India Ratings and Research (Ind-Ra) has maintained a neutralsector outlook and a Stable rating Outlook for housing finance companies (HFCs), driven by the improving operating conditions, strengthening of funding profiles and calibrated portfolio diversification.

The agency expects the operating environment for HFCs to remain favourable over the medium term, aided by a benign interest rate cycle and transmission of policy rate cuts by the Reserve Bank of India (RBI). This is likely to result in a moderation of cost of funds, particularly for HFCs with a higher proportion of bank borrowings linked to external benchmark lending rates (EBLR), thereby supporting their net interest margins and profitability.

With the interest rate cycle turning favourable, HFCs have an opportunity to strengthen their liability profile by tapping capital markets through longer-tenor non-convertible debenture (NCD) issuances. This will help lock in competitive rates, stabilise the cost of funds, and improve asset-liability management, particularly for higher-rated HFCs with an established market access.

“As per Ind-Ra’s expectations, policy rate cuts by the RBI should moderate funding costs for HFCs, with benefits dependent on liability repricing cycles and competitive pressures, offering some support to spreads and NIMs in the near-to-medium term. The asset quality remains broadly stable with a slight uptick in 1HFY26. The ability to balance growth with asset quality amid a portfolio shift toward affordable housing and LAP will be a key monitorable,” says Karan Gupta, Head and Director Financial Institutions, Ind-Ra.

Ind-Ra expects the profitability to be increasingly driven by on-balance sheet growth, as HFCs gradually reduce their reliance on direct assignments. Improving capitalisation and comfortable liquidity buffers are expected to support higher asset retention on balance sheet. While assignment transactions may continue to be used as a liquidity or risk management tool, their contribution to the overall profitability is likely to moderate.

The sector is also witnessing a gradual increase in exposure to loans against property (LAP), including affordable LAP products with lower ticket sizes, offering yield enhancements and customer cross sell opportunities. However, a sharp increase in the share of LAP portfolio in the overall mix, without a commensurate strengthening of risk controls could exert pressure on asset quality.

Overall, the agency expects the asset quality across HFCs to remain stable, supported by the secured nature of the underlying loan portfolio, conservative loan-to-value ratios and normalised credit costs. The ability of the HFCs to balance growth, margin expansion and asset quality amidst a portfolio shift towards affordable housing and LAP segments will remain a monitorable.

Large-ticket HFCs with strong institutional backing continue to benefit from scale, financial resilience and operational efficiency, enabling them to drive AUM growth through geographic diversification, cross-selling synergies, targeted product positioning, and effective capital mobilisation. The segment witnessed an average 13.2% yoy loan book growth in 1HFY26 and 15.1% in FY25. Ind-Ra believes large-ticket HFCs will grow 13.5% yoy in FY26 and 13.0% yoy in FY27. The outlook for prime HFCs remains Stable, reflecting resilient asset quality, adequate capitalisation and stable funding profiles. The asset quality is supported by a pre-dominantly salaried borrower base, calibrated LTV ratios and seasoned portfolios, resulting in stable delinquency levels and normalised credit costs (historically, credit costs have remained below 0.75% for the segment). The recent policy rate cuts by the regulator are expected to support the housing demand and lend stability to residential property prices in key urban markets.

Ind-Ra expects the affordable housing segment to grow around 20.7% yoy in FY26 and at 20.9% in FY27. Historically, growth in the affordable housing segment has been volume-led; however, recent trends indicate a shift toward value-driven growth, with disbursement sizes now 15%-30% higher than the average ticket size for affordable HFCs.

The outlook for affordable housing finance companies remains Stable, reflecting strong medium-term growth prospects, resilient asset quality and adequate capitalisation. Growth is expected to remain healthy, driven by deepening penetration in existing geographies and gradual expansion into Tier III and Tier IV cities, where affordable housing demand remains structurally strong, supported by urbanisation, improving infrastructure and continued focus on financial inclusion. The credit costs are expected to remain within normalised ranges, aided by strong collection efficiencies and effective recovery mechanisms.

The profitability is expected to remain stable in FY26, with NIMs and spreads supported by inherently higher portfolio yields in affordable housing compared to prime housing. However, it will be capped due to competitive intensity. This will be partially offset by higher operating costs, attributable to labour-intensive origination and collection processes, wider branch networks in semi-urban and rural locations, and higher borrower acquisition and monitoring costs. Operating expenses (as percentage of average AUM) have remained stable at 3.5%-3.7% with return on average assets between 3.3% and 3.6% for the three fiscals ended FY25, based on Ind-Ra’s assessment of 14 affordable HFCs.