PNB Housing’s affordable loans drive pushes it to revive commercial mortgage biz

Mumbai: PNB Housing Finance Ltd is looking to re-grow its commercial mortgage portfolio after having substantially improved the asset quality of its corporate loan book, even as it restructures its retail business to focus on the higher yielding affordable loans segments.

The lender is looking to bulk up its commercial portfolio, even if marginally, to make up for the reduction in high-ticket lending to individuals (retail borrowers) as it shifts its focus to smaller housing loans.

Affordable housing loans fetch PNB Housing the highest interest rates, offering yields of 12.6%, higher than 10.2-10.3% from the emerging market segment and 9.5% from the prime loans segment, managing director and chief executive Girish Kousgi told Mint in an interview.

“We are moving from low-yielding segments to high-yielding segments. While we are changing to these segments so that we are more profitable, we will grow at 17% in FY25 (compared with 14% in 2023-24)," Kousgi said.

PNB Housing aims to boost its affordable housing loans AUM to ₹5,000 crore by March and ₹15,000 crore by 2026-27, he added.

That said, PNB Housing’s shift in focus to small home loans will have it competing with other major lenders in the affordable housing segment such as Aadhar Housing Finance Ltd, Motilal Oswal Home Finance, and Mahindra Rural Housing Finance.

Aadhar Housing was the largest affordable housing loan lender with assets under management of ₹19,294 crore as of March, followed by Aavas Financiers Ltd with ₹16,604 crore and Shriram Housing Finance Ltd with ₹11,859 crore, as per data from the National Housing Bank.

In comparison, PNB Housing Finance’s affordable and emerging market loans cumulatively stood at ₹13,478 crore, of which affordable home loans were ₹1,790 crore.

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Analysts expect even an incremental growth in corporate loans to help PNB Housing’s retail book too.

“The company is expected to focus on growing its retail book primarily and any new loans in the corporate book would be to indirectly aid its retail book," HDFC Securities Ltd said in a note earlier this month, adding that PNB Housing has also enhanced its loan collections and introduced digital channels to streamline the process.

PNB Housing Finance is India’s fifth-largest housing finance company, with total assets of ₹72,371 crore, as per March data from the sector apex regulator, the National Housing Bank.

PNB Housing's shares, as of 13 September, had gained 45% since 1 January, while market leader LIC Housing Finance Ltd had gained about 28% and Aadhar Housing about 40% in the same period.

A shrinking commercial segment

PNB Housing began shrinking its corporate loan portfolio in 2020-21 and 2021-22 to reduce its exposure to high-ticket bulky wholesale loans and improve its asset quality.As a result, the share of its corporate book fell to 3% of its total assets under management (AUM) in March 2024 from 21% in March 2019.

The lender’s back to building up its corporate book, although gradually. PNB Housing disbursed ₹34 crore in corporate loans in the April-June quarter, taking its total corporate portfolio to ₹1,829 crore as of 30 June.

Importantly, the segment had zero non-performing assets, or loans turned sour, at the end of June, compared with a gross NPA ratio of 3.31% in the preceding March quarter and 24.99% a year earlier.

PNB Housing’s overall gross NPA ratio was 1.35% and net NPA ratio 0.92% at the end of June.

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“The corporate book is a very small proportion, 2.5% of the entire portfolio. We plan to enter corporate in a small way; in the next few months we will be starting. But it would always be less than 10% of the loan book at any given point in time," Kousgi said.

Commercial mortgage, commonly referred to as developer or project finance, is offered by most banks and housing finance companies. However, delays in project completions and builder defaults led to elevated bad loans for lenders prior to the pandemic years.

Since then, most lenders including LIC Housing Finance, India’s largest housing finance company, have worked to, or were forced to, reduce their exposure to such projects.

Sudipto Sil, chief financial officer of LIC Housing Finance, during the first-quarter earnings call with analysts said that the company’s loans to developers or builders had declined over the past three years.

“Year-on-year there is a decline of almost 26-27% on the portfolio, and it has not increased significantly. Bottoming out has happened between December 2023 and March-June 2024," Sil said in the call, adding that LICHFL’s share of builder loans had dropped to around 2% of its total book.

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Big opportunity in small loans

PNB Housing’s total retail assets under management were at ₹65,157 crore at the end of June, of which the prime segment was ₹50,825 crore, emerging markets was ₹11,971 crore, and affordable housing, 2,361 crore. Kousgi is working on flipping this around.

PNB Housing’s average loan size in the affordable segment is ₹13 lakh, followed by ₹25 lakh in the emerging market segment, and ₹35 lakh for prime loans.

“We have vacated super prime and are slowly reducing prime… Two years back, we were predominantly present in super prime and prime segments. Then we started affordable housing loans, and the book is now about ₹2,500 crore. We are scaling up that book fast," he said.

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PNB Housing’s overall retail loan disbursements in the June quarter were 19% higher on year at ₹4,363 crore, of which 33% were contributed by the emerging markets and affordable housing segments, Kousgi said, adding that the lender aims to increase this to 40-42% by the end of March.

The lender’s emerging market business is expected to grow by 18-20% and the prime segment by about 10% in the ongoing financial year, Kousgi added.

The on-book portfolio of affordable housing finance companies grew 29% in 2023-24 to ₹1.1 trillion as of March 2024, accounting for 14% of the overall home loan industry assets, ICRA Ltd said in a report last month, adding that it expects this portfolio to grow by 22-24% in this financial year.

“The overall (retail) mortgage industry growth rate is about 13.5% and affordable is 19%. But the overall industry is about ₹34 lakh crore ( ₹34 trillion), of which affordable-focused companies have built a book of a little over ₹1 lakh crore," Kousgi said. “So the opportunity is huge. We have been growing quite well."