How do housing finance companies compare to their more diversified peers — banks? Does their niche focus give them an advantage with regard to operational parameters and help them deliver better profits?

Historically, even as banks had slightly lower lending rates, housing finance companies scored on superior customer service, lower operating costs, long-term funding sources and focussed lending to fend off the competition.

For instance, the cost-to-income ratios of HDFC and LIC Housing Finance are 7.6 per cent and 14.1 per cent respectively during March 2012 fiscal compared to 44.2 per cent in the case of banks.

Better profitability

Leaner operations (as they rely on selling agents and other non-branch channels for loan origination) and lower provision on non-performing assets meant that, even as banks scored on spreads, the housing finance companies managed better profitability.

For instance, during the year ended March 2012, even as the cost of funds for HDFC was 9.5 per cent compared with 5.9 per cent for banks, the return on assets was 2.7 per cent compared with banks’ 1.08 per cent.

Housing finance companies have steadily increased their market share over the last few years; it rose from as low as 28 per cent in March 2007 to an estimated 34.6 per cent as of March 2012.

Top housing finance companies such as HDFC, LIC Housing Finance and Dewan Housing Finance witnessed loan book growth of 22-37 per cent during the year ended March 2012, thereby increasing their market share. The growth in home loans from banks was 16.3 per cent year-on-year.

Under-penerated market

The house mortgage penetration is still very low in India.

The mortgage loan-to-GDP ratio is estimated in the range of 8-9 per cent compared to 20 per cent in China, 43 per cent in Hong Kong and 54 per cent in Singapore.

Also, home loans are more concentrated in metros. For instance, 60 per cent of the loan accounts outstanding for banks are from the metro and urban areas.

According to BCG-FICCI report, home loan market is expected to grow to Rs 40 lakh crore by 2020 from around Rs 5.5 lakh crore as of March 2011. This offers huge potential for growth, not only in urban areas but also in rural and semi-urban areas, which are largely untapped.

Housing finance companies are also taking a slightly risky route of commercial real-estate loans to prop-up their yields and make up for loss of spreads in home loan portfolio.

For instance, 33 per cent of HDFC’s loans under management are lent to non-housing segment. LIC Housing and Dewan Housing also have developer loans, but the ratio is far less than that of HDFC. Yet, such exposure didn’t have much bearing on the asset quality of these companies.

Thanks to superior credit appraisal and monitoring, these institutions have gross NPA ratios in the range of 0.42- 0.66 per cent.

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