Hous­ing Fi­nance in In­dia

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In­tro­duc­tion

“A house is a home when it shel­ters the body and com­forts the soul”.

House gen­er­ally refers to a shel­ter or build­ing that is a dwelling or place for habi­ta­tion by hu­man be­ings. The term in­cludes many kinds of dwellings rang­ing from rudi­men­tary huts of no­madic tribes to high-rise apart­ment build­ings. In some con­texts, “house” may mean the same as dwelling, res­i­dence, home, abode, ac­com­mo­da­tion, hous­ing, lodg­ing, among other mean­ings. It is one of the most im­por­tant ba­sic needs of an in­di­vid­ual.

The pur­pose of a hous­ing fi­nance sys­tem is to pro­vide the funds which home-buy­ers need to pur­chase their homes.

Hous­ing fi­nance in In­dia

The need for long term fi­nance for hous­ing in In­dia is catered to by the fol­low­ing types of in­sti­tu­tions – 1) Banks 2) Co­op­er­a­tive Banks 3) Re­gional Ru­ral Banks 4) Agri­cul­ture and Ru­ral De­vel­op­ment Banks

5) Hous­ing Fi­nance Com­pa­nies (HFCs)

6) State Level Apex Co­op­er­a­tive Hous­ing Fi­nance So­ci­eties

7) NBFCs/MFIs etc. have also been lend­ing for hous­ing though in a small way

The Sched­uled Commercial Banks hold the max­i­mum share in the hous­ing loans out­stand­ing for­mal hous­ing mar­ket. The share of Banks can be at­trib­uted to ex­ten­sive net­work and broad cus­tomer base, ac­cess to sta­ble low-cost funds and other reg­u­la­tory man­dates. How­ever, the share of HFCs is also grow­ing and is in­dica­tive of the strength of their fo­cused ap­proach, tar­get­ing of spe­cial cus­tomer seg­ments, rel­a­tively su­pe­rior cus­tomer ser­vice, and sig­nif­i­cant growth plans.

Hous­ing Fi­nance pen­e­tra­tion in In­dia in­creased from 4.5% as on March 2004 to 7% as on March 2007 how­ever has re­mained at these lev­els over the last 5 years. This fig­ure is how­ever sig­nif­i­cantly lower than the pen­e­tra­tion rates in de­vel­oped coun­tries, and be­ing so it ap­pears to point to a sig­nif­i­cant scope for fur­ther growth in fu­ture. Nev­er­the­less, the chal­lenges im­pact­ing the growth of the sec­tor are rel­a­tively high property prices, de­clin­ing af­ford­abil­ity (as property prices has ap­pre­ci­ated at a faster pace than in­crease in in­come lev­els), and tough op­er­at­ing en­vi­ron­ment.

The to­tal hous­ing credit out­stand­ing in In­dia as on March 31, 2012 was over Rs.6261 bil­lion as against Rs.5345 bil­lion as on March 31, 2011, in­di­cat­ing growth of 17%. The hous­ing loan mar­ket re­ported a growth of about 10% over 2011-12 lev­els in 2012-13. Al­though high property prices and tough op­er­at­ing en­vi­ron­ment could con­tinue to tem­per the num­ber of home trans­ac­tions, pos­si­ble soft­en­ing in home loan rates, at­trac­tive schemes of­fered by the banks and higher ticket sizes (be­cause of higher property prices) could sup­port a 17-19% growth of the In­dian mort­gage mar­ket in 201213.

The mort­gage/home loan-toGDP ra­tio is es­ti­mated in the range of 8-9 per cent com­pared to 20 per cent in China, 43 per cent in Hong Kong and 54 per cent in Sin­ga­pore. Also, home loans are more con­cen­trated in met­ros. For in­stance, 60 per­cent of the loan ac­counts out­stand­ing for banks are from the metro and ur­ban ar­eas. Ac­cord­ing to BCG-FICCI re­port, home loan mar­ket is ex­pected to grow to Rs.40 lakh crore by 2020 from around Rs.5.5 lakh crore as of March 2011. This of­fers huge po­ten­tial for growth, not only in ur­ban ar­eas but also in ru­ral and semi- ur­ban ar­eas, which are

largely un­tapped.

