CHAPTER 1 V HOUSING FINANCE SCHEMES IN INDIA - AN ANALYSIS

House is a basic necessity. Everyone, rich or poor, whether in rural areas or urban areas, needs a house to protect his life and property and also to promote his well-being. Houses do a great deal more than housing the people. They channel human relationship and are an integral part of the society. A house is not an isolated structure but forms part of the neighbourhood and the total community. Housing does not mean the construction of a shelter only, a shelter to protect way from the inclemencies of weather. Housing in its wide sense a comprehends a shelter designed to fit in with his social and cultural wants and located in proper environment supported by physical and social infrastructure. The physical characteristic of the present day houses in the country also reflects various phases of the evolutionary process in the socio-cultural growth of the country. There is a growing demand for recognition of housing as basic human right. Providing adequate housing is the responsibility of the State. In a large country like lndia, natural diversities, geographical and climatic extremes and socio- economic disparities have enhanced the magnitude of the problem of housing. The rural urban divide is a glaring example of the disparity. Estimates show that lndia will have 41 million people without a proper roof over their head by the year 2000 A.D. Of this, 32 million people would be in rural areas. Although there has been a sharp increase in the construction of houses in

the past two decades, escalating land prices, paucity of land in urban centres and high interest rate have dampened the pace in recent years. HOUSING SHORTAGE IN INDIA Housing shortage is the gap between total demand and total stock of houses. A shortage arises due to many forces among which the most important are the slze and growth in population, the marriage age and the prosperity of the economy The housing shortage is estimated to have increased from 9 million dwelling units in 1951 to 21.1 million in 1981 to 39.1 million in the year 2001. Table No. 4.1

Source: NBO and Seventh Five Year Plan. As is seen in Table No. 4.1, housing shortage has grown faster in rural areas as compared to the urban sector. Rural and urban housing conditions in the country are unsatisfactory. The migration from rural areas, growth of cities and towns, growth of population, limited land, steep rise in construction materials have all contributed to the problem. In spite of the tremendous boost provided to the housing sector in shortage in the country continues to be alarming. State recent times, the hous~ng Govt. has encouraged specific programmes and policies in the public and private

sectors in construction activities. The housing policy aims at all-round development in housing and environmental situation and eradicating the bottlenecks In the housing sector. The magnitude of the housing shortage in urban and rural areas and the year- wise details from 1991 to 2001 are exhibited in Table No. 4.2 and a diagrammatic representatiin of the same is given in Fig. - 1. Table No. 4.2

Source: National milding Organization The housing shortage which stood at 8.23 million i n 1991 is expected to fall to 6.64 million in 2001 is due to the healthy investment from all quarters and equalizing the resources through various housing finance institutions and by broad-basing the institutional set up in the housing sector. The Govt. expects to reduce the urban housing shortage to the barest minimum and
by 2011 A.D; housing shortage will almost be negligible.

Fig. - I Housing Shortages in India (7991-2007)

HOUSING AND THE FIVE YEAR PLANS:

The Housing Programmes and Policies of the Govt. date back to the First Five Year Plan when the emphasis was laid on encouraging the housing to people from various sectors. Both the central and the state Governments have been implementing a number of housing schemes right from the first five year plan for eliminating the housing shortage in the country. It is therefore not surprising that houslng is regarded as an important index of overall economic activtty. It would appear that housing has not enjoyed a high priority under our Plans. Though emphasis was laid on housing during the Five Year Plans, the investment in housing was not adequate enough to meet the ever increasing demand, owing to further growth of population and the new household formations. In the initial stages adequate priority was not accorded to the housing sector thus resulting in low investment in this particular area. The allocat~onmade for housing in successive Five Year Plans reveals that though there has been a cumulative increase as compared to the total outlay, the percentage of provision made for housing has been declining. Total Financial Outlay and Outlay for Housing in Five Year Plans are presented In Table 4.3

Table No. 4.3 Total Financial Outlay and Outlay for Housing in Five Year Plans

i ; F ;year Plans

Total Outlay (Rs. in crore)

1 2 3 4 5

First Second Third Fourth Fifth

7 Sek 8 Ei hth Source: Ministry

3360 6750 10400 22635 47561 172210 80 610000 Jrban Affairs and Employment.

