The staggering dimension of the housing storage in the country, urban as well as rural can never be solved by devising ad-hoc solutions. Long term goals and strategies are needed to solve this eternal problem. The government fully understand that we need enormous funds to solve these hydra headed problems. In fact specialised financial institutions with dedicated funds for housing development is the need of the hour.
In India the government must create a National Housing Fund on top priority basis. Political will and planned strategies can definitely create the fund. The government, through National Housing Bank, Should create such a dedicated fund for the development of housing stock in the country. Even a fraction of amount from the turn over of big public sector organisations like LIC, ONGC and the likes can bring about a sea change on front. Corporate India can and should also contribute to the corpus of the national housing fund. Millions upon millions of home seekers are fed up with slogans like, “shelter for all by the year so and so”, raised by political parties of all hues and colours.
We can also adopt the Singapore model to create funds for housing for tapping provident funds and other such avenues. A tiny percentage from the various taxes the government collects, can also be invested for creating the fund; which can fund the development of housing to different groups, especially the low income and the middle classes , on reasonable terms for a variety of shelter options. The task force of the planning commission on shelter must take the lead in this matter and evolve the clear cut strategy in consultation with National Housing Bank and the finance ministry. The fund can also be enhanced by the government sponsored Real Estate Mutual Funds.
The housing front is most vital for national economy and human settlement. National Housing Policy has clearly admitted this fact and has stressed the need for all out efforts for the development of the housing stock in the country. Shelter concerns all and hence deserve orchestrated and dedicated efforts form the government through its various organisations. A centralised housing fund is acute to build the nation .
The Indian housing finance sector is crowded with players of all sizes and nature: government organisations, insurance companies, banks, housing finance companies and co-operative organisations like HUDCO and NHB. Major players in the industry are HDFC, LIC housing finance, Dewan housing, CanFin homes, SBI home finance and Gujarat rural housing. The youngest entrant into the industry, which is penetrating rapidly, is ICICI. Interestingly, both can Fin homes limited and its parent Canara Bank are in to housing finance. It is the same with quite a few banks , for example, SBI and SBI home finance limited, Bank of Baroda and BOB finance, Vyasa and Vyasa bank housing . Although HDFC and ICICI have their banking arms, they compete with each other in personal loans ,and not housing loans.
The industry comprises of nearly 383 housing finance companies although disbursements from only the leading 29 institutions are eligible for re-finance from national housing bank ,which is the regulatory body of these companies. These housing finance companies (HFCs) constitute nearly 95% of the total disbursement by the industry.
Fund Raising Avenues
The primary sources of funds for Housing Finance Companies include NHB refinance schemes, public deposits, debentures, private placement of bonds and borrowing from banks and financial institution. Efficient financial management has a key role to play in the housing finance industry.
The various sources of finance are explained below.
NBH Refinance Schemes
The National Housing Bank (NHB) was set up in July 1998, under an Act of the parliament as a wholly owned subsidiary of the reserve bank of India. The NHB was conceived and promoted to function as the apex institution in the housing sector. With the setting up of NHB in 1998, there has been sustained efforts at creating and supporting new set of specialised institutions to serve as dedicated centres of housing credit. NHB’s role in this regard can be measured from the fact that from 2 housing Finance Companies (HFCs) approved for refinance assistance in the year 1989, when NHB had just come into existence, at present there are 29 HFCs whose disbursement of housing loan was approximately Rs 7,400 crore during the year 1998-99. NHBs cumulative refinance support provided to all the HFCs is over Rs 7,500 crore.
