View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Factor
  2. Social
September 8, 2022updated 15 Sep 2022 12:08pm

HDFC’s $1.1bn deal: An Indian oasis in the social loan desert

Indian financial group HDFC has signed the world’s largest social loan to help provide affordable housing. An encouraging sign, perhaps, but there are doubts it will presage a flood of such transactions just yet.

By Adrian Murdoch

Affordable housing, which the proceeds of HDFC’s new social loan will fund, accounts for nearly half of India’s residential property market. (Photo by PradeepGaurs/Shutterstock)
  • India’s Housing Development Finance Corporation last month took out a $1.1bn syndicated three-year social loan to help fund affordable housing.
  • The world’s biggest social loan and India’s first social external commercial borrowing transaction is a positive sign for a market struggling to take off.
  • Last year saw 71 social loans worth just $16bn signed globally, with another $1.6bn in the first quarter of this year, by Capital Monitor data.

Both India’s affordable housing sector and the somewhat sickly global market for social loans received a billion-dollar shot in the arm from Mumbai-based Housing Development Finance Corporation (HDFC) last month.

Even as investors clamour for environmental and green debt, last year just 71 social loans were sold globally for a total of $16bn, and in the first quarter of this year six deals raised a paltry $1.6bn, according to Capital Monitor data (see chart below). To put that into context, combined green, social, sustainability and sustainability-linked (GSSS) loan issuance reached $717bn last year.

Asia is something of a bright spot, at least, accounting for around one-third (24) of the social loans in 2021, and a landmark $1.1bn syndicated social loan taken out by HDFC on 5 August is a positive sign for the market globally.

It is the world’s largest such transaction and India’s first social external commercial borrowing (ECB) loan deal. Social loans are structured in a “use of proceeds” format, and in this case, all the money will be used to finance affordable housing in India. Similarly pioneering deals have been done elsewhere, with Hong Kong property company New World Development this year using part of a green and social bond to finance affordable housing.

Founded in 1977 as the country’s first specialised mortgage company, HDFC has since financed 9.5 million housing units and had a loan book of R6.7trn ($83.9bn) at the end of last year via its network of 695 domestic offices across tier 1, 2 and 3 cities.

Affordable housing a big deal in India

Affordable housing has been part of HDFC’s business model for “quite a long while now”, Harini Anand, the firm’s Mumbai-based general manager for treasury, tells Capital Monitor.

It is strictly defined by the Reserve Bank of India (RBI) as houses costing below R4.5m ($56,403) and with at least 60 square metres of carpet area (that is, usable indoor space) for tier 1 metropolitan areas such as Delhi, Kolkata and Mumbai, and at least 90sqm elsewhere.

Affordable housing accounts for approaching half (43%) of India’s housing market, according to a 2021 round-up report from real estate consultancy PropTiger. It is difficult to find estimates of the size of India's residential property market, but the real estate sector as a whole is forecast to rise to hit $650bn by 2025 and $1trn by 2030, accounting for 18-20% of India's GDP, having stood at $180bn in 2020, according to India Brand Equity Foundation, which is part of the Department of Commerce.

Content from our partners
Is fintech disrupting SME currency hedging?
How start-ups can take the next step towards scaling up
The US' turbulent relationship with ESG

The country's affordable housing market is supported by the government’s “Housing for All” programme, which provides accommodation for the urban poor. It was launched in June 2015 and was due to finish in March this year but has been extended until the end of December 2024.

“We expect to see more intense activity in the housing market in 2022, especially in the affordable homes segment, as various deadlines to avail of the government subsidies near the end,” said Dhruv Agarwala, group chief executive of PropTiger, at the launch of the report in March.

Although some tax breaks have come to an end, the main government scheme – with a subsidised interest rate for affordable housing mortgages that starts at 6.5% – has been extended until the end of 2024. Average mortgage rates in India range from 8.15% to 11.80%.

A smooth social loan process

HDFC started having conversations on its new social loan deal in the fourth quarter of last year, says Amanpreet Singh, Singapore-based director of ESG finance for Asia Pacific at MUFG Bank, the lead social loan coordinator and a mandated lead arranger and borrower on the deal. The Japanese lender worked on the transaction alongside Taiwan’s CTBC Bank, Mizuho Bank, State Bank of India and Sumitomo Mitsui Banking Corporation.

MUFG has experience in the space. It was involved in kick-starting the GSSS loan market in India in April last year with a $750m, five-year sustainability-linked syndicated loan for Mumbai-based chemicals group UPL Corporation. The bank also coordinated Southeast Asia’s first social bond in October 2019: Bank of Ayudhya’s $200m so-called ‘gender bond’ in Thailand, which expanded credit lines to women-led small and medium-sized enterprises.

Syndicated loans can often take as much as a year to finalise, but Anand says HDFC’s loan was agreed very quickly because the company is a quality credit. The company is rated AAA by local rating agencies Crisil and India Ratings & Research, BBB- by S&P and Baa3 by Moody’s. The two international rating agencies cap corporate ratings at the rating of their respective sovereigns.

Proceeds of the loan will be used solely to fund affordable housing, which Singh says represents HDFC’s “bread and butter business”.

While HDFC’s average loan size is around R2.7m, Anand says, for this kind of lending it would be “half or less than half of that”.

HDFC: a GSSS financing track record

The social loan has not been HDFC’s first foray into the GSSS market. It took a $250m green loan in July last year from the International Finance Corporation, the private-sector arm of the World Bank, and in June 2020 received a $200m green loan from the Asian Infrastructure Investment Bank, another multilateral development bank. In both cases, funds are being used to develop HDFC’s green housing portfolio.

The latest deal stands out, however, because it is in the ECB format – a structure used by Indian companies to access foreign money and regulated by the RBI. It was chosen by HDFC both to diversify the firm’s methods of funding and because it came at “the right market levels and opportunity”, says Anand.

Certainly, the timing of the loan worked in HDFC’s favour. The RBI relaxed ECB rules at the end of July, making it easier for organisations to raise funds. This allowed the deal to be increased from its originally planned size of $700-750m.

For HDFC’s R20.7trn ($259bn) balance sheet, a $1.1bn loan is not an “exceptional size”, Anand says, with the firm regularly borrowing up to $1.5bn in the domestic market. At the time of writing, HDFC Bank is raising R100bn ($1.25bn) in perpetual bonds.

The three-year bullet loan – common in the real estate market, the interest is paid during the life of the loan with the principal repaid at maturity – priced at 90 basis points over the secured overnight financing rate (Sofr), which equates to 3.3%. Sofr is the lending benchmark that replaced the London interbank offered rate (Libor) for new transactions at the end of last year.

Neither HDFC nor MUFG would be drawn on the deal’s pricing dynamics, but the interest rate of green and social loans is generally up to 25bp lower than conventional loans.

It is unlikely the social loan market across Southeast Asia will suddenly burst into life now, says Singh, given continuing hesitancy over such transactions. Clients across the region still require convincing that ESG funding makes a difference, he adds, and there is often “inertia to take the first step”.

Nonetheless, Anand says HDFC’s experience has been positive and is looking to do similar borrowing in the future, possibly by the end of the year. The firm’s success in getting the deal done may at least soothe concerns for other potential borrowers.

Capital Monitor is hosting the second part of its Webinar series, Making Sense of Net Zero, alongside New Statesman and Tech Monitor on September 21. Find out more information on NSMG.live.

Websites in our network
NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. To receive our weekly newsletter – to your inbox, simply send us your work email.
I consent to New Statesman Media Group collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED
THANK YOU

Thank you for subscribing to Capital Monitor.