Robust growth in the housing finance market
The housing finance market has recorded Robust growth in the last five years, clocking a CAGR of about 40% between FY 1999 and FY 2004. Residential mortgage debt as a % of GDP was a mere 0.58% in 1994 which has moved upto 2.21% in FY 04. Falling interest rates in housing loans 17% (1996) to 7.5% (2004) combined with increasing loan tenures, increasing loan to value ratio and rise in the installment to income ratio are precipitating high growth rates in the housing finance market.
Structure of the housing finance Industry
Traditionally housing finance was dominated by a handful of private sector institutions. These Housing Finance Companies commended 70% market share in FY 1999, which has subsequently fallen to 50% in FY 2004 as a direct result of policy changes that permitted the entry of this bank into this industry. banks now control 40% of this market and continue to show explosive growth.
Reveals the impressive growth of 39.33% shown by commercial banks.
Variation in standards
The housing sector is witnessed varying standards and practices among the lending community, be it in origination and documentation or monitoring and supervision. Variation in standards across the industry imposes systematic risks, which can be a potential threat.
Aggressive approach may lead to defaults
Growing competition coupled with reduction in risk weights on housing loans has led the lending institutions to adopt aggressive practices including very high loan has led the lending institutions to adopt aggressive practices including very high loan to value loans, softening of collateral requirements, competitive pricing etc. with such an aggressive approach being followed may lead to increase in the default rates.
Cost of funds
The prevailing interest rate war has resulted in constant downward revision of interest rates. Further, the spreads are increasingly becoming thin as the lending rates are fast nearing the cost of funds. while during 1993-94, the interest rate on housing loans were in the range of 17-18% the same right now are in the range of 7%-8.5%. this may lead to erosion of profitability in the long run.
Security Deficit due to norms
Many primary lending institutions are making terms and conditions of sanction flexible and liberal, thus enabling the borrowers to avail the loans even more than value of security for long tenure of 20 to 25 years. The large quantum of institutional finance in the property transactions may lead to the problem of security deficit. Logically, the RBI has stipulated higher risk weightage of 75% as against 50% in November 2004.
Due diligence Issues
Increasingly, there have been instances of dilution in due diligence on the part of lenders. Sometimes, loans are sanctioned without strictly complying with laid down rules, systems and procedures. This situation arises primarily out of fierce competitive pressures. It is observed that the growing customer expectations force the PLIs to compromise due to diligence, field verification process and appraisal norms, in a rush to sanction the loan at the earliest.
Lack of Uniformity of norms amongst industry players
While banks and HFCs are the prominent players, HFCs face few constraints. The regulatory norms stipulate 10% capital adequacy for banks whereas the same is 12% for HFCs. Further, banks have access to lower cost retail funds compared to HFCs. Uniformity in norms and hence a level playing field has to be ensured for a healthy housing finance system. These are newer challenges which need to be addressed and resolved in times to come.
Industry Fragmentation
The fragmented nature of the housing finance industry is a major impediment for its further growth. Despite this, the industry has managed to grow mainly due to consistent decline in interest rates, tax incentives given by the government and changing income profile of the Indian middle class population.
Conflicting Interests
While the private housing finance institutions are required to abide by the guidelines of the NHB, the general financial institutions, which include the commercial banks, follow the guidelines set by the RBI. Today, both these sections are competing with each other for the same housing pie but their functioning and lending practices seem to bear no similarity.
Asset liability mismatch is one of the biggest risks housing finance institutions are confronted with. Funding of long term loans with short term deposits, leads to a mismatch between assets and liabilities that can be overcome by adopting appropriate asset liability management (ALM) techniques.
FDI Constraints
FDI guidelines for real estate development have come under a lot of flay. Guidelines requirements such as a minimum capitalization of US$10 million for a wholly owned subsidiary and US$5 million for joint ventures with Indian partners, development of a minimum area of acres, a minimum lock in period of 3 years from completion of minimum capitalization before repatriation of original investment, act as constraints to foreign investors.
Future Outlook
Though Indian housing finance system has got its own share of problems, given the huge tapped housing loan market, government support and favourable macroeconomic environment, reasonably resilient banking system, the industry has got excellent growth prospects. The present growth rate at about 40% +, appears to be sustainable in the foreseeable future.
The tenth plan has estimated the urban housing shortage at the level of 8.9 million dwelling units. The tital investment required for the above is estimated at the level of Rs 4,15,000 crore. And such a huge amount cannot be raised by the Central and State Governments alone. Rather active private sector participation is very much essential for achieving this goal, atleast partly.
Recommendations & Insights
Greater Uniformity of standards
Thus, there is a need for following measures to help the market perform more efficiently:-
Adoption of uniform practice by the housing finance industry relating to matters like appraisal and documentation, prepayment of housing loans, conversion of fixed rate loans into floating rate loans etc.
Greater transparency in dealings with the borrowers to enable them to exercise informed choices about products and lending institutions.
Promotion of Securitisation
In the budget 2002-03, the FM announced that NHB would launch a mortgage credit guarantee company will work to achieve the following goals:
Generate a greater volume of mortgage lending in the Indian market
Lower down payment requirements to as low as 5%
Broaden the eligibility for mortgages; and
Extend mortgage repayment periods upto 25 years.
These changes will facilitate capital market development by promoting securitization and increasing home ownership. Further, measures to promote residential mortgage backed securitization market in India can further strengthen our housing finance system and make it more competitive.
Central registry for housing mortgages
In order to address the issue of rising incidence of frauds in housing finance, section 20 of the SARFAESI Act introduced the provision of setting up a central registry to provide a statutory backing to the security interest created in favour of banks and financial institutions and enabling them to claim priority over other claimants while enforcing the securities. Introduction of such a registration system would be conducive to credit would become easy resulting in competition amongst lenders and better interest stared for the borrowers.
Reverse mortgages reverse mortgages are a financial tool to enable consumers and investors tap this source of funds for more productive usage. It is an arrangement wherein once the monthly installments, a lump sum amount or a line of credit. The present circumstances like higher life expectancy, growing nuclear families, house rich but cash poor populations suggest that the time is just right to introduce this instrument in India.
Techniques and schemes should be put in place for a proper asset liability management and explain the generally followed ALM techniques to counter an issue that could threaten the very existence of an institution.
Autonomy to banks
We propose to the banks through RBI, to undertake lending for housing purposes as it will provide a remunerative avenue. The RBI has permitted banks to grant loans for housing schemes upto certain limits from their own resources. Introduced stipulations regarding maximum loan amount and margins, charging of penal interest, security, term of the loan, graduated installments (where installments are progressive), etc. for PCBs housing loans.
Interest rates not too much of a concern
Both the banks and HFCs are increasing their business at the stake of decreasing returns. However, a consoling factor is that mortgages are just 2% of GDP and about 10% of the advances of the banking sector. Hence even if the bubble were to burst, it may be withstood by the country.
NHB report on trend and progress of housing in India, June 2004
Housing finance in India – by ICFAI press (http://www.icfaipress.org/books/housingfinanceinIndia_ct.asp)
Housingfinance.org – www.housingfinance.org/pdfstorage/7640060605.pdf
India: Studies and Technical Advisories in Housing Finance – Urban Institute
A credible low income housing policy – by Ramesh Ramanathan (India Together)

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