PNB Housing eyes affordable, emerging segments to boost loan yields

Mumbai: After grappling with slower growth and elevated non-performing assets (NPAs) in its commercial loan portfolio, PNB Housing Finance is shifting its focus to profitability and margin maximization.

The lender is targeting high-yielding affordable and emerging markets to counter competitive pressures from banks offering cheaper loans in prime and super-prime categories, according to a senior executive at the company.

This shift also comes amid increasing competition from traditional housing finance companies (HFCs) like LIC Housing Finance, which are similarly targeting middle-to-lower-income customers.

To achieve profitability, PNB Housing Finance is expanding its retail housing portfolio by increasing affordable and emerging market loans, opening new branches to serve these segments, and diversifying into commercial loans and the newly launched loan against property (LAP) vertical.

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PNB Housing’s plans to grow its retail loan book from the current ₹75,000 crore to ₹1 trillion by FY27. Of this, the affordable housing book (branded as Roshni) will account for ₹15,000 crore, or 15% of the portfolio; the emerging segment will be around ₹25,000 crore, and the prime segment will make up the remaining ₹60,000 crore, said managing director and CEO Girish Kousgi.

As of 31 March 2025, PNB Housing's assets under management (AUM) stood at ₹80,397 crore, of which loan assets comprised ₹75,765 crore, and retail loans accounted for 99% of all loan assets.

Affordable and emerging segments

“We have very ambitious plans for both emerging and affordable businesses," said Kousgi, adding that while demand has been strong across segments, growth was higher in affordable and emerging segments in FY25 due to the smaller size of the books and margin pressure on the prime side.

The emerging segment, launched in FY25, grew about 21% during the year, while the affordable loan segment rose 183% to ₹5,070 crore, with plans to expand to ₹9,500 crore by the end of the current financial year.

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“Our focus is slightly less on prime because of profitability reasons. The focus is more towards emerging and affordable," Kousgi said. The latter two segments currently account for 40% of incremental disbursements and comprise 23% of the total loan portfolio. The lender aims to increase this to 40% by FY27, he said.

These segments are appealing because they largely consist of middle-to-lower-income customers and first-time homebuyers with limited credit histories, allowing HFCs to charge higher interest rates compared to prime borrowers who often receive finer pricing from banks. The current average yield for the emerging segment is around 10.25%, while the affordable segment yields 12.65%.

The broader housing finance market also reflects a growing emphasis on lower-ticket loans.

According to data from quasi-housing regulator National Housing Bank, loans to economically weaker section (EWS) borrowers comprised 12% of total disbursements by housing finance companies in the first half of FY25, while loans to the lower-income group accounted for 21%.

However, despite the growing focus on affordable loans, the largest share of disbursements in FY24 was still concentrated in the higher-ticket segment. Loans above ₹25 lakh accounted for 58% of total disbursements, up 18.9% year-on-year, while loans up to ₹10 lakh rose 6.3% during the same period.

After de-growing the commercial book in FY25, the housing financier has started re-looking at the corporate segment and plans to do about ₹1,500 crore of business in FY26 in this portfolio. "We have kind of restarted, so we will see disbursements happening in this year," Kousgi said, attributing the renewed interest in the segment to it being more margin accretive.

In FY25, corporate loan disbursements were just ₹66 crore, down 55% year-on-year, with no incremental disbursements in the last quarter.

"We want to take the overall mix of non-housing loans, at an enterprise retail level, to 31-32% from close to 30% today. That will help us on the yield," he said, adding that the recently launched loans against property (LAP) vertical will also help give an “upside on yield".

Balancing prime and super-prime exposure

Amid a strategic move to higher-yielding loans, PNB Housing has halted fresh disbursements in the super-prime segment and slowed growth in prime loans, which grew 12% on-year in FY25.

Kousgi said that within the prime segment, the focus is on “identifying certain pockets, certain products where we get a higher yield," particularly in cities like Chennai, Hyderabad, and Bangalore, rather than the costlier real estate markets of Delhi NCR and Mumbai.

PNB Housing should be able to improve the yield for the prime segment to 9.5-9.6% in FY26 from 9.4% currently led by a better mix of customer profile, product and geography, he added.

While banks benefit from lower borrowing costs and can offer finer pricing to prime customers, non-bank lenders like PNB Housing face tighter spreads.

The lender’s loan spread remained flat at 2.19% in Q4 and FY25, with a 10 basis point sequential decline, underscoring the impact of limited pricing power in the prime segment. The shift to emerging and affordable loans is an attempt to offset this compression with higher-yielding segments.

Disbursements in the final quarter of the last fiscal year (Q4FY25) were at ₹6,854 crore, up 24% year-on-year and 27% sequentially. Of this, prime loan segment disbursements were ₹4,141 crore, up 7% year-on-year, emerging segment disbursements were ₹1,422 crore, up 40% year-on-year, and affordable loans were ₹1,291 crore, doubling from the previous year.

Profitability and operational challenges

PNB Housing Finance reported a net profit of ₹550 crore for Q4FY25, up 25% on year and 14% on quarter.

However, JM Financial Research noted that the profit was primarily driven by recoveries from the retail written-off pool, rather than core operational gains. Recoveries from written-off accounts more than doubled for the lender to ₹178 crore in FY25, compared with ₹68 crore in the previous year.

PNB Housing saw a provision write-back of ₹64.8 crore, largely driven by recoveries from its retail write-offs pool.

The brokerage firm said that PNB Housing’s profitability in the near term is likely to remain tied to recoveries, with an outstanding write-off pool of ₹1,400 crore– ₹1,000 crore in corporate loans and ₹400 crore in retail loans–expected to drive further provision write-backs.

Gross non-performing assets (NPAs) improved to 1.08% as of 31 March 2025, from 1.50% a year earlier, while net NPAs fell to 0.69% from 0.95%. However, the bounce rate for affordable loans increased to 11% in Q4FY25 from 10.4% in the previous quarter, and 8.2% a year ago, a rise Kousgi attributed to the book’s growth rather than underlying stress.

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Kousgi aims to reduce the gross NPA ratio to 1% in FY26.

“With recoveries expected to continue from the balance write-off pool, PNB Housing’s credit costs are likely to remain low for the near term. Over the medium term, steady state credit costs are estimated at 20 bps (basis points)," JM Financial said, adding that a strong growth trajectory, steady branch expansion and consistent recoveries from written-off accounts should help keep the RoA (return on assets) at an average of 2.5% over FY25-FY27.

Even as the focus has started shifting to higher-yielding segments, the lender's average yield on advances moderated to 10.03% in Q4FY25 from 10.12% in Q3FY25 and 10.08% in the corresponding quarter of the previous year.NB H

The cost of borrowing remained stable at 7.84%, slightly up from 7.83% in the previous quarter but lower than the 7.98% recorded in Q4FY24. As a result, net interest margin (NIM) improved marginally to 3.75% in Q4FY25, up from 3.7% in Q3FY25 and 3.65% in the same period a year ago.

Motilal Oswal Financial Services noted that PNB Housing’s stock trades at 1.2x FY27 price-to-book value, with a favourable risk-reward profile. Yet, there are risks: the lender may struggle to expand net interest margins amid aggressive mortgage competition, and seasoning in the affordable loan book could lead to asset quality deterioration and elevated credit costs.

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Nonetheless, Kousgi remains optimistic, highlighting the lender’s capital adequacy ratio of 29% as a safeguard against immediate capital-raising needs. The reversal of risk weights on bank loans to non-banking financial companies (NBFCs) has also helped stabilize borrowing costs.