Affordable, low-ticket home loans show early signs of rise in delinquencies

Affordable and low-ticket housing loans are showing signs of an increase in early-stage delinquencies, given that low-income borrowers’ repayment capability has been impacted due to weaker rural growth and a fall in households’ savings.

“There was a payment shock due to the rising interest rate cycle and multiple increases in interest rates, because of which some affordable segment players are now operating at upwards of 13–14 per cent. There has also been a drop in the savings rate compounded by the noise on small-ticket unsecured loan exposure. All of this has reduced the capacity and capability of servicing debt for the below ₹30 lakh loan segment,” said Kanika Singh, Chief Risk Officer, India Mortgage Guarantee Corporation (IMGC).

Nitin Purswani, CEO at Medius AI, a cloud collection and debt management platform, said that the increase in delinquencies can be attributed to several factors, most notably the slower rural growth and its impact on repayment capabilities.

Early Signs

Early indicators reflect an uptick in delinquencies, especially in the 30, 60, and 90 dpd (days past due) buckets, Singh said, adding that affordable housing NPA levels are around 2–2.5 times the industry average.

Affordable home loan borrowers’ EMIs are estimated to have surged 20 per cent in the last two years. The decline in repayment ability is also reflected in the muted incremental demand for affordable houses.

Fall in sales

According to Anarock Research, the share of affordable homes in overall sales fell 11 per cent y-o-y to 20 per cent in H1 2023. In the top 7 cities, this segment’s share fell to 18 per cent from 23 per cent in H1 2022.

Some industry participants believe the elevated delinquencies are due to temporary financial constraints and should correct in the medium term, led by strong macroeconomic variables and a resurgence in the rural economy. However, others said the issue could extend beyond affordable housing.

“The situation in the low-income and affordable housing segments is concerning. This is a telling sign of broader economic stress and reflects a deeper systemic issue,” Purswani said.

InCred Finance, in its Consumer Finance Review for December 2023, said that a key delinquency metric for affordable home loans is similar to that for regular housing loans, despite the much bigger ticket sizes and tighter credit checks for the latter.

“The widespread industry perception is that housing loans are the safest lending products from a credit risk viewpoint. However, even in this segment, there are risks to be managed,” it said, adding that early delinquency rates on home loans are comparable to unsecured products like credit cards and personal loans, which suggests that lower home loan NPA rates are due to intense collection efforts rather than intrinsic customer quality.