BANKING & HOUSING FINANCE SECTOR REPORT
Date Published: November 15, 2024
Sector Overview:
India's banking sector is composed of public sector banks, private sector banks, foreign banks, small finance banks, co-operative banks (urban and rural), and non-banking financial institutions (NBFIs). The sector is regulated and governed by the Reserve Bank of India (RBI), which in the past year has taken numerous steps to streamline regulations and enhance compliance. The government's decision in the 1990s to allow private player entry into the banking sector has led to increased competition, with both traditional and digital banks vying for market share. This competitive landscape has driven the launch of innovative products and services, as well as a heightened focus on digitisation across the industry. Despite the challenges posed by global macroeconomic headwinds, India's banking sector has demonstrated resilience, with key indicators of capital and asset quality remaining healthy. The RBI has taken steps to address liquidity risks, including modifying the Liquidity Coverage Ratio (LCR) framework for banks. Looking ahead, the Indian banking sector is poised to continue its transformation, driven by technological advancements, evolving customer preferences, and the RBI's ongoing efforts to maintain financial stability and promote inclusive growth.
Segment Opportunities:
While public sector banks still hold a relatively larger share of the total banking sector in India, their market share has been declining over time. Increased competition from private sector banks, which have been offering more customer-centric services, innovative products, and customer-friendly branches, has enabled lenders to gain a growing market share in the country. Another promising segment is Small Finance Banks (SFBs). In December 2019, the RBI allowed existing NBFCs, microfinance institutions (MFIs), and local area banks in the private sector to convert into SFBs, subject to certain conditions. These specialised banks have been playing a crucial role in furthering financial inclusion and catering to the underserved and unbanked population. In June 2022, the RBI adopted the Payments Vision 2025, a document that aims to establish India as a global payments powerhouse. The vision targets a three-fold jump in the number of digital payments and mandates the domestic processing of payment transactions to mitigate emerging geopolitical risks. This progressive move is expected to drive further growth and innovation in the payments ecosystem. The retail credit segment continues to be a key area of focus for the Indian banking sector. Experts at Kotak Institutional Equities anticipate a 15% compound annual growth rate (CAGR) for retail loans during the period FY2022 to FY2025. Within the retail banking portfolio, housing loans, credit cards, and other personal loans are expected to be the key drivers of growth, with credit cards and unsecured loans projected to experience the fastest growth at a 25% CAGR. Looking ahead, the Indian banking sector is poised to witness further transformation, driven by technological advancements, evolving customer preferences, and the RBI's efforts to promote financial inclusion and maintain financial stability.
Government Policy:
The Indian government has continued to play a pivotal role in shaping the country's banking landscape, introducing various policy measures and reforms to strengthen the sector and promote financial inclusion. In December 2019, the Reserve Bank of India (RBI) issued revised guidelines for the licensing of small finance banks, doubling the minimum capital requirement to INR 2bn.
This move was aimed at enhancing the stability and viability of these specialised banks, which have been instrumental in catering to the underserved and unbanked population. Building on this, the RBI set up a standing external advisory committee in March 2021 to review applications for on-tap banking licenses for universal and small finance banks. This committee is tasked with evaluating proposals and making recommendations to the central bank, further streamlining the licensing process.
The government has also maintained its focus on promoting digital payments and modernising the country's payments infrastructure. In June 2022, the RBI adopted the Payments Vision 2025, which targets a three-fold increase in the number of digital payments and mandates the domestic processing of payment transactions to mitigate emerging geopolitical risks. Additionally, the RBI has continued to issue licenses to cooperative banks, recognizing their role in expanding banking services to rural and semi-urban areas. In FY2024, the central bank licensed 12 new cooperative banks across various states, bringing the total number to 1,842.
Overall, the government's focus has shifted from large-scale recapitalisation to strengthening the regulatory framework, improving asset quality, and promoting financial inclusion through specialized institutions like cooperative banks. The government has licensed 12 new cooperative banks in FY 2024, recognising their role in expanding banking services to rural and semi-urban areas. Overall, the Indian government's policy approach has focused on strengthening the existing banking ecosystem, promoting financial inclusion through specialised institutions, and modernizing the payments infrastructure, while exercising caution on the entry of large corporate houses into the banking sector.