The list of 29 housing finance companies which are eligible for NHB refinance include:
Andhra Bank Housing
BOB Housing Finance
Cent bank Home Finance
Dewan Housing Finance Corporation
GIC housing Finance
GLFL Housing Finance
Global Housing Finance Corporation
Happy Homes Profin Limited
Housing Development and Finance Corporation
Housing and Urban Development Corporation (HUDCO)
Home Trust Housing Finance
Ind. Bank Housing
LIC Housing Finance
Livewell Home Finance Limited
Maharashi Housing Development Finance Corporation
National Trust Housing Finance
Orissa rural Housing and Development Corporation
Parashwanath Housing Finance Corporation
PNB Housing Finance
Peerless Abasan Finance
SBI Home Finance
Saya Housing Finance
Vyasa Bank Housing Finance
Vijaya Home Loans
VI Bank Housing Finance
As an apex refinance institution, the principal focus of NHBs programmes is to generate large scale of involvement of various primary lending institutions to serve as dedicated outlets for assistance to the housing sector. These institutions include schedule banks (both commercial and co-operative), regional rural banks and the state apex co-operative housing finance societies. NHB has formulated schemes to support all these agencies and help them to cater to the housing needs of the community at large. NHB also under takes direct financing in respect of government sponsored bodies/institutions for projects only.
The refinance assistance provided by NHB to HFCs has enabled them to increase their operations and cover a larger section of the population. The outstanding deposits and Housing loan portfolios of NHB approved HFCs have witnessed significant growth. For instance, the public deposits of the NHB approved HFCs increased from Rs 5196.03 crore, as on March 31, 1997 to Rs 6631.30 crore, as on march 31, 1998 and to Rs 7326.70 crore, as on March 31, 1999. Similarly, the housing loans disbursed by these companies grew from Rs 4627.74 crore during 1997-98 and to Rs 5783.36 crore during 1997-98 and to Rs 7413.44 crore during the year 1998-99. Thus ,the HFCs registered a 28.19% growth in the volume of housing finance disbursed by them during the year 1998-99 as compared with 24.97% during 1997-98. Also there was a marked growth in the positions of housing loans outstanding of these companies from Rs 15489.32 crore, as on March 31, 1997 to Rs 18048.32 crore, as on March 31, 1998 to Rs 21765.33 crore, as on March 31, 1999.
The need for easy flow of institutional credit for housing in rural areas has been considered necessary for some time. This formed the background for the announcement of a separate scheme for financial rural housing by the government of India. NHB formulated the Swarna Jayanti Rural housing finance scheme which was launched in August 1997. The scheme envisaged provision of institutional credit to individuals desirous of constructing or acquiring new dwelling units and for extension or repairs of existing units, in the rural areas of the country. In view of a flexible approach needed to modulate the options according to the shelter needs of different sections of the population, the terms of the loan under the scheme were suitably framed and operated through the banking sector, co-operative sector institutions and the HFCs, which possessed a substantial geographic coverage, functional reach and necessary infrastructure to ensure its effective operation.
In this context , conscious about the long term nature of housing finance, sufficient backup was in-built byway of refinance facility from NHB to all eligible institutions in order to supplement their efforts. The targets of financing 50000 and 100000 dwelling units during the first two years of operation of the scheme were successfully achieved by the various institutions.
Interest Rate scheme
The National housing Bank, in its new liberalized refinance scheme (LRS), lowered the interest rates for the best rated housing finance companies (HCFs) and scheduled banks (SBI) by almost 200 basis points across all the loan slabs, besides introducing floating interest rates. NHB also introduced an internal credit rating for the HFCs in order to determine the company’s eligibility, exposure, security and interest rate on refinance assistance.
The scheme provides refinance assistance with respect to prospective housing loans to be disbursed by HFCs and banks in addition to the loans already disbursed . It also offers reduced interest rates for shorter times. On the other hand, the scheme allows HFCs and banks to switch over from fixed to floating rate of interest and vice-versa on payment of the requisite fee. Apart from this , the repayment levy has also been reduced.
Loan Amount Fixed Rates Floating Rates
2-5 years 5-7 years 7-15 years 2-15 years
Upto Rs 10lacs 7.10% 7.30% 7.50% 8.90%
Rs 10lacs – Rs 1 crore 7.30% 7.50% 7.70% 7.10%
FACED with large-scale prepayments, multilateral institutions have been examining options of the entering the Indian housing finance sector .Institutions such as the Asian development bank (ADB) have already begun discussion with domestic housing finance companies. however such lending would not be eligible for any sovereign guarantees. Traditionally all lending by the ADB has been done only on the back of sovereign guarantees.