1150 1300 1550

Fl,

F~eFcenGg; outlay for Housin 34 19 15

31458 77976

10

In the First Five Year Plan, provision made for housing was 34 percent of the total plan outlay. It was 19, 15 and 12 per cent respectively in the Second, Third and Fourth Plan periods. It was 10 per cent in the Seventh Plan period and it was kept to the extent of 12 per cent of the total outlay during the Eighth Five Year Plan.
HOUSING FINANCE

Housing Finance is an important element of housing policies persuaded by'the Governments of developed and developing countries of the world. In India the flow of credit into the housing sector comes from two sources that is formal and informal sectors. According to Dr. Rangarajan Committee Report in the year 1987, the formal sector comprises of :
b Central and State Governments' budgetary allocation
' i General financial institution, namely LIC, GIC, and its subsidiaries,

scheduled commercial banks and Provident Funds

P Specialized housing finance instiiutiins like National Housing Bank (NHB)

the HUDCO. Apex and Cooperative finance institutions are in the public sector while HDFC and other housing finance companies are in the private sector. The informal sector consists of the households themselves, public and private employers extending house loans to their employees and project financing by HUDCO and other agencies outside the budgetary processes. In lndia 1941, we had 5.72 lakhs surpluses houses, but in 1951, we had a shortage of 2.57 lakhs houses and the shortage is co:ntinuously increasing with the growth in population. The Government has been able to solve the problem of food, but not shelter. For 1988 itself we needed 250 lakhs houses in India. which required a finance of Rs. 88,000 crore. This shortage is increasing by 3.5 per cent per annum and by 2000 A.D. lndia will require 320 lakhs houses more. The finance of which requires Rs. 1,80,000 crore. Table No. 4.4 shows the housing requirements in the Ninth Plan. Table No. 4.4 Housing Requirements during Ninth Plan No. 1 2 Segment Number of Units (in Lakhs) Fund's Requirement From Formal

Urban 167.6 Rural 162.5 330.1 Total Source: Industrial Economist, 30'~ 0ctober

121.370 29.000 150.370 - 1 4 ' ~ o v e m ~ 1998, ~ e r p. 48

As per the Ninth Plan, a total sum of Rs.150.370 crore is need for construction of 330.1 lakhs units leaving a margin of 98.370 crore to be mobilized

by the expansion of formal sector and also encouraging informal sector flows. Supply demand ratio for urban housing comes to 1:3. In such circumstances, it is not possible for the Government alone to tackle the problem. Hence it was decided to sponsor the private sector in housing finance through the National Housing Bank, which is a subsidiary of RBI. They will help all private wrporations to work as per their norms. They expect the private sector not to depend on them totally but will sponsor wrporations, which generate funds from the public itself by. way of deposits and from the loan seekers by way of House Loan Account Scheme. For housing finance no recognized instiiutions were existed till 1971. When Government of lndia constituted the Housing and Urban Development Corporation (HUDCO), individual demands for housing loans were fulfilled by the setting up of Housing Development Finance Corporation (HDFC) in 1977. The establishment of National Housing Bank (NHB), an apex body owned by the RBI in 1988, has a new direction to the decentralized finance system by promoting housing finance institutions. The major institutions meeting the housing finance in lndia are:
1. NATIONAL HOUSING BANK OF INDIA (NHB)

NHB was set up in July 1988 under the National Housing Bank Act 1987 i.
ii.

with the following objectives: To mobilize resources for the housing sector, To promote financial institutions, both in the urban and rural areas.

iii.

To provide financial, technical and administrative assistance to such institutions.

iv.
v

To regulate the working of housing finance institutions at all levels. To provide advisory services in operating the policies relating to savings mobilization, credit appraisal, disbursement and recovery.

vi.

To identrfy, legal, fiscal, institutional and other constraints to the development of the housing finance system and to recommend measures to remove them.

vii.

Establishing House Loan Account Scheme, extending the refinancing schemes for housing finance by commercial banks and other financial institutions; and

viii.