Sector Snapshot:
Assets:
In Q4 FY2024, the total assets of the SCBs sustained their growth trajectory, reaching at least INR 236.43tn by the end of March 2024, compared to INR 231.9tn by the end of December 2024. Notably, assets grew by 13.2% y/y in Q4 FY 2024, compared to 19.4% y/y in Q3 FY2023. Bank credits remained the most significant portion of assets, accounting for approximately 68.64% of total assets and reached INR 162.3tn in Q4 FY 2024, compared to INR 157.34tn in Q3 FY 2023 i.e. recording a 3.15% q/q growth. Notably in Q4 FY2024 and in March 2024, credit growth remained strong. Credit disbursement of scheduled commercial banks demonstrated strong growth in Q4 FY2024, primarily fuelled by the impact of mergers and increased personal loans. The outlook for the upcoming quarters appears favourable, supported by economic expansion, enhanced capital expenditure, and the execution of the PLI scheme. In the present circumstances, banks in India are well-placed due to experiencing strong credit expansion and ongoing enhancements in asset quality. Banks held less cash by the end of the quarter, as cash in hand fell by 8.8% q/q. Meanwhile, balances with RBI increased by 14.59% y/y to INR 9.24tn in Q4 FY2024, compared to INR 9.26tn in the previous quarter.
Loans:
Loans and advances grew q/q for the twelfth consecutive quarter in Q4 FY2024. It grew by 3.15% q/q compared to 4.8% q/q in the previous quarter. On a y/y basis, load demand was strong and registered growth of 20.33% y/y in Q4 FY2024, compared to 20.49% y/y in the previous quarter. The retail loans segment continued to lead the credit expansion (27.6% y/y growth) in March 2024, primarily driven by housing loans, according to the RBI, and bank credit to industry rose by 9.0% on a y/y basis in the same month. Reflecting the resilience of credit conditions in India, according to the RBI's Bank Lending Survey for Q4 FY2024, bankers' expectations for overall loan demand during Q1 FY2024 remained optimistic, albeit a bit below that of the previous quarter. The weighted average lending rate (WALR) of the SCBs on outstanding credit rose to 9.68% in Q4 FY2024, compared to 9.55% in Q3 FY2024, 9.47% in Q2 FY2024 and 9.43% in the previous quarter, according to the CEIC database.
Deposits:
Bank deposits continued to increase in Q4 FY2024. They increased by 2.18% q/q in Q4 FY2024, compared to 2.29% q/q growth in the previous quarter. In terms of y/y growth, they grew at a slower rate by 13.27% y/y compared to 13.57% y/y in the previous quarter. The gap between credit growth and deposit growth on a y/y basis rose slightly to 707 basis points in Q4FY2024, compared to 692 basis points in the previous quarter. Despite strong deposit growth, it has been lagging behind credit growth for most banks, in spite of the RBI raising its policy repo rate by 250 basis points since May 2022.
The Indian banking sector witnessed robust deposit growth during FY2024, driven by improved economic conditions and a shift towards financial savings. This uptick in deposit growth helped narrow the gap with credit growth, which had been outpacing deposit mobilisation in recent years. The credit-to-deposit ratio for the banking system rose to around 78% as of March 2024, up from 75.7% a year earlier. However, this elevated ratio posed challenges for banks in pursuing aggressive credit expansion.
NPAs:
Despite experiencing a 20.2% year-on-year growth in advances, the Gross Non-Performing Assets (GNPAs) of Scheduled Commercial Banks (SCBs) decreased by 17.2% to INR 4.68tn as of March 31, 2024. This reduction was attributed to lower slippages, consistent recoveries and upgrades, and write-offs. The GNPA ratio of SCBs saw a significant decrease to 2.8% as of March 31, 2024, down from 4.1% a year earlier. Furthermore, the Net Non-Performing Assets (NNPAs) of SCBs decreased by 23.8% year-on-year to INR 1.04tn as of March 31, 2024. The NNPA ratio of SCBs reached an all-time low of 0.6%, down from 1.0% in Q4FY23.