Evo­lu­tion of Hous­ing

Fi­nance in In­dia

The early de­vel­op­ment of hous­ing fi­nance in In­dia came as an up­shot of Govern­ment hous­ing poli­cies, as seen in the five year plans. Ini­tially, the hous­ing needs were ei­ther self-funded or funded by the Govern­men­towned in­sti­tu­tions in the Realty Sec­tor like State Hous­ing Boards and De­vel­op­ment Au­thor­i­ties. In 1970, the Cen­tral Govern­ment set up the Hous­ing and Ur­ban De­vel­op­ment Cor­po­ra­tion (HUDCO) to fi­nance hous­ing and ur­ban in­fra­struc­ture ac­tiv­i­ties in the coun­try by pro­vid­ing tech­ni­cal and fi­nan­cial as­sis­tance to State Hous­ing Boards, Ur­ban De­vel­op­ment In­sti­tu­tions, and the hous­ing Co-op­er­a­tive sec­tor. This marked the be­gin­ning of for­mal hous­ing fi­nance in In­dia.

To sup­ple­ment Govern­ment sup­port, var­i­ous state-owned co­op­er­a­tive Hous­ing Fi­nance in­sti­tu­tions were set up in re­spec­tive states, and joint sec­tor (Pub­lic-Pri­vate sec­tor) ini­tia­tives were in­tro­duced. One ma­jor joint sec­tor ini­tia­tive was the set­ting up of the Hous­ing De­vel­op­ment Fi­nance Cor­po­ra­tion (HDFC) in 1977. The in­cep­tion of HDFC made the be­gin­ning of pri­vate sec­tor in­volve­ment in the In­dian Hous­ing Fi­nance mar­ket, and within a decade sev­eral Hous­ing Fi­nance Com­pa­nies were set up as ei­ther pri­vate ven­ture or joint ven­tures with State Gov­ern- ments or Banks/In­sur­ance Com­pa­nies-spon­sored Hous­ing Fi­nance Com­pa­nies. The co­op­er­a­tive in­sti­tu­tions that are State spe­cific have also pro­vided hous­ing fi­nance, es­pe­cially in semi-ur­ban and ru­ral ar­eas. The re­quire­ment of more Hous­ing Fi­nance In­sti­tu­tions to cater to the needs of people through for­mal mech­a­nisms led to the es­tab­lish­ment of Na­tional Hous­ing Bank (NHB) in 1988, as an apex in­sti­tu­tion. In the late 1990’s, commercial banks ac­tively got in­volved in hous­ing fi­nance and built re­tail hous­ing fi­nance portfolios. Their en­try into the hous­ing fi­nance mar­ket was trig­gered by mul­ti­ple fac­tors in­clud­ing lower in­ter­est rate regime, ris­ing dis­pos­able in­comes, rel­a­tively sta­ble property prices, fis­cal in­cen­tives, and vast de­mand for hous­ing loans.

The ag­gres­sive en­try of commercial in­sti­tu­tions in the hous­ing fi­nance mar­ket fu­elled the growth of the in­dus­try. The re­gional ru­ral banks and mi­cro­fi­nance in­sti­tu­tions are the later en­trants for pro­vid­ing Hous­ing Fi­nance. With in­sti­tu­tional hous­ing fi­nance mech­a­nism gain­ing trac­tion in In­dia, the hous­ing fi­nance sec­tor has grown ex­po­nen­tially since 2000.

Many large real es­tate de­vel­op­ers have tied up with Banks and HFCs to pro­vide home fi­nance to the buy­ers as a mar­ket­ing/sales pro­mo­tion mea­sure. Some builders have also en­tered the area of home fi­nance through their as­so­ciate con­cerns. Ma­jor Banks are also en­ter­ing into tie ups with builders to of­fer home loans for their projects.