Co-operative land development and shelter programme of public and private agencies through HUDCO and other financial institutions and scheduled banks. It must be stated that housing finance companies across the

country are confronted with a stark problem : a cash crunch of unprecedented proportions. Refinancing is inadequate and institutional credit is limited. Many squarely blame the NHB for the present state of affairs as the apex institution
NHB is expected to refinance approved HFCs. Currently there are about 370

Housing finance companies in the country and only 26 of them have been approved by NHB for refinance facilities. There are a large number of HFCs, which are depending on it for more than 65 per cent of their loan funds. The problem is that the NHB itself neck deep in trouble due to the stock scam.

The RBI has suspended the long-term operational assistance of Rs.50 crore to NHB. The 13 per cent bonds floated by the NHB in December 92 yielded only Rs 45 crore when compared to Rs 88 crore mobilized in 1991. The Capital Gains Bond Scheme under which NHB mobilized Rs. 156 crore till September 1992 has been terminated. NHB's problem has naturally had a deleterious effect on the refinance it is able to offer to the HFCs. The Government has been dithering over the implementation of the Working Group Report on Finance for the Housing Sector as the RBI, the Ministry of Finance and Ministry of Rural Development have objected to some of the important proposals put forward by the Group. For instance, the report argued that the Government must do away with the discrimination, which the HFCs face, compared to other financial institutions. There are three main factors which have a direct bearing of housing finance, viz., I ) The availability of serviced land, which is a natural resource and cannot be changed; 2) Providing land for housing implies, cutting of other sections like agriculture and forestry as the industrialization and urbanization have appropriated a large chunk of land, the environment is affected by this encroachment; and 3) the availability of building materials at a reasonable price. Since 70 per cent of the Indians are poor, the housing components
must therefore be manageable. With this housing situations ,claiming immediate

national attention, housing finance institutions have mushroomed in the last few years. However, despite them and their disbursement, much needs to be done especially in areas of policy, law and taxation.

These aspects have been analyzed and reported by the Working Grwp on Finance for the Housing Sector. It is considered as the most comprehensive document on the subject. But many of the suggestions have
been demolished. Rejection and lethargy have also disillusioned and

d~scouraged the housing finance authorities.

2. HOUSING AND URBAN DEVELOPMENT CORPORATION (HUDCO)

Over the decades the housing scenario presents a dismal picture. The living conditions of the people, especially those from the economically weaker strata, are abysmally low. Shelter, even though a roof over one's head, continues to be one of the burning issues of the day. It is in this environment that it was decided in 1970 to establish
HUDCO as a fully owned Government of lndia enterprise with the following

conditional objectives: i. To provide long term finance for construction of houses for residential purposes or finance or undertake housing and urban development programmes in the country. ii. To finance or undertake, wholly or partially, the setting up of new satellite towns.
iii.

To finance or undertake the setting up of building material industries. To administer the money received from time to time from the Government of lndia and other sources as grants or otherwise for the purposes of financing or undertaking housing and urban development programmes in the country.

iv.

v.

To promote, establish, assist, collaborate and provide consultancy services for the projects of designing and planning works relating to housing and urban development programmes in India and abroad.

vi

To subscribe to the debentures and bonds to be issued by the State Housing Board Improvement Trust, Development Authorities specifically for the purpose of financing housing and urban development programmes. Incorporated on April 25, 1970, HUDCO was an expression of the

concern of the Central Government with regard to the deteriorating housing conditions in the country and the desire to assist the state authorities and various agencies in dealing with it. HUDCO has emerged as the leading national techno - financial institution with the major objective of financing and encouraging the housing activrty in the country and alleviating the housing shortage of all groups in rural and urban areas with an emphasis to cater to the needs of the Low Income Groups. Resource base of HUDCO The present paid up capital of HUDCO is Rs. 1,613 crore as against the authorized capital of Rs. 2,500 crore. HUDCO created a reserve of Rs. 1,126 crore over the years. This institution has further mobilized resources from LIC, GIG, UTI, Banking Sector, International Assistance and Market Borrowing as well as through public deposits to the tune ~f Rs. 20,006 crore. At present the cumulative resource base of HUDCO is Rs. 28,043 crore. The details are shown in Table No. 4.5 and 4.6 respectively.

