HFCs lean towards realty, construction finance

Housing finance companies are focusing on real estate and construction finance due to improved credit profiles and regulatory support, aiming for better margins and portfolio diversification. Growth driven by cleaner balance sheets and expansion into smaller cities.

Housing finance companies (HFCs) are placing a greater emphasis on real estate and construction finance, driven by the improved credit profile of real estate players and the regulatory environment. The shift is taking place as HFCs pursue improved margins through higher yields in the segment and diversification of loan portfolios, industry experts said.

HFCs are also taking comfort in the cleaner balance sheets of realtors as they extend exposure to the sector.

"We have changed our strategy in project lending and are now focusing on smaller projects with ticket sizes of Rs 50-100 crore. We're expanding to Tier-II and III cities, beyond our earlier focus on major cities. This has strengthened our nationwide presence, especially in smaller markets where bank competition is lower and monitoring is stronger at the local level," Sandeep Kumar, MD and CEO, LIC Housing Finance told FE.

LIC Housing Finance currently focuses on project lending and expects the portfolio to reach Rs 15,000 crore by March. Project loans disbursements grew 169% to Rs 1,436 crore in H1 (April-September) from Rs 534 crore in the year-ago period. The portfolio grew 12% YoY to Rs 9,740 crore as of September 30.

PNB Housing has also restarted the construction finance business, targeting a Rs 10,000-11,000-crore book in three years and plans to increase the share of this segment to 7-8% of the total book. "Against the Rs 3,000-crore loan book target by year-end (March 2027), we have almost done 20-25%," said MD and CEO Ajai Kumar Shukla.

Shobhit Agarwal, CEO - investment banking, strategic advisory and valuations, Anarock Property Consultants, said HFCs have now started to participate selectively in financing real estate projects. They are funding smaller and new groups. Banks for reasons of size are less active in this space and also face regulatory curbs to fund activities like land purchases. HFCs are addressing these requirements and are funding re-development projects against backing of development rights.

Earlier, lenders were reluctant, with several of them reducing exposure to construction finance amid concerns over credit quality.

Ashish Modani, group head - financial sector, ICRA, said "Many real estate players have de-leveraged their balance sheets, addressing the issue of debt and improving the credit profile. RERA (Real Estate Regulatory Authority) has improved regulatory environment with better cash flow and declining slippages. These have increased the lender's confidence in extending loans to creditworthy borrowers."

Reserve Bank of India's data on non-banking finance companies, including HFCs, point to a rise in funding by them to real estate. Their credit to commercial real estate grew 23.4% year-on-year by as of September 2026, up from 8.9% a year ago. In absolute terms, it grew from Rs 78,740 crore in September 2024 to Rs 85,787 crore in September 2025 and further to Rs 1,05,845 crore in September 2026.

Higher yields on lending to real estate firms are important when the retail housing portfolio, where competition is intense among players, has thin margins. Yields on construction finance typically range from 13% to 15%, depending on the credit rating. "This strategy shift (towards real estate firm lending) is aimed at improving margins," said Kumar of LIC HFC.

The wholesale segment -- loans to real estate entities -- is a high-yield business. "To some extent, it balances out the implications of highly competitive retail lending segment," Modani of ICRA said.