Default Surge In Affordable Housing Temporary : Post GST & Demonetisation
The affordable housing segment is witnessing rising defaults as demonetisation and the introduction of the Goods and Services Tax (GST) have affected the underlying borrowers’ cash flow over the past year, according to analysts and housing finance companies (HFCs). They, however, add that the “temporary” phase will pass soon and the segment will reach its growth potential.
International Credit Rating Agency Moody’s and its Indian subsidiary, ICRA, said in a recent report that the average Gross Non-Performing Assets (GNPAs) in the affordable housing segment rose to 1.8 per cent in September 2017 from 1.4 per cent in March 2017. The asset quality of loans in the traditional (or premium) housing segment remained the same, the report noted.
Senior vice-president, ICRA, told, Market conditions, be it demonetisation or the GST which caused disruptions have affected the cash flows of underlying borrowers, leading to some rise in delinquencies. According to ICRA, the GNPA levels of housing loan portfolios (all types of properties) of HFCs stood at 0.6 per cent as of September 2017.
The credit collection ratio (CCR) for traditional housing loans was in the range of 98 to 100 per cent, whereas it was 94-96 per cent for the affordable segment, when ICRA-rated housing loan pools were taken into account, the report said.
Whatever growth in competition and demand we see, is coming from those in the informal or self-employed sector. Unlike traditional customers with regular cash flows, this segment is characterised by irregular cash-flow.
The risks of default are factored into the loan pricing, hence the risk-adjusted return is better in the affordable housing segment than in traditional housing loans with lower NPA levels. Affordable housing loans were not like sub-prime loans or those being given to credit impure customers.
If we look at the subprime crisis in the US, the issue was that there was no control over the loan-to-value (LTV) ratio; you had teaser rates, NINJA loans (no-income-no-job loans) etc.
LTV ratios are regulated in India by the National Housing Board, which means that no loan can cover less than 50 per cent or more than 90 per cent of the asset (home) value. Further, with the Pradhan Mantri Awas Yojana scheme and the credit-linked subsidy announced by the government in January 2017, both instruments have helped push the LTV down for the lender, as well as ease some of the burden off the buyer.
The mistakes that many HFCs have made are, lending at a very early stage or that they lend more than required, given the projects’ stage of construction. Such structured home loan products definitely increase the risk. When the buyers’ equity is not up to the mark, then the risk of default becomes high.
The risk of an affordable housing loan portfolio can be constrained if there is more of a buyers’ equity stake in the house, or as long as the customer is not stretched in terms of having too many debt obligations.
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