The Indian real estate sector, often regarded as the barometer of the nation’s economic health, has been undergoing a transformational journey lately, with its trajectory significantly influenced by the pivotal role played by the housing finance sector. This vital financial ecosystem has emerged as the cornerstone of millions of dreams, enabling ordinary citizens to achieve the archetypal Indian aspiration: owning a home. Through innovative financial products and inclusive lending practices, the housing finance sector has empowered individuals across diverse socio-economic backgrounds, fuelling the surge in property investments.
As a catalyst for economic growth, it has not only provided the necessary funds for homebuyers, but has also stimulated the construction industry, generated employment opportunities and driving economic prosperity. In this symbiotic relationship, the housing finance sector stands as a linchpin, bridging the gap between aspirations and reality, thereby shaping the landscape of India’s real estate sector.
While the impact of housing finance companies (HFCs) on India’s metro cities is well-documented, their influence is now also reaching smaller towns and cities, reshaping the real estate landscape across the nation. As per reports, India is poised to achieve a significant milestone in its real estate sector, with projected sales surpassing $1 trillion by 2030. This growth is primarily driven by Non-Banking Financial Companies (NBFCs) or the HFCs, instrumental in promoting financial inclusion and transforming the dream of home ownership into reality for people across diverse income groups.
The pioneer in the domestic space was HDFC which was started by the late H T Parekh. Following his footsteps, his nephew Deepak Parekh has helped create this large financial conglomerate. It is now merged into HDFC Bank. With a larger balance sheet, the bank would offer the national economy possibilities of higher growth, a large bouquet of financial products for the customers, and higher flows into affordable housing, agriculture, MSME, etc.
As a consequence of this merger, the bank is poised to benefit from HDFC’s leadership in home loan products, which can now be directly offered through the bank’s large network of branches helping a greater number of people fulfill their aspiration to be homeowners. The home loan business will also benefit from low cost of funds that a bank traditionally enjoys. “It is my time to hang my boots with both anticipation and hope for the future. While this will be my last communication to shareholders of HDFC, rest assured we now stride tall into a very exciting future of growth and prosperity,” says Deepak in a letter to HDFC Ltd’s shareholders as the chairman.
“HFCs are the cornerstone of India’s growth narrative, with the housing finance industry growing at a CAGR of 20 per cent. We will witness the government’s commitment for housing loans, where our role in shaping the nation’s prosperity will be more crucial than ever. Beyond providing homes, we fuel economic growth by catalysing job creation, real estate activity, infrastructure development, income growth, fiscal benefits, and economic resilience,” says Sarosh Amaria, MD, Tata Capital Housing Finance Limited.
Building brick by brick
According to a recent report by KPMG, India’s real estate sector is expected to grow at a CAGR of 9.6 per cent from 2020 to 2027, owing to the significant demand in this industry post Covid-19. The NBFC-HFC book portfolio grew by 11 per cent Y-o-Y in FY23. The report states that there is a remarkable shift in investor portfolios over time – from traditional assets to newer options like logistics and data centres. This transformation is fuelled by several factors, one of them being the growing preference for home ownership among millennials, who, due to remote work, are increasingly choosing tier II and III cities with a focus on enhanced amenities for health and well-being.
Until the first half of 2021, residential properties accounted for around 80 per cent of the real estate market. This surge in demand was a result of rapid urbanisation and increasing household incomes, positioning India among the top ten markets globally in terms of housing price appreciation.
This is where housing loans become a vital catalyst for economic growth; this has a considerable impact on various other sectors as well. The pivotal role played by HFCs extends beyond providing homes to individuals and families. They actively contribute to the nation’s GDP, aiming to reach 13 per cent by 2025.
As for developers, their role is peaking as well. Developers are adapting to the evolving demographics of urban and semi-urban areas by constructing large townships and gated communities tailored to the needs of the workforce driving industrial development. These housing loans empower individuals and families to purchase homes, thereby boosting economic activity in the housing and ancillary sectors.
Mortgage penetration currently accounts for around 13 per cent of GDP. However, given the surging demand in the housing sector, it is anticipated that India could potentially double its home loans, reaching a substantial $600 billion by 2027. This growth stands in stark contrast to other Asian economies, where the mortgage to GDP ratio typically ranges between 20 and 30 per cent.
India’s unique demographic advantage adds to this potential, with approximately 66 per cent of its population being below the age of 35 years, creating a significant opportunity for widespread disbursement of home loans. This scenario paints a picture of abundant possibilities, indicating a promising future for India’s housing finance industry.