GNPA’s of public and private banks stood at 3.5% and 1.8% at the end of Q4 FY2024, compared to 5.5% and 2.2% in Q4FY2023. NNPA’ of the former stood at 0.8% and 0.5% at the end of Q4 FY2024, compared to 1.3% and 0.5% at the end of Q4 FY2023. Quarter-on-quarter, the Gross Non-Performing Assets (GNPAs) of Scheduled Commercial Banks (SCBs) decreased by 4.2%, primarily attributed to a significant enhancement in the asset quality of other Public Sector Banks (PSBs), which dropped by 13.3% to INR0.42tn as of March 31, 2024. Non-performing assets (NNPAs) of SCBs reduced by 6.5% q/q with PSBs declining by 6.8% and Private Banks (PVBs) showing a 5.6% decrease. There was a slight decrease in write-offs as banks focused on improving their balance sheets. The decline in the total amount of GNPAs and the increase in advances contributed to lowering the GNPA ratio of SCBs to 2.8% as of March 31, 2024, from 4.1% the previous year, indicating a consistent improvement over the past few years.
Capital Adequacy:
The capital adequacy ratio (CAR) is a crucial measure of a bank's financial strength and resilience. It represents the ratio of a bank's capital to its risk-weighted assets, indicating its ability to absorb potential losses. The RBI has set minimum regulatory requirements for the CAR to ensure the stability of the Indian banking system. As per the RBI norms, Indian scheduled commercial banks are required to maintain a minimum capital adequacy ratio (CAR) of 9%, with a minimum Common Equity Tier 1 (CET1) capital ratio of 8%. However, the RBI generally expects banks to maintain capital levels above the regulatory minimums, commensurate with their individual risk profiles. In recent years, Indian banks have maintained healthy capital positions, with the overall CAR for scheduled commercial banks standing at 16.8% as of September 2023, compared to 17.1% in March 2023, well above the regulatory requirement. The CET1 capital ratio, which is a crucial measure of a bank's core capital, stood at 13.7% during the same period.
Liquidity:
Though the Liquidity Coverage Ratio (LCR) remained above the regulatory requirement of 100% in March 2022, it declined to 135.6% in September 2022, from 147.3% in March 2022, and further to 131.4% in March 2024. The Indian banking system experienced a liquidity surplus, reaching INR1.47tn as of April 2, 2024, attributed to March month-end government spending. According to Rahul Bajoria, Managing Director and Senior Regional Economist, Asia-Pacific, at Barclays Investment Bank, the RBI has taken more active measures in liquidity management following the February monetary policy committee (MPC) meeting, including multiple interventions to adjust liquidity through withdrawals and injections. The aim of these interventions is to gradually align the weighted average call rate (WACR) with the repo rate, which previously approached the upper end of the rate corridor (6.75%). Additionally, factors such as residual government spending at fiscal year-end and the maturity of the RBI’s USD 5bn sell-buy swaps have contributed to injecting rupee liquidity. CareEdge Ratings highlighted in a report that the RBI has been utilising variable rate repo (VRR) and VRRR auctions to manage liquidity while aligning with its withdrawal of accommodation stance and meeting the credit needs of the economy.
Housing Finance Companies
Overview
Housing finance companies are specialised institutions lending to the housing sector, including both property developers and homebuyers. Initially, the HFCs were regulated and supervised by the NHB under the provisions of the National Housing Bank (NHB) Act, 1987. Later, NHB expanded and was established as a refinancer and lender to the housing sector. India’s Union Budget 2020 transferred the regulatory authority for the housing finance sector to the RBI with effect from August 9, 2019. In June 2020, the RBI proposed that HFCs should not be simultaneously allowed to lend to a property developer as well as homebuyers in the developer’s project.
