About Bajaj Housing Finance Limited

Bajaj housing Finance Limited is a non-deposit taking Housing Finance Company (“HFC”), registered with the National Housing Bank (“NHB”) since September 24, 2015, and engaged in mortgage lending since Fiscal 2018. They have been identified and categorized as an “Upper Layer” NBFC ("NBFC-UL”) in India by the RBI since September 30, 2022, as part of its “Scale Based Regulations (SBR): A Revised Regulatory Framework for NBFCs” dated October 22, 2021. 

They offer financial solutions tailored to individuals and corporate entities for the purchase and renovation of homes and commercial spaces. Their mortgage product suite is comprehensive and comprises (i) home loans; (ii) loans against property (“LAP”); (iii) lease rental discounting; and (iv) developer financing. Furthermore, their primary emphasis is on individual retail housing loans, complemented by a diversified collection of lease rental discounting and developer loans. Consequently, their financial products cater to every customer segment, from individual homebuyers to large-scale developers.

To support their offerings, they had a network of 215 branches as at June 30, 2024, spread across 174 locations in 20 states and three union territories, which are overseen by six centralized hubs for retail underwriting and seven centralized processing hubs for loan processing. Their diversified reach helps them meet the specific needs of their target customers across geographies, in urban as well as upcountry locations.

They use direct and indirect channels for origination of loans. For example, they source direct business through strategic partnerships with developers, self-sourcing by customer engagement, leveraging leads from digital ecosystem and partnership with digital players. Under indirect sourcing channels, they originate business through a distribution network of intermediaries such as channel partners, aggregators, direct selling agents, third party agents and connectors. Simultaneously, a direct-to-customer ("D2C”) strategy empowers them to maintain control over the customer experience thereby enabling them to maintain consistency in their services while personalizing their customer experience. This hybrid model, leveraging both intermediaries and direct engagement with customers allows them to cater to various customer preferences and increase their market presence.

They have recently, on December 22, 2023, registered ourselves as a corporate agent with the Insurance Regulatory and Development Authority of India (“IRDAI”), enabling them to expand their suite of insurance products to include life, general, and health insurance.

LANDSCAPE OF NBFCS IN INDIA
The Indian financial system includes banks and non-banking financial companies (NBFCs). Though the banking system dominates financial services, NBFCs have grown in importance by carving a niche for themselves by catering to customers in underbanked regions or those who would not be catered to by traditional financial institutions, due to absence of credit history or lack of proper collateral records.

In January 2021, the RBI had proposed a tighter regulatory framework for NBFCs by creating a four-tier structure with a progressive increase in regulation intensity in a discussion paper titled ‘Revised Regulatory Framework for NBFCs - A Scale-based Approach’. Based on the inputs received, in October 2021, the RBI put in place a revised regulatory framework for NBFCs, which is in effect from October 2022. 

As per the RBI’s Scale-Based Regulation for NBFCs framework, the regulatory and supervisory framework of NBFCs should be based on a four-layered structure depending on their size, activity, and perceived riskiness: base, middle, upper, and top layers. 

The base layer NBFCs will be similar to current non deposit taking NBFC NDs and will consist of NBFCs having asset size less than Rs. 10 billion. The middle layer will consist of all non-deposit taking NBFCs having asset size more than Rs. 10 billion and all deposit taking NBFCs irrespective of their asset size. The upper layer will consist of selected set of NBFCs, specifically identified by RBI, which are significant from the point of view of systemic risk spill over and therefore required to be subjected to tighter regulations.

The RBI has taken a balanced view, and instead of going for a one-size-fits-all approach, it has opted for differential regulations based on the size and systemic importance of an NBFC. Furthermore, the importance of NBFCs in providing credit to underserved customers has been recognised. The RBI has not proposed imposition of CRR and SLR on NBFCs, which would come as a relief to NBFCs.

On June 6, 2022, the RBI released a circular aligning provisioning for standard assets by NBFCs in the upper layer as per RBIs scale-based regulations with that prevalent with the banks, which would be effective from October 1, 2022. The impact of the norms is unlikely to be material as most large NBFCs already maintain Stage 1 and Stage 2 provisioning, which is comfortably higher than the required levels.