It is expected that 40 per cent of India’s population will reside in urban regions by 2030, as compared to the current 32 per cent. This may be propelled by the fact that, over the years, India has consistently been witnessing an uptake in the number of households being shifted towards the concept of a nuclear family.
“The housing finance market is expected to grow at a CAGR of 20.58 per cent from FY22-31 owing to affordable housing, decrease in property prices, attractive tax incentives and a surge in household income. In 2022, the affordable housing segment made up 90 per cent of the market in terms of volume and in terms of value,” says the KPMG report.
Confirming this trend, Deepak Patkar, CEO & MD, SMFG Grihashakti (SMHFC) claimed that their home finance business has shown tremendous growth in FY23, with disbursals of Rs3,055.2 crore, a 137 per cent growth over the Rs1,287 crore disbursals in FY22. SMHFC received Rs100 crore of capital from its parent company SMFG India Credit in Q4 FY23.
In the bustling metros of India, where the real estate market has historically thrived, HFCs have emerged as pivotal players in boosting growth. These institutions have revolutionised the landscape with their innovative financial products and nimble lending practices, proving to be a boon for both developers and aspiring homeowners.
Metro marvels
For developers navigating the complex realm of real estate, HFCs serve as a lifeline, especially when traditional banks often shy away from funding large-scale projects due to regulatory constraints. The swift loan approvals and disbursements facilitated by HFCs play a crucial role in shaping project timelines. This efficiency impacts the supply of housing units in densely populated urban areas, where demand perpetually outstrips supply.
On the flip side, homebuyers in metros reap substantial benefits from the presence of HFCs. These institutions offer tailored home loan products designed to cater to diverse needs, coupled with competitive interest rates and streamlined processing. As a result, home ownership becomes more attainable, allowing individuals and families to realise their dreams of owning a home in these bustling city centres.
Amongst all these aspects, what sets HFCs truly apart is their focus on segments of the population that often face challenges with traditional lenders such as banks. For instance, self-employed individuals, who might find it difficult to secure loans from conventional financial institutions, discover new opportunities with HFCs.
By catering to these underserved demographics, HFCs have broadened the pool of potential homebuyers in metros, fostering inclusivity within the real estate market. In essence, the strategic role played by HFCs not only accelerates growth in India’s metros, but also fosters a more accessible, dynamic, and inclusive real estate landscape, shaping the dreams and aspirations of millions in the heart of the country’s urban hubs.
Other factors driving growth include decrease in property prices, attractive tax incentives, a surge in household income, and the affordable housing segment. In fact, as of 2022, the affordable housing segment made up 90 per cent of the housing finance market in India. Furthermore, the home loan portfolio over the last 6 years has increased owing to an increase in disbursements with a surge in demand in tier-II and III cities, increase in the number of nuclear families and growing disposable income.
Some financial institutions also provide value added services that make the idea of home ownership more enticing for the average working-class individual. HFCs like SMFG Grihashakti leverage their extensive experience, robust risk management framework, and the strength and legacy of their parentage to make a profound impact in this sphere. With a country-wide distribution network of over 100-plus branches, they not only offer a diverse portfolio of loans tailored to meet the unique needs of Indian citizens, but also financing options for home improvement, home construction, home extension, loans against property, and support for commercial real estate ventures.
Deepak Patkar, CEO & MD, SMFG Grihashakti says: “HFCs play a pivotal role in India’s economic landscape. As the nation experience rapid urbanisation and a growing population, the demand for affordable housing has surged. HFCs step in to bridge the gap between aspiring homeowners and commercial banks. HFCs offer customised home loan solutions making home ownership more accessible. They extend credit to diverse segments of the population, including low- and middle-income individuals, thus promoting financial inclusion. HFCs stimulate economic growth by channelling funds into the real estate sector, generating employment and fostering associated industries. Their operations contribute to the ‘Housing for all’ initiated by the Government of India.”
In 2019, HFCs had outstanding loans totalling Rs7.31 lakh crore, a figure projected to soar to Rs9.1 lakh crore by 2023, indicating an impressive growth rate of 24.1 per cent. This surge in loans has led to an average ticket size ranging from Rs14-R16 lakhs over the past 5 years. These figures underscore the burgeoning demand for home loans in India, reflecting the nation’s increasing focus on affordable housing options and the pivotal role played by financial institutions in meeting these aspirations.
Smaller town surge
While traditionally, metros have been the epicentres of real estate activity, smaller towns and cities are now experiencing a real estate boom, which may be attributed to the rising number of housing finance companies. These financial institutions are bringing financing opportunities to regions that were once overshadowed by their urban counterparts.
