HFCs: The new battleground for housing finance companies: Affordable housing

The housing finance industry is undergoing a churn. CEOs of PNB Housing Finance, IIFL Home Finance, and TPG-backed Grihum Housing Finance have quit over the past one year. The challenge, though, is not limited to top exits. Housing finance companies (HFCs), facing the heat from banks, are being forced to pivot to the affordable housing segment to stay relevant. Banks can access funds at a lower cost than HFCs.

There is a good reason for the shift. India’s housing finance market, with outstanding loans of Rs 33 lakh crore, is projected to grow at a 15% compound annual growth rate (CAGR) over the next decade on the back of housing shortage and the government’s Housing for All target, up from 13% CAGR between 2019 and 2024. Within this, the affordable segment is expected to pick up after years of anaemic growth due to collapse of non-banking financial companies such as IL&FS and Dewan Housing, followed by the pandemic, which dragged growth below 6% between 2018 and 2023. It is now expected to grow at double this rate by FY27, according to a Crisil estimate. EY India pegs the segment at Rs 10.6 lakh crore as of December 2024, that is, 34% of the total housing finance market.

The Affordable Shift

With banks pricing out HFCs from super prime (high net worth individuals) and prime segments (salaried borrowers) in big cities, 90 out of 100 HFCs have shifted to the affordable segment, say industry experts. There has been a big shift among leading HFCs such as PNB Housing and Canfin from super prime and prime segments to the affordable segment in smaller towns and cities, they say. “Over the next three years, PNB Housing’s portfolio will likely be concentrated entirely in emerging and affordable markets,” says Girish Kousgi, MD & CEO at PNB Housing, who is leaving the company in October.

If one door closes, another opens. “HFCs have found a new growth engine, which is also a high-yielding business,” says a market player. There is also a demand push. “Government support remains a key enabler, as India faces a housing shortage of approximately 10 million units in urban areas and about 20 million units nationwide (including rural areas). The renewed PMAY scheme aims to address this shortage by 2029,” says Akriti Singh, Chief Alliances Officer at India Mortgage Guarantee Corporation (IMGC). The PMAY stands for Pradhan Mantri Awas Yojana.

The huge demand, coupled with high yields, is attracting everyone, crowding the space. Affordable housing is risky but promises high growth and better yields, one reason private equity players are lining up for a piece of action, say experts. Warburg Pincus and Sweden-based private equity firm EQT have spent huge sums to buy Shriram Housing Finance and Indostar Home Finance, respectively.

“The lending business needs regular capital for growth; some of these deals are a result of existing shareholders prioritising allocation of capital to segments where they expect margins to be higher than affordable housing,” says Akshay Gupta, Director, Prime Securities.

The rush of capital, however, carries familiar risks. A CEO of an affordable housing company cautions that this segment is different from housing in metro cities which largely includes salaried class prime segments.

Business Model

Affordable housing is a high-touch model because of its focus on the economically weaker section, the low-income group, and part of the middle-income segment. In most cases, the customer is genuine, runs a business, and earns, but has little or no formal documentation to verify these activities. The nature of affordable housing—small-ticket loans, self-employed borrowers, and high-touch origination—creates exposure to documentation gaps, frauds, and process lapses.

“The fact that many borrowers lack official documentation or credit history presents another major obstacle, making it challenging to sanction loans. HFCs are tackling this with a technology-driven, minimal documents strategy that evaluates credit risk using AI, digital footprint, and alternative data. HFCs rely on available documentation, which is uploaded and stored digitally, even though these borrowers don’t use the internet much,” says Rishi Anand, MD & CEO, Aadhar Housing Finance, a niche player in the affordable housing market.

Yet independent experts ask—are all HFCs adequately equipped to manage this risk? “This transition demands distinct underwriting approaches and skillsets,” says Sriram Kalyanaraman, BFSI Advisor, Practus, with prior stints at Equifax Credit Information Services, Deutsche Bank, and Standard Chartered Bank.