Systemic credit to grow at 13-15% CAGR between Fiscal 2024-Fiscal 2027
Corporate credit determines the growth in overall credit as it accounts for nearly two-third of systemic credit. The slowdown in economic activity, coupled with heightened risk aversion among lenders, tightened the overall credit growth to approximately 6.3% in Fiscal 2021. In Fiscal 2022, the systemic credit growth picked up steam despite the second wave of COVID-19 hurting economic growth in the first quarter of the fiscal. The retail credit has been a strong driving force behind the growth in overall credit. Retail credit witnessed a growth of 10% year on year during Fiscal 2021 and 14% during Fiscal 2022, while non-retail credit grew at a slower pace of 3% and 9% during Fiscal 2021 and Fiscal 2022. The systemic credit grew at 10.3% in Fiscal 2022 to reach approximately ₹161 trillion. The growth was mainly driven by the budgetary push towards investments, pick-up in private investment, and business activities. In Fiscal 2023, systemic credit showed strong growth at 12.8% year on year on back of pent-up retail demand. In Fiscal 2024, credit growth was healthy at 14.1% year on year on the back of disbursements to the retail segment, resilient demand for home and vehicle loans and supported by the services segment with healthy demand from NBFC’s and trade segments. 

Going forward in Fiscal 2025, loan growth in the retail segment although normalizing is expected to remain the top credit growth driver supported by focussed approach of banks in expanding their retail portfolios. The normalization is due to moderation in credit growth of unsecured credit owing to RBI’s risk weight circular. CRISIL MI&A projects systemic credit to grow at 13-15% between Fiscal 2024 and Fiscal 2027.

The retail credit (includes Housing finance, Vehicle Financing, Gold Loans, Education Loans, Consumer Durables, Personal loans, credit cards and microfinance) in India stood at ₹ 75 trillion, as of Fiscal 2024 which rapidly grew at a CAGR of 15% between Fiscals 2019 and 2024. Retail credit growth in Fiscal 2020 was around approximately 12% which came down to approximately 9% in Fiscal 2021. However, post-pandemic, retail credit growth revived back to reach approximately 13% in Fiscal 2022. In Fiscal 2023, retail credit has grown at approximately 22% year on year basis due to strong growth in retail book of private banks as compared to public banks. Retail credit grew at 20% in Fiscal 2024 supported by steady demand in underlying assets like housing, auto and growth in credit card and personal loans growth driven by consumption. The Indian retail credit market has grown at a strong pace over the last few years and is expected to grow further at 14-16% between Fiscal 2024 and Fiscal 2027 with risks evenly balanced. Moreover, the increasing demand and positive sentiments in the Indian retail credit market, presents an opportunity for both banks and NBFCs to broaden their investor base. However, RBI’s risk weight circular, sustained inflation and increase in lending rates could play spoilsport in the retail credit growth.

The credit growth of NBFCs which has trended above India’s GDP growth historically, is expected to continue to rise at a faster pace. NBFCs have shown remarkable resilience and gained importance in the financial sector ecosystem, growing from less than Rs 2 trillion AUM at the turn of the century to ₹ 41 trillion at the end of Fiscal 2024. Between Fiscals 2019 and 2024, NBFC credit is estimated to have witnessed a growth at CAGR approximately 11%. Rapid revival in the economy is expected to drive consumer demand in Fiscal 2025, leading to healthy growth in NBFCs. 

Going forward, CRISIL MI&A expects NBFC credit to grow at 15-17% between Fiscal 2024 and Fiscal 2027 driven by growth in retail segment, and MSME loans in the wholesale segment continuing to be the primary drivers.

NBFC credit to grow at 15-17% between Fiscal 2024 and Fiscal 2027
NBFC’s share in systemic credit is estimated to have increased from 12% in Fiscal 2008 to 20% in Fiscal 2024. Overall, consolidation in certain corporate groups and other corporate activities indicate buoyancy in the NBFC space and expectations of healthy credit growth. 

