NewsStocksLarge Housing Finance Companies Face Margin Pressure in Q3 as Banks Cut Home Loan RatesLarge Housing Finance Companies Face Margin Pressure in Q3 as Banks Cut Home Loan Rates
Large housing finance companies face a challenging December quarter with expected margin compression and slower growth due to aggressive bank competition in home loans. Affordable HFCs demonstrate better resilience by maintaining stable prime lending rates and benefiting from lower borrowing costs. While both segments project 11% AUM growth, asset quality remains stable with no significant spillover effects observed.
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Large housing finance companies are bracing for a challenging December quarter, with analysts expecting weaker disbursements, slower asset growth, and significant pressure on profitability margins. The deterioration stems from intensified competition as banks have aggressively cut home loan rates, creating substantial pricing pressure in the prime housing segment.
Divergent Performance Between Large and Affordable HFCs
While large housing finance companies face headwinds, affordable housing finance companies are demonstrating greater resilience. The key differentiator lies in their pricing strategy - most affordable HFCs have refrained from reducing their prime lending rates, helping maintain yield stability and supporting margin expansion.
| Segment | Expected AUM Growth (YoY) | Margin Outlook | Key Factors |
|---|---|---|---|
| Large HFCs | ~11% | Contraction expected | Bank competition, rate cuts |
| Affordable HFCs | ~11% | Expansion likely | Stable PLRs, lower borrowing costs |
Motilal Oswal noted that disbursement momentum for both segments was relatively weaker than earlier expectations, partly due to the concentration of festive holidays during the quarter, which disrupted housing loan origination processes.
Competitive Pressure Intensifies
Banks have turned increasingly aggressive over the past two quarters, offering home loans at significantly lower rates that large HFCs struggle to match. This competitive dynamic has created a challenging environment where large mortgage lenders face net interest margin contraction as pricing pressure weighs heavily on yields.
Affordable HFCs have maintained a more defensive position by keeping their prime lending rates unchanged through December 2025. This strategy, combined with benefits from lower borrowing costs, has supported both spreads and net interest margin expansion for these players.
Individual Company Projections
Analysts have provided specific forecasts for key players in the housing finance sector:
| Company | AUM Growth (YoY) | Margin Impact | Credit Costs |
|---|---|---|---|
| LIC Housing Finance | ~6% | -3 bps (sequential) | ~18 bps |
| Bajaj Housing Finance | ~23% | -5 bps (QoQ) | Not specified |
| HomeFirst | ~25% | +15 bps (sequential) | Not specified |
| Aavas Financiers | ~16% | Not specified | Not specified |
HomeFirst is expected to report approximately 12% year-on-year growth in disbursements, while Aavas Financiers is projected to achieve 15% disbursement growth.
Asset Quality Remains Stable
Despite the challenging operating environment, asset quality trends remained broadly stable during the quarter for both large HFCs and affordable HFCs. Notably, analysts observed no spillover from micro loan-against-property portfolios into affordable housing loans.
However, 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 maintain vigilance for any potential spillover into larger ticket sizes.
Outlook for Recovery
JM Financial expects affordable HFCs 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. The 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.
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