Credit rating agency CRISIL expects home loan disbursals to grow at 20 per cent in 2007-08. Though lower than the 30 per cent annual increase seen the past three years, CRISIL says, the growth represents a substantial expansion in absolute terms.
According to the study, the slower growth reflects the impact of rising property prices and interest rates; property prices in the metros and Tier I cities have grown at a compounded annual rate of 30-40 per cent, and interest rates have increased by a total of about 400 basis points since October 2004.
On the sustainability of disbursement growth in an environment of rising property prices, CRISIL's research shows that while these increases have resulted in a weakening of the affordability index (the ratio of property prices to net annual income) at 5.2 this parameter still compares favourably with the indices for other developing nations.
Therefore, says CRISIL, it believes that despite the currently high level of property prices, demand for mortgages will continue to grow. Similarly, CRISIL's study highlights that increases in interest rates in recent months have only moderately influenced new mortgage disbursements, because today's borrowers are younger than their counterparts of a few years ago are, and their incomes are rising faster.
According to Tarun Bhatia, head, corporate and government ratings, CRISIL "The changing age profile of borrowers allows lenders to sanction loans of longer tenures. If interest rates increase, tenures can be increased to ensure that the loans amortise fully before the borrowers retire."
Bhatia adds that, by strengthening borrowers' capacity to repay, rising incomes also support lenders' asset quality. Moreover, the continuing trend of 8 per cent prepayments in the Indian mortgage market partly neutralises the effect of rising interest rates.
The outlook on lenders' profitability, on the other hand, is not as sanguine. Small housing finance companies, in particular, face declining profitability because of heightened competition and increasing borrowing rates. The incremental net profitability margins of housing finance companies reduced to 1.52 per cent in the first half of 2006-07, from 1.76 per cent in 2004-05. Many housing finance companies are borrowing short-term to counter this trend, a risky strategy in a rising interest rate scenario.
CRISIL's ratings on housing finance companies remain stable. According to Raman Uberoi, senior director, CRISIL Ratings, "Housing finance companies continue to enjoy strong parent support and capitalisation. These factors will enable them to maintain their ratings at current levels over the medium term. On its short-term ratings, CRISIL continues to watch the management of asset-liability mismatches very closely."