Decoding India's Housing Finance Landscape: Growth Drivers & Under-tapped Potential

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Housing finance accounts for more than half of the secured loan book in India as of March 2023.  The home loan market in India holds an estimated value of INR30 Trillion, offering substantial prospects for Banks, HFCs, and NBFCs. Demonstrating a consistent expansion, this market maintains a CAGR of 13%. As of Jun’23, Home loans are dominated by PSU Banks by value and volume followed by Private Banks.

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The top five institutions in this sector, including State Bank of India, HDFC Limited (now merged with HDFC Bank), ICICI Bank, LIC Housing Finance, and Axis Bank, collectively account for about 57% of the total individual housing loan market.

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Major Drivers of Housing Demand & Market

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India’s demographic profile is expected to favour the housing industry, leading to growth in the housing finance market. CRISIL MI&A forecasts that housing loan credit will continue to grow at a CAGR of approximately 13-15% from Fiscal Year 2023 to Fiscal Year 2026.

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• This progress can be attributed to several factors, including rising incomes, enhanced affordability, increasing urbanization and nuclearization of families.

• The emergence of tier-II and tier-III cities, easier access to financing, tax incentives, and the expanded reach of financial institutions.

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• RERA has brought monumental change to the real estate industry since its inception. The benefits of the new RERA Act go beyond simply keeping developers accountable for the completion of the project within the set timeline and to the highest safety standards. It has become an empowering tool for buyers that helps in decision-making and ensures that everyone gets a fair deal on every property purchase.

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• PMAY-U, PMAY-G, Special financing window, Relaxation of external commercial borrowing ("ECB") guidelines, Tax incentives, etc are some of the government’s initiations. These schemes/initiatives aim to fill the supply-demand gap in the housing sector. On supply side, the scheme offers incentives for beneficiary-led housing, public private partnerships ("PPP") in building homes for EWS and LIG by offering incentives such as allowing higher floor space index and announcing grants and subsidies for slum redevelopment. On the demand side, it provides financial assistance and interest rate subsidy.

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The Rise of Fintech Startups in Housing Finance

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Fintech is empowering both homebuyers & investors through its tech-first solutions. Leveraging seamless integration of technology, data analytics, and digitization, the home loan processes have become swifter, more accessible, and highly secure. The new-age fintech companies provide qualified leads and a wider customer base for lenders, and access to housing finance at affordable rates to the borrowers.  

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Discovery Platforms: Basic Home Loan (BHL) is one such discovery platform that offers end-to-end digitization of the loan journey right from lender selection to loan sanction. Such platforms help home buyers avail loans with better rates and lenders to have far wider reach beyond their traditional distribution channels.

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Lending Platforms: HomeCapital is one such platform that provides loans for down payment, stamp duty, home interiors and home rentals. The company partners with developers across cities and lending institutions to enable seamless disbursement of loans.

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Enablers: FinTechs also act as an enabler for traditional FIs by expanding their reach beyond traditional channels and streamlining the process. Few such examples: Axis Bank co-lending with Shriram Housing Finance through Yubi.

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Recent investments in this space - BHL has raised ~$5mn from early-stage VCs & Angels in June 23. Housing.com announced a strategic investment in Easiloans in Nov 2023.

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Affordable Housing – The Next Wave of Housing Finance

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The shortage of housing in India is primarily concentrated in the Low-Income Group (LIG) and Economic Weaker Section (EWS), accounting for a staggering 95% of the deficit. Conversely, the Middle-Income Group (MIG) and above contribute to only 5% of the shortage . The major reason for housing deficits in EWS and LIG is lack affordable capital to build or acquire quality housing. These household have an annual income under INR 8 lakhs, many of them are new to credit and mostly are from semi-urban and rural areas, which are underserved by the formal banking system. As of March 2023, 15% of the housing finance market focus is on low-income housing loans, as per CIBIL data3. Tapping into this space and addressing the credit crunch offers a huge opportunity for HFCs and NBFCs. Aadhar, Aptus, Shubham, Aviom, Umeed, Vastu Housing finance are few HFCs focussed on catering the lower income group.

