Banks will take away more home-loan market share from housing finance companies (HFCs) in FY23, a report said on Wednesday.

This is despite HFCs seeing a 10-12% growth in assets under management in the current financial year compared to an 8% rise in FY22, rating agency Crisil said in a report. 

The faster growth in AUM will, however, not be sufficient for the HFCs to hold on to market share as banks have turned very aggressive on home loans, which could grow 15% year-on-year.

HFCs have already ceded 400 basis points market share to banks over the last four fiscals. The banks’ share has increased to 62% of the home-loan market as of March 2022, the agency said.

“The ability of HFCs to compete with banks in the traditional salaried-home-loan segment remains a challenge given their relatively higher funding costs. And in the non-home loan segments (developer financing and LAP), which have been yield kickers, HFCs’ exposure has reduced in the past few years, which has put pressure on overall spreads," Crisil said in its report

The trend of banks gaining market share is unlikely to reverse in the near term. The merger of the largest pure play home financier HDFC with HDFC Bank will only expand the banks' market share, it said.

HFCs will grow relatively faster in affordable housing loans, where competition from banks is limited. The segment will see a 18-20% growth in assets in FY23.

The agency said the core home loans segment for HFCs will grow at 15 per cent in FY23, while the growth in developer financing and loans against property will continue to be muted.

Given the challenges like thin spreads, tightening regulatory conditions and lack of depth in the corporate bond market, HFCs will need to realign their business models, the agency said.

According to Crisil, HFCs are expected to increasingly partner with banks so that both the entities are able to leverage on each other's strengths to grow their books. Already, there are some examples of this. It will lead to faster growth in AUM, though the on-book growth in assets will be lower.

Last fiscal, HFC growth was a story of two halves which included a stunted growth of 2% on an annualised basis in the first half because of the second wave of the pandemic, followed by a 14% growth on an annualised basis in the second half.

The home loan segment, which is nearly three-fourths of the HFC AUMs, grew 11% last fiscal on the back of better affordability, improved income visibility after resumption of economic activity, higher demand in urban areas bolstered by migration of service sector workforce back to base locations, and increased preference for home ownership, the agency said.