Sector Guides
How to Analyze Housing Finance Stocks in India: Spread & 1+ DPD
Team QuartrlyHousing Finance Company (HFC) earnings hinge on Spread — the gap between what an HFC earns on home loans and what it pays to borrow — because unlike banks, HFCs have no access to low-cost deposits. For investors tracking Indian HFCs such as PNB Housing Finance, Aavas Financiers and LIC Housing Finance, Spread, 1+ DPD (early delinquency) and BT Out (customer attrition to rival lenders) together explain most of the quarter-to-quarter swings in profitability and asset quality.
Key Takeaways
- Spread is the primary profitability indicator, measuring the difference between yield on loans and cost of funds.
- 1+ DPD (One Day Past Due) serves as an early warning signal for asset quality deterioration, well ahead of reported NPA figures.
- BT Out (Balance Transfer Out) reveals customer retention challenges and pricing competitiveness — and the departing loans are often the best-quality ones.
- A rising Opex to Assets ratio indicates inefficient growth, particularly concerning for affordable housing lenders.
- AUM Mix between retail and corporate loans determines risk profile, with retail-heavy books considered safer.
Quick Reference
| Metric | Definition | Healthy Range | Warning Sign |
|---|---|---|---|
| Spread | Yield minus cost of funds | 2.0-2.5% (prime), 5%+ (affordable) | Compression for 2+ quarters |
| 1+ DPD | Loans overdue by 1+ day | Below 4% | Rising trend predicts NPA spike |
| BT Out | Customer transfers to rivals | Below 5% annually | Sudden spike in transfers |
| Opex to Assets | Operating costs / AUM | <1% (prime), <3% (affordable) | Rising above 3.5% |
| AUM Mix (Retail) | Retail loans as % of AUM | Above 90% | Corporate exposure above 10% |
| Disbursement vs. Sanction | Conversion rate | Above 85% | Below 75% or declining |
| Technical Write-off | Loans removed from books | Proportionate to losses | Large write-offs masking GNPA |
| Yield on Advances | Average lending rate | 9.5-11% (prime), 13-15% (affordable) | Declining without cost reduction |
Understanding Housing Finance Metrics
Housing Finance Companies differ fundamentally from banks in their funding structure. Banks access low-cost deposits through savings and current accounts (CASA), often paying 3-4% interest. HFCs must rely on wholesale borrowings — bonds, term loans from banks, and non-convertible debentures — at significantly higher rates of 7-8%.
This structural funding disadvantage makes spread management critical for HFC survival. Every basis point matters when operating on thin margins. Additionally, HFCs face unique risks from balance transfers, where customers refinance with competitors offering lower rates. These dynamics require investors to track metrics that may not be relevant for traditional banks.
Spread
What it is: Spread is the difference between an HFC's yield on advances (the average interest rate charged to borrowers) and its cost of funds (the average interest rate paid on borrowings). It is typically expressed in percentage points or basis points.
Why it matters: Spread represents the gross profit margin on lending operations before operating costs. Because HFCs lack access to cheap retail deposits, maintaining stable spreads is essential for profitability. Spread compression directly impacts net interest income and return on assets.
What good looks like: Prime HFCs lending to salaried professionals typically maintain spreads of 2.0-2.5%. Affordable housing finance companies targeting self-employed borrowers operate at higher spreads of 5.0% or above to compensate for elevated credit risk. PNB Housing Finance reported a spread of 2.26% in Q2 FY26.
Red flag: Sequential spread compression for two or more consecutive quarters indicates pricing pressure or rising funding costs. Aavas Financiers saw spreads fall below 5% for the first time in recent quarters, signaling competitive intensity in the affordable housing segment.
Example from earnings call:
"Our spread marginally improved to 2.26% in Q2 FY26 from 2.23% in Q1 FY26. NIM remained range bound at 3.67%." — PNB Housing Finance Q2 FY26 Earnings Call
1+ DPD (One Day Past Due)
What it is: 1+ DPD measures the percentage of the loan portfolio where borrowers have missed at least one payment by even a single day. It captures delinquency earlier than the standard 90-day NPA classification used by banks.
