Lower rates to weigh on large housing finance companies in Q3 – News Air Insight

Mumbai: Large housing finance companies (HFCs) are likely to report weaker-than-expected disbursements, slower assets under management (AUM) growth and pressure on margins for the December quarter, as banks have intensified competition by offering home loans at sharply lower rates.

In contrast, affordable housing finance companies (AHFCs) are expected to hold up better on margins, having largely refrained from cutting their prime lending rates (PLRs), which has helped keep yields stable, analysts said.

“For housing finance companies, disbursements and AUM growth were slightly weak, but asset quality remained stable,” brokerage Motilal Oswal said in a report. “Banks have turned more aggressive over the past two quarters, offering home loans at significantly lower rates. Disbursement momentum for both large HFCs and affordable HFCs was relatively weaker than earlier expectations, driven partly by the concentration of festive holidays during the quarter, which disrupted housing loan origination.”

Motilal Oswal estimates AUM growth of around 11% year-on-year for both large and affordable HFCs. However, large mortgage lenders are expected to see a contraction in net interest margins (NIMs) as pricing pressure in the prime housing segment weighs on yields.

Affordable HFCs, meanwhile, are better placed on profitability. Most AHFCs have not reduced their PLRs until December 2025, supporting spreads and NIM expansion, aided further by the benefits of lower borrowing costs.

“Affordable HFCs are likely to see a gradual pickup in disbursement momentum from the weakness witnessed in the first half of 2025, although growth may remain below historical levels,” JM Financial said in a note. “Margin improvement is becoming visible for smaller players as borrowing cost benefits are now being reflected, while asset-side yields have remained stable or declined only marginally. Although incremental rates in non-prime home loans have softened, yields are holding up in low-ticket non-housing loans, partly due to concerns around asset quality.”

Asset quality trends were broadly stable during the quarter for both large HFCs and AHFCs, with no spillover from micro loan-against-property (LAP) portfolios into affordable housing loans, analysts said. JM Financial cautioned that several affordable HFCs have flagged stress in select pockets and non-housing segments. While pressure remains largely confined to small-ticket loans, analysts said they remain watchful for any spillover into larger ticket sizes.

Motilal Oswal expects LIC Housing Finance to report credit costs of around 18 basis points, with margins contracting by roughly 3 basis points sequentially and loan growth of about 6% year-on-year. Bajaj Housing Finance is expected to post AUM growth of around 23% on-year, with margins contracting by about 5 basis points quarter-on-quarter.

For affordable lenders, the brokerage estimates HomeFirst will report around 12% year-on-year growth in disbursements, translating into AUM growth of roughly 25%, with NIM expansion of about 15 basis points sequentially. Aavas Financiers is projected to report disbursement growth of 15% and loan growth of 16% year-on-year.