Indian Housing Finance Sector Remains Robust Despite Rising Interest Rates

Resilience in Indian Housing Finance Amidst Interest Rate Hikes

The Indian housing finance sector has demonstrated notable resilience, with asset quality improving despite the significant increase in interest rates over the past 18 months. This stability is attributed to rising income levels, which have helped counterbalance the higher monthly payments.

Affordability and Loan Management: Industry Outlook

Industry experts and analysts report no signs of stress in terms of affordability, even with rising housing prices and increased interest rates. Kotak Institutional Equities highlighted that for floating-rate loans, lenders often opt for extending the loan tenure rather than increasing the equated monthly installment (EMI), contributing to lower delinquency rates in loan portfolios.

Lenders' Response to Interest Rate Increases

PNB Housing Finance's managing director, Girish Kousgi, expressed confidence in repayment collections despite the rise in interest rates and construction costs. He noted that current interest rates remain lower than pre-Covid levels, mitigating impact on borrowers' repayment capacity. PNB Housing Finance, which ventured into affordable housing finance about a year ago, has 97% of its retail loan assets of ₹58,500 crore under ₹1 crore tickets.

Rate Hikes and Housing Loan Yields

Since the beginning of the rate-tightening cycle in May last year, PNB Housing Finance has increased lending rates by 225 basis points. The Reserve Bank of India has raised the repo rate by 250 basis points between May 2022 and February 2023. The Kotak report observed that housing loan yields for banks have surged by approximately 175 basis points, largely influenced by the repo rate, which serves as the external benchmark lending rate.

Improved Asset Quality and Expanding Middle Class

The expansion of middle-income households has positively impacted housing affordability. PNB Housing Finance’s gross non-performing assets ratio improved significantly, as did the ratios for other major lenders like LIC Housing Finance and the State Bank of India.

Evolving Housing Loan Market

The Kotak report also examines the housing loan market from three perspectives to assess affordability. It notes a slight shift towards the negative due to marginal increases in real estate prices and higher interest rates. However, the growth in larger-ticket loans suggests lenders' continued focus on the higher-income population.