One of the standout contributions of HFCs to smaller towns is their role in supporting affordable housing initiatives. The Pradhan Mantri Awas Yojana (PMAY) and similar government schemes have found strong backing from housing finance companies. These institutions have stepped in to provide the necessary financing for developers in smaller towns to construct affordable housing units.
As a result, more and more families in these areas can now aspire to own homes. Thus, HFCs are helping developers and entrepreneurs fill the void left by traditional banks and empowering them to pursue ambitious projects, thereby catalysing economic growth in smaller towns.
In the words of Manish Shah, MD and CEO, Godrej Capital: “Home ownership is not just financial goal-setting in India; it’s an aspiration built heavily on emotion. HFCs offer flexible loan terms and simplified application processes, addressing the under-penetration in India’s housing finance sector.” He explains that Godrej Capital is not just an NBFC service, but a passion project. Reflected in initiatives like ‘Design your EMI’, Godrej Capital aims at making homeownership accessible by empowering buyers with flexible and personalised financial solutions.
“Additionally, HFCs have also stepped up to bridge the gap restricting access to formal banking services for a substantial portion of the Indian population. Innovations in data-driven decision-making also expand access to diverse income sources, thereby increasing credit availability in the market. They have contributed to the growth of the digital economy by spurring innovation and encouraging technological advancements in the financial sector, led by adopting digital lending processes, online repayment systems, and data analytics to streamline their operations, improve customer experience, and enhance risk management,” adds Shah.
HFCs have also made contributions to the growth of the digital economy in India. By spurring innovation and encouraging technological advancements in the financial sector, HFCs have evolved to adopt digital lending processes, online repayment systems, and data analytics to streamline their operations, improve customer experience, and enhance risk management.
As Sandeep Menon – Founder, Managing Director & Chief Executive Officer, Vastu Housing Finance puts it: “The ‘techade’ has poised India for exceptional economic growth, positioning it as a global hub for innovation and local production. However, India’s transformation also hinges on improving the living conditions of its entire population, right down to the last mile. In the context of India’s severe housing shortage, government support of such scale across segments could be transformational if implemented well. This has the potential to be the bedrock for India’s infrastructure development, social index and economic well-being, fostering stability in the lives of its people. This substantial initiative is a stride towards greater equity and inclusivity, bridging the financial divide and embracing the low-income segment of India’s vast human capital, which holds immense potential.”
As the world’s most populous nation, India has huge unmet demand for housing. Given the strikingly low mortgage penetration, India’s mortgage-to-GDP ratio, currently at 11 per cent, significantly lags behind its Asian counterparts and other mature economies. With an initiative like this, there could be an increase in mortgage penetration in a relatively short period of time. “The shift towards more nuclear families and improved affordability is propelling the demand for housing loans, and this policy could further stimulate lending in the affordable housing sector,” he adds.
Menon’s stand was supported by Pankaj Gadgil, Managing Director & CEO of Aditya Birla Housing Finance Limited (ABHFL) and Head Digital platforms – Aditya Birla Capital, who stated that: “NBFC-HFCs are primary providers of home loans in India, especially in semi-urban and rural areas that are underserved by banks. The seamless disbursement of these home loans is largely made possible through the utilisation of Digital Public Goods (DPGs). These DPGs built on the foundation of Aadhaar, payments, and bank accounts, the India Stack, are truly transforming the way we undertake KYC, collect fees, execute e-agreements and set up e-mandates.”
HFCs are leveraging technology to bridge the gap between metros and smaller towns. With online loan application processes, digital document verification, and instant approvals, HFCs are reducing the barriers to accessing financing, irrespective of geographical location. This technological integration is especially beneficial for residents of smaller towns who might have limited access to physical bank branches.
The agility of HFCs is a stark contrast to the, often bureaucratic, processes of traditional banks. This flexibility allows them to tailor their offerings to suit the local dynamics of each region. In smaller towns, where property values and income levels may differ significantly from metros, HFCs are adapting their lending criteria to make homeownership more accessible.
Technology has played a crucial role in fulfilling the home ownership aspirations in rural India. Numerous industry initiatives have demonstrated its ability to streamline the entire home loan process, making a significant impact. In a country as vast and diverse as ours, with varying income levels and intricate real estate markets, technology has catalysed a transformative change, creating a pivotal shift in the way people approach home ownership. Data analytics has also made deep inroads, facilitating the analysis of market trends, pricing, demand patterns, prospects’ eligibility, and repayment intent. Access to land records and property registration has substantially reduced fraud and created a transparent and secure system for property transactions.
Government initiative
According to reports by Reuters, India is considering spending Rs60,000 crore ($7.2 billion) to provide subsidised loans for small urban housing over the next 5 years – a plan substantiated by Prime Minister Narendra Modi in an Independence Day speech in August 2023.
