'HFCs to face competition in mid-to-large segment'

Housing finance companies (HFCs) are likely to face competition in the mid-to-large ticket housing (above Rs 30 lakh) segment if banks were to reduce marginal cost of lending rate following rate cut for savings deposits, according to Ind-Ra.

HFCs might find it challenging to expand their portfolio in the large ticket housing segment amid increasing prepayment rates on account of portfolio transfers. The agency believes HFCs will face a margin contraction in this segment, limiting the spreads to absorb all the costs, while trying to generate reasonable returns. Ind-Ra estimates about one-fifth of the total HFCs’ portfolio to be of ticket size higher than Rs 50 lakh.

The current spread between State Bank of India’s MCLR rate and a five-year AAA yield curve rate is 74 basis points. This will contract as the rating of the borrower goes down the curve. According to Ind-Ra’s sensitivity analysis, MCLR can face downward revision up to 35 bps for some of public sector banks (25 bps for private sector banks).

Ind-Ra believes the increased pressure on the large ticket housing portfolio together with increasing opportunity in the small ticket housing space will increase HFCs’ focus towards financing small ticket housing loans.