Why it matters: This metric serves as a leading indicator for future asset quality problems. A borrower missing a payment by one day may be experiencing early financial stress. Tracking 1+ DPD allows management and investors to identify deterioration before it appears in reported NPA figures.
What good looks like: Well-managed affordable housing lenders maintain 1+ DPD below 4%. Aavas Financiers reported 1+ DPD of 3.85% as of December 2024. Prime HFCs with salaried borrowers typically see even lower delinquency rates.
Red flag: A spike in 1+ DPD — such as an increase from 4% to 5% — often predicts a corresponding rise in Gross NPAs within the following two quarters. Investors should monitor the trend direction rather than absolute levels.
Example from earnings call:
"Our asset quality continues to be pristine with 1+ DPD of less than 4% at 3.85% as of December 2024." — Aavas Financiers Q3 FY25 Earnings Call
BT Out (Balance Transfer Out)
What it is: BT Out measures the percentage of the loan portfolio that customers transfer to competing lenders through refinancing. It represents customer attrition to rivals offering better terms.
Why it matters: Balance transfers typically involve the highest-quality borrowers — those with improved credit scores who qualify for lower rates elsewhere. High BT Out rates indicate weak customer retention and competitive pricing disadvantage. The departing loans are often the most profitable, leaving behind a riskier residual portfolio.
What good looks like: BT Out rates below 5% annually indicate strong customer retention and competitive pricing. Modest increases of 10-20 basis points year-over-year are normal during rate-cutting cycles.
Red flag: Sudden spikes in BT Out, such as LIC Housing Finance's reported ₹4,000 crore of balance transfers in a single quarter, signal significant competitive disadvantage. High BT Out forces HFCs to replace lost volume with new, untested borrowers, diluting portfolio quality.
Example from earnings call:
"BT Out Rate was 5.7% in Q2 and 5.3% for H1, up 10 basis points year-over-year." — Aavas Financiers Q2 FY26 Earnings Call
Opex to Assets
What it is: Opex to Assets ratio measures operating expenses (employee costs, branch expenses, technology, and administrative costs) as a percentage of total assets under management. It indicates operational efficiency.
Why it matters: HFCs cannot offset high operating costs with cheap funding like banks can. Efficient cost management directly impacts profitability. This ratio also reveals whether growth is being achieved efficiently or through excessive spending on branches and personnel.
What good looks like: Prime HFCs with large-ticket loans (₹50 lakh and above) should maintain Opex to Assets below 0.8%, as fixed costs are spread over larger loan amounts. Affordable housing lenders with smaller ticket sizes (₹8-15 lakh) typically operate at 2.5-3.0%. Aavas Financiers reported 3.51% with guidance to reduce below 3% over the medium term.
Red flag: An Opex to Assets ratio exceeding 3.5% for affordable housing lenders indicates excessive spending relative to the loan book. Rising ratios over consecutive quarters suggest inefficient scaling.
Example from earnings call:
"OpEx to Asset Ratio is 3.51%. Our guidance is to bring OpEx to asset ratio below 3% over the medium term." — Aavas Financiers Q2 FY26 Earnings Call
AUM Mix (Retail vs. Corporate)
What it is: AUM Mix shows the composition of the loan portfolio between retail loans (individual home buyers) and corporate loans (builder and developer financing). It is expressed as a percentage of total assets under management.
Why it matters: Retail home loans carry lower default risk because borrowers use their own homes as collateral and have personal liability. Corporate loans to developers carry concentration risk and are tied to real estate cycles. The 2018-2020 NBFC crisis demonstrated that excessive developer exposure can destroy HFC portfolios.
What good looks like: A retail concentration above 90% indicates a conservative, lower-risk portfolio. PNB Housing Finance's retail book now constitutes 99.6% of total loans following deliberate de-risking efforts.