CRISIL MI&A believes that NBFCs will remain a force to reckon within the Indian credit landscape, given their inherent strength of providing last-mile funding and catering to customer segments that are less in focus by the Banks. Going forward, NBFCs are expected to continue to gain market share over other lenders due to their ability to provide flexible lending solutions and tailored services, focused approach to tap under-served and niche customer segments, ability to penetrate deeper into geographies, leveraging technology to reimagine the lending process, strong origination skills and shorter turnaround time.

With high focus on retail loans, NBFCs are driving financial inclusion
While banks are the primary institutions for banking in India, retail loan portfolio forms only 34% of the overall banking credit as of Fiscal 2024. Other focus areas for banks are wholesale lending to large corporates, credit to services sector and agriculture sector. Lower presence of banks in the retail space has created an opportunity for NBFCs to penetrate the segment which has also led to greater financial inclusion as NBFCs also cater to riskier customer profiles with lower income. Compared to that of banks, NBFC credit to retail segment forms more than 48% as of Fiscal 2024 of its portfolio indicating larger focus on retail customers. Rural areas, presents vast market opportunity for NBFCs. NBFCs have played a major role in meeting this need, complementing banks and other financial institutions. NBFCs help fill gaps in the availability of financial services with respect to products as well as customer and geographic segments. A strong linkage at the grassroots level makes them a critical cog in the financial machine. They cater to the unbanked and underbanked masses in rural and semi-urban India and lend to the informal sector and people without credit histories, thereby enabling the government and regulators to realize the mission of financial inclusion. 

The NBFC sector has, over the years, evolved considerably in terms of size, operations, technological sophistication, and entry into newer areas of financial services and products. The number of NBFCs as well as the size of the sector have grown significantly, with several players with heterogeneous business models starting operations. The increasing penetration of neo-banking, digital authentication, and mobile phone usage as well as mobile internet has resulted in the modularization of financial services, particularly credit. Overall NBFC credit during Fiscals 2019 to 2024, is estimated to have witnessed a CAGR of approximately 11% which was majorly led by retail segment which is estimated to have witnessed a CAGR of approximately 14%, while NBFC non-retail credit is estimated to have witnessed a growth of approximately 9% during the same period. 

Going forward, growth in the NBFC retail segment is expected at 14-16% from Fiscal 2024 to Fiscal 2027 which will support overall NBFC credit growth, with continued focus on the retail segment and multiple players announcing plans to reduce wholesale exposure.

Regulatory Initiatives in the Housing Finance segment
The Union Budget 2019-20 announced the transfer of regulatory power on housing finance companies (HFCs) from National Housing Bank (NHB) to the Reserve Bank of India (RBI). This has resulted in streamlined regulations and implementation as well as better risk management framework for HFCs. The RBI Act was amended to give the central bank powers to regulate HFCs. This move was expected to ensure there is greater parity in regulations for NBFCs and HFCs

The RBI has increased (under the notification released in June 2018) eligibility for priority sector lending (PSL) in housing loans with a view to converge PSL guidelines with Pradhan Mantri Awas Yojana (PMAY). The eligibility has been increased from ₹ 2.8 million to ₹ 3.5 million for metropolitan centers and from ₹ 2 million to ₹ 2.5 million for other centers. The cost of dwelling units has been capped at ₹ 4.5 million in metropolitan centers and at ₹ 3 million in other centers. The on-lending limits given to NBFC/HFCs from Banks was also raised from ₹ 1 million to ₹ 2 million. 

Under the eligibility criteria prescribed by the National Housing Bank under The Refinance Scheme under Affordable Housing Fund for the Fiscal 2022 (“Refinance Scheme”) read with paragraph 12.1(i) of the Master Directions – Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2020 (“PSL Master Directions”), individual housing loans with a ticket size lower than ₹ 2.5 million in non-metropolitan areas are considered as affordable housing loans. Furthermore, paragraph 12.1(i) of the PSL Master Directions sets out that loans up to ₹ 3.5 million to individuals in metropolitan centres (with population of one million and above); and up to ₹ 2.5 million to individuals in other centers, for the purchase or construction of a dwelling unit, per family, will be eligible for priority sector classification, provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹ 4.5 million and ₹ 3.0 million, respectively.

