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MUMBAI, 25 August 2025:
The affordable housing finance sector in India is poised for a significant shift. Following a decade of robust growth, firms are now facing moderated expansion along with increasing operational hurdles. According to a recent report by Elara Capital, the ₹13 trillion industry, which had enjoyed a compound annual growth rate (CAGR) of 35-45% from FY15 to FY24, is set to stabilize at a more conservative growth rate of 20-25% for FY25 to FY28. This projected growth rate sits well above the general industry average, which stands at 14-15%.
Rising Challenges in Growth and Operations
The complexities of scaling beyond a loan book of ₹200 billion are becoming evident. Companies in the sector are grappling with slower branch expansion, stagnant employee productivity, and rising attrition rates. Elara Capital notes that operational efficiency is projected to decline, with the operating expenses-to-assets (opex-to-assets) ratio rising to 3.0-3.2% from a previous 2.5-2.8% during FY21-24. The report anticipates a decrease in return on equity by 250-450 basis points, bringing it down to 15-16%. This decline reflects not only escalating costs but also growing competition within the sector.
As an example, consider the case of APTUS Housing Finance, which has managed to build a robust portfolio largely subsidized by non-banking financial company (NBFC) support. Despite the competitive pressures, APTUS might be one of the few companies that could still witness net interest margin growth due to its unique business model.
Margin Pressures and Asset Quality Challenges
While the potential for margin expansion exists, it may not be fully realized due to competition and diminishing operating leverage. Asset quality pressures are also on the horizon, with Stage 2 loans expected to rise to 3.0% from the current 2.5%. As credit costs are forecasted to increase modestly, companies need to prepare for a tougher landscape ahead.
Home First Finance is among those identified as best positioned to navigate these challenges, thanks to its solid operational framework and market positioning. APTUS Housing Finance has received a Buy rating from Elara Capital, which suggests that it could be an attractive proposition for investors despite the pressures accumulating in the sector.
Valuation Concerns and Investment Strategies
The report suggests that valuations in the affordable housing finance sector have become stretched relative to the underlying fundamentals. With many firms adopting homogeneous business models and enhanced technology solutions, the competitive moats that once protected these companies are beginning to narrow. Elara Capital’s proprietary dashboard distinctly ranks APTUS Housing Finance at the top, followed by Home First Finance and Aadhar Housing Finance. Furthermore, Aavas Financiers has seen its rating upgraded from Reduce to Accumulate, a signal that investors should consider selective opportunities within this evolving landscape.
As firms transition from a period of rapid growth to one of steady momentum, strategic geographic expansion and productivity improvements are expected to be vital for sustaining returns. For instance, an investment in digital platforms could allow housing finance companies to optimize their services, reaching underserved markets and streamlining operations. These moves could mitigate some of the challenges posed by rising costs and tightening margins.
Looking Ahead: A Steady Path for Affordable Housing Finance
The future of affordable housing finance in India is undoubtedly changing, with new dynamics at play. Companies that can adapt to these operational challenges while maintaining growth will be better positioned to thrive. Industry players must be vigilant in their strategies, balancing the need for expansion with the realities of a more competitive environment.
For readers interested in navigating the complexities of the affordable housing sector or investing in finance-related ventures, staying updated on market trends will be essential. As strategic decision-making becomes increasingly critical, stakeholders should keep an eye on firms like APTUS and Home First Finance that are taking steps to adapt and succeed.
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Original source: bfsi.economictimes.indiatimes.com
