Housing Development Finance Corp. Ltd (HDFC) has perhaps reaped the best of the benefits from the government’s push to the housing market. The operating metrics of the home loan lender for the December quarter clearly show how small loans have driven the game.

On an asset under management basis, the company’s loan book grew 18%, after the 14-15% growth seen in the last four quarters. That translated to a healthy growth of 14% in net interest income and excluding the one-time gain of Rs3,675 crore it made by selling a stake in its life insurance business, HDFC’s profit grew 17%.

The bulk of the loan growth is driven by home loans to individuals belonging to the economically weaker and low-income groups. The mortgage lender saw 39% of its disbursals during the December quarter come from the economically weaker section and another 32% from the low-income group.

These two categories of borrowers are the biggest beneficiaries of government-sponsored schemes under the Pradhan Mantri Awas Yojana.

HDFC saw its individual loan book growth bounce back to 19% due to these two categories and the management understandably believes this would sustain. That is a rate not seen for more than three years now because of a steady slowdown in the lender’s individual loan book growth.

Loan disbursals to individuals is the bedrock of HDFC’s business and the fact that growth here has quickened should please investors. Of course, it also means that spreads have come under pressure as the high margin corporate loan book has, in fact, shrunk slightly during the December quarter.

There are two pitfalls of this kind of growth. Given that individual loans garner a lower spread coupled with the fact that interest rates were being reduced for the last two years, there is a hit on spreads. The spread on individual loans narrowed to 1.91% from 2.02% a year ago, bringing down the overall spread by five basis points to 2.29%. A basis point is 0.01%.

Another warning sign should be asset quality. A recent report by the Reserve Bank of India pointed out the fact that non-performing assets are the highest as a percentage of loans given to borrowers in the economically weaker and low-income groups.

So far, HDFC has managed to keep a check on its asset quality and it believes that small loans are not bad loans. Focusing on these segments for growth is perhaps a good strategy for the company. But the mortgage leader needs to keep its eye on asset quality. HDFC has the wherewithal and the experience to do so, and will be richly rewarded it if keeps a check on its bad loans.

The satisfaction of investors was evident from the 2.66% gain in the mortgage lender’s shares after the results. While the HDFC stock trades at a multiple of over four times estimated book value for the current fiscal year, consistent performance would ensure these valuations don’t change.

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