By Accommodation Times Bureau
By CA, Rajkumar Adukia?
“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 –
2) Cooperative Banks
3) Regional Rural Banks
4) Agriculture and Rural Development Banks
5) Housing Finance Companies (HFCs)
6) State Level Apex Co-operative 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 2012-13.
The mortgage/home loan-to-GDP 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 Government-owned 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 Governments 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 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. The proposal will result in deepening the housing finance market for the lower income households and help in mitigating their housing requirements with increased flow of institutional credit.
2) Provisions under Rural Housing Fund have been enhanced from 3000 crore to 4000 crore. This proposal will encourage the provision of Housing Finance to target groups in rural areas, a step towards mitigating the housing shortage in rural areas amongst the target groups.
3) The Interest Subvention Scheme of 1 percent on housing loan up to Rs.15 lakh where the cost of the house does not exceed Rs.25 lakh has been extended for another year: The proposal will have impact in improving the affordability levels and generating increased demand for housing loans particularly from low and median income segments.
4) The limit of indirect finance under priority sector has been enhanced from Rs.5 lakh to Rs.10 lakh. This proposal will encourage the lending by Banks to HFCs as a result of which their portfolio of loan upto Rs.10 lakh will increase significantly. As these loans will be recognized as priority sector loans in the books of banks, they will be able to increase their priority sector lending and meet their allocated target through indirect financing mechanism besides their own lending of housing loans upto Rs.25 lakh. This may result in a significant increase in loans to lower and middle segment households by HFCs.
5) Tax free bonds of Rs.60,000 crore to be allowed for financing infrastructure projects in 2012-13 which includes Rs.5000 crore for NHB and Rs.5000 crore for HUDCO For NHB, issuance of Tax Free Bonds will ensure availability of funds at lower rates which can be utilized for refinancing housing loans disbursed by Banks & HFCs at competitive rates. NHB can also invest these low cost funds in financing the Public Private Partnership Projects in affordable Housing segment.
6) Rate of withholding tax on interest payment on ECBs proposed to be reduced from 20 percent to 5 percent for 3 years for some sectors including affordable housing. It will improve the availability of funds through ECB (external commercial borrowings) as reduction in withholding tax will encourage the foreign lenders to lend to the eligible entities as approved.
A dynamic housing finance system is essential to enhance significantly the level of savings by the household sector. Housing investment has strong macroeconomic linkages and is directly tied to the internal efficiency and productivity of cities. In fact investments and lendings for housing occupy a very important place in the financial system of our country.