While there is competition from banks for hawking loans, the gap between demand and supply (of housing units) is yawning. Funding the salaried class to buy houses is less risky with their assured income and very low delinquency.
Vibha Batra, senior vice-president and co-head financial sector rating at Icra, said it could be a challenge to get access to funds, especially from banks, for nascent housing companies. Typically, housing finance companies (HFCs) require a three-year record before lending institutions could consider extending the facility. It is here that PEs could play the crucial role of chipping in funds, albeit high cost equity capital, during the formative stage, she said. This equity capital by PE funds could be leveraged once lenders develop comfort to lend, after a reasonable track record.
Establishing branch network, systems and processes and risk management practices are crucial for new HFCs to grow in sustainably. PE funds with presence on board can provide support in the formative stage.
Upcoming HFCs are also looking for PE money. DMI Finance, a Delhi-based non-banking finance company, has just floated a housing finance unit and is looking for capital infusion. In January 2013, the Burman family, promoters of consumer goods major Dabur, picked up a significant stake in DMI.
Shivashish Chatterjee, co-founder of DMI Finance, said besides investing money, PE firms could help to nurture international best practices to keep cost practical. This would help convert higher top line growth into a robust bottom line. According to ratings agency CRISIL, while housing finance outfits have a higher cost of funds compared to banks, they have been able to maintain comparable spreads. With improved efficiencies, lower operating costs and better risk management, HFCs are reporting higher net interest margins.WHY PES ARE BULLISH ON HFCS
- Strong loan demand in dwelling starved market
- Decent and stable return on equity
- Better quality assets (low-loan default record)
- Stable regulatory and supervisory regime