OVERVIEW OF HOUSING FINANCE MARKET OF INDIA
The Indian housing finance market clocked a healthy approximately 13.1% CAGR (growth in credit outstanding) from Fiscal 2019 to Fiscal 2023, on account of rise in disposable incomes, healthy demand, and greater number of players entering the segment. Over the past two Fiscals, housing finance segment has seen favourable affordability on account of stable property rates and improved annual income of individual borrowers. The overall housing finance segment credit outstanding is approximately ₹ 33.1 trillion as of Fiscal 2024, which increased during Fiscal 2024, the overall housing market grew 15.2%, led by the aspirations of a growing young population with rising disposable income migrating to metro cities and elevated demand in Tier 2 and 3 cities as well. Demand for home loans remained largely unscathed despite a sudden rise in repo rates. Moreover, the income of the salaried class remained largely intact despite the economic slowdown caused by the Covid-19 pandemic and rise in inflation, thereby allaying lenders' concerns about any deterioration in asset quality. 

Going forward, Crisil MI&A expects overall housing segment to grow at a CAGR of 13-15% from Fiscal 2024 to Fiscal 2027. The Government of India has been pursuing various social welfare schemes and initiatives to enhance the flow of credit to the housing sector and increase home ownership in India.

Among major ticket-size brackets, Prime housing segment (Loans above ₹ 5.0 million) witnessed the fastest growth from Fiscal 2019 to Fiscal 2024, growing at a CAGR of 20.2% which was followed by loans in the mass market housing segment (loans between ₹ 2.5 to ₹ 5.0 million) which grew at a CAGR of 15.8% and affordable housing (loans less than ₹ 2.5 million) growing at a rather slow pace of 5.9% during the Fiscals. 

Market share for ticket brackets, in value terms was equally distributed as at Fiscal 2024, with prime housing segment accounting for 35% market share, followed by affordable housing segment accounting for ~33% share and mass market housing with 32% market share.

In Fiscal 2020, GNPAs of the overall housing loan portfolio increased sharply from 1.6% to 2.3% due to slippages as consumer perception of the general economic situation, employment scenario, and household income had plunged. Continuing consumer pessimism and lockdowns in Fiscal 2021 further impacted self-employed customers and micro, small, and medium enterprises. 

Housing finance companies also faced asset-quality challenges, leading to a peak rise of approximately 60 bps in GNPAs to 3.9% in Fiscal 2021. Subsequently, the asset quality of the overall housing finance improved to 2.3% in Fiscal 2022, and 1.9% in Fiscal 2024, led by economic recovery, pent-up credit demand, and government schemes such as the Liquidity Infusion Facility Scheme, the Affordable Housing Fund and other measures announced under the ambit of the Atma Nirbhar Bharat Package. 

Among lenders, private sector banks had the highest asset quality, with 90+ DPD at approximately 1.05%, followed by public sector banks at approximately 1.61%. 90+ DPD for housing finance companies stood at approximately 4.28% as at Fiscal 2024.

OVERVIEW OF PRIME HOUSING FINANCE MARKET IN INDIA
Prime housing finance market in India is defined by loans above ₹ 5.0 million in ticket size, the market has witnessed a CAGR of 20.1% from Fiscal 2019 – Fiscal 2024, to reach ₹ 11.5 trillion from ₹ 4.6 trillion in Fiscal 2019, the growth witnessed by prime housing finance market during the Fiscals has been faster than the growth in overall housing finance market of India, during Fiscal 2019 – Fiscal 2024, overall housing witnessed a CAGR of 13.1%.

