Star Housing Finance Downgraded: CARE Cites Funding Crisis

Introduction: A Shift in Outlook

CARE Ratings has revised its outlook for Star Housing Finance Limited (SHFL), downgrading its ₹300 crore long-term bank facilities from 'Stable' to 'Negative'. This significant move highlights the mounting pressure on the housing finance company as it grapples with persistent challenges in raising capital and scaling its operations. The downgrade serves as a critical indicator of the hurdles SHFL faces in executing its growth strategy, despite maintaining a robust Capital Adequacy Ratio.

The Core Issue: Capital Raising Failures

The primary driver behind the negative outlook is SHFL's repeated inability to secure necessary equity funding. The company has faced considerable setbacks in its capital-raising efforts, which are essential for fueling loan book growth. A planned rights issue of ₹100 crore was withdrawn after failing to attract sufficient subscriptions. Additionally, warrants issued by the company were allowed to lapse, and an anticipated preferential capital infusion of ₹40 crore did not materialize.

These failures have directly constrained the company's ability to expand. The slowdown in loan disbursements during the fiscal year 2025 (FY25) and the first half of fiscal year 2026 (H1FY26) is a direct consequence of this funding crunch. Without fresh equity, the company's growth has become heavily reliant on internal accruals and debt, putting a strain on its financial structure.

Financial Performance Under the Microscope

While SHFL reported a 22% year-on-year growth in its Assets Under Management (AUM) to ₹521 crore as of March 2025, its profitability metrics have weakened. The Net Interest Margin (NIM) declined to 6.32% in FY25, and the Return on Total Assets (ROTA) fell to 2.13% in the same period, dropping further to an annualized 1.15% in H1FY26. This moderation in profitability, combined with increased credit costs, points to pressure on the company's core business operations.

On the positive side, the company's Capital Adequacy Ratio (CAR) remains strong at 50.55%. However, its gearing has increased to 2.84x, signaling a greater dependence on borrowed funds. Asset quality has seen mixed results; the Gross Non-Performing Assets (GNPA) ratio rose to 1.85% by March 2025 but showed a slight improvement to 1.65% by September 2025.

Governance and Concentration Risks

Adding to the financial challenges are concerns around governance. SHFL has experienced several changes at the management and board levels, including the resignation of key personnel. Such instability can create uncertainty and impact strategic execution. Furthermore, the company faces significant concentration risks that make it vulnerable to economic shocks.

Geographically, Maharashtra accounts for 69% of its AUM, exposing the company to regional economic downturns. There is also a high concentration in its borrower profile, with 72% of its loan book comprising non-salaried individuals. This segment is often more susceptible to income volatility, which could impact asset quality if economic conditions worsen.

Company Profile and Business Focus

Incorporated in 2005, Star Housing Finance Limited is registered with the National Housing Bank (NHB) and focuses on the affordable housing segment. The company primarily provides home loans to individuals in the Economically Weaker Section (EWS), Low Income Group (LIG), and Middle Income Group (MIG) categories. Its operations are concentrated in semi-urban and rural areas, particularly in Tier II and Tier III cities, aligning with the government's Priority Sector Lending norms.

The Path Forward

The 'Negative' outlook from CARE Ratings is a clear signal that SHFL is at a critical juncture. The rating agency has stated that the outlook could be revised back to 'Stable' if the company successfully mobilizes substantial equity capital to support its operational scale-up. This must be achieved while maintaining current profitability and asset quality metrics.

Investors and stakeholders will be closely watching the company's next moves, including its plan to raise up to ₹50 crore through Non-Convertible Debentures (NCDs), which was recently approved by the board. The successful execution of its funding plans is paramount for restoring confidence and ensuring sustainable growth.

Conclusion

Star Housing Finance Limited faces a challenging period defined by its struggle to secure growth capital. The downgrade in its outlook by CARE Ratings underscores the urgency of the situation. While its focus on the affordable housing segment remains relevant, its ability to overcome funding constraints, manage concentration risks, and stabilize its leadership will determine its future trajectory. The coming months will be crucial in demonstrating whether SHFL can navigate these headwinds and return to a path of stable growth.