Table No. 4.5 Resource Base of HUDCO (as on 31.03.2003) A. INTERNAL RESOURCES
-

SI.

No.

Provisional

Capital Base (Authorized) Equ~ty (Paid-up) 1 Share Application Money Reserves Net Worth Borrowings (SLR Debentures, Taxablemax-free Bonds, Loans 2 from LIC, GIC, UTI, NHB, International Borrowings, Public Deposits etc.) L Total

Amounts (Rs. in crore) 2500 1613 50 1126 2748 20006 28043

B. INTERNATIONAL RESOURCES Table No. 4.6 Foreign Aided Projects Sanctioned

W, Germany
BIC, Japan

DM 135M 8670 MJY (Million Japanese Yen) availed for 26 Projects for Water Supply & Sewerage Projects Rs. 345.57 Cr (LOC) ($73M) $30M (Rs. 135.60) Cr. raised from US Capital Market $100M for Housing (Rs

ian Development

Source : Website of HUDCO Programmes of HUDCO: In order to realize the objectives for which it was established, HUDCO has implemented a variety of schemes for providing shelter and there by improving the living conditions of the people. HUDCO extends assistance of benefiting the masses in urban and rural areas under the broad spectrum of programmes as described below:

Housing: Urban Housing, Rural Housing, Staff Rental Housing, Cooperative Housing, Repairs and Renewals, Urban employment through Housing and Shelter upgradation, Night Shelter for Pavement Dwellers, Working Women Ownership Condominium Housing, Housing schemes through Private Builders. In addition to Housing, HUDCO also extends assistance to infrastructural facilities (like land acquisition, urban infrastructure, basic sanitation, etc.), consultancy s e ~ i c e sbuilding , technology and training in human settlements. HUDCO's financial assistance for their projects are made available to agencies which include State Housing Board, Rural Housing Boards, Slum Clearance Boards, Development Authorities, Primary Co-operatives, Apex Cooperative Housing Federation, NGOs and Professional Private Developers. Though HUDCO started its assistance for Rural Housing only from

1977-78, its contribution to rural housing for weaker section has been significant
since its inception. Financing by HUDCO is invariably project oriented and the objective is to ensure that projects are affordable to the target groups and at the same time technically sounds, financially viable and legally acceptable. HUDCO ensures that the houses built for Economically Weaker Section (EWS) and Low Income Group (LIG) families remain within their repaying capacity. People who have been classified by HUDCO in different economic categories include:

I.

Economically Weaker Section Economically Weaker Section (EWS) with household income of Rs. 1,250 per month or less.

ii.

Low Income Group (LIG) - household income not more than Rs. 2,650 per month. This group should be above EWS

iii.

Middle Income Group (MIG) with household income above the LIG but not more than Rs. 4,450 per month and

iv.

High Income Group (HIG) above MIG -but not more than Rs. 4450 per month. The details of annual allocation of resources by HUDCO are shown

in Table No. 4.7. Table No. 4.7 Annual Allocation of Resources by HUDCO ' I . Category Financed Percentage Allocated No. I EWS 30 55 2 LIG -25 3 MIG 25 45 4 HIG 8 Others 20 100 Total Source: Corporate Protile: HUDCO Table 4.7 indicates that 30per cent of the annual allocation of resources by HUDCO is for EWS, while the annual allocation of resources to LIG and MIG represent 25 per cent each. The annual allocation of resources by HUDCO to HIG and Other categories constitutes 20per cent only. A differential interest rate policy operates for various categories of household with over ridding emphasis on concessional rate of lending for EWS and LIG .The lower the household income, the lower the interest rate and vice

versa. Similarly, the lower the cost of shelter unit, the higher the HUDCO's loan

component as part of the project cost. In the case of EWS where the unit cost is Rs. 7500 or below, HUDCO finances the entire project cost. From the following it can be seen that with the increase in unit cost, project cost goes of declining. Details of the Extent of Financing of the Cost of Houses to loanees coming under various categories of Income are given in Table No. 4.8 Table No. 4.8 Details of the Extent of Financina of the Cost of Houses to Loanees corning under various iategories of lncome Extent of Financing of the SI. Income Category Cost of House (in percentage) No.
I

