Affordable Housing: Why Risk Management Should Be The Priority For Lenders
Lenders need to be cautious with their offerings to the affordable housing segment to prevent bubbles
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The Pradhan Mantri Awas Yojana (PMAY), which envisages ‘Housing for All’ by 2022, has made the affordable housing segment attractive to both borrowers and lenders by providing a series of subsidies and benefits upfront.
Banks and the housing finance companies (HFCs) have evinced great interest in this segment. So far, around 200 banks and Housing Finance Companies (HFCs) have signed a MoU with the National Housing Bank, the central nodal agency. In fact, HFCs have topped the banks in lending to this segment with over 70 per cent share in disbursements to this segment.
In the last fiscal, HFCs witnessed a growth of around 24% in assets under management (AUM) owing to their focus on affordable housing. According to ICRA, AUM rose by 22% in the home loan segment, which translated into a CAGR of 20% over the past 3 years.
While this growth numbers on the back of affordable housing are heartening, lenders need to ensure that they take prudent measures in maintaining the asset quality, as they sharpen focus on loan against property (LAP) segment, low ticket-size home loans, and increased lending to the self-employed customer segment.
The Reserve Bank of India (RBI) in fact, had issued a stern warning to the banks to strengthen their underwriting norms in respect of lending to borrowers in the affordable housing segment. The RBI asked the banks to tighten their risk management standards and find ways to keep delinquencies in check.
Avoiding the ‘bubbles’
For the self-employed segment, funding only based on their current cash flows instead of projected (future) cash flows will mitigate chances of future slippages. Similarly, for construction finance, careful selection of the construction projects is a must.
Reliance Home Finance (RHF) follows stringent risk assessment and risk management practices. It is very selective about projects it funds and has limited the average ticket size to around Rs 14 crore per project and focuses on funding brown-field projects that have reached close to 50% stage of completion.
At RHF, all loan applications undergo a check through this system prior to disbursal of the loan. The need of the hour is the use of algorithms, big data and artificial intelligence to assess the client profile before sanctioning the loan. Technology has become a necessity to understand the credit worthiness of a borrowerand importantly to check the ability of the borrower to repay.
Having a dedicated Real-Time Risk Monitoring (RTRM) team in place can help the companies to identify and review sanctioned cases with high-risk factors and implement a standardised underwriting system to maintain high asset quality. The RTRM team checks whether there is consistency in terms of decisions being taken for the same kind of risk appetite across locations but has a system in place for notifying the senior managers and supervisors whenever an exception is made.
RTRM can become a point of reference for making policy changes by the company. Policy managers can keep a tab on what kind of deviations are being made more frequently from the existing policy, what are their implications and be a feeder to the policy managers. The frequent deviations, which have no major impact from the risk point of view, can be incorporated in the policy itself.
Technology can be deployed for fraud checks as well. A hosted application, provided by one of the credit bureau, is presently being used by over 80 financial institutions, including RHF, in identifying fraud cases early.
With the emphasis on the retail segment, which has resulted in an exponential increase in volume across all products, this has also necessitated strict policy measures to be put in place, pivoting around the debt servicing capacity of the clients. Policy measures undertaken to identify, minimise and eliminate risks are necessary to avoid bubbles in the affordable housing sector.
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