Red flag: Increasing corporate or developer book exposure, particularly above 10% of AUM, signals higher risk appetite. Aggressive growth in developer financing during real estate booms often precedes asset quality problems during downturns.
Example from earnings call:
"The retail loan book grew by 17%. It now contributes 99.6% of the total loan book. Corporate book now stands at ₹332 crores as on September 30, 2025." — PNB Housing Finance Q2 FY26 Earnings Call
Disbursement vs. Sanction
What it is: Disbursement represents the actual amount of money released to borrowers, while Sanction represents the total loan amount approved on paper. The disbursement-to-sanction ratio indicates conversion efficiency.
Why it matters: High sanction numbers can be misleading if they do not convert to actual disbursements. Sanctions may lapse due to borrower withdrawal, property issues, or competition. A declining disbursement-to-sanction ratio suggests operational inefficiencies or competitive losses during the approval-to-funding gap.
What good looks like: A disbursement-to-sanction ratio above 85% indicates efficient conversion and minimal customer drop-off between approval and funding.
Red flag: A disbursement-to-sanction ratio below 75%, or a declining trend, warrants investigation into reasons for customer drop-off.
Technical Write-off
What it is: Technical write-off refers to the removal of non-performing loans from the balance sheet for accounting purposes, even when recovery efforts continue. The loans are moved off-book but not forgiven.
Why it matters: Technical write-offs improve reported asset quality ratios (GNPA, NNPA) without actual recovery. Investors should examine gross write-offs alongside reported NPAs to understand true portfolio stress. Aggressive write-offs can mask underlying asset quality problems.
What good looks like: Write-offs should be proportionate to actual loss expectations based on historical recovery rates. Transparency about cumulative write-offs and subsequent recoveries is a positive indicator.
Red flag: Large technical write-offs coinciding with sudden improvement in reported GNPA ratios warrant scrutiny. Consistent write-offs exceeding 1-2% of the loan book annually suggest persistent origination problems.
Yield on Advances
What it is: Yield on Advances is the average interest rate an HFC earns on its loan portfolio. It is calculated by dividing interest income from loans by average outstanding advances.
Why it matters: Yield on Advances represents the "selling price" of money in the HFC business model. Combined with cost of funds, it determines the spread. Yield trends indicate pricing power, portfolio mix shifts, and competitive positioning.
What good looks like: Prime HFCs typically achieve yields of 9.5-11.0%. Affordable housing lenders operate at higher yields of 13-15% reflecting the higher risk profile of their borrowers.
Red flag: Declining yields without corresponding reduction in cost of funds indicate competitive pressure. A mismatch between falling yields and stable credit costs suggests spread compression ahead.
Special Considerations: The Balance Transfer Trap
A common analytical mistake involves focusing on gross loan disbursements without accounting for attrition. Consider this scenario:
| Item | Amount |
|---|---|
| New Loans Disbursed | +₹100 crore |
| Normal Repayments | -₹10 crore |
| Balance Transfers Out | -₹40 crore |
| Net Growth | ₹50 crore |
An HFC reporting 20% disbursement growth may actually achieve only 8-10% net book growth after accounting for BT Out. The departing customers are typically the best credit quality, leaving behind a riskier residual portfolio.
Investors should calculate net growth (disbursements minus repayments and BT Out) rather than relying solely on headline disbursement figures.
Related Sectors
- How to Analyze Private Banking Stocks in India: NIM & GNPA — banks are HFCs' biggest competitors for home loans, and the same funding-cost discipline applies to their mortgage books.
- How to Analyze Real Estate Stocks in India: Pre-Sales, Collections — HFC loan books and developer pre-sales/collections move together with the housing cycle.
- How to Analyze Life Insurance Stocks in India: VNB & Persistency — loan-protection cover is routinely bundled with home loans, tying persistency to HFC originations.