FWS
I

RO
I

4 1 HIG Source: Corporate Profile: HUDCO

.-..-

.60

Other major fields where HUDCO operates are:

I. Urban infrastructure

II. Training and Research input into Shelter Programmes

Ill. Action Plan Schemes such as: a. Integrated low cost sanitation scheme b. Urban employment generation schemes through shelter upgradation and training. c. Night shelters
d. Building centres

IV. HUDCO's asststance to rehabilitation housing for national calamities V. Land Bank for shelterless category VI. Layout design and analysis models developed by HUDCO

VII. Support to building material industry VIII. Design development and consultancy support
Trends in Sanctioning and Releasing of Funds by HUDCO:

HUDCO's programmes during the 8th plan period, i.e., from 1992 to 1997, had envisaged to support housing and infrastructure projects with a substantial loan commitment. The sanctions were of the order of and the releases were to the tune of about Rs. 5,286 crore. The increased sanctions and release size, reflects the

Rs. 7323 crore

Government's thrust for a larger housing effort for the poor and the urban basic services. This prop3 indeed had helped to provide shelter and amenities to a large number of economically weaker and socially downtrodden sections of the society in rural and urban areas. Table No. 4.9 Details regarding the Operations of HUDCO during the Eighth plan period

Source: Corporate Profile: HUDCO The Eighth Plan operations of HUDCO had surpassed its financial and operational efforts during the last twenty two years (i.e., 1972 to 1992) as is evident from Table 4.9.

HUDCO Vision 2002

The vision statement for HUDCO 2002 envisages the role of market leader in supporting housing and urban development needs of the emerging 21'' century into the right choices of options, for policies, progammes and projects and diversified mode of delivery options through public, private, cooperative, corporate, NGO and individual sectors. The HUDCO vision 2002, projects its activity levels of financial sanction and releases of the order of Rs.12, 717 crore and Rs.11, 058 crore as given in Table No. 4.70 and a diagrammatic representation of the same is given in Fig. - II. Table No. 4.10 HUDCO: Vision 2002 -St. Operations No. 1 . Up to Eighth Plan (70-92) 2 Eighth Plan (92-97) Vision 2002 Ninth Plan (97-2002) 3 Total Source: Corporate Profile HUDCO (Rs. in crore) Grand Sanctions Releases Total 11,159 6,801 4,358 7,323 5,286 12,609 12,717 11,058 23,775 26,841 20,702 47,543

Fig. - II Funds Sanctioned and Released by HUDCO (1970-92,92-97 & 97-2002)

As a market leader in this area of techno

- financial assistance,

HUDCO would emerge as the only organization of its kind for dealing with the needs of shelter and infrastructuie development of human settlements. In short it would be the overwhelming endeavor to serve as an organization for housing and urban development sector and also for meeting the goals of social objectivity and profitability. As HUDCO completes three decades in the service of the nation, it has contributed its mite towards poverty alleviation with successful performance in provision of housing and basic services. Today HUDCO's assistance covers the housing needs of all income categories of the society with a significant emphasis on the needs of the deprived. It covers assistance for construction of new housing stocks as well as for upgradation of the existing housing stock with an exclusive allocation of its annual resources for the needs of the weaker section and low income groups. HUDCO extends funds to this section at a cheaper and affordable rate of interest with a higher amount of funding towards the total cost of house and a longer repayment period. HUDCO during its three decades of existence, has extended assistance for taking up over one crore dwelling units in total, in urban and rural areas. HUDCO's assistance for housing in last three decades has helped in providing shelter to 101.4 lakhs families in urban and rural areas and significantly 94 per cent has beneficiaries are the poor and low income groups. In recent years its annual contribution has been over 1.5 million housing units. In 1999 to 2000, its contribution as part of 2 Million Housing Programme is particularly significant as HUDCO is contributing to support more

