NBFCs move into home loan market
3 min read . Updated: 23 Dec 2010, 10:41 PM IST Dinesh Unnikrishnan & Joel Rebello
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Mumbai: Non-banking financial companies (NBFCs) that have thus far largely restricted their operations to broking, advisory and wealth management are now expanding their focus to the retail housing finance business, a sector dominated by commercial banks.
Three NBFCs—Edelweiss Capital Ltd, Muthoot Fincorp Ltd and Dewan Housing Finance Ltd (DHFL)—are either setting up subsidiaries or acquiring business from banks to tap India's fast growing mortgages market.
Analysts say this will increase competition for companies already operating in the space in the next few years as these NBFCs gain size and expertise. The result could be good for customers.
"But these new entrants will face a challenge against the established companies till they gain scale and size themselves," said Pawan Agrawal, director, corporate and government ratings at rating agency, Crisil Ltd.
The move by NBFCs assumes significance because the Reserve Bank of India is currently drafting norms on new banking licences and many NBFCs are willing to convert themselves into banks—should they get the go-ahead.
India's home loan market is estimated to be around ₹ 5 trillion, 60% of which is controlled by banks and the rest by housing finance companies, according to Crisil. Housing Finance Development Corp. Ltd (HDFC) is the largest company in the space with ₹ 1.06 trillion assets in September.
Keki Mistry, vice-chairman and managing director at HDFC, does not think the new companies will pose a threat to his firm.
"Our cost of funds is lower, cost of operations is among the lowest and cost-to-income ratio is also coming down.
Besides, the volume growth over the years and our large balance sheet has helped us offer rates at a competitive cost which I don't think new players can offer," he said.
The Rashesh Shah-promoted Edelweiss Capital, which recently received approval from the National Housing Bank (NHB) to set up a separate housing loan subsidiary under the name Edelweiss Housing Finance Ltd, is targeting high-value customers. Edelweiss has started operations in Mumbai and aims to expand operations in Delhi in January, Anil Kothuri,?executive?vice-president, Edelweiss Capital, said.
With an initial capital of ₹ 100 crore, the firm has plans to scale up operations over the next two years to 20 cities.
"The subsidiary will be targeting consumers seeking loans in the range of ₹ 50-75 lakh in the initial stage. We are looking at the direct agency and online channels to reach out to clients. We will also tap our existing 2.5 lakh customers to cross-sell the products," said Kothuri, who was earlier heading the retail and small and medium enterprise (SME) asset financing business at Citibank.
The firm currently has a team of 30 executives and plans to expand this to 250-300 in next two years.
Recently, Edelweiss picked up a 5% stake in Kerala-based Catholic Syrian Bank Ltd, but Kothuri ruled out any immediate plans to acquire any HFC to strengthen its presence in the home loan segment.
Muthoot Fincorp, a Kerala-based NBFC, plans to start its housing finance operations by early next year. Its mortgage arm, Muthoot Housing Finance, expects to get NHB's nod in January, Thomas John Muthoot, chairman and managing director of Muthoot Group, said.
"The subsidiary will cater to the low-income people who have monthly earnings of ₹ 6,000-15,000. These people have regular income, but normally they find it difficult to secure loans from banks due to collateral requirements," Muthoot added. The company is looking at loans between ₹ 150,000 and ₹ 600,000.
Crisil's Agrawal said there is a huge opportunity in the low-cost housing space where borrowers do not necessarily have proper documentation. "If new companies can adequately assess credit quality and build processes for the same, they can tap this growing market."
Muthoot has plans to set up 25 branches in the initial phase of operations in the suburbs of major metros such as Mumbai and Chennai.
DHFL recently acquired Deutsche Postbank Home Finance Ltd for just over ₹ 1,000 crore, taking its asset base to at least ₹ 20,000 crore by end-March.
Anil Sachidanand, chief executive of Dewan Housing, had earlier said that the buyout would provide Dewan Housing access to customers in the upper income bracket. Currently, it is focusing on customers in the middle- and low-income segments.
Analysts said the new companies have experience in financial services, but will need to sharpen their skills.
"Properties have to be approved by the lenders and new companies will face challenges in approvals because it will take more time for them to do the due diligence," said Adhil Shetty, chief executive of personal finance website, Bankbazaar.com.
"Established companies have pre-approved projects and so their response is quicker. There is also a legal process involved which could be time-consuming for the new entrants," Shetty added.
dinesh.n@livemint.com