Green Energy Finance: The Next Megatrend

Back in 2022, HDFC chairman Deepak Parekh made an important prediction about India's housing finance sector.

He predicted that India should be able to double its home loans to around Rs 46 trillion in the next five years i.e. by 2027.

Loans to the housing sector rose by nearly Rs 10 trillion in the two years after the pandemic. But, as per RBI, the quantum of outstanding home loans touched Rs 27 trillion by March 2024.

For Mr Parekh's prediction to come true, the home loans will have to almost double in next three years.

The recent blockbuster IPO of Bajaj Housing Finance seems to suggest that there is no looking back for India's top home financers.

Let us be clear that the Indian housing finance sector is a crowded one. The sector consists of more than 80 entities. But it is dominated by only a select few.

Public sector banks currently dominate the home loan market with a 40% share, followed by Housing Finance Companies (HFCs, 34%). Private sector banks have 20% share while NBFCs and other entities have the balance 6%.

However, housing finance companies are significant players with a growing presence. This growing competition benefits borrowers by potentially driving down interest rates and improving loan terms.

India has a low penetration rate for housing finance compared to other emerging markets. The mortgage-to-GDP ratio of 12.3% is very low even when compared to countries like China and South Africa which have 28% and 21% respectively.

A substantial portion of the home loan market now caters to the lower ticket size segment (loans less than Rs 2 m). This is where public sector banks face stiff competition from HFCs.

There is also a growing focus on affordable housing finance. New housing finance companies are catering to borrowers who were not eligible for home loans under the traditional norms.

The existing ones are also prioritising this segment. While there are positives for potential homebuyers, the impact on asset quality remains to be seen.

But what is the scope for home financers to create value for shareholders?

Bajaj Housing Finance, for instance, offers diversified loans such as home loans, loan against property, lease rental discounting, and developer financing. Home loans constitute over 57% of the assets under management (AUM) while lease rental accounts for nearly 20%.

While the home loans and lease rental discounting are secured, the loans to developers are unsecured. These loans expose housing financers to the risk of defaults during periods of high interest rates.

Bajaj Housing Finance had an average loan-to-value ratio of 69%, one of the highest in the sector. The average loan ticket size of Rs 4.6 m as of June 2024, is also higher than that of most peers. Although its NPA ratios have been quite low, it may be too early in the cycle to assess the quality of such loans.

But the key differentiator for the company is the use of technology for identifying and understanding the needs of the potential home loan customers.

Bajaj Housing Finance can access the customer quicker, to be able to complete the loan process faster than competitors.

As the lending rates are by and large the same, it is technology that makes a difference. Technology also helps in risk assessment, debt management, and control over operating costs.

So apart from the potential penetration of housing loans and expansion of Bajaj Housing Finance in semi urban and rural areas, there is limited upside to the fundamentals of housing finance entities in general and Bajaj Finance in particular.

Now, a long-term investor may want to evaluate the upside from investing in Bajaj Housing Finance versus investing in other NBFCs.

Financing for green energy is set to take centre stage in India in the coming decade.

India is rapidly emerging as a renewable energy powerhouse. There is a surge in both capacity addition and brownfield expansion.

As India's manufacturing sector moves towards automation and digitisation, there is set to be significantly higher demand for electricity. This is even as the country continued to generate more electricity from its coal-fired plants in recent months.

Renewable energy accounted for 71.5% of the record 13,700 megawatts of power generation capacity added by India in the first quarter of financial year 2024-25.

This is well ahead of the government's target to establish 50% cumulative power generation capacity from non-fossil fuel-based sources by 2030.

Moreover, leading renewable energy project developers, manufacturing companies, banks, and financial institutions have committed close to Rs 32 tn to the development of renewable energy projects by 2030.

To put things in perspective, this is nearly 19% of the overall outstanding loans of Rs 169 tn in the books of Indian banks and NBFCs in June 2024.

So, while both home loan financing and green energy financing have compelling growth prospects in India, three factors will determine the sustainability and profitability of the entities lending to these segments:

• Policy tailwinds to support loan growth, including tax sops
• Quality of borrowers
• Impact of lending rates on the ticket size of loans

Here, the home loan financing companies (like Bajaj Housing Finance) have largely leveraged the tailwinds for the sector for decades. Plus, the quality of borrowers is already established with the technology led risk profiling.

A sharp increase in lending rates could, in fact, impact the ticket size of the home loans in the years ahead.

For green energy financers, like IREDA (Indian Renewable Energy Development Agency), the tailwinds for lending to the sector are just beginning to play out.

Moreover, with larger and more diversified entities venturing into green energy projects, the quality of borrowers is largely set to remain consistent.

Given the necessity to shift towards green energy, the ticket size of RE loans are unlikely to vary based on lending rates.

Given such a risk reward scenario, buying the stock of a housing finance company at almost double the PE multiple of the green energy financer seems like a lost proposition.

Also mind you, IREDA is not the only green energy financer that could reap the benefits of India's energy revolution. There are several other NBFCs too.

But overpaying for growth in housing finance without taking the prospects of other financing entities into account could be a cardinal mistake.

Check out Equitymaster Factsheets for detailed comparison of NBFCs.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)