Mumbai: Affordable housing lenders are increasingly luring borrowers with promises of future reductions in loan repayments as competition intensifies in the January-March quarter and firms rush to meet year-end credit targets, according to analysts.
According to analysts, affordable housing lenders are at a disadvantage, as policy interest rate cuts by the central bank have not translated into a meaningful reduction in their borrowing costs. Moreover, competition for small home loans has risen, pushing some of these financiers to adopt aggressive marketing strategies. Industry leaders said the aggressive push is not limited to affordable housing finance companies (HFCs), while some acknowledged there could be instances of mis-selling.
“Competition in the January-March quarter is always high in every industry, including housing finance companies, because every company has an annual target. A lot of action is seen during this quarter,” Deo Shankar Tripathi, executive vice-chairman at Aadhar Housing Finance, said.
Assets under management of affordable housing finance companies stood at ₹1.7 trillion in September 2025, which forms 15% of the total outstanding housing finance credit for non-banking financial companies (NBFCs) and HFCs, according to a report by Icra in January.
The affordable housing segment typically refers to homes priced below ₹45 lakh, and loans of ₹5-25 lakh extended to low-income and self-employed borrowers who fall outside the traditional mortgage market.
A report by Ambit Capital on 10 March found that some lenders are pitching potential interest rate cuts to customers within six to twelve months of loan disbursal to ease equated monthly installment (EMI) burdens. However, such promises may not always materialise. The Reserve Bank of India (RBI) has lowered the policy repurchase rate by 125 basis points (bps) since February 2025 to 5.25%, and is now expected to keep the rates unchanged over the next few bi-monthly monetary policy reviews.
“One of the common trends that emerged from ground interactions is that customers are being told about a potential reduction in loan rates 6-12 months after disbursal, which would ease the EMI burden. One of the experts admitted that this is being done only to lure the customer to get the loan, whereas the actual reduction rarely happens,” the Ambit report said.
Intense competition among affordable housing finance companies has also led to a willingness to stretch underwriting norms, the report said, adding that affordable HFCs’ risk-taking appetite remains elevated, given signs of over-estimating customers’ loan serviceability and underwriting shortcuts.
Industry experts believe that such aggressive customer acquisition strategies are partly driven by margin pressure and rising competition in the housing loan market.
“Majority of the housing loans are on floating rate basis, either based on an external benchmark or on an internal benchmark. This leads to housing financiers facing pressure on the lending yield side, while banks are not commensurately reducing funding cost towards them,” Siddharth Goel, director of non-banking financial services at Fitch Ratings, said.
“So, they face margin pressure unlike the non-mortgage non-banking financial institutions (NBFIs), whose lending interest rates are primarily fixed and consequently have the ability to be flexible about it. To retain market share, some housing financiers may adopt aggressive marketing strategies in an already highly competitive housing loans market,” Goel said.
However, some housing financiers have argued that selling floating-rate loans with the possibility of future rate cuts is not inherently misleading, because such products are directly linked to benchmark rates.
“Almost 90-95% of entire home loans, not only affordable but also in the prime segment, are on a floating rate basis, so conceptually and factually, it is correct,” a senior executive at a private housing finance company said on the condition of anonymity.
EMIs on loans linked to floating rates may rise or fall when interest rates change.
Asset quality concerns
While Ambit Capital’s report shows cautious sentiment on asset quality in affordable home loans, housing finance officials say recent results present a mixed picture.
Miscommunication with clients in initial stages of underwriting including potential EMI cuts and aggressive estimates on future income generation are one of the reasons for early signs of caution among portfolio quality of housing financiers.
“While the past 3-4 years saw very good business volumes, the last 1 year saw moderation in growth due to tighter underwriting. The elevated bounce rates/overdues are likely a direct outcome of the higher risk taking by the industry in the last few years,” the report said.
For example, the gross stage-3 assets of Home First Finance Co has risen to 2% as of 31 December, against 1.9% a quarter ago and 1.7% a year ago. India Shelter Finance Corp also saw its gross stage-3 assets rise to 1.54% against 1.2% a quarter and a year ago.
However, large housing finance companies such as Aadhar Housing Finance saw its quality largely stagnant, with gross stage-3 at 1.42%, unchanged from last year and lower than 1.47% a quarter ago. Gross stage-3 assets is an accounting term for bad loans held by NBFCs and financial institutions.
Beyond marketing practices, analysts have also warned that the borrower profile in affordable housing could make the segment vulnerable to economic shocks. Borrowers are often self-employed or small-business owners whose incomes are more volatile.
“An impact on asset quality on the affordable housing segment could stem from the SME and self-employed borrower profile, given they may face pressure from the economy such as rise in input costs and impact on their product demands due to uncertain geopolitical issues,” Goel said.