| Housing Finance in India – Changing
Frontiers |
| by |
| National Housing Bank, India |
Policy
Development
| - Changing Profile of Housing Sector |
| - From “Social Sector” to “Economic Sector” |
| - Government’s growing thrust on housing |
| - Institution building and financial deepening of the
housing sector |
| - Growing dependence on the market – major shift in
policies since early 1990s |
| - Deregulated Environment – but “Accessibility” and
“affordability” continue to be major
challenges | |
Supportive policy regime
| - Housing as a “lead sector” for all-round economic
development |
| - Role of all agencies – private, public, cooperative
sector, Central and State governments – duly recognized in the
policy framework |
| - Continued fiscal provisions/tax benefits for borrowers,
lenders, corporates engaged in housing finance |
| - Repayment of principal and interest on housing loans are
eligible deductions |
| - Lenders can transfer 40% of their profit to special
reserve exempted from tax |
| - Supportive fiscal regime has led to sustained increase
in demand for housing loans |
| - Borrowers’ changing preferences – from debt averse to
market savvy – preference for loans |
| - Lower interest rates and stable housing prices over the
last 5 to 6 years have reinforced demands for housing
loans | |
Supportive Credit & Regulatory Policy
of RBI
| - Risk weight on housing loans reduced from 100% to 50%
(raised to 75% in September, 2004 by RBI in the mid-term
review of credit policy) |
| - Priority sector lending includes individual housing
loans upto Rs.1.5 million (recently raised from Rs.1
million) |
| - Banks’ indirect lendings to HFCs can also be covered
under priority sector |
| - At least 3% of incremental deposits of the banks to be
lent for housing – directed credit |
| - Banks’ investments in MBS also to carry reduced risk
weight of 50% |
| - Low NPA levels in housing sector (2 - 3%) has encouraged
the lending agencies |
| - Supportive regulatory policy has led to sustained
increase in lending for housing
finance | |
Financing Agencies
| - Large number of institutions in the market – supportive
policy framework |
| - Besides the HFCs, commercial banks have emerged as major
players – public sector banks, private sector banks as well as
foreign banks |
| - Commercial banks currently accounting for nearly 60% of
the market which is set to further increase |
| - Housing sector has registered an annual growth of nearly
32% over the last decade |
| - Steady growth in number of HFCs – 46 registered HFCs
with NHB 10 HFCs with assets size more than Rs.5 billion |
| - Dominated by few major players viz. HDFC, ICICI Home
Finance, LIC Housing Finance, CanFin Homes, Dewan Housing
Finance Corporation and HUDCO |
| - Top 5 HFCs account for nearly 80% of all deposits held
by HFCs and 75% of all lendings done by HFCs |
| - State level cooperative sector institution – funding
from Insurance Company – LIC |
| - With the entry of commercial banks in housing finance
sector, competition has intensified | |
Challenges
| - Formal sector still accounts for only 25% of the total
investments in housing |
| - Affordability and security are important issues for the
lenders who perceive higher risk in going beyond the existing
market |
| - Financial assistance through informal sector agencies are
being explored |
| - Direct intervention through the government’s subsidized
housing programmes for the lowest segments of the population -
limitations |
| - Targeting and sustainability of such programmes continue
to pose challenge - fiscal consolidation at the Centre and
State levels |
| - On the other hand, market cannot be relied upon to fund
these segments |
| - Housing needs of these segments still continue to be
recognized as the government’s responsibility |
| - Innovative mechanisms and products are being tried in the
form of subsidy scheme, loan-cum-subsidy, funding against
tenurial rights, funding through self-help groups |
| - Formal and informal sectors are still compartmentalized
|
| - Institutional innovations are being explored
| |
Real Sector Issues
| - Land and housing market are over-regulated |
| - Built-in rigidities. Inelastic supply curve affects
efficiency of the market |
| - Insensitive supply resulting in cost escalation as well
as distortion |
| - Legislations in the past, such as, the Urban Land
Ceiling Act and Rent Control Act have both resulted in reduced
supply of housing |
| - Though aimed at serving social good, they have created
distortions in the sector |
| - Corrections are being attempted at the policy
level |
| - Market absorbs the costs of these adjustments |
| - High stamp duty and registration fees are also impeding
the growth of the housing market. High stamp duties result in
discrepancies in the actual and the reported values by the
borrowers – stamp duty ranges between 5 - 14.7% |
| - Lenders have to take the call and adjust for such
discrepancies in value |
| - Adds to market imperfections | |
National Housing Policy
| - National Housing and Habitat Policy has encouraged all
stakeholders in the housing sector – a strong advocacy
document |
| - Has sought to build a broad consensus on the approach
and strategy |
| - Prescribes enabling role for the government and public
agencies |
| - Places reliance on private sector enterprise and
potentials |
| - Envisions strong, efficient and sustainable
public/private partnership in all segments of the housing
sector |
| - The policy has also prescribed a strong collaboration
between the formal/informal sector |
| - Recognizes the potential of MBS and secondary mortgage
markets as an important source of
funds | |
National Housing Bank
| - NHB’s regulation for HFCs - a confidence building
measure – to build a credible and dependable housing finance
system |
| - Has enhanced the confidence of depositors, investors,
creditors and borrowers as well as the policy makers |
| - Regulatory framework aims at streamlining the growth of
the housing finance sector along sound lines – Best Practices
approach |
| - Regulations have resulted in better integration of the
housing finance system with the broader financial sector |
| - Also integrates with the capital market through the
placement of bonds and other debt instruments by the housing
finance companies |
| - Deposit growth among the HFCs as well as their
borrowings from commercial banks indicate high level of
confidence |
| - Deposits have grown from Rs.8.6 billion in 1992-93 to
Rs.135 billion in 2003-04 |
| - Banks’ lending to HFCs has grown from Rs.28.7 billion in
2000-01 to Rs. 98.5 billion in 2003-04 |
| - Role of NHB in promoting MBS – so far 10 Issues
involving Rs.6640 million – profile of originators and
investors |
| - NHB’s refinance, present outstanding nearly Rs.85.97
billion involving HFCs and banks in private and public sectors
and the cooperative institutions. Cumulative refinance of Rs.
154.50 billion |
| - New endeavours to introduce Mortgage Guarantee mechanism
in the country – to serve larger and wider segments of the
market – with international partners | |
Opportunities
| - Deregulation has led to competition |
| - Demand - led growth of the sector |
| - Competition has led to rate war |
| - Innovative products in the market. Demand-driven
product |
| - Increased awareness among borrowers |
| - Greater transparency in the industry |
| - Low NPA levels |
| - MBS, Credit Guarantee and Credit Information are some of
the emerging Institutional
Innovations | |
Government Guarantees - State leve
| - Borrowings by public agencies against State government
guarantee |
| - Government guarantee – public agencies also doing EWS
& LIG housing |
| - Helped public agencies to serve their mandate |
| - Moral hazard element |
| - Also recourse to land as security was not necessary with
government guarantee. (Real sector issues could not surface
for correction) |
| - Government guarantee linked to the budgetary
allocations |
| - Prudent limits were often transgressed |
| - ARDBs – Issue bonds backed by State government
guarantee |
| - SLR Bonds – Government Guaranteed |
| - Municipal Bonds – backed by govt. guarantee and tax-free
| |
Subsidies
| - Fiscal Benefits |
| - Tax – Free Bonds |
| - Subsidised Schemes – Rural Housing |
| - Capital Gains Bonds through NHB |
| - Public Agencies – Budgetary Grants |
| - Major providers of housing |
| - State Government outfits |
| |