Hous­ing Fi­nance Com­pa­nies in In­dia

Hous­ing Fi­nance Com­pa­nies (spe­cial­ized in­sti­tu­tions lend­ing for hous­ing) reg­is­tered with the Na­tional Hous­ing Bank are a ma­jor com­po­nent of the mort­gage lend­ing in­sti­tu­tions in In­dia. The 54 HFCs reg­is­tered with the Na­tional Hous­ing Bank as on March 31, 2012 have a net­work of ap­prox­i­mately 1692 branches spread across the coun­try. The growth in the hous­ing loan port­fo­lio of HFCs has been en­cour­ag­ing with a growth of 19 per­cent in the out­stand­ing hous­ing loan port­fo­lio for the year end­ing March 31, 2012. The mar­ket share of HFCs is ap­prox­i­mately 30-35 per cent of the re­tail hous­ing fi­nance mar­ket cater­ing pri­mar­ily to the bor­row­ers in the for­mal sec­tor.

Reg­u­la­tion and su­per­vi­sion of hous­ing fi­nance

Banks and Hous­ing Fi­nance Com­pa­nies (HFCs) are the ma­jor play­ers in the hous­ing fi­nance mar­ket in In­dia. While Banks are sub­ject to reg­u­la­tion and su­per­vi­sion by the Re­serve Bank of In­dia, HFCs are reg­u­lated and su­per­vised by Na­tional Hous­ing Bank un­der the pro­vi­sions of the Na­tional Hous­ing Bank Act, 1987 and the di­rec­tions and guide­lines is­sued there un­der from time to time. The reg­u­la­tory mea­sures in­clude pru­den­tial norms, trans­par­ent and stan­dard­ized ac­count­ing and dis­clo­sure poli­cies, fair prac­tice code, as­set li­a­bil­ity man­age­ment and other risk man­age­ment prac­tices etc. These mea­sures have helped to en­sure the de­vel­op­ment of the sec­tor on healthy and sus­tain­able lines.

Hous­ing Loans

Hous­ing loans are clas­si­fied into two cat­e­gories on the ba­sis of in­ter­est rates i.e. fixed rate and float­ing rate of in­ter­est. There are only few lenders in In­dia who of­fer pure fixed rates where the rate of in­ter­est re­mains con­stant for the en­tire ten­ure of the hous­ing loan. Hous­ing loans are gen­er­ally given at float­ing rate and are di­rectly linked to the base rate of the Bank and mar­ket con­di­tions. The loans are given for longer ges­ta­tion pe­riod. Gen­er­ally hous­ing loans are pro­vided by the lenders upto max­i­mum of 80% of the agree­ment value of the house. The loans are re­paid through monthly in­stal­ments i.e. EMI spread upto a pe­riod of twenty years. The max­i­mum ten­ure of a hous­ing loan is re­stricted by the bor­rower’s age at the end of the ten­ure so as to en­sure that the loan gets fully paid by or be­fore the re­tire­ment age.

The hous­ing loans ex­tended by Commercial Banks are in a range of 10 per­cent to 13 per­cent. Some Banks ex­tend hous­ing loans at lower in­ter­est rates un­der spe­cial schemes of re­fi­nance from NHB (Na­tional Hous­ing Bank) and other man­dates such as pri­or­ity sec­tor lend­ing. 83 per­cent of hous­ing loans are dis­bursed at a rate of in­ter­est lower than 12 per­cent. How­ever, the loans are mainly for higher in­come and mod­er­ate in­come groups who have ac­cess to for­mal sources of hous­ing fi­nance.

Mea­sures re­lated to Hous­ing Fi­nance un­der the Union Budget 2012-13

1) Credit Guar­an­tee Trust Fund will be set up to en­sure bet­ter flow of in­sti­tu­tional credit for hous­ing loans. This pro­posal will en­cour­age lend­ing by banks and hous­ing fi­nance in­sti­tu­tions to EWS and LIG house­holds as the pro­posed Guar­an­tee Fund will en­hance the con­fi­dence of the lend­ing in­sti­tu­tions in pro­vid­ing hous­ing loans to these seg­ments.

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