Markets have been on a wild ride ever since the Reserve Bank of India announced a surprise rate hike on May 4.
While the benchmark Nifty50 index has shed around 9% since then, individual housing finance companies have cracked up to 36%.
Investors have shunned housing finance companies, or HFCs, amid fears that sharp rise in interest rates, and higher inflation can dent the housing demand in the near-term.
This, in turn, may have a trickle-down effect on the demand for home financing.
Yet, analysts believe fundamentally strong HFCs would be able to tide over the rate hike cycle better even as they partially absorb increased interest rates.
Speaking to Business Standard Parag Jariwala – Director (Investments), WhiteOak Capital Management] said, bigger HFCs like HDFC, LIC Housing have pricing power. They can pass on rate hikes as cost of funds stay competitive. Some HFCs have floating rate assets and fixed rate liabilities, he said. Margins may be protected.
Home loan rates stood at around 6.5% in April 2022, and have risen above 7% now.
However, analysts believe they are still within comfortable limits, thus protecting buyers’ interest.
That said, analysts warn that HFCs, which cater to the price-sensitive segment of affordable housing, may see some margin erosion in the short-to-medium term.
Ashish Khandelia, Founder, Certus Capital & Earnnest.me said, home loan business is highly competitive. Many players shift their books towards retail from corporate lending, he said. Some HFCs may partially absorb rate increase, impacting margins.
Kotak Institutional Equities expects affordable HFCs under their coverage to witness 10 to 70 bps YoY decline in net interest margin in FY23, and further 20 to 100 bps in FY24.
According to the brokerage, “While there is headroom for increased rates, most affordable HFCs did not pass on the benefit of lower rates to borrowers. Hence, they may be slow in passing on rate hikes”
Overall, financials will remain on investor radar in the immediate future, as credit recovery will be a keenly watched to gauge the health of the economy.
On Friday, Japan’s inflation data, US home sales data and stock-specific action, back home, will guide the markets.
 "Mid, small-sized HFCs may bear the brunt of rising interest rates")
