interest rate hikes and increased cost of funds, AHFCs need to balance growth, asset quality, and margins.

Asset quality management:

AHFCs have demonstrated effective asset quality management, with improved metrics in FY23. Continued vigilance and strategic measures are crucial to maintaining stability.

AHFCs represent a dynamic and growing segment within the housing finance market. With a positive growth outlook and a strategic focus on diversification, these companies are poised to capitalize on emerging opportunities. While challenges exist, their robust capital structure and effective asset quality management contribute to a favorable trajectory.