Many large HFCs claim to be developing new credit assessment models that factor in informal income, seasonal cash flows, and alternative documentation. PNB Housing Finance has developed specialised products, which involve visiting the customer, evaluating his business on-site, estimating income, and preparing a basic profit and loss account and balance sheet to support the loan assessment. “This model requires every customer to be physically visited, salaried customers by a sales manager, and self-employed customers by a credit manager,” says a top PNB official. In fact, PNB has also developed customised templates or modules tailored to specific industries and geographies to improve underwriting accuracy. For instance, trading businesses in Gujarat may operate differently from those in Karnataka. These modules serve as reference points, helping underwriters estimate a customer’s revenue, expenses, and profit based on typical business patterns.

Since most HFCs have jumped into the affordable housing market, playing the low-interest rate game is no longer enough. HFCs must develop products that are tailored to the unique requirements of their target market to set themselves apart in a competitive environment.

Risks On The Horizon

HFCs carry structural weaknesses—greater exposure to self-employed customers, concentration in specific geographies, and relatively unseasoned books—that standard risk models may struggle to capture. In its financial stability report in June, the Reserve Bank of India cautioned that HFCs, though capitalised, face risks from over-leveraged borrowers, dependence on wholesale funding, and systemic interconnectedness.

According to CareEdge Ratings, the performance of HFCs has been good in the past few years, and this is expected to continue. “Nonetheless, a significant macro event or change in the operating environment might put this segment to the test. These situations might not necessarily be captured in stress test modules, and these mainly focus on interest rate changes,” says Sanjay Agarwal, Senior Director, CareEdge Ratings.

Agarwal, however, believes that management overlays and early-warning triggers tied to inflation, employment, and district-level absorption could act as mitigating factors. “The highest risk is observed among thin-file, cash-income self-employed borrowers, particularly when income is overstated. Loans linked to under-construction properties from weaker developers also pose elevated risk. In some rapidly appreciating micro-markets, stretched affordability may be obscured,” says Jain.

According to experts, the risk could also vary by size, particularly for fintech players and new-age NBFCs that prioritise short-term, high-growth opportunities fuelled by private equity capital. There is also a geographic risk, as some prefer a particular region in terms of business. Aavas Financiers, for instance, has a dominant presence in Rajasthan, Gujarat, and Madhya Pradesh, while Shubham Housing has a strong presence in north India. Similarly, some are focusing on very low-ticket size loans.

“Platform-based fintechs typically generate revenue through origination and servicing fees, relying on partnerships with lenders for funding. While this model allows for rapid scaling up, it is sensitive to fluctuations in lender appetite. A hybrid approach is increasingly seen as more sustainable,” says Gopal Jain, MD & CEO, Gaja Capital.

Similarly, for older, well-established players, building a new architecture for underwriting affordable loans is not easy and requires a different mindset. “The risks are well-recognised and increasingly mitigated through stronger governance, technology adoption, and regulatory oversight. Deploying digital KYC, property verification tools, and centralised credit decisioning (could) reduce human dependency and fraud risk,” says Agarwal of CareEdge Ratings.

The ‘Insurance’ Cover

HFCs’ push for a 75% guarantee covers on loans up to Rs 25 lakh under the Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) reflects concentration of risk in affordable housing. At present, the scheme offers 70% cover for loans up to Rs 20 lakh, leaving the Rs 20-35 lakh ticket size borrowers uncovered. The scheme enables lenders to secure the loan purely on the assets financed, without any collateral. That means the existing portfolio of lenders with a ticket size of more than Rs 20 lakh is outside the ambit of this scheme and would have been appropriately priced and secured by lenders. An increase in the coverage of the scheme from Rs 20 lakh to Rs 25 lakh will provide additional support for growth in this range, while allowing flexible pricing and more efficient risk management.

As the affordable housing opportunity expands, stress points such as rising defaults, higher compliance costs, and funding volatility could push the sector towards consolidation. Industry watchers compare the trend to how banks once edged HDFC (now merged with HDFC Bank) out of the urban prime segment.

Experts expect a consolidation over the next couple of years, especially if regulatory and non-performing asset pressures mount. Private equity funds have a definite fund life within which they must exit.

After driving out the HFCs from the prime turf, banks are now eyeing newer customers in the high-growth affordable housing segment. They are experimenting with co-lending models with new-age NBFCs.

What began as a play to meet priority sector norms decades ago, and later expanded to the affordable segment, is fast becoming a new growth frontier. And as technology helps in better credit assessment, even the self-employed and cash-income borrowers may no longer be beyond the banks’ reach.

For HFCs, this is not just competition—it’s the new battleground in the years to come.