Key developments:
The Indian housing finance sector has continued its promising trajectory, showcasing remarkable development and maturity over the past year. According to the latest industry data, loans and advances of housing finance companies rose by 9.77% y/y in FY2023. This healthy growth has been driven by a confluence of factors, including rising disposable incomes, sustained housing demand, and the entry of new players in the market. HFCs recorded a 10% year-on-year growth in their on-book portfolio in the first quarter of the FY2024. ICRA anticipates an acceleration in disbursements for the remaining fiscal year and maintains its projection of a 12%-14% annual portfolio growth for both FY2024 and FY2025.
Despite having a relatively low mortgage loan-to-GDP ratio of 11% as of March 2024, the Indian housing finance sector has expanded steadily with a compounded annual growth rate (CAGR) of 16% over the past seven years. This growth trajectory is expected to continue, with industry projections indicating a CAGR of 15-17% over the next three fiscal years. The mortgage loan-to-GDP ratio in affluent nations typically ranges between 30% and 60%, highlighting the significant untapped potential in the Indian market. In terms of market share, the Indian housing finance sector continues to be dominated by a select few players.
According to the latest data from the Reserve Bank of India, the top four players - Housing Development Finance Corporation Ltd. (HDFC), Indiabulls Housing Finance, PNB Housing Finance Limited, and LIC Housing Finance - collectively hold a market share of 75% as of March 2024. The sector, however, has witnessed the entry of several new players, including fintech-based lenders and affordable housing finance companies, which have been steadily gaining market share.
The governments continued focus on affordable housing, through initiatives like the Pradhan Mantri Awas Yojana (PMAY), has been a significant driver of growth in the housing finance sector. The allocation for PMAY has been increased by 52% INR 0.92tn in the FY2025 Union Budget, further bolstering the sector's prospects. Overall, the Indian housing finance sector has demonstrated remarkable resilience and growth potential, positioning it as a key contributor to the country's economic development and the government's vision of "Housing for All."
Commentary
Housing finance companies (HFCs) in India have been witnessing growth in their assets under management (AUM) in FY2024. This growth was driven by a strong rebound in the home loan segment, which accounts for approximately 74% of the overall assets under management (AUM). The home loan segment growth is attributed to several factors.
These include improved affordability due to stable incomes, increased preference for home ownership, and higher demand in urban areas as service sector workers returned to their home locations. Additionally, government initiatives like the Pradhan Mantri Awas Yojana (PMAY) have continued to provide support and incentives for the affordable housing segment.
However, the growth in other segments, such as loans against property (LAP), remained relatively muted, with only large and well-capitalized HFCs actively engaged in wholesale financing. This cautious approach was driven by potential risks and the need for prudent pricing in the LAP segment. Despite the overall growth, HFCs continue to face stiff competition from banks, which are gaining market share in the home loan sector. Banks' share in the home loan market has risen to around 64% as of March 2024, up from 62% in the previous year.
This is primarily due to banks' ability to access low-cost deposits, which gives them a funding cost advantage over HFCs. To address this challenge, HFCs have been focusing on diversifying their product offerings, enhancing digital capabilities, and strengthening their presence in the affordable housing segment. The government's continued support for the housing sector, through initiatives like the increased allocation for PMAY, is expected to further bolster the growth prospects of the housing finance industry. Overall, the Indian housing finance sector has demonstrated resilience and adaptability, positioning itself as a key driver of the country's economic development and the government's vision of "Housing for All."
Key Factors Driving Housing Finance in India:
Rising Disposable Incomes and Affordability
The Indian economy has witnessed a steady increase in disposable incomes, particularly among the middle and upper-middle classes. This has enhanced affordability and has fuelled the demand for housing, with the average age of home buyers coming down. Government initiatives, such as interest subsidies under the Pradhan Mantri Awas Yojana (PMAY), have further improved affordability.
Urbanisation and Demographic Shifts:
India's urban population grew from 17% in 1951 to 35% in 2021 and is projected to reach 40% by 2030. This rapid urbanisation, coupled with a young population (median age of 28 years) and the trend of nuclearisation, has driven the demand for housing in urban areas. The shift towards smaller households has increased the need for housing finance.
