Affordable housing finance companies are increasingly looking beyond India’s major cities as Tier-2, Tier-3 and smaller markets generate a larger share of housing credit demand. Rising incomes, infrastructure development and demand from first-time buyers are reshaping where lenders are building their next growth engines.
Smaller Cities Gain Importance for Affordable Housing Finance
Affordable housing finance companies are increasingly expanding beyond major metropolitan markets as housing credit demand shifts toward smaller cities and towns. The trend is being supported by first-time homebuyers, self-construction activity and households seeking homes at prices that are often more manageable outside major metros.
Data cited by Crisil Intelligence shows that Tier-3 and beyond cities accounted for 48.10% of affordable housing loan originations in H1FY26, while Tier-2 cities contributed around 31.11%. Metropolitan and Tier-1 cities accounted for a smaller share.
The shift is significant for housing finance companies because their business model is closely linked to customers who may not have easy access to traditional bank housing loans.
Many borrowers in smaller markets are self-employed, run small businesses or have income streams that require more detailed assessment. Housing finance companies often build local sourcing and underwriting capabilities around these customer profiles.
Tier-2 and Tier-3 Cities Drive Housing Loan Growth
The movement beyond metros is also visible in broader home loan data. A January 2026 report based on the Urban Money Homebuyers Credit Pulse Report said Tier-2 and Tier-3 cities accounted for 64% of total home loan volumes in 2025.
Home loan volumes in these markets grew 81% year-on-year, compared with 52% growth in Tier-1 cities, according to the report.
The numbers point to a wider change in India’s housing market. Home ownership demand is not limited to large employment centres such as Mumbai, Bengaluru, Delhi-NCR or Hyderabad.
Smaller cities are seeing increased economic activity, better road and transport connectivity, new commercial developments and greater access to formal financial services. These factors can support demand for housing loans as households move toward formal employment and financial documentation.
For affordable housing lenders, the opportunity lies in reaching customers before the market becomes heavily penetrated by larger financial institutions.
Affordable Housing Lenders Expand Their Branch Networks
Physical distribution continues to play an important role in the affordable housing finance segment, particularly where customers have irregular or informal income profiles.
A September 2026 report by Systematix Research said mature branches of affordable housing finance companies are facing slower growth as their existing catchments become more penetrated. The report suggested that entering new catchments and adding branches could become increasingly important for maintaining growth.
The research was based on branch-level interactions and checks across Maharashtra, Karnataka, Tamil Nadu, Telangana and Rajasthan.
This expansion strategy is already visible among several housing finance companies.
Aavas Financiers reported 435 branches across 13 states and two Union Territories as of March 2026 after adding 38 net branches during FY26. Its investor presentation showed that more than 80% of its presence was in Tier-3 and smaller locations.
The company’s FY26 annual report also said it planned to add around 30 to 40 branches, with a focus on deepening its presence in Tier-2 and Tier-3 markets.
Self-Construction Creates a Major Lending Opportunity
One reason smaller cities remain important is the nature of housing demand.
Affordable housing finance is not dependent entirely on large residential projects. Many borrowers construct homes themselves, purchase resale properties or gradually expand existing houses.
Crisil Ratings said around 45% of lending by affordable housing finance companies is directed toward self-construction and resale of houses. It also noted that more than 75% of industry-wide loans below ₹35 lakh are concentrated in Tier-2 and smaller markets.
This structure makes the segment different from the premium housing market in major metros.
In a large city, housing finance demand can be closely linked to new apartment launches and established developers. In smaller towns, individual construction, plot purchases and resale properties can form a larger part of the borrowing requirement.
For lenders, this requires local knowledge because property documentation, borrower income and construction patterns can vary significantly from one market to another.
Technology Is Supporting Expansion Beyond Metros
Branch expansion does not mean affordable housing lenders are relying only on physical offices.
Technology is increasingly being used for customer acquisition, credit assessment, documentation, collections and internal risk monitoring. This can help lenders serve geographically dispersed customers while keeping operating processes manageable.
The challenge is particularly relevant for smaller borrowers. A self-employed applicant may not have the same salary slips or standard income documentation as a salaried employee.
Housing finance companies therefore often rely on a combination of financial records, banking information, business cash flows, field verification and local assessment.
Crisil’s research on the sector has highlighted the relevance of local sourcing ecosystems and underwriting capabilities in Tier-2 and smaller markets. The combination of technology and local presence allows lenders to assess borrowers while maintaining a physical connection with the communities they serve.