The offers by these multilateral institution comes even as some of the past borrowings from them are in the process of being paid. Already close to about 3 billion of sovereign borrowing has been paid and more borrowings by public sector companies are in the process of being tired. It was these prepayments that have triggered the interest of these institutions in the domestic housing sector.
In 1981, the United States Agency for the international development (USAID) under the housing guaranty program of the united states government permitted HDFC to borrow from the US capital market a total of US 125 million under various tranches commencing from December 1981. The funds raised were to be lent out to low income households. Similarly, in 1991, the overseas economic cooperation fund (OECF)entered into an agreement with the government of India to provide loan assistance to the tune of Japanese Yen 2.97 billion under the housing programme for median and low-income households. This fund was channelised through NHB to HFCs. More recently the ADB has provided technical assistance to NHB to strengthen the the housing finance institutions, to set up the mortgage insurance fund and to promote business linkages between HFCs and CFIs. It has also extended loan assistance of US 100 million each to NHB, HDFC and HUDCO for onward lending to borrowers.
The kind of support of these multilateral institutions are more in the nature of refinance or backstop facilities or in the forms of credit lines. Refinance would mean that the credit risk would be taken on the institution only. All other debtor-related risks would have to be assumed by the HFCs themselves. Backstop facilities ,are provided for the meeting asset liability mismatches. However, in the case of both credit lines and backstop facilities provided by the multilateral financial institutions , HFCs would have to pay commitment fees. These fees are in the of about 0.5 percent of the committed amount.
HDFC has signed an agreement with the international finance corporation ,the world banks private sector lending arm for 200 million credit line. Others such as LIC housing finance Ltd had initially opted for raising funds through external commercial borrowing (ECB) route. LICHFL has raised the equivalent of about 50 million through this route. This was done in view of the softening interest rates and the soft forward premium, which brought the effective cost down to about 4%. At current leading rates ,this would mean of spread of at least 6%, since most of them are lending at rates up wards 10%. In fact, funds available from multilateral institutions was likely to be even cheaper ,by at least 50 basis points lower than ECB rates.
But while institutions such as CanFin homes have begun looking more closely at the ECB route, they have prepared to be cautious. The caution was due to rising forward premiums. Also ,the banking regulation was not in favour or HFCs increasing their liabilities through the ECB route. This was because any weakening in the exchange rate was likely to put serious asset liability mismatches.
As a result , although there are offers to pick up funds from institutions such as the ADB, HFCs need to look at long-term implications on costs. The long-term implication is particularly because housing finance is traditionally a long-term funding activity ,in excess of 10 years, mostly fixed-rate loans. On the other hand, ECB availability is for periods of only 5 years and multilateral funding for 10 years, almost entirely on floating rate terms. Hence, if interest rates or forward premiums move upward, then the spreads also could become negative.
Advance from Banks
Another option that housing finance companies used to raised funds is through borrowing from nationalized banks. LIC housing finance (LICHF) plans to raise Rs 2000-2500 in the current fiscal. The funds will be raised primarily from nationalized banks.
LICHF, which registered a 65% growth in its disbursements at Rs 3200 crore for the year ended March ’03, has projected total disbursements to rise to Rs 4800 crore in ‘03-04.
Non Residents Indians
Private sector housing finance companies (HFCs)are allowed to raise deposits from non resident Indian, a funding route which was restricted to institution sponsored HFCs in the past. The Reserve Bank of India had sought the finance ministry’s opinion on permitting NRI funds to flow to the private players.
This move was considered to provide a level playing field to the private sector operators, who were at a disadvantage earlier. Private sector HFCs such as Dewan housing, Global housing, weizmann housing finance and hometrust housing finance had lobbied the national housing bank for permission to tap NRI funds, so that they could offer facilities at par with their “stronger” institutionalized partners like HDFC, LIC housing and GIC housing. The free flow of NRI funds to the private HFCs helped to boost “priority” housing and account for shortfalls in housing.