thep!%gramme tq&yf seven hkhs in urban areas t .- 7.; y,.;;; r-\ and more than six lakhs'.@?qainst the prograhuqe target of 13 lakhs in rural than 4 lakhs units as a
,
, i ~

areas. Under the 2 Millin Hou-

iagainst j ~ the target ~ of & 10 lakhs ~

housing units, HUDCO extended support to build 10.65 lakh units in 1998 to 1999 and 11.09 lakh housing units in 1999 to 2000. In the fiekl of provision of basic infrastructure in urban areas HUDCO's contribution has been significant. HUDCO has assisted in the implementation of 1811 projects with a total project cost of Rs.20,613 crore and its loan assistance came to the tune of Rs. 12,242 crore. This covers

infrastructural facilities such as water supply, sewage, drainage, sdid water management, transportation, including airports. Human Settlement Management Institute (HSMI), the research and training wing of HUDCO, is the model institute on behalf of the Ministry of Urban Affairs and Employment to co-ordinate various training and documentation activities under the Information, Education and Communication (IEC) component of Swarna Jayanti Shahari Rozgar Yogana (SJSRY), the major poverty alleviation prograri-*liein urban area. Seventy training programmes have been conducted under IEC during January 1999-March 2000.
HUDCO had achieved a land mark performance during 1999-2000.

HUDCO achieved an all time high sanction of Rs 8.899. 89 crore, about 33.5 per

cent growth over last year's achievement of Rs 6666.67 crore by providing assistance for construction of 16.34 lakh dwelling units and over 1.8 lakh sanitation units. It had also given support by taking up 86 urban infrastructural

projects through out the country. The loan amount released during 1999-2000 amounted to Rs 4,317.50 crore, which shows an increase of 35 per cent over the period 1998-1999 (Table No.4..11). HUDCO had also received awards for its outstanding performance as evaluated against the MOU's entered into with the respective ministries. The award, for being the top ten Public Sector Undertakings, was received by HUDCO from the Prime Minister on 1st April

Table No 4 11 HUDCO's Landmark Performance at a glance during 1999-2000. - - (Rs. in crore) Operations 1998-'99 1999-2000 Growth (in percentage) No 33.50 8,899.89 sanctions - 6,666.67 1 35.00 3,200.68 4,317.50 2 -Releases Source. Shelter - HUDCO publication, Vol. IllNo: 2, April 2000, p. 6.
-

Details regarding HUDCO's Operational Performance as on 3oth June 2003 are presented in Table No.4.12

Table No.4. 12

From Table No.4.12, it is discernible that HUDCO has so far given assistance for the construction of more than1.35 crore Residential Dwellings, 1.10 crore Dwellings for Economically Weaker Section, 13.84 lakh Residential Dwellings for Lower Income Group, 4.3 lakh Dwellings and for Middle Incpme Group and 2.67 lakh Residential Dwellings for Higher lncome Croup besides providing financial assistance for the construction of 4.15 lakh HUDCO Niwas Deta~lsregarding the Scheme-wise assistance given by HUDCO upto 3othJune 2003 are given in .Table No.4.13

Table No.4.13 Details regarding the Scheme-wise assistance given by HUDCO upto 30" June 2003

Table No.4.13 indicates that a major part of HUDCO's financial assistance constitutes assistance for Urban Housing (68.93 per cent),while the assistance for Rural Housing; Co-operative Housing and Staff Rental Housing represent 2.9 per cent, 1.18 per cent and 2.09 per ceni respectively. Details regarding the Urban Infrastructure Operations of HUDCO upto 30Ih June 2003 are exhibited in Table No.4.14

Table No. 4.14 June, Details regarding the Urban lnfrastructure Operations of HUDCO upto 3oth 2003

Source: Website of HUDCO It can be observed from Table N0.4.14 that HUDCO's Urban lnfrastructure Operations encompasses Utility Infrastructure, Social lnfrastructure and Commercial Infrastructure. Among the Urban lnfrastructure Operations, Utility lnfrastructure represents the single major component accounting for about 71.5 per cent of the total, while Sociallnfrastwcture and Commercial lnfrastructure constitutes 7.08 per cent and 21.42 per cent respectively.
3. HOUSING DEVELOPMENT FINANCE CORPORATION (HDFC)

Incorporated 1n1977with a share capital of Rs. 100 million, HDFC has since emerged as the largest mortgage finance institution in the country, promoted by lClCl and with initial investments from the International Finance Corporation and the Aga Khan, the corporation had a series of share issue raising its capital to Rs. 1 19 billion.