Competition Is Also Increasing in Smaller Markets
The opportunity in smaller cities is attracting more lenders, which is changing the competitive environment.
Banks remain important competitors because they can often offer home loans at comparatively lower interest rates and have broader customer relationships. Affordable housing finance companies compete through local sourcing, faster turnaround times and greater familiarity with borrowers with informal or self-employed income profiles.
This competition means simply opening more branches may not be enough.
Lenders need to identify markets where housing demand is strong enough to support a branch over several years. They also need effective underwriting and collections systems because rapid loan growth without appropriate risk controls can affect portfolio quality.
The September 2026 Systematix Research report similarly pointed to own sourcing, faster turnaround times, field-based underwriting and customer retention as important factors as competition increases.
Infrastructure and Urbanisation Could Support Future Growth
The expansion of affordable housing finance into smaller cities is also connected to broader economic development.
Crisil Ratings expects affordable housing lenders’ AUM to grow by around 19% to 20% in FY27 and FY28. It expects home loans, which account for around 68% of affordable housing lenders’ AUM, to grow 17% to 18% over the next two fiscals.
The ratings agency said demand from Tier-2 and smaller cities could benefit from economic growth, infrastructure development and continued government support.
For housing finance companies, this creates a long-term expansion opportunity. Better roads, connectivity, local employment and rising household incomes can gradually make smaller towns more attractive for formal housing credit.
However, the pace will differ across markets. A city with strong employment growth and improving infrastructure may offer a different lending opportunity from a smaller town where population growth and local business activity remain limited.
Growth Will Depend on Credit Quality Too
The shift toward smaller cities does not remove the risks associated with affordable housing finance.
Lenders need to balance growth with asset quality, particularly when entering new geographical markets. Understanding local employment patterns, property values, borrower cash flows and repayment behaviour is important for controlling credit risk.
The competitive environment can also affect loan pricing and customer acquisition costs. Mature branches may find it harder to grow once a large portion of the addressable borrower base has already been reached.
This is why lenders are increasingly looking at a combination of new branches, digital processes, local underwriting and customer retention.
The next phase of affordable housing finance in India is therefore likely to be less about simply increasing branch numbers and more about building sustainable lending ecosystems in smaller markets.
What This Means for India’s Housing Finance Market
The movement toward Tier-2, Tier-3 and smaller cities reflects a broader geographic expansion of India’s formal credit market.
The strongest opportunity appears to be in markets where housing remains relatively affordable, household incomes are improving and demand for first-time home ownership is increasing.
For borrowers, greater lender presence can mean more options for accessing formal housing finance. For housing finance companies, the same markets offer a larger pool of potential customers.
The challenge will be maintaining credit discipline while expanding rapidly. As more lenders enter these markets, companies with strong local knowledge, efficient underwriting, effective collections and sustainable branch economics will have to compete for the same customer base.
The data indicates that smaller cities are already an important part of India’s affordable housing finance market. The next stage of growth will depend on how effectively lenders can deepen that presence without compromising portfolio quality.
Takeaways
- Tier-3 and smaller cities accounted for 48.10% of affordable housing loan originations in H1FY26, according to Crisil Intelligence.
- Tier-2 and Tier-3 cities accounted for 64% of India’s home loan volumes in 2025, according to the Urban Money report cited by Business Standard and Moneycontrol.
- Affordable housing lenders are expanding branches and technology infrastructure to reach customers beyond major metros.
- Stronger demand is creating opportunities, but lenders also face greater competition and the need to maintain credit quality.
FAQs
Why are affordable housing finance companies expanding into smaller cities?
Tier-2, Tier-3 and smaller cities are generating a significant share of affordable housing credit demand. First-time buyers, self-construction activity, improving incomes and infrastructure development are supporting this demand.
How important are Tier-2 and Tier-3 cities for housing finance?
They are increasingly important. Data cited by Crisil Intelligence shows that Tier-2 and Tier-3 and beyond markets accounted for nearly 80% of affordable housing loan originations in H1FY26 when combined.
Why do some borrowers prefer housing finance companies over banks?
Housing finance companies often have local branch networks and underwriting processes designed for self-employed and informal-income customers. They may also provide faster processing or use alternative methods to assess repayment capacity. However, interest rates and eligibility vary by lender and borrower.
What are the main risks for lenders expanding into smaller cities?
Key risks include credit quality, inadequate local market assessment, rising competition, operating costs and slower growth at mature branches. Maintaining effective underwriting and collections becomes particularly important as lenders enter new markets.
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