While recent policy changes in India have mitigated the liquidity pressure facing some of the housing finance companies, nonbank mortgage lenders may not see a significant turnaround unless the government rolls out more measures to boost demand for homes, experts say.

The Reserve Bank of India announced new policies in October that would expand the funding sources for housing finance companies. The policy goal is to revive mortgage demand by lowering interest rates through increasing the pool of available funds for lending.

The central bank, which took over regulation of nonbank mortgage lenders last year, will allow them to partner with banks for lending under a plan that was only applicable to systemically important NBFCs when it was introduced in 2018. Also, the RBI introduced a new way to calculate mortgage risk in relation to loan-to-value ratios, which allows both banks and nonbanks to set aside less provisions and lend more.

Some housing finance companies, especially the smaller ones, have have facing a shortage of funds, as investors became more averse after the government took over debt-laden Infrastructure Leasing & Financial Services Ltd.

The government said on Nov. 12 that it would spend 180 billion rupees on an urban housing plan, in addition to the 80 billion rupees announced in the budget for the fiscal year ending March 2021. It also offered tax incentives for builders and home buyers as it seeks to use housing as a vehicle of support to the economy and for employment generation.

"We are already seeing a positive impact of the measures announced by RBI and the Government on the real estate sector. However, in wake of the challenges the sector is facing, more handholding is required," Rajani Sinha, chief economist and national director of research at the property consulting firm Knight Frank, told S&P Global Market Intelligence.

India's residential property market has shown signs of recovery in the third quarter, after home sales in the nation's top eight cities fell to their lowest levels in a decade in the first half of 2020, according to Knight Frank India. According to Sinha home sales in those cities recovered to around 50% of pre-COVID levels in the July-September period. The amount of loans sanctioned and disbursed were both higher year-over-year in September, according to a Nov. 5 statement by the National Housing Bank, which refinances mortgage lenders.

India's GDP contracted 7.5% on year in the July-to-September quarter, pushing the economy into its first technical recession on record. However, the decline was shallower than street estimates, prompting analysts at Nomura and United Overseas Bank to upgrade their growth estimates for the year.

Lower risk charge

Shobhit Agarwal, CEO of Anarock Capital, which advises on real estate funding, said the RBI's move to relax rules on the ratio of loan a borrower can take to fund a property versus its value will reduce risk charges for lenders, and thus free up more capital for lending.

"It will [increase] banks and HFCs' [ability] to disseminate larger amount of credit into the industry and the margin from [the] customer side [will] gradually reduce, which eventually will help the overall sector," Agarwal said.

Knight Frank's Sinha agreed that the reduction of loan-to-value ratios will likely boost mortgage lending.

"At a time when corporate loan growth is slow, banks and [nonbank financial institutions] are relying hugely on retail loan growth to drive business. Amongst retail loans, home mortgage is considered to be a safer asset class to lend to," she added.

More support is needed

However, experts say more policies measures, such as cutting stamp duty charges, are needed to lure more buyers back to the home market.

"The various duties paid by real estate developers are very high. State governments need to come forward and provide incentives to buyers of homes." Rusmik Oza, head of fundamental research at Kotak Securities, said in an email to Market Intelligence.

"The purchase of a home is among the highest discretionary expense for an individual, and does temper down in times of economic downturns or shocks," Oza said.

He added that Covid-19 will likely result in a 35% drop in demand for residential real estate in the fiscal year ending March 2021. It would be worse than the 21% drop in sales seen in the 12 months after the Modi government abruptly outlawed high-denomination bank notes in November 2016 in an effort to check black money, he said.

Sinha added: "Reduction in stamp duty rates across states and allowing input tax credit on GST for real estate will provide further boost to housing demand.”

For instance, the reduction in stamp duty in Maharashtra state has resulted in a big jump in housing sales in markets like Mumbai, she said. "The data for Mumbai shows that the state government’s revenue collection from registration has also not got adversely impacted," he added.

As of Nov. 27, US$1 was equivalent to 74.03 Indian rupees.