LENDING SUPPORT: The journey from dream to doorway | Photo Credit: Dimple Bhati

For millions of Indians, owning a home is more than just a financial milestone — it’s a source of dignity, stability, and hope for the next generation. Yet, as home prices climb and economic realities shift beneath people’s feet, the path to affordable homeownership is getting trickier for the average Indian family, as also the lenders who serve them.

Changing landscape

Last year tells a compelling story: outstanding home loans surged to ₹40.6 lakh crore, up 13 per cent year-on-year. In FY2025 alone, new home loan originations reached an impressive ₹10.7 lakh crore. Dig deeper, though, and a new trend emerges. While public sector banks increased their market share of value originated by 6 per cent (43 per cent market share), the number of new loans rose just 3 per cent. There is a shift toward high-value loans (₹75 lakh and above).

Frontline of inclusion

Housing finance companies (HFCs), meanwhile, continue to anchor the affordable market, defending a strong 20 per cent share, mainly through sub-₹15 lakh loans. The market for affordable housing in India is expected to be ₹13 lakh crore, according to a CII report.

HFCs operate in segments often underserved by banks, making homeownership accessible to first-time buyers, informal workers, and those in smaller towns and rural India. These borrowers may lack paperwork, credit histories, or regular salaries, but they are the backbone of India’s urbanisation story. The next wave of urbanisation will be driven by small cities, and hence new methodologies are needed to balance credit access, asset quality and sustainable returns.

However, the latest data shows that loans under ₹5 lakh as a share of home loan originations fell to 15.8 per cent in FY25 (from 17.9 per cent a year earlier), reflecting reduced demand or supply of finance at the very bottom.

What keeps HFCs in business is their hands-on, flexible approach: community-based lending, cost-efficient credit checks, on-ground engagement to assess income, and a willingness to take on non-traditional borrowers who might find the doors of big banks closed to them.

Risk and resilience

Serving at the edge of the system means living with higher risk. Delinquency rates — loans overdue by more than 90 days — are about 1.95 per cent for ₹5 lakh loans (and close to 4.94 per cent on early delinquencies), starkly higher than the overall levels seen at large banks, which enjoy delinquency rates under 0.2 per cent.

Even so, HFCs have made real progress: overall delinquencies stand at 0.31 per cent, and improving each year. The risk profile gets safer as loan size increases. For loans above ₹35 lakh, delinquency rates drop to around 0.15 per cent.

How do HFCs make the numbers work with riskier portfolios? By pricing for risk — charging a little more interest — and staying close to their customers, both literally and figuratively. Their business is built on local trust and knowledge.

Industry data confirms this pivot to higher-value lending, with overall origination of sub-₹5 lakh loans shrinking. Yet, the need for affordable finance to the semi-formal and informal sectors remains as urgent as ever. Mainstream financial institutions, with their strict underwriting rules, keep out many hard-working, low-income families. HFCs can serve them only by keeping costs — sourcing, operational and default losses — under tight control.

What needs to change

The answer is not to force banks into the trenches, nor leave HFCs carrying all the risk. Instead, India needs a partnership:

• Allow HFCs to originate and manage small loans (below ₹15 lakh) with their tailored, community-based methods.

• Once these loans “season” and prove stable, let banks refinance or buy these performing pools, supplying liquidity to HFCs and adding safe, diversified assets to their own books.

• Regulators should consider a different yardstick for delinquency and credit ratings in this segment, since low-value borrowers may need longer to recover after shocks.

• Encourage more scalable public-private models that bring together land, infrastructure and finance.

The path forward

For affordable homeownership, India must strengthen the unique role of HFCs.

In the journey from kaccha to pukka, from dream to doorway, let lending follow the heart of the community — and let stability follow success. That’s how the next million Indian homeowners will get their hard-earned keys.

(The writer is Partner-BFSI, Practus)

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Published on August 4, 2025