Affordable housing now accounts for 68% of active home loans in India, led by expansion in smaller cities. However, the sector faces a new challenge today following the Reserve Bank of India's decision to increase the repo rate by 25 basis points. Investors should watch how higher borrowing costs impact home loan demand and lender profit margins.
Affordable housing has emerged as the engine of India’s retail credit growth, currently making up 68% of all active home loans in the country. This segment has become the primary entry point for first-time borrowers, with growth increasingly driven by Tier II and Tier III cities rather than saturated urban metros. While this expansion is significant, the environment for lenders has shifted today following the Reserve Bank of India’s decision to increase the repo rate by 25 basis points to 5.50%. This change signals a move away from the recent low-interest period, directly increasing the cost of funds for banks and housing finance companies.
Housing Finance Companies (HFCs) have been central to this growth, capturing a 31.4% market share by August 2026. These lenders have successfully used digital underwriting and alternative data to reach customers who previously lacked formal credit histories. By focusing on smaller administrative hubs, HFCs have outpaced many traditional banking institutions in reaching these underserved regions. However, the rising repo rate presents a new hurdle for these firms. As their own borrowing costs from banks and market sources rise, HFCs will face pressure to either pass these costs to customers or absorb them, which could compress their profit margins.
To balance these pressures, lenders are increasingly shifting their focus toward high-yield products. Data shows that many HFCs are expanding their portfolios into Micro Loan Against Property (LAP) categories. These assets often provide better interest margins compared to standard home loans, helping lenders protect their bottom line in a rising rate environment. While the overall asset quality of the affordable housing sector has shown resilience, particularly in the ₹10–25 lakh loan segment, caution remains necessary for the sub-10 lakh category. This segment is often more sensitive to economic shocks and carries a higher risk of delinquencies, especially if borrowers become over-leveraged.
The next phase for the sector will be defined by how well companies navigate this rate-sensitive climate. Investors should track three primary monitorables: the impact of higher interest rates on new loan demand, the ability of HFCs to maintain their net interest margins, and the ongoing performance of their loan books in the smaller-ticket segments. As the industry moves into this phase of calibrated monetary tightening, the focus is shifting from aggressive growth to maintaining a healthy balance between lending volumes and asset quality.