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LIC Housing Fin: Safe shelter

Sanjiv Shankaran

LIC Housing Finance (LICHF) is the second biggest player in the market for housing loans. The stock has produced smart returns over last year, so much so that investors may have got better returns by investing in LICHF than in some technology companies. The company currently trades around Rs 35.

The market for housing loans is perhaps the safest- least risky- sector in the financial sector. Housing Finance Companies (HFCs) generally target the retail borrower where the nature of the loan ensures that defaults are few and far between. The relativ ely small size of a housing loan also ensures that risk is well spread out.

While low-risk is a big advantage to HFCs, the strong linkage, the construction industry has to critical industries such as cement and steel, ensure that the Government is sympathetic to requests for benefits. Over the last two years, on the heels of sig nificant tax benefits and a regime of softening interest rates, the market for housing loans has grown fast.

LICHF's disbursals on housing loans have grown at a compound annual rate of about 21 per cent in the last three years to touch Rs 1,313 crore as on March 2000. The company's income has grown by about 17 per cent over the same period to record Rs 645 cro re in 1999-2000.

In this environment for HFCs, the market for housing loans has seen new entrants. Therefore, the existing HFCs face the challenge of shrinking realisation for each housing loan. With the entry of new players, some of whom have access to a huge resource b ase, HFCs have seen the spread (difference between the interest expense paid and income earned) gradually decline.

The impact of the increasing competition is captured by the decline LICHF's return on net worth (RONW) over the last three years. The RONW was about 23.65 per cent in 1998. By March 2000, the RONW had declined to 21 per cent. Given the growing competitio n, the profitability of operations is unlikely to increase in the near future.

While the phase of high profitability may have ended, the risk in the housing finance business may decline further. Early this year, Parliament approved amendments to foreclosure laws that may make it easier for HFCs to repossess assets of borrowers who fail to honour their obligations.

Simply put, the housing finance market will be characterised by low returns and low risk. The market is likely to be dominated by a handful of players with a big resource base and wide reach.

LICHF is likely to stay in the league of dominant players in the medium-term. By virtue of being one of the earlier entrants in the market for housing loans LICHF has the established distribution network and brand awareness to capitalise on the huge pote ntial that continues to exist in the sector.

Recently the company announced that it intends to get into housing construction business. It may better to reserve judgement on the issue till the more concrete details of the move are in public domain.