Government Initiatives and Policy Support:
The government's focus on affordable housing, through initiatives like PMAY, has been a significant driver of growth in the housing finance sector. The allocation for PMAY has been increased by 52% to INR 0.92tn in the FY2025 Union Budget, further bolstering the sector's prospects.
Technological Advancements and Innovation:
The housing finance sector has witnessed increased adoption of digital technologies, such as online loan applications, automated credit assessments, and mobile-based services. This has improved accessibility, reduced processing times, and attracted younger borrowers, contributing to the overall growth of the market.
Merger of HDFC and HDFC Bank:
The merger between Housing Development Finance Corporation Limited (HDFC), the largest housing finance company, and HDFC Bank is expected to have a significant impact on the market. The combined entity will have a stronger balance sheet and a wider reach, potentially reshaping the competitive landscape. As the Indian housing finance market continues to evolve, these drivers are expected to sustain the growth momentum in the coming years, with projections indicating a CAGR of 21% from 2022 to 2027.
Challenges
Asset Quality and Inflated Pricing
The Indian housing finance sector continues to grapple with concerns surrounding asset quality and inflated property prices. Housing Finance Companies (HFCs) have been focused on reducing their leverage and managing non-performing assets (NPAs), which have arisen due to poor underwriting and overpriced land acquisitions. Maintaining a healthy balance sheet requires HFCs to carefully select their land banks and developer partners, while also strengthening their risk management frameworks to address financial, legal and technical risks.
The report also highlights that higher NPAs and negative credit ratings can lead to increased funding costs for HFCs, underscoring the importance of comprehensive loan assessments and robust risk management practices. While the gross non-performing loan (NPL) ratio in the banks' home loan portfolios has generally stayed below 2.0%, the industry is still cautious about the potential impact of rising interest rates and inflation on borrowers' cash flows.
Dent on Reputation
The collapse of prominent housing finance companies like Dewan Housing Finance Ltd. and Reliance Housing Finance in 2019 had a significant impact on the reputation of the overall housing finance sector. These events led to a lack of confidence from lenders and the market in providing finance to Housing Finance Companies (HFCs), as they were perceived to have poor governance, liquidity management, and regulatory oversight. The downfall of these major players raised concerns about asset-liability mismatches and the need for more stringent due diligence processes. These issues highlighted the complex and evolving nature of the challenges facing the housing finance industry, with the impact eventually spilling over to the infrastructure finance sector as well. To address these reputational concerns, HFCs have been focused on strengthening their risk management frameworks, improving transparency, and aligning their operations with the regulatory requirements introduced by the Reserve Bank of India. However, rebuilding trust in the sector remains an ongoing challenge.
The report also highlights that higher NPAs and negative credit ratings can lead to increased funding costs for HFCs, underscoring the importance of comprehensive loan assessments and robust risk management practices. While the gross non-performing loan (NPL) ratio in the banks' home loan portfolios has generally stayed below 2.0%, the industry is still cautious about the potential impact of rising interest rates and inflation on borrowers' cash flows.
Grappling with Liquidity Crisis:
According to the latest industry reports, Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) in India have continued to grapple with a liquidity crisis since 2018, triggered by the collapse of several prominent housing finance companies. The transition of HFCs' supervision from the EMIS Insights - India Banking Sector Report Q4 FY2024 (Annual Update) An EMIS Insights Industry Report Any redistribution of this information is strictly prohibited. Copyright © 2024 EMIS, all rights reserved. National Housing Bank (NHB) to the Reserve Bank of India (RBI) in FY2020 was aimed at strengthening oversight and creating a more robust regulatory framework for the housing finance sector.
As part of this shift, the RBI introduced scale-based regulations and updated non-performing asset (NPA) recognition norms in 2021.While these regulatory changes were intended to improve the stability and resilience of the housing finance industry, they have also posed significant challenges for HFCs and NBFCs. Compliance with the new norms has required substantial investments in technology, risk management, and governance frameworks. Furthermore, the tightening of liquidity conditions due to the COVID-19 pandemic and the subsequent rise in interest rates have exacerbated the funding constraints faced by these institutions. Many HFCs and NBFCs have struggled to access affordable sources of capital, leading to concerns about their ability to maintain growth and meet the rising demand for housing finance. To address these liquidity challenges, the government and regulators have introduced various measures, such as the Partial Credit Guarantee Scheme and the Special Liquidity Facility for NBFCs. However, industry experts suggest that more comprehensive and long-term solutions are needed to ensure the sustainable development of the housing finance sector.