Urban regions accounted for the highest share of Prime housing finance credit outstanding in Fiscal 2024, with a share of approximately 77%, witnessing a CAGR of approximately 1.8%, followed by rural regions with approximately 11% share and semi-urban regions with 6.4% share. Among major tier brackets, semi-urban regions witnessed the fastest growth with a CAGR of approximately 30%, followed by rural regions with 28% CAGR and urban regions with 18% CAGR during Fiscals 2019-24.

OVERVIEW OF AFFORDABLE HOUSING FINANCE MARKET IN INDIA (<₹ 2.5 MILLION)
As per Refinance Scheme under Affordable Housing Fund for Fiscal 2022 issued by the National Housing Bank, read with the Master Directions–Reserve Bank of India (Priority Sector Lending–Targets and Classification) Directions, 2020.” Housing Loans with a ticket size of less than ₹ 2.5 million are considered as Affordable Housing Loans.

The overall size of the affordable housing finance market in terms of loan outstanding was ₹ 10.9 trillion as at Fiscal 2024, constituting around 33% of the overall housing finance market. Public Sector Banks have the highest market share of approximately 45% in the Affordable Housing finance segment. Housing Finance Companies accounted for approximately 27% of the market followed by Private banks with market share of approximately 25%. 

Between Fiscal 2019 and Fiscal 2024, the growth in the affordable housing loans has remained subdued, with the segment having witnessed a CAGR of 5.9% as compared to overall housing loans, which has grown by approximately 13.1% during the same time. This can be primarily attributed to a slowdown in economic activity, funding challenges due to NBFC crisis and the Covid-19 pandemic. Further, rise of hybrid work model and working from home along with rising propensity to spend merged with rising standard of living due to rising incomes of individuals has led to an increase in demand for bigger residential homes. As a result, the sale in affordable housing took a beating whereas high-end and mid-segment housing gained the maximum in the last couple of years. 

In Fiscal 2021, with the onset of pandemic in the first half of the Fiscal, it had a disproportionate impact on the segment’s EWS and LIG customers vis-a-vis the overall segment that caters to salaried individuals, whose incomes have been relatively stable. However, with faster-than-expected recovery in the second half because of the central and state government measures, proactive measures by RBI and tax sops with low interest rates led to growth in the affordable housing segment. 

The segment growth was again curtailed by the pandemic’s second wave in the first quarter of Fiscal 2022, leading to localized lockdowns by the state governments, which affected economic activities in tier II and III cities. But continued assistance from the government and the central bank, supported by higher demand for housing, and continued penetration in tier II and III cities by affordable HFCs helped the segment recover and bounce back.

LOAN AGAINST PROPERTY (LAP)
LAP is availed by mortgaging a property (residential or commercial) with the lender. LAP is a secured loan, as it provides collateral to the financier in the form of the property. Its interest rate is lower than personal or business loans. It could be used for either business or personal purposes. It can be availed by both salaried and self-employed individuals. For all these reasons, LAP has become popular among borrowers in recent years. The financiers offering housing loans, also provide LAP loans primarily due to synergies between the two products, higher yields offered by LAP, while continuing to cater to similar customer profile, collateral requirement, and ticket size.

The overall Loan against property segment market size has expanded from ₹ 5.1 trillion as of Fiscal 2019 to ₹ 10.9 trillion as of Fiscal 2024. The growth in this segment is attributed to increasing financial penetration and an increase in the number of players in the targeted market. Overall LAP portfolio witnessed a growth of 9.3% year-on-year in Fiscal 2021, owing to slowdown in the economic activity and pandemic induced lockdown imposed by the government. In Fiscals 2023 and 2024, the overall LAP portfolio grew by 17.9% and 16.9% year-on-year respectively on account of improved economic conditions and normalization of business activities. Going forward, CRISIL MI&A expects overall LAP portfolio to grow at 13-15% CAGR between Fiscal 2024 and Fiscal 2026 aided by increasing lender focus and penetration of such loans, enhanced availability of data increasing lender comfort while underwriting such loans, enhanced use of technology, newer players entering the segment, and continued government support.

