Interview: Mr. Nirmal Jain: ADIA investment key to penetrating deeper into affordable housing

What would the proceeds of the ADIA investment be used for?

IIFL Home Finance has been growing at a good pace. The market opportunity is huge because, in the affordable housing finance segment, there are not too many players. This is a hugely under-penetrated market, and affordable housing finance is something that even banks have not been able to capture for people who are self-employed or those in the informal sector, where documents are not fool-proof. There are so many smaller towns and places in India where credit still has to go deeper. And this is what we would want to target now that we have the investment from ADIA. We want to grow the business across the country.

Which new geographies are you looking to tap?

There are many districts that we need to penetrate deeper. Right now, housing finance is operating in 230 cities across India. When we say new market, we mean that we would want to target the underserved markets in Tier 4 or Tier 5 towns and cities. We will go deeper into these markets.

What is your outlook on branch expansion?

Right now, we are present in 16 states and two union territories, with 230 branches. We will continue to expand branches. IIFL Finance, which is the holding company, will set up 300 new branches in FY23.

How will the rate hikes impact demand for housing loans?

Rising interest rates will harm demand. But at this point, demand has been very strong. There is pent-up demand. Interest rate hikes worth 50 to 100 basis points at this stage can be absorbed, but if they go up by another 100 bps, there will be an impact on home loan demand; it will slow down. It is a function of two things: one is economic activity, and the other is interest rates. One good thing is that housing prices, in nominal terms, have grown at a much slower pace in the last 20 years compared with income. But I agree that if interest rates go up further, there will be some impact on demand.

By how much will home loan rates rise across the industry given that the rate hike cycle is expected to continue?

Currently, across the industry, home loan rates have gone up by 75-to-100 bps. These rates are for one year, and these are floating rates. I think the rate increases in the shorter end of the G-Sec yield curve will get passed on, and we may see rates rise by another 75 to 100 basis points at the industry level, assuming the rate hike cycle will continue for some time. If RBI is compelled to take more rate hikes, then very robust housing demand will see some moderation.

What is your outlook on interest rates?

Any guess at this point looks difficult. 

How do you assess the impact of the RBI’s rate hike on the affordable housing market?

This is a hugely under-penetrated market, and I think the relative impact of the rate hike will be less in the affordable housing segment. Since the loan amount is small, the rate hike can be absorbed. At the same time, we also have to see that our cost-to-income ratio should be efficient enough to absorb some of the cost. This segment is very large. Some of the housing finance companies that cater to this market have scaled back or wound up. So the competitive intensity for this has reduced, but the demand remains strong.

What would be the impact on your margins?

We won’t have much of an impact on our margins because we can pass on the rate hike to our customers. Almost the entire loan book is linked to external benchmarking or floating rates. We do not have a fixed rate for long-term loans. We normally do not lend for very long terms. If you lend for a long term, then you do not have the flexibility to increase the term. So, instead of increasing the EMI (equivalent monthly installment), most lenders, including most housing finance companies, tend to increase the term. This helps in repayment and collection.

Do you have any growth targets for assets under management (AUM) in FY23?

It is difficult to make a forward-looking statement at this point. But if the industry is growing at 15 to 20 percent, our AUM should be able to grow slightly faster than that.

How has asset quality panned out for IIFL Home Finance?

This quarter, what has happened is that all the moratoria and restructuring that were offered are over. We are seeing that most customers have started to make the scheduled payments, or else they are classified as delinquent or non-performing assets (NPA).

What is the outlook on NPAs?

We expect asset quality trends to improve from here. Our NPA ratios will improve, and after the third COVID wave, collections have also been improving. Our target is to bring down the gross NPA ratio to below 2 percent of our loan book in this financial year. We also aim to have more than 100 percent coverage on these. Home loan NPAs will be brought below 1 percent of our loan book in FY23; that is our target.

How will the HDFC-HDFC Bank merger impact smaller players in the industry?

Since it is a merger behemoth, we expect them to focus more on large, premium customers. They would probably look for co-lending or partnership arrangements for affordable loans or small-ticket segments. So, it may not impact us much.