RBI Rate Cut Boosts Affordable Housing Financiers, But Sustainability in Question
Affordable housing finance companies (HFCs) have seen a significant boost following the Reserve Bank of India's (RBI) recent 50-basis-point rate cut. However, experts caution that the impact on housing demand might not be as substantial as anticipated.
Rbi Rate CutAffordable HousingHfcsHousing DemandMortgage RatesReal Estate NewsJun 11, 2025
It’s because in a low-interest rate regime, affordable HFCs are likely to offer better returns compared to prime or super prime lenders, according to experts.
“The affordable space is niche and relatively less competitive, as there are no banks present in that segment,” Anusha Raheja, research analyst at Dalal & Broacha Stock Broking Pvt. Ltd, told Mint. “Hence, they will face lower NIM (net interest margin) pressures compared to the prime or super prime segments going ahead.”
Nonetheless, Harsh Madhusudan Gupta, manager of Ionic Asset’s PIPE fund, said the RBI’s latest policy move should benefit most HFCs in general. “It should be incrementally accretive for their earnings per share and book value per share estimates, despite the fact that the move is to some extent just front-loading the overall rate cuts.”
Catering to prime or super-prime borrowers puts housing financiers in direct competition with banks, given that this is a relatively safer lending pool. Now that the RBI has slashed the repo rate to 5.5%, banks will also reduce their repo-linked home loan interest rates soon, compelling HFCs to follow suit even if their borrowing costs don't fall immediately. This will likely squeeze the profitability of prime and super prime HFCs a bit harder, Raheja added.
Affordable housing financiers' funding costs are high, and they charge higher interest as they have a riskier borrower profile and lower quality of collateral. But since the National Housing Bank subsidizes most of their funding costs, they end up earning higher margins and higher return on their assets.
Moreover, the government’s credit-linked subsidy scheme reduces borrowers’ liabilities by subsidizing the principal portions of their loans. This reduces the credit risk for lenders, making the overall business model profitable.
The Union government announced the Pradhan Mantri Awas Yojna (PMAY) 2.0 in its 2025 budget to provide 20 million additional houses to the poor in the next five years. With renewed impetus from the government and the RBI’s latest monetary policy move, the market now has enough liquidity to boost home loan volumes at a much faster pace in 2025-26.
“The affordable and mid-income housing segments are highly rate-sensitive, and borrowers here are quick to respond to lower EMIs,” said Atul Monga, chief executive and co-founder of BASIC Home Loan, a fintech company offering home loans to semi-urban and under-served borrowers.
“With the repo rate cut translating into reduced home loan (interest) rates, we anticipate stronger traction in affordable housing loans compared to corporate or prime segments,” he added.
However, experts also caution against an overestimation of incremental housing demand in response to the latest monetary policy actions, as residential housing demand has already been growing at a solid pace so far.
“Affordable HFCs have been growing at 30%-plus growth rates. I doubt if they will start growing at 40% after the rate cuts,” Dalal & Broacha’s Raheja said.
Apart from slashing interest rates to 5.5%, the RBI cut the cash reserve ratio (CRR) by 100 basis points to 3%, which is expected to infuse an additional ₹2.5 trillion in the economy.
While this will partly offset NIM pressures arising from the latest repo rate cut and help in faster monetary policy transmission to the credit market, residential housing demand is likely to normalize on a high base, said Tanvee Gupta Jain, chief India economist at UBS.
“That said, we think the housing demand cycle could be extended based on mortgage rate cuts and improved consumer sentiment,” she added.
However, Raheja noted that mortgage rate cuts might not always translate to commensurately higher loan volumes, as job security and income growth also remain key deciding factors in availing home loans, particularly for the poor.
To be sure, wage growth in urban India has been in a slow lane for a while now. Wage bill growth of BSE 500 companies was stuck between 4-6% year-on-year throughout 2024-25, against a 12% on-year rise in 2023-24, said a recent Nuvama Institutional Equities report.
But as the market largely ignores any demand concerns for now, IIFL Finance emerged as an outperformer among all major non-banking financial companies (NBFCs), rising almost 7% in the last three days. Majority of IIFL’s loan book is secured, comprising housing (40%) and gold loans (27%), and until recently its stock was trading at a substantial discount to its peers.
This was mainly because the RBI had imposed a ban on its gold loan business back in March 2024, citing governance issues in the company. Even though the ban was lifted in September 2024, its stock price did not react sharply to the development back then.
Experts believe the RBI’s latest monetary policy decisions might have triggered a potential re-rating of the stock.
Frequently Asked Questions
What is the impact of the RBI's 50-basis-point rate cut on affordable housing finance companies?
The RBI's 50-basis-point rate cut has boosted the stocks of affordable housing finance companies (HFCs) by around 6-7% in the last two trading days. This is because in a low-interest rate regime, affordable HFCs are likely to offer better returns compared to prime or super prime lenders.
Why are affordable HFCs less competitive compared to prime or super prime lenders?
Affordable HFCs are less competitive because there are no banks present in the affordable segment, making it a niche market. They face lower NIM (net interest margin) pressures and benefit from government subsidies, which reduce credit risk and make the business model more profitable.
How does the government's credit-linked subsidy scheme benefit affordable housing financiers?
The government’s credit-linked subsidy scheme reduces borrowers’ liabilities by subsidizing the principal portions of their loans. This reduces the credit risk for lenders, making the overall business model more profitable for affordable housing financiers.
What is the potential impact of the RBI's rate cut on housing demand?
While the RBI's rate cut is likely to boost housing demand, experts caution against overestimating its impact. Residential housing demand has already been growing at a solid pace, and job security and income growth are key factors in availing home loans, particularly for the poor.
Why did IIFL Finance outperform other NBFCs following the RBI's monetary policy decision?
IIFL Finance emerged as an outperformer among all major non-banking financial companies (NBFCs), rising almost 7% in the last three days. This was mainly due to the RBI’s latest monetary policy decisions, which might have triggered a potential re-rating of the stock. Additionally, IIFL’s loan book is largely secured, comprising housing and gold loans.
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