Dominance of Aavas Financiers Limited

Aavas Financiers is an affordable housing finance company. The firm has a diversified browning profile along with a robust asset liability management position. The company also enjoys a capital adequacy ratio (CAR) of more than 50%. The company has very diligently ensured that the average maturity of the debt is in sync with the lifecycle of its assets while also ensuring that its balance sheet is devoid of any sort of short term debt. The lender has plentiful sources to raise additional liquidity from various sources to ensure their stability.

The rationale behind Aavas’s success comes down to three crucial factors:

Firm’s capacity to borrow at favourable rates:

The firm’s cost of funds stands at around 7% which relatively is far better than its rivals in the segment by around 20 to 100 basis points. The reason behind this is due to the firm’s long standing proven record of possessing a high quality asset portfolio with a superior product portfolio along with robust capital adequacy. The Indian financing market saw a huge crash due to firms relying on the short term borrowing to purchase long term assets which turned out to be their downfall. However, Aaavas relies on the long term borrowings and staves aways from short term borrowing to finance its activities. Another factor that works in favour of the firm is that its loan book, which is dominated by retail home loans, falls unders the Priority Sector Lending category (PSL). This puts Aaavas in an advantage because Aavas has positioned itself as a high quality PSL investment for banks that in turn allows Aavas to transfer its loans and risk to the banks. Additionally, Aavas has gained interest from DFIs like Asian Development Bank etc which helped Aavas raise close to ₹ 500 crores. Furthermore, credit rating agencies have rated borrowings to Aavas at AA- which is a testament to its strong loan book.

Concentrating on Specialised Consumer Segments:

Aavas has carved a niche of its own. Affordable Housing Financing segment is the firm’s area of focus and expertise. Rather than focusing on Tier 1 cities, Aavas has concentrated its efforts in Rural India. Along with that, lenders usually spread themselves too thin by expanding geographically too wide – too fast, instead Aavas tries to go deeper into existing geographical bases before entering new regions. The firm’s strategy is to focus on self employed income segments on self constructed propertings, this particular niche is very difficult for banks to penetrate since it requires a deeper form of verification and it bypasses the large developer financing deals as well.

Aavas enjoys a higher pricing power:

The customer base for Aavas have limited access to credit as their income levels are lower than ₹ 50,000 a month on average. Thus, Aavas transaction comes with a monthly instalment of ₹ 12,000 to 15,000 per month for a 15 year housing deal. Since, the monthly instalments remain steady, Aavas enjoys a steady and stable balance sheet which is difficult for lenders to snatch away even though the customer base is largely non delinquent.   

Therefore, the deep expertise Aavas has garnered in its segment and the unique business model it has created is difficult to replicate.