Unlike the private players, institution sponsored HFCs often do not feel the need to aggressively hawk for deposits ,since they have a big brother to bail them out .LIC housing , for example ,has excess to cheap funds from its parent and does not mop up funds through fixed deposits.
HDFC sees good business opportunities from NRIs in the future. In 2002, sanctions to NRIs amounted to around Rs 400 crore. The target for the year 2003 was Rs 600 crore.
HFCs such as the housing development finance corporation Ltd have resorted to borrowing from the international market. HDFC proposes to raise 250 million from overseas markets in the fiscal year 2003-04. Out of the total amount of 250 m,100 m was to be raised “immediately” and the rest in about three months. In addition, the company also spoke to the Asian development bank for loans. The quantum of loan was in the region of around 150 m.
HDFC expects to raise its loan sanctions to over Rs 12000 crore up from Rs 9042 crore last year. The amounts received from loan repayments and the funds raised abroad would take care of the banks funding needs for the current financial year.
Raising funds through Debt
Demand for the funds in the last quarter of the current fiscal to meet heavy disbursement, has resulted in a slew in housing finance companies raising debt. In the past week alone the industry has mopped up Rs 1600 crore from the market.
Bond issues and securitised paper aggregating Rs 1600 crore were floated by the clutch of financial institutions. For instance, HDFC raised Rs 1000 crore through its five-year bond at a coupon rate of 5.85%.
Housing finance disbursements are estimated to have increased at a CAGR of 45.6% during the past 5 years, with fiscal 2003 reporting a phenomenal 78% growth, according to the latest ICRA report on home loans. The Indian mortgage finance industry has been growing at an impressive rate in last 5 years owing mainly to the decline in mortgage interest rates, debt being increasingly seen as an acceptable means of financing home purchases, not a mention the various tax incentives provided by the government.
LIC housing finance ,for instance , is raising Rs 250 crore through five years bond , having a three-year put/call option and carrying a coupon rate of 5.95%. Dewan housing finance has raised Rs 60-70 crore through securitised paper against its home loans. This has door to door maturity of 11-12 years, and carries an interest rate of 6.98%.
The national housing bank is also out in the market, raising Rs 250 crore by floating taxable priority sector bonds. These bonds have maturity of three years with a two years put/call option and carry a coupon of 5-5.10%. NHB has floated these bonds at a time when many foreign and private banks are expected to invest in this paper to meet the shortfall in their priority sector lending targets.
HFCs have started tapping the securitisation market for raising non-debt resources for meeting their lending requirements. This is expected to bring down the cost of resources and lending rates, which are currently in the region of about 11%, depending on the amount and tenure. However they have restricted their securitisation of programmes to just 5 states in the country. the choices of the five states – Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu and Karnataka, is in the view of the low stamp duties. In these five states, the stamp duties are just 0.1%, subject to ceiling of Rs 1 lakh.
The HCFs ,which have tapped the markets, include HDFC, CanFin homes Ltd and ICICI home finance ltd. more are expected to tap the market during the coming months, some could for repeat issues.
MBS (mortgage backed security) issuers have been resorting to issue these kinds of papers after the last credit policy reduced the risk weightage on housing finance to just 50%. Consequently, if the HFCs float bonds, the risk weighting would be 100%, whereas, if they are backed by underlying housing finance assets, the risk weighting comes down. As a result ,the cost of raising funds are also considerably lower.
Mortgage Backed Security
The issue of MBS involves the assignment of retail housing loans from the HFCs to NHB. The individual loans ,repayable in EMIs ,are packed and offered to the investors by the way of securities in the form of pass through certificates sans resources to the issuer. The issue proceeds are used by NHB to pay the HFC the part of consideration of the receivables purchased. Under the transaction, NHB has to make an express declaration of trust (SPV) in respect of receivables, appoint itself as sole trustee and hold and administer the receivables as trust property for the benefit of PTC holders. The SPV trust relies only upon collections against the receivables and the credit enhancement specified in this information memorandum for making payments on the PTCs. The HFC, which has originated the housing loans will continue to administer them even after securitisation, in its capacity as servicing and paying (S&P) agent.