Strong growth and Stable Outlook
Declining Share of PSL-compliant Home Loans
The share of PSL loans in the home loans mix as well as in the overall PSL portfolio for banks is on a declining trend over the past two years. To some extent, it can be attributed to rising ticket sizes of home loans whereas PSL thresholds have remained fixed at up to ₹35 lakh in metropolitan cities and ₹25 lakh in other cities. This, in turn, acts as an opportunity for AHFCs who can further build their portfolio through co-lending or direct assignment transactions with banks. Any upward revision in the PSL thresholds could reduce the attractiveness of this niche sector.
Rising Share of Loans against Property in AHFCs Portfolio
In terms of classification based on product type, AHFCs continue to have the majority of their loan book in the form of housing loans, owing to its mandate, which contributed to 74% of the total loan book share as on March 31, 2023. However, amidst the high competitive intensity, AHFCs are increasingly diversifying across non-housing segment to mitigate margin pressures. Non-housing portfolio is mainly in the form of ‘loan against property’ (LAP) in which micro, small and medium enterprises (MSMEs) and small businesses raise funds for their business and personal needs against collateral which is mainly in the form of property. Also, while the prime HFCs diversify their loan book through builder book/ construction finance, the AHFCs tend to lend towards LAP only under the nonhousing segment. Consequently, the share of housing loans reduced from 79%, as on March 31, 2019 to 74%, as on March 31, 2023, in the AHFCs loan portfolio. The rise, however, is within the regulatory guidelines.
As per the RBI, HFCs need to have 60% of the portfolio towards housing finance by March 31, 2024. With nonhousing portfolio of most of the AHFCs being well below the regulatory threshold, CareEdge Ratings expects the non-housing share to further increase to 27% in FY24 and FY25, in the pursuit of sustain the margins. For some of the AHFCs, where non-housing portfolio is near the threshold, the regulation could be a constraining factor for their growth in the near term.
Margin Pressure May Impact Profitability
Net Interest Margins for AHFCs have seen improvement in FY23, primarily due to the rapid repricing of loans compared to liabilities. The growth in the proportion of the relatively higher-yielding non-housing portfolio, coupled with a reduced liquidity buffer, has further bolstered the spreads. However, the impact of earlier increase in cost of funds during the current fiscal being visible is anticipated to place pressure on net interest margins. AHFCs have exercised caution in transmitting interest rate hikes to their customers, balancing the dynamics of growth, asset quality, and margins. However, since the AHFC lending rates are relatively high, they face reasonably large balance transfers of existing borrowers moving towards banks and/or other larger HFCs.
Improving Asset Quality
The improvement in collection efficiency and strategic write-offs led to enhanced asset quality metrics in fiscal year 2023. This culminated in a reduction of the GNPA ratio to 1.19% as of March 31, 2023. This improvement occurred despite the implementation of revised IRAC norms, which slightly increased the overall asset quality metrics. This positive trend in asset quality metrics is expected to continue into fiscal years 2024 and 2025, with the GNPA ratio projected to stabilize at approximately 1.2% and 1.1%, respectively.
Banks Continue to Dominate the Debt Profile
The AHFCs borrow a major chunk of their borrowings from banks in the form of term loans, with a few large entities tapping the capital market. As on March 31, 2023, the borrowing mix of the AHFCs had 59% of the overall borrowings from banks, followed by the National Housing Bank (NHB) and capital markets. During the Covid period, NHB offered liquidity and low-cost funding through its various special liquidity relief schemes. Accordingly, the share of NHB loans in the borrowing mix of AHFCs increased from 12%, as on March 31, 2020, to 20%, as on March 31, 2023. With NHB again moving back to its regular refinance schemes, there has been a gradual normalization in NHB share. Garnering low cost resources will continue to be significantly important agenda item of all HFCs including AHFCs.
