SHORT TERM EFFECTS OF HOME LOAN DISBURSEMENTS – AN ANALYSIS
Dr Sunder Ram
Reader in Finance, NMIMS.
A recent statement by the CEO of a leading housing finance institution estimated the disbursal of home loans from January to March 2002, by all institutions in India, at Rs.16,500 crore. If the margin contribution by the buyer and the working capital provided by banks to builders are also considered, the total infusion of funds into housing construction could be to the tune of Rs.25,000 crore during this period. An analysis of this development, coupled with an update on the housing sector is carried out in the paragraphs below.
The economic downturn since the late 1990s led to over-supply conditions, resulted in a massive price-correction. This led to the exit of investors from the market, and the entry of genuine buyers. Government policy measures, which were pro-housing, simultaneously included a mix of incentives and de-legislation, helped in making housing affordable to the Indian middle-class. The wide-ranging use of information technology has also changed work styles – it is neither necessary for entrepreneurs to operate in a central business district, nor are employees required to visit their headquarters each day. These factors have also extended suburbs beyond the established city boundaries, further pushing down real estate prices.
The package of policy measures includes permission for Foreign Direct Investment (FDI) in housing, together with a higher FII equity participation in housing finance companies. What further needs to be done by various state governments is the total scrapping of all manifestations of ULCRA and the Rent Control Acts that continue to prevail, high stamp duties, tardy land records and registration procedures that promote inefficiency and corruption.
The major beneficiaries of a housing boom, this time thankfully a genuine one, will be the prospective home owner. Falling prices, better construction and amenities, falling interest rates and friendly loan procedures have perked up business activity in a recession-hit economy. Other beneficiaries are the ancillary or supporting industries: cement, steel, paints, miscellaneous building materials and services. Those manufacturing elevators, household electrical equipment and home appliances are also benefiting from this boom. There is also a close synergy between the viability of new housing projects and the improvement of urban infrastructure, thereby bringing added benefits to the construction, construction equipment and building materials segment.
The proposed move by rating agencies to certify skilled and unskilled construction workers and provide ratings to construction companies is a good one that will streamline the operations of this ‘industry’.Many builders now seek to corporatize, embrace corporate governance practices, display a long-term interest in the business, break the nexus with anti-social elements, curb off-balance-sheet transactions and pay taxes. On the operational side, they now endeavour to provide better designs, construction and amenities, deliver on time to customers and do away with hard-cash dealings.
The aspect of management of finances by construction companies also merits mention. Hitherto, builders would engage in collecting advances from customers and use these amounts to accumulate stocks of land, instead of completion of projects in-hand. The market crash has made better sense prevail. Today, builders are timing their construction projects for early completion and then offering them for sale. In the light of the large flow of funds through institutional disbursals, builders are likely to adopt a multiple strategy of disposing unsold stock, completing unfinished projects and then initiating new projects.
Housing finance delivery systems have also undergone many changes. Stand-alone Housing Finance Companies are competing with Banks and Financial Institutions (FIs). All types of banks, from nationalized, to private sector, foreign and co-operative banks are moving away from financing of business and commercial activities to financing personal loans, knowing fully well that housing finance is the least-risk business. This very real fear of NPAs has also made ICICI turn towards personal finance in a big way, and IDBI is likely to follow suit. HUDCO, a techno-financial institution, has also entered the fray for retail lending and is one of the lowest-cost lenders in the market today. There is a large element of predatory lending taking place. To illustrate, not only do HFCs, banks and institutions compete with each other, but also with affiliates in their own group! Rate cutting is one manifestation of this phenomenon. It is quite possible that HFCs may buy out the home loan portfolio of banks and FIs, when an increased credit offtake from the manufacturing and service sector as and when the industrial revival takes place.
Some of the recent entrants into the housing finance sector include Birla Home Finance, ICICI Home Finance, Sundaram Home Finance and Tata Homefinance. IDBI and a host of other banks, NBFCs and FIs are contemplating an entry into housing finance, and the takeover route is one option. Birla took over ITC Classic Housing, ICICI took over Anagram Housing Finance. Sundaram and Tata were promoted by their parent finance companies, established in equipment finance. Tata Homefinance is likely to sell out to HDFC, adding to HDFC’s recent acquisitions of GRUH (Gujarat-based) and Hometrust (Kolkatta based, promoted by Gujarat Ambuja Cements). LIC Housing Finance is also taking over GLFL Housing, another Gujarat-based housing finance outfit, promoted by the Gujarat government. This trend of consolidation through mergers and acquisitions is likely to continue. Thus, India has seen the emergence of financial conglomerates having a presence in housing finance, insurance, banking and mutual funds. Examples being: HDFC, ICICI, IDBI, LIC, Sundaram, GIC, SBI, Canara Bank, Bank of Baroda and Punjab National Bank.
Public deposits seem to be the most popular mode of raising funds for financing operations. However, in view of the long-term exposure required, and the depositor is usually left with an illiquid investment instrument. MBS is a fund-raising cum financial engineering solution, which comes in two versions. In the pass-through structure, a Special Purpose Vehicle merely acts as a conduit (or passive trustee) on behalf of investors. In the pay-through structure, the future cash flows are carved into securities of varying maturity to cater to varying investor tastes in terms of risk and investment horizon- interestingly, HDFC has opted for this latter structure. Other sources of funds are equity offerings and placements with Mutual Funds, FDI partners and FIIs, FIs, Insurance companies and Banks. One can also envisage a strategic alliance among institutions across segments of the financial sector, dictating cash flows at an optimal rate of return.
The cleaning up of the stock exchanges through dematerialization, electronic trading and surveillance systems, rolling settlement, corporatization of brokerage houses, introduction of derivatives, demutualization of exchanges are features that rid the exchanges of most of its evils. The exchanges are now in a position to offer themselves as a perfect platform for providing the resources and the liquidity for financing the national housing effort, a feature that will enable the housing finance systems to ease its tilt from the government’s budget. In such a scenario, the government need only to act as a facilitator, and intervene physically only in respect of housing solutions for the weaker sections. There is an increasing acceptance of Mortgage Backed Securitization ( MBS) as as a fund-raising device, by converting housing loan receivables into marketable securities. As and when MBS, with all its variations are traded in the markets in the demat mode, it can attract retail as well as institutional investors in the form of insurance companies, debt mutual funds and pension funds.
The anticipation of these cash flows in an optimal manner may result in the cost of funds for housing to remain at low levels even if industrial demand pick up. Banks and FIs would find it attractive to revert to short- and medium-term to the industrial sector, particularly the industries supporting housing and urban infrastructure, outlined above.
There is some uncertainty though – which is related to the positive pronouncements by the Finance Minister that housing is to be the thrust area of this forthcoming Union Budget. Many prospective home-owners are likely to just hold back on their purchases to the next financial year, if some good news is anticipated. In such a scenario, the targeted disbursements of Rs. 25,000 may not fully take place before March 31, this year.