One of the main advantages of this paper for the originator is that such resource raising would be well within the existing CAR of the housing finance companies and it helps reduce the weighted average cost of working funds. the bigger advantage, however, is that in parceling the underlying cash flows and selling it ,HFCs tend to realise a spread.
One of the most compelling reasons for HFCs to raise these kinds of sources is also due to CAR. Most of the HFCs have already reached the upper limit of the CAR. Consequently, the ability to raise resources by borrowing has significantly declined. Under NHB guidelines, HFCs are allowed to leverage only upto 10 times their capital. Some HFCs are capitalized only to the extent of about Rs 100 crore which includes both equity and reserves.
The country’s first mortgage backed securitisation deal was successfully placed in the market with national housing bank (NHB) acting issuer and trustee to the proposal special purpose vehicle (SPV) trust. The deal size was RS 103.54 crore comprising 11,106 individual housing loans originated from housing development and finance corporation ltd. (HDFC) and LIC housing finance ltd. (LICHFL) in two separate branches for HDFC and LICHFL individually. The issue was marketed on the book building basis and closed on August 29, 2000, fully subscribed at 11.85%. The issue received good response from a wide range of institutional investors including insurance companies, Mutual funds, financial institutions and commercial banks.
In 2002, CanFin homes ltd. (CHL) hit the market with a structured mortgage backed securitised (MBS) paper. CHL was the second housing finance company after the housing development finance corporation in that year to tap the market through the MBS route. HDFC had earlier mopped up its targeted Rs 156 crore through MBS, an off balance sheet route to raise resources. CHL, however, raised only Rs 58 crore through the issue .
The entire issue was privately placed as was the case with HDFC. However ,unlike HDFC, which opted for the book building route, CHL offered a fixed coupon of 8.99% payable on a monthly basis, which worked out to a yield to maturity of 9.25%.
The MBS paper was essentially in the form of pass through certificates (PTC) ,which implied that the collection and collateralizing of the securities was vested with the national housing bank, which was also the trustee. The collateral for the PTCs were the properties funded by CHL.
This paper had obtained a+LAAA+ rating from ICRA. And to secure this high safety rating, additional safeguards were built into instrument. The safeguards were provided In the form of additional collatalising to the extent of another Rs 27 crore, which would comprise part B of the MBS. In addition, CHL also provided a liquidity support to the extent of Rs 77 lakh, which would act as a backstop facility. This facility was to be triggered in the event of shortfalls for meeting the PTC investors payments.
Trends in Housing Finance
The way financial sector has evolved over the last few years has forced HFCs to look for changes to survive and grow. Boundaries between different sections of the financial sector have gradually disappeared. Be it a bank, development institution, HFC or NBFC, there appears to be no area of financial intermediation that is taboo. Retail loans, asset management companies, banking and insurance are all areas where a single group operates under a variety of companies. It is just varying regulatory requirements that have different companies under the same umbrella carrying on different activities.
The same trend in pushing more stand alone HFCs to look at other areas of financial intermediation to leverage on the name and data base coming from the housing loan business. HFCs are likely to see a gradual growth in the importance of non-housing business in their earnings over the next few years. While housing finance is likely to remain the core area of the business, revenue from the other lines of financing should pay a more important role in stand-alone HFCs such as HDFC.
The disappearing differential in interest rates between different categories of HFCs is almost inevitably going to lead a squeeze on the interest spreads of smaller HFCs because they will not be able to raise resources at as low cost as HDFC and ICICI home finance.
Housing finance is likely to remain a low risk, low margin business that records fast growth in the foreseeable future. The market is likely to get a little more broadbased in the sense that HDFCs marketshare may be eaten into by others such as ICICI. But the industry will continue to be dominated by a handful of big players. HFCs associated with NBFCs and the housing finance division of banks may carve their own niches, but there is unlikely to be radical change in the basic structure of the sector for some time.