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To further improve the penetration in this segment, SBI has entered in a co-lending opportunity with multiple HFCs like PNB Housing Finance, IIFL Home Finance, Shriram Housing Finance, Edelweiss Housing Finance and Capri Global Housing Finance.  Easy Home Finance Ltd has partnered with DCB Bank in Dec 2023, for a co-lending business alliance to provide affordable home loan solutions. The alliance will use DCB Bank’s expertise in affordable housing and EHFLs tech capabilities to enable quick disbursement of affordable home loans.

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Investor Interest in this space

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As per the Crisil Report, the housing loan market in India grew at a CAGR of ~13% between FY2018- FY2023 and is expected grow at a CAGR of 13-15% to ~INR 42- INR 44 trillion by FY2026. This space is garnering interest from institutional investors as HFCs/NBFCs are levelling the playing field for a significantly overlooked demographic by providing easier access to credit, consequently strengthening financial inclusivity. HFC’s understanding of underwriting for this customer segment as well as micro market related dynamics are critical for success and is reflected in the financials, making these companies much more attractive for investment.

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Investors are keen to invest in HFCs/NBFCs that have good asset quality with low GNPA on a sustained basis, geographical diversification, low cost of borrowing, strong capital adequacy, good portfolio vintage, low PAR, healthy growth trajectory and a strong management team.

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Marquee Investors Leading the Way

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Peak XV Partners, Westbridge capital, Steadview invested in Aptus Value Housing Finance in 2019, which was listed on NSE in 2021. Blackstone backed Aadhar Housing Finance filed for an IPO in Jan 2024. Poonawalla Finance was acquired by TPG global in Dec’22. Faering, Norwest invested in Vastu Finance, majorly owned by Multiple PE. British International Investment has invested in affordable housing companies Sewa Grih & Shubham. Vridhi Finserv Home Finance, an HFC with branches across Karnataka and Andhra Pradesh, has raised INR150cr from Elevation in October 2023 .

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House View

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Housing finance stands out as an asset class with the lowest annual credit costs among all major financial asset classes, primarily due to the collateralization and secured nature of the funding. Given the risk of losing their equity in the event of default, borrowers typically prioritize early repayment of their home loans. Consequently, the non-performing asset (NPA) rate in the home loan segment remains low. Favourable demographics, low mortgage penetration, rising per capita income and government push to affordable housing are expected to sustain the demand for housing loans for many years to come.

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As of March 31, 2023, rural areas, contributed 47% to the GDP. They received only 8% of the overall banking credit, indicating substantial market potential for financial Institutions to extend lending in these regions. HFCs, which are majorly present in underpenetrated geographies with relatively lower financial penetration, are well poised to capture the market and address the credit deficit in the Low-Income Groups (LIG) and Economic Weaker Sections (EWS).

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As fintech’s continue to flourish and extend its reach, it will assume an increasingly crucial role in connecting borrowers with lenders, promoting financial inclusivity, and propelling global real estate market growth. These companies will help Banks, NBFC, HFCs to expand to cities where they don’t have too much access too. They will act as enablers that help financial institutions in expanding their reach, and also make the disbursement and appraisal process digital.

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How Merisis can help - Contact Us

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Fintech companies are expected to play a vital role in increasing financial inclusion and digital adoption. The total addressable market for Indian fintech industry is expected to reach $2.1 Tn by 2030, with a CAGR of 18% from 2022. India has seen a significant rise in fintech investment, with about $35 billion invested across segments so far. The years 2021 and 2022 saw more than $19 billion of fintech funding and an addition of 18 fintech unicorns.  Capitalizing on strong demographics, increasing digital adoption, maturing data ecosystem & infrastructure, and product expansion will help fintech companies accelerate financial inclusion within the regulatory guardrails.

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The Fintech team at Merisis strives to identify trends early on and assist companies in the identified sub-segments with their growth plans. The team has extensive experience in fundraising and M&A transactions across the FinTech landscape having worked with companies in payments, distribution, lending, wealth tech and insurtech space. Read more

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Write to us on fintech@merisis.in

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