Despite Current Negative Perception Of NBFC Sector, It Is Still An Attractive Investment Opportunity For Future
Investors have been on the edge since September 2018, when the IL&FS crisis surfaced, bringing low equity capitalization and funding issues of HFCs to the forefront. Actions taken by the regulators, coupled with selling off assets by NBFCs and HFCs, helped in controlling the crisis. However, the recent downgrades by rating agencies of HFCs have got investors worried.
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The broader market which seemed to slowly limp back has been spooked once again by the rating downgrades in the NBFC sector. The sector which was already squeezed for liquidity, is now likely to face concerns of asset-liability mismatch.
Despite the current negative perception regarding the NBFC sector, there is no doubt that the NBFC and HFC sectors are still an attractive business and investment opportunity for the future. Rising income levels and population movement from rural to urban areas, coupled with a relatively low per capita home ownership, indicate a sizeable market in the future. The “Housing for All by 2022” scheme launched by the Government has created a massive market for affordable housing. With a planned 20 million houses in the urban areas and 30 million houses in the rural areas under the PMAY, the Government has implemented various initiatives to help both the developers and the home buyers.
While there are around 80 plus players in the market, 78% of the market share is with the top 5 HFCs. With an average loan size of approximately INR 30 lakh and housing demand that ranges between 12 and 20 million units, the Indian market size stands at more than INR 28 lakh crore. 2019 seems to be a very conducive year for buying a house for Indians. Stagnated property prices, rising income levels, tax incentives and subsidies under PMAY and protection from interest rate hikes for those availing funds from NBFCs and HFCs arguer good tidings for the HFC sector. The emphasis on schemes and policies by the Government to increase home ownership is likely to continue. Thus, we can expect allocation towards the PMAY, Affordable Housing Fund and RIDF to be areas of key focus in the upcoming interim budget.
On 2nd May, CARE Ratings placed PNB Housing Finance Ltd (PNBHFL) on a ‘Watch with Developing Implications’, due to its requirement for raising money to maintain comfortable capital adequacy and gearing level. This was due to the increasing percentage of the corporate loan book in PNBHFL's total loan portfolio. According to CARE, while the retail housing finance segment continues to be resilient and healthy, the whole sale loan book of HFCs including PNBHFL has increased given weakness in real estate sector and credit profile of real estate developers. PNBHFL debentures and bonds carry "AAA" ratings and CARE will continue to monitor developments and take up review of the rating again.
With a disbursement CAGR of over 52% and an asset CAGR of over 50%, 2 years lagged NPA at 0.67 as compared to 1.6 for other HFCs and a consistent product mix of 70:30 for housing: non housing, PNBHFL maintains a well-balanced and sustainable product mix. In the construction finance loan segment, over 99% of the projects are in post launch stage. PNBHFL have in place a robust real estate projects loan approval process, with over 85% of loans approved by the Credit Committee of the Board. Corporate term loans stand at 22% of the wholesale book with over 80% concentration in Tier 1 cities.
Maintaining a well-diversified resource profile consisting of Banks, Pension Funds, Provident Funds, Insurance companies, multilateral agencies, mutual funds, foreign portfolio investors and over 1,30,000 deposit accounts, PNBHFL has multiple avenues to resource mobilization. An average yield of 10.24%, average cost of borrowing at 7.97% and ROE at 14.00% for FY18 and 16.22% for 9M FY19 indicates a sound financial picture for the company.