The scheme will offer an annual interest subsidy of between 3-6.5 per cent on up to Rs9 lakh of the loan amount. The sources added that housing loans below Rs50 lakh utilised for a tenure of 20 years will be eligible for the proposed scheme.
The share of residential housing loans in total advances has increased over the last eleven years to 14.2 per cent in March 2023 from 8.6 per cent in March 2012, as per the Reserve Bank’s latest Financial Stability Report (FSR). It also said the housing sector is witnessing healthy growth with sales growing by 21.6 per cent in the fourth quarter (January-March) of 2022-23. In addition to rising sales, new launches also maintained healthy growth, reflecting strength in demand by end-users.
According to RBI data, the outstanding housing loans, including priority sector housing loans in March 2023 amounted to Rs19,36,428 crore – a 15 per cent increase compared to the previous year. The FSR states that the all-India house prices index (HPI) recorded its highest increase over the last 17 quarters (4.6 per cent Y-o-Y) in the fourth quarter of 2022-23.
On the potential of HFCs and Prime Minister Narendra Modi’s vision, PNB Housing Finance’s MD & CEO, Girish Kousgi, says: “As we navigate the ever-evolving landscape of housing finance in India, HFCs are set to play an even greater role in the economy. Over the past few years, the realty and housing segments have shown resilience and growth potential, and this momentum is expected to continue for at least 5-7 years. Modi’s vision, as articulated in his recent Independence Day speech, reflects a deep commitment to improving the living conditions of urban families in rented homes, slums and unauthorised colonies.”
He added: “Housing finance companies facilitate home ownership, generate tax revenues, support government projects and play an important role in public welfare schemes. Their economic contribution creates a ripple effect across industries like real estate and infrastructure, and help in job creation, income growth, entrepreneurship and resilience. Given the ongoing shift in urban and semi-urban demographics, HFCs have an opportunity to cater to the housing needs of a diverse population in the country. In fact, PNB Housing Finance is at the forefront to capitalise on this changing trend, through its offerings in both prime and affordable housing segments, which allows us to fulfil the home ownership dreams of lakhs of individuals across India.”
With over three decades of specialised experience in housing finance, PNB Housing has a large network of branches spread across the country which helps its customers utilise financial services (loans and deposits) seamlessly. PNB Housing provides housing loans to individuals and corporate bodies for purchase, construction, repair and upgradation of houses. It also provides loans for commercial space, loans against property and loans for the purchase of residential plots.
“As per world Economic Forum projections, growth in annual incomes will transform India from the bottom of the pyramid economy to a truly middle class-led economy by 2030. The expected expansion of the middle-class segment represents a once in a lifetime opportunity for the large population of India. The increase in incomes coupled with government schemes has led to improved affordability and has given a boost to the overall housing segment,” says Anirudh Kamani, Managing Director & CEO, ICICI Home Finance Company Limited.
He added that, at ICICI Home Finance, they are seeing robust growth in the demand for mortgage loans over the past few years. This is reflective of the growing aspirations of Indians looking to buy their homes and expand their current homes, across Tier 1-2-3 markets. India’s housing market is diverse, with every state/region having its unique set of customer profiles and property characteristics. For HFCs to succeed in this diverse market, it is imperative to understand the needs of customers at the local level.
With digitisation picking up across sectors, the HFC segment is working towards tech-enabled growth. HFCs like ICICI Home Finance are continuously working to decongest processes internally. They are using tools that have made the entire mortgage loan process efficient by fetching KYC, income and bank statements from source.
Recently, ICICI Home Finance has also launched a WhatsApp bot to provide in-principle sanction for home loans. This helps prospective home loan customers to check their loan eligibility and obtain interim sanction over WhatsApp within 3 minutes, enabling their branches to check applicant eligibility on the spot and save a significant amount of time and effort.
In terms of the growth of the HFC sector in the coming years, HFCs with the highest credit rating coupled with a licence to accept deposits and a pan-India presence will undoubtedly lead the way, given their stable and diversified liability profile. This will enable them to offer various loan products to their customers at competitive interest rates.
Commenting on the company’s expansion plans, Anirudh Kamani, MD & CEO of ICICI HFC says: “As part of our expansion strategy, we are focusing on states that have a vibrant housing market with residents who are seeking financing solutions for their dream home. We are optimistic that our growing network and reach will serve customers who wish to own their dream homes.”
