Cholamandalam Investment & Finance Co, an Indian financier for vehicles, is persisting with its plan to set up a mortgage-finance unit undeterred by a credit crunch that is roiling shadow banks in the nation.
“A housing finance subsidiary will help the company grow its loan book faster,” said Cholamandalam’s Executive Director Arun Alagappan. “The company will target buyers of low-cost homes and offer loans of as much as Rs 15 lakh ($21,000),” he said.
Prime Minister Narendra Modi’s administration has pledged to build homes for poor Indian families by 2022. A government plan to provide benefits including interest subsidies has seen a surge in funding for affordable homes and lured buyers and financiers such as Cholamandalam, even as the collapse of Infrastructure Leasing & Financial Services Ltd (IL&FS) led to a cash squeeze at shadow lenders.
“We see a huge opportunity,” Alagappan said. “We are doing loans where we have the capability to underwrite loans.”
India plans to build 10 million houses in urban areas by 2022. It managed to build 2.64 million until August 13, according to data available from the Ministry of Housing and Urban Affairs. That compares with a shortage of 18.78 million homes in towns and cities, and 43.67 million in rural areas, according to the National Housing Bank.
Risks and benefits
“Cholamandalam will transfer its Rs 2,600 crore housing loan portfolio to the new housing subsidiary once it gets its license,” Alagappan said.
The housing finance license will also help Cholamandalam take advantage of refinancing options from National Housing Bank, which supervises housing finance companies.
There are other incentives as well. Under the government’s Pradhan Mantri Awas Yojana for urban areas, the state will subsidise interest on mortgages of as much as Rs18 lakh.
Still, bad loans are the highest among borrowers who have taken loans of up to Rs 2 lakh, according to the NHB. Soured debt is lowest in the Rs 10 lakh to Rs 25 lakh.
Meanwhile, a malaise that has hit luxury homes has started afflicting affordable property as well — unsold inventory. At the end of June, nine major cities in India had more than 4,00,000 low-cost units priced below 45 lakh that could not be sold, according to data available with PropTiger.com.
Mortgage finance companies including Dewan Housing Finance Corp (DHFL) and Indiabulls Housing Finance Ltd have had their credit rating cut. Mumbai-based Dewan has been trying to sell-off assets to raise funds, while its shares have tumbled.
“Even at the time of crisis when we went to banks for fund raising, we did not have any issues of raising money,” Alagappan said. “For more than 20 quarters, Cholamandalam hasn’t had an asset liability mismatch, which has been the cause for trouble for many non-bank firms,” he said.