Mumbai: Housing finance companies (HFCs) are likely to need around Rs 9,000-16,000 crore of external capital over the next three year to grow at 20-22 per cent, said a report on Monday.


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Most of this incremental capital requirement would be for the small HFCs, including those operating in affordable housing space, it said.


"HFCs will require around Rs 9,000-16,000 crore of external capital (11-19 per cent of their existing net worth) to grow at a CAGR of 20-22 per cent for the next three years with internal capital generation levels of 15-16 per cent," said the report by rating agency Icra.


It, however, said the capital adequacy by HFCs remains comfortable, given the relatively lower risk weights for home loans and commercial real estate loans.


The report said for funding requirements, large HFCs rely more on debt market instruments and fixed deposits while small HFCs depend largely on bank borrowings and debt market instruments.


The cost of funds for HFCs remained moderate at around at 8.04 per cent cent in first quarter of FY18 as against 8.10 per cent in the fourth quarter of FY17.


Sharper decline in yield on advances vis--vis the cost of funds has led to a decline in net interest margins of HFCs from the fourth quarter of FY17 levels.


Despite that the mortgage players continued to report good profitability with overall return on equity (ROE) of 16.7 per cent in the first quarter of FY18, it said.


The report said the lower incremental lending rates in the home loan segment are likely to result in the net interest margins of HFCs shrinking by 10-15 basis points in the fiscal 2017-18.


"Overall, we expect a 5-10 basis points reduction in profitability for HFCs in FY18. Nevertheless, HFCs are likely to report good return on equity of 17-19 per cent for the current fiscal," Icra's group head (financial sector ratings), Rohit Inamdar said.


In the 12 months ended June 30, 2017, the housing sector's credit growth slowed to 14 per cent at Rs 14.6 trillion. The loan growth in the segment was 16 per cent in the period ended June 30, 2016.


"The growth in the sector was impacted by a slowdown in new project launches and buyers and investors deferring their home purchase decisions in expectation of a decline in real prices," Inamdar said.


In addition, disruptions in the real estate market owing to implementation of Rera and GST and preference of end users for finished inventory/RERA-approved projects also resulted in a slowdown, he said.