OVERVIEW OF REAL ESTATE FINANCING AND LEASE RENTAL DISCOUNTING
Over the past few Fiscals, non-banking financial companies’ (NBFCs) lending to the real-estate sector has undergone a considerable change in terms of size, complexity, and interconnectedness with the financial sector. Majority of housing finance companies (HFCs) are downsizing their real-estate portfolios due to asset quality concerns, but few are actively expanding and have been able to do well owing to prudent credit quality and monitoring, diversified portfolio books and quality customer sourcing strategy. 

In recent years NBFC’s real estate financing credit book to change directions owing increasing developer’s penetration in the Indian markets. In the top 10 residential real estate cities, during Fiscal 2021 to Fiscal 2023, the overall unsold inventory level continued to decline sequentially. Developers were restricting new launches during Fiscal 2021 (Covid-19 pandemic year) and were cautious even during Fiscal 2022. In post-pandemic environment where hybrid mode of work is established, consumer preferences have pivoted towards larger and bigger configurations in premium housing projects. In sync with this trend, large established developers have also gradually aligned their new launches to premium projects. 

Top residential markets witnessed strong momentum in the past few Fiscals supported by sustained economic growth and continuation of hybrid working models, growth is expected to continue in Fiscal 2025 primarily due to necessity for larger living spaces and an enhanced lifestyle, catalysed by the pandemic.

The commercial real estate market is expected to grow and expand supported by the healthy growth of Indian corporate and start-up ecosystem and their need for office space, strong office leasing trend and advent of the global capabilities centers (GCCs) of the multinationals. The overall supply and demand in the top 7 cities are expected to reach 59.1 million square feet (msf) and 56.8 msf respectively in Fiscal 2025.

BAJAJ HOUSING FINANCE LIMITED COMPETITIVE STRENGTHS
1. Distinguished heritage of the “Bajaj” brand, which enjoys widespread recognition as a reliable retail brand with strong brand equity
2. Second largest HFC in India (in terms of AUM) with a track record of strong growth driven by a diversified portfolio
3. Strategic presence with omni-channel sourcing strategy, driven by customer-focused digitization initiatives and technology
4. Well defined credit evaluation and risk management practices resulting in lowest GNPA and NNPA among our Peers in Fiscal 2024
5. Access to diversified and cost-effective borrowing sources facilitated by the highest possible credit ratings from rating agencies
6. Experienced management team supported by a team of dedicated professionals and ability to attract and retain talented employees

BAJAJ HOUSING FINANCE LIMITED STRATEGIES
1. Continue to leverage technology and analytics to enhance productivity, reduce expenses, improve customer experience and manage risks
2. Diversifying and strengthening market presence with strategic customer focus and comprehensive risk management
3. Continue to diversify their borrowing profile to optimize borrowings costs
4. Continue to attract, train and retain talented employees

BAJAJ HOUSING FINANCE LIMITED RISK FACTORS & CONCERNS
1. If they are unable to comply with the requirements stipulated by Reserve Bank of India, it could have a material adverse effect on their business.
2. Their assets under management are concentrated in four states and the union territory of New Delhi and any adverse developments in these regions could have an adverse effect on their business.
3. Their inability to comply with the financial and other covenants under their debt financing arrangements could adversely affect their business.
4. Their portfolio is significantly exposed to real estate and any downturn can adversely affect their business.
5. They may face interest rate and maturity mismatches between thei assets and liabilities in the future, including in the near term, which may cause liquidity concerns.
6. A majority of their retail home loan portfolio may be adversely affected by various factors such as business failure, insolvency, lack of liquidity, loss of employment or personal emergencies of their customers.
7. They are subject to periodic inspections by the National Housing Bank.
8. They are exposed to risks related to concentration of loans to certain customers.
9. They conduct their operations under the “Bajaj Finserv” brand and have a license to use that brand name and certain other trademarks and any failure to renew their intellectual property licence agreements.
10. They are exposed to risks of increased commercial real estate vacancies in their lease rental discounting portfolio and regulatory and other challenges faced by developers in relation to their developer financing portfolio.
11. The bankruptcy code in India may affect their rights to recover loans from their customers.