Rate cut is dependent on when banks decide to lower their rates: Pankaj Gadgil of Aditya Birla Housing Finance 

Aditya Birla Housing Finance has doubled its loan book from Rs 13,000 crore to Rs 26,700 crore over two years. Approximately 93-94% of the company’s new disbursements have been made to borrowers with a credit score above 700, underscoring a strong emphasis on credit quality.

In an interview with Teena Jain Kaushal, the Managing Director and CEO of Aditya Birla Housing Finance, Pankaj Gadgil discussed the market conditions post the Reserve Bank of India’s (RBI) recent rate cut and the company’s future outlook.

How long will it take for the repo rate cut to be passed on to borrowers?

A: For housing finance companies, the cost of borrowing depends on multiple factors: the cost at which we borrow from banks, our operational expenses, and credit costs. These elements together determine the final rate we offer to customers.

We continuously evaluate opportunities to pass on benefits, but the process is complex. Even if the cost of borrowing remains unchanged, operational efficiencies might allow some reduction. However, if credit costs rise, it could offset any savings.

Currently, 35% of our borrowings are through term loans, 39% via NCDs (Non-Convertible Debentures), 14% from the National Housing Bank (NHB), and a small proportion from the short-term money market. For us to benefit from a repo rate cut, banks need to lower their rates first. Since bank lending rates are linked to various tenures—one month, three months, six months, or one year—transmission takes time. Housing finance companies like ours will only see the benefit once banks adjust their rates accordingly.

So, the rate cut is entirely dependent on when banks decide to lower their rates.

A: Yes, banks play a crucial role. The way deposits are structured impacts rate transmission. Large banks have 20–40% of their deposits in savings accounts, which have fixed interest rates (typically 3% on savings and 0% on current accounts). Fixed deposits are locked for two to three years, meaning immediate changes in repo rates don’t significantly impact their overall cost of funds.
While short-term money market rates fluctuate, they form only a part of a bank’s borrowing structure. This is why changes in repo rates take time to reflect in lending rates. The RBI’s neutral policy stance suggests they want institutions to explore ways to lower rates, but I don’t expect any immediate reduction.
There are multiple loan options available—MCLR, repo-linked loans, and others. As a customer, how do I decide which one to choose? 

Loans are benchmarked to reference rates, and customers can also opt for fixed-rate loans. Some prefer fixed rates, believing the current rate is favourable over a 15–20-year period. However, floating rates tend to be a better option as they adjust to market conditions. Banks are required to benchmark housing loans to an external reference rate, such as the repo rate or T-bill linked rates, ensuring a dynamic adjustment. Housing finance companies, on the other hand, do not have this mandate since they do not take public deposits or offer savings/current accounts. Their rates are determined internally based on borrowing costs, operational expenses, and credit risks.  

As a customer, the key considerations should be the reference rate, the margin charged over the benchmark, any hidden fees, and prepayment flexibility. For home loans, there are no prepayment charges, allowing borrowers to repay anytime without penalties. The regulator has also made the process more transparent, requiring banks, NBFCs, and HFCs to disclose their reference rates publicly so that customers can compare and make informed choices.  

Given the signs of stress in the economy and the spike in unsecured lending defaults, what has been your experience so far?

A: Our portfolio quality remains strong. Among housing finance companies, we are in the top quartile in terms of asset quality, with a gross NPA of just 0.99%. For new disbursements, 94% of our loans are to customers with a credit score above 700. We maintain a conservative underwriting approach, as we believe the return on capital is paramount in the lending business.

Credit score is just one of the many parameters we consider. We have invested significantly in analytics, using proprietary scorecards to assess loan eligibility. Our underwriting process also involves a strong human touch, ensuring a thorough risk evaluation. We continuously monitor existing borrowers’ credit behaviour to identify potential risks. While growth in unsecured lending has slowed recently, we remain vigilant, ensuring strong underwriting standards to maintain portfolio health.

Given the current situation, what kind of demand are you seeing for home loans? 

A: Despite high interest rates, the housing sector has been performing well. Over the last five years, the industry has consistently grown at 14–15% annually, even during COVID-19. Interest rates are just one factor; several other drivers sustain demand.

One key metric is the housing loan-to-GDP ratio, which is currently low at 13–14%. In developed economies, this number is much higher, highlighting India’s housing finance potential. Additionally, the housing shortage remains significant, further driving demand.

Urbanisation is another major factor. More people are moving to Tier-1 and metro cities, expanding urban populations from 30% to nearly 40%. Cities like Ahmedabad, Hyderabad, Delhi, Mumbai, and Pune are witnessing rapid expansion, increasing the demand for housing.

Changing family structures also contribute. Joint families are breaking up into nuclear units, reducing the average family size from 5.5 to around 4.3 members. This means more households need separate residences.

Additionally, the pandemic has changed consumer preferences. People now prefer larger homes to accommodate work-from-home setups, driving up the average ticket size of home loans. With rising disposable incomes and property price increases staying in check, homeownership remains an attractive option.

While lower interest rates would act as a catalyst, the underlying fundamentals ensure that the housing sector continues to thrive.

What are the major challenges for the company?

A: The primary challenge is maintaining a high-quality loan portfolio, ensuring strong underwriting and effective collections. Another key focus is managing liabilities—securing low-cost, stable funding is crucial. While we currently rely on banks, bond markets, and the National Housing Bank for funding, we would be keen to explore deposit-taking capabilities if regulatory approvals allow.

Maintaining brand trust and customer confidence is also vital. As part of the Aditya Birla Group, we prioritise transparency and reliability in all customer interactions.