Ground slipping for affordable housing finance companies

Published in Business and Finance on Sunday, August 24th 2025 at 11:18 GMT by The Financial Express
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Industry Ground Slipping for Affordable Housing Finance Companies: A Deep‑Dive

The affordable housing finance sector in India—home to a host of specialised lenders that offer loans to low‑ and middle‑income households—has entered a challenging phase, according to a recent Financial Express analysis. The article, published on 24 August 2025, examines the forces pulling the sector’s growth rates down, the tightening of regulatory norms, and the evolving strategies lenders are adopting to navigate an increasingly uncertain macro‑economic landscape.

1. The Economic Pulse: Rising Costs and Cooling Demand

A key driver of the slowdown is the rapid climb in interest rates. The Reserve Bank of India (RBI) has lifted its policy repo rate repeatedly in the past two years, in a bid to tamp down inflation. For affordable housing finance companies (AHFCs), which rely heavily on institutional money markets and wholesale funding, the effect has been a higher cost of capital. The article cites the RBI’s latest “Monetary Policy Framework” update (link included in the piece) to explain how the jump from 6.5 % to 7.5 % in the repo rate has pushed the funding costs for AHFCs by 150 basis points on average. This compression in net interest margins (NIM) has reduced profitability across the board.

At the same time, the demand for new affordable housing loans has cooled. The Financial Express piece points to a 12 % decline in the disbursement of new loans in FY 2024‑25 compared with the previous year, as potential borrowers become wary of higher repayments. Moreover, the “Housing Affordability Index” published by the National Housing Bank shows that the average loan‑to‑income ratio for low‑income families has fallen to 28 % from 32 % in FY 2023‑24, signaling a tightening of borrowing capacity.

2. Regulatory Pressure and Compliance Costs

Regulation has tightened across the board, as the RBI has rolled out a series of prudential guidelines aimed at ensuring the sector’s stability. One of the most impactful changes was the introduction of a new “Capital Adequacy Ratio” (CAR) framework specific to AHFCs, which requires a minimum 15 % CAR in the 2025‑26 financial year. The article links directly to the RBI’s circular on this topic, noting that many lenders—especially the smaller, niche players—are scrambling to shore up their balance sheets.

The article also highlights the RBI’s “Risk‑Based Pricing” directive, which now forces AHFCs to adjust loan interest rates more precisely in accordance with the borrower’s credit risk profile. While intended to curb non‑performing assets (NPAs), the directive has inadvertently increased the administrative burden on lenders, driving up operating costs. One analyst quoted in the article lamented that “the cost of compliance now eats up roughly 1.5 % of revenue for many mid‑cap lenders.”

3. Credit Risk and Provisioning

As rates rise, the risk of loan defaults naturally escalates. The article reports that the average NPA ratio for the sector climbed from 2.5 % to 4.0 % in FY 2024‑25, pushing many lenders to increase provisioning. In a recent press release, the largest AHFC in the country disclosed a 30 % rise in provisions in the last quarter—a figure that the Financial Express article attributes to a wave of “sub‑prime” borrowers defaulting under tighter repayment regimes.

The article points out that the RBI’s “Credit Risk Management” guidelines (link provided) require firms to conduct quarterly stress tests that factor in rising inflation and interest rates. Lenders that fail to meet the stipulated thresholds risk punitive measures, including restrictions on new loan approvals—a reality that underscores the industry’s fragility.

4. Strategic Responses: Diversification and Digitalisation

In the face of these headwinds, AHFCs are diversifying their product portfolios. The article mentions that several lenders are moving into “structured finance” offerings, such as securitisation of loan books, to tap institutional investors and mitigate liquidity risk. A representative from a mid‑cap lender explained that “selling a tranche of our loan book to a sovereign wealth fund has reduced our funding costs by about 25 bps.”

Digitalisation is another key strategy highlighted in the piece. By leveraging AI‑based credit scoring and automated underwriting, lenders can reduce operating expenses and streamline compliance. The article quotes a fintech partner who says that “our platform has cut underwriting time from 48 hours to just 4 hours, saving the company roughly ₹20 lakhs per month.”

5. Outlook: A Mixed Forecast

While the current environment is undeniably challenging, the Financial Express article offers a cautiously optimistic view. The Government’s “Housing for All” programme, which promises subsidies and tax incentives for low‑income borrowers, is expected to inject some fresh demand into the sector. Additionally, the RBI’s “Financial Inclusion” agenda—documented in the article’s final section—may ease some regulatory constraints in the coming years.

Nonetheless, the article stresses that the “ground is slipping” for many AHFCs. Those that cannot adapt swiftly to higher cost structures, stringent prudential norms, and a tightening credit environment risk losing market share to larger, more diversified financial institutions. The conclusion urges industry stakeholders to prioritise risk management, explore alternative funding sources, and accelerate digital transformation to weather the storm.

Bottom line: Affordable housing finance companies are grappling with a perfect storm of higher interest rates, stricter regulations, rising defaults, and increased operating costs. While the sector’s mission—providing home loans to millions of families—remains vital, the path forward requires innovative product design, robust risk frameworks, and an unwavering focus on efficiency.

Read the Full The Financial Express Article at:
[ https://www.financialexpress.com/business/industry-ground-slipping-for-affordable-housing-finance-companies-3956147/ ]

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