Comfortable Capital Structure
Capital structure, for the sector, continues to be comfortable with gearing at 2.8x as on March 31, 2023. Though loan book growth has picked up, healthy internal accruals supported the gearing profile. Going forward, the sector is expects gearing to slightly increase to 2.9x, as on March 31, 2024.
Strong drivers accelerating demand for housing:
The Indian residential real estate sector is experiencing robust demand, backed by strong macroeconomic fundamentals. While drivers such as improving affordability, rising urbanization, low mortgage to GDP ratio, favourable demographics & government policies have been traditional underlying growth drivers; shift in post pandemic consumer behaviour towards preference for open living spaces, premiumization as well as other factors such as low interest rates, stamp duty rebates resulted into an up-cycle in residential real estate market. These forces are set to sustain housing demand over the medium to long-term. Since the pandemic, housing demand has surged, further supported by low interest rates and beneficial policy measures, leading to sales of residential units reaching a decade-high of 470,424 units in CY23, with 467,449 new launches. Despite the Reserve Bank of India's cumulative repo rate increase of 250 basis points from May 2022 to February 2023, residential demand has remained robust
HFCs AUM growth gaining momentum propelled by retailisation: In sync with a rebound in the residential real estate market, retail loans started witnessing an uptick from FY22. Consequently, the AUM growth has been led by retailisation. During FY23, the overall AUM of HFCs grew by roughly 9% with the housing segment growing by 13% while the non-housing portfolio including the developer finance book contracted marginally. The total outstanding portfolio of HFCs as of March 31, 2023, stood at Rs. 7.4 lakh crore (excluding HDFC Ltd) of which housing loans comprised Rs. 5.5 lakh crore vis a vis housing loans by SCBs amounting to Rs.19.4 lakh crore.
The Indian economy is performing relatively well, despite a slowing global economy. It grew by 7.76% y/y in Q4 FY2024, compared to 8.57% y/y in the previous quarter and grew annually by a robust 8.2% in FY2024, compared to 7.2% in FY2023. India remains one of the fastest-growing economies in the world. The country is currently the world's fifth-largest economy and is also the fastest growing major economy globally. It is anticipated to progress to become the third-largest economy in the world, following the United States and China, in the coming years.
The central bank highlighted the resilience of the banking system and non-banking financial companies (NBFCs), emphasising their strong capital ratios, improved asset quality, and robust earnings growth. The RBI noted that this has facilitated double-digit credit growth and domestic economic activity.
With economic recovery carrying on in FY2024, the loan growth of banks continued to be robust and averaged 19.9% y/y in Q2, Q3 and Q4 of FY2024, according to CEIC data. Broad-based economic recovery and stronger and cleaner balance sheets are enabling banks to expand credit. However, in FY2025, the anticipated credit growth of the Indian banking sector is expected to decrease to a range of 11.7% to 12.5%, down from the FY2024 levels. Rating agency ICRA has revised downwards its outlook for the Indian banking sector from "positive" to "stable" for FY2025. In absolute terms, credit expansion is projected to fall to between INR 19tn and INR 20.5tn from a record high of INR 22.2tn in FY2024. Challenges in deposit mobilisation, regulatory measures, and declining interest margins are expected to impact the profitability of banks. The compression in interest margins over the last 18 months has been driven by rising deposit costs.
India's economy is projected to grow at 6.8% in FY2025 and reach 6.9% in FY2026, according to estimates from S&P Global. This robust economic growth is expected to drive credit demand and support the banking sector's expansion. Government initiatives like Jan Dhan Yojana, Pradhan Mantri Mudra Yojana, and Direct Benefit Transfer schemes are expected to further integrate marginalised populations into the formal banking system, contributing to the sector's growth.
According to the International Monetary Fund (IMF), India is projected to emerge as the world's third largest economy by 2027, surpassing Japan and Germany, with GDP exceeding USD 5tn. This global economic position will likely attract increased foreign investment and will further drive banking sector growth.
Industry Major: Banking & Housing Finance Sector:
