What is the best place to find out the intimately linked story of a troubled real estate sector and the liquidity crunch non-bank finance companies have found themselves in since last year?

The answer is the balance sheet of the largest non-bank lender to housing. The adjoining chart shows how cautious HDFC Ltd has turned on non-individual housing loans. In other words, HDFC has been going slow in lending to real estate developers over the last several quarters. For housing finance companies such as HDFC, it was a question of prudence but for many others it was simply a question of having no money to lend because of funding channels being choked.

Nevertheless, for HDFC the strategy seems to have worked in protecting its balance sheet. HDFC’s asset quality stayed pristine compared with other industry players even though it did not impress compared with its own historic performance. Gross bad loans rose marginally to form 1.33% of total loan book predominantly due to slippages in the non-individual book. Vice chairman and chief executive Keki Mistry said that loan disbursals growth was led by individual borrowers with non-individual book growing by a measly 3%. “97% of incremental growth in loan book was due to individual loans," Mistry said.

Of course, the stellar 60% jump in net profit for the September quarter was mainly due to one-time gains and increase in dividends from subsidiaries including the most valued HDFC Bank. HDFC booked a gain of ₹1627 crore through its stake sale in erstwhile subsidiary Gruh Finance.

But surely there is a flipside to the focus on affordable loans and retail lending. That flipside is the deceleration in its loan book and the contraction in margins. HDFC’s loan book growth was 13%, a far cry from the average of 17% seen in previous years. Indeed, the deceleration is driven by its non-individual loan book. Another factor in turning your back to developers is the sacrifice on margins. But HDFC has managed to keep the margin erosion to the minimum. Spread on loans was 2.26% for the September quarter, marginal erosion from 2.28% a year ago.

Investors need to watch how long the lender can keep its margins from eroding especially when its developer book is hardly growing. HDFC has been able to maintain margins perhaps partly due to the edge it has in borrowing costs. Compared with its peers, HDFC has enjoyed lower cost of borrowing as its bonds are priced aggressively in the market.

Times may be tough but mortgage lender HDFC Ltd has showed it is tougher, at least so far. That said, HDFC needs to pull through a slowing economy the pain point of which is the real estate sector. Success in this will ensure investors maintain the premium on its stock.


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