Navigating tomorrow
According to Gadgil, “The home loan fulfilment journey continues to be cumbersome due to the legal and technical verifications required to ascertain the collateral marketability. Land records in India are not digitised unlike Aadhar enabled by UIDAI. Most NBFC-HFCs, rely solely on banks and the National Housing Bank (NHB) for funding. Bank exposure to HFCs has remained relatively flat over the past 2 years, with only a modest increase of 5 per cent per year.
To meet the high demand for housing loans, HFCs should be allowed to accept public deposits and tap other sources of funding. Additionally, mutual funds and insurance companies should be encouraged to invest in mortgage-backed securities. This will translate into cost optimisation for HFCs which in turn can be passed on to customers.”
Gadgil added: “The Indian housing market is expected to grow rapidly in the coming years. The estimated demand for housing finance is Rs58 lakh crore in the next 5 years, with the disbursements for FY23 estimated at Rs9.3 lakh crore, leaving a gap of Rs48.7 lakh crore.”
According to a recent housing finance report by HDFC Securities: “Affordable-focused HFCs have emerged as high-growth. We expect India’s housing demand (largely end-use) to witness ~15-16 per cent CAGR during FY23-28 on the back of improving affordability, increasing penetration beyond Tier-I locations, and the rising pace of urbanisation. Although affordability gains reversed during FY23 on the back of a 250-bps rate hike, we believe that the secular trends will help sustain the longer-term expansionary stage of the cycle.”
The revival of housing demand since the pandemic has been anchored on increased preference for home ownership as well as upscaling and premiumisation among home buyers with a preference for bigger houses and better-rated developers. This is reflected in increasing contribution of mid-income and premium ticket-sizes for both lenders, as well as developers.
India’s housing (and home loans) demand remains fairly widespread beyond Tier-I cities, with 60 per cent contribution coming from non-Tier I cities. “In the next 5-10 years, the housing sector is expected to experience several transformative trends. We see a surge in enthusiasm among homebuyers, sustained by stable interest rates and a confluence of factors including attractive institutional incentives, rapid urbanisation, rising disposable incomes, and the release of pent-up demand following the pandemic. The growth potential, especially within the affordable housing segment, is substantial. Technology adoption will continue to reshape the industry, with digitalisation streamlining processes, enhancing customer experiences and driving broader outreach.”
The journey of HFCs from being niche players to driving forces in India’s real estate sector is a testament to their adaptability and innovation. As they continue to expand their footprint, it is essential for both the industry and regulatory authorities to collaborate to ensure that the growth witnessed in these regions is equitable and sustainable. HFCs are not just impacting real estate; they are reshaping the economic and social fabric of India, one town at a time.
“In housing real estate, whatever is being launched is being sold and pre-sales momentum remains strong. We expect the consolidation story to continue in the top seven cities and see a volume-driven growth in MMR, Delhi-NCR, Bangalore, Hyderabad and Pune. With robust sales in these markets, we expect a double-digit growth for the housing finance sector for the next few quarters,” says Arvind Kapil, Country Head - Mortgage, HDFC Bank. “There is a higher presales growth from premium housing segments and “the real estate developers associations and other industry bodies also appear optimistic about the growth in the current quarter,” adds Kapil.
“We see geographical diversification which will lead to higher growth in housing sales from non-core markets and thereby positively impact the housing finance sector. One of the key drivers could be the interest subvention scheme for small urban housing which the government is slated to launch in this quarter. In metro and major urban markets, developers are evolving to offer variants of luxury real estate and we see a healthy demand of the same, it is like a new product lifecycle in the housing space. Coupled with India’s rising per capital income, customer preference for quality housing and lending facilities available across all pin codes of the country, we see a bright future for the sector,” sums up Kapil.
In conclusion, the housing finance demand in India finds a robust ally in the form of HFCs, operating as vital cogs in the wheel of the nation’s real estate sector. As the need for prime, regular and affordable housing continues to escalate, HFCs have risen to the occasion, facilitating access to home loans for millions of Indians. Their role as alternative financing channels within the NBFC ecosystem is instrumental in not only fostering homeownership, but also in bolstering the economic growth of the nation.
On the buyer side, technology has been a game-changer in the Indian real estate sector, making homeownership more attainable and convenient. It has empowered buyers with information, streamlined processes, and opened up new possibilities for even those with modest incomes to enter the property market. The continued integration of technology promises a brighter future for homeownership in India.
While challenges still exist, in a country where the dream of owning a home is deeply ingrained in the collective consciousness, HFCs stand as enablers, helping turn that dream into a tangible reality for countless individuals and families across the subcontinent. As we move forward, the symbiotic partnership between HFCs and the housing sector will undoubtedly play a pivotal role in shaping India’s future.