Whalesbook
The affordable housing finance sector has encountered significant headwinds in the second quarter of fiscal year 2026 (Q2FY26), marked by a substantial increase in early-bucket delinquencies and bounce rates climbing to 20-22% across lenders. According to Elara Securities, this trend is likely to keep credit costs elevated, projected at 35-50 basis points over FY26-FY28, which is considerably higher than the typical 20-30 bps range that previously supported high returns.
The deterioration in loan performance is attributed to weakening repayment behavior among borrowers with loans under Rs 10 lakh and the broader impact of softer cash flows in semi-urban markets. Slower disbursement trends have also emerged, with lenders reporting uneven borrower income cycles and increased rejection rates during loan screening. The operating environment is now described as significantly different from the stable periods that fueled the sector's earlier expansion.
Company-specific data reveals clear signs of stress. Aadhar Housing Finance saw its 1+Days Past Due (DPD) rise to approximately 7% in Q2FY26. India Shelter Finance reported a sharp increase in its 30+DPD to 4.7%, up from 3.1% in Q4FY25. Home First Finance also experienced a rise in 30+DPD to 3.7%. Aptus Value Housing Finance has been relatively more insulated, though Elara cautioned that no lender is entirely shielded if bounce rates persist. Aavas Financiers showed stable early-bucket patterns but softer disbursement performance in certain regions.
Impact
The report indicates that credit costs are set to reset higher structurally. While net interest margins may remain steady for some lenders, they are unlikely to fully offset the combined drag from slower growth and increased provisioning. The sector's growth outlook is expected to moderate to 17-20% between FY25 and FY28, down from a previous CAGR of nearly 35%. Valuations across the affordable housing cohort have seen a modest correction, signaling investor caution regarding the sector's prior credit-cost assumptions. The upcoming quarters will be critical, with collection behavior and early-stage delinquency metrics providing key signals for future credit cost trends.
Rating: 8/10
Difficult Terms Explained:
Early-bucket delinquencies: Loan payments that are overdue in the initial stages of the loan term, indicating early signs of repayment trouble.
Bounce rates: The percentage of checks or electronic payments that fail to clear, typically due to insufficient funds or other technical issues.
Credit cost: The expense incurred by a lender due to loan defaults or potential losses, usually expressed as a percentage of the total loan portfolio.
Basis points (bps): A unit of measurement used in finance, equal to one-hundredth of one percent (0.01%). For example, 100 bps equals 1%.
Disbursement trends: Refers to the rate and volume at which lenders are issuing new loans.
Borrower segment: A specific group of customers categorized by their income levels, financial profiles, or loan requirements.
Semi-urban markets: Areas that are located between rural and major urban centers, often characterized by developing infrastructure and mixed economic activities.
1+DPD (Days Past Due): A metric indicating loans where the payment is one day or more overdue.
30+DPD (Days Past Due): A metric indicating loans where the payment is 30 days or more overdue, often considered a more serious indicator of default.
Provisioning: The practice of setting aside funds to cover anticipated losses from bad loans or other financial risks.
Net interest margins (NIMs): The difference between the interest income generated by a financial institution and the interest it pays out to its lenders, relative to its interest-earning assets.
CAGR (Compound Annual Growth Rate): The average annual growth rate of an investment over a specified period of time, assuming that profits were reinvested.
Stage 3 levels: Refers to loan assets classified as non-performing assets (NPAs) according to accounting standards, indicating significant default risk.