Objectives:
The prlmary objective of HDFC is to enhance residential housing stock and to promote house ownership. Another objective is to increase the flow of resources for housing through the integration of housing finance institutions with the domestic capital market.

Operations:
HDFC commenced operations as a mortgage bank. It raised large resources, both domestic and international ,and lends primarily to individual households. In 1991, it entered the retail deposit market by offering savings and ~nvestment opportunities to households by competing with other instruments in the financial market As a result, the number of depositors have risen from 56 thousand in 1991 to over 9, 58000 in 1998 with an outstanding amount of Rs.
44.24 billion, HDFC has a mix of individual and corporate clients ,both on the

funding and lending side. HDFC's lease finance facilities are being offered to companies and devebpment authorities for the development of infrastructural facilities and other assets. Cumulative approvals and disbursements of HDFC as on 31'' March and Rs.3.01billion respectively. 1998 were Rs.4.33 b~llion
Table NO. 4.15 shows the total resources raised by HDFC during
the years 1996 -1998, including international borrowings.

Table No. 4.15 Details regarding the Resources of HDFC from 1996 -1998 (Rs.in Billion). SI. Years 1997 1998 1 Institutional Loans 7.70 7.52 8.19 17.82 22.58 29.06 2 Domestic loansand Bonds 3 Deposits 25.13 35.02 44.24 --. Total 50.65 65.12 81.49 .-Source: HDFC, Corporate Profile.
,

IF-.
--

The total resources of HDFC which stood at Rs.50.65 billion during 1996 has increased to Rs.81.49 billion during the year 1998,registering a growth rate of 60.88 Table No.4.15
Lending :

per cent when compared to the period 1996 as is evident from

HDFC's loan approvals in the year 1991 aggregated to Rs. 8.14 billion, which increased to Rs. 32.51 billion by 1998. Disbursements for 1998 were Rs.27.54 billion. At the end of March 1998 the cumulative loan approvals amounted to Rs. 148.38 billion and disbursement amounted to Rs.122.33 billion. Financial Performance: HDFC has a track record of high growth and profitability and has consistently maintained a sound financial position. As at 31st March 2000 HDFC's capital and reserves were Rs.119.11crore and Rs.1976.86 crore (Table
No.4.16).

The div~dend declared for financial year 1998 was Rs.75 per share. The capital adequacy of the corporation as at 31st March 1998 was 17.6 per cent

as against a minimum of 8 per cent. Non-performing loans of HDFC were 0 .69 per cent of the loans outstanding. Houslng finance companies accepting deposits are required to obtain credit rating for their deposit instruments from a recognized agency and HDFC was awarded "AAA rating for deposits and bonds both from CRlSlL and

The financial results for the year ended, 31st March 1999 and 31st March 2000 is presented in Table No. 4.16 Table No. 4.16 The financial results of HDFC for the year ended, 31st March 1999 and

L -

and Taxation) 2 Depreciation 49.77 3 (2-1) Profit before 388.90 4 Provision for Tax 55.00 5 (54) Net Profit 333.90 6 Equlty Capital (Paid Up) 119.11 .Reserves ---7 1,852.73 Earnings Per Share I (Shares of Rs.10 each during the 28.03 It , h a ? Source HDFC - mancia1 results dated. 3rd ME!~ 2000.

ax

43.58 460.81 59.00 401.81 119.11 1,976.86 33.73

Getails regarding the pattern of Shareholding of HDFC are shown

In Table No. 4.17

Table No. 4.17

Source: HDFC financial results dated,3rd May 2000 Foreign Institutional Investors represent the major part (53.68 per cent) of the shareholding of

HDFC,while Foreign Direct.lnvestment, contribution

account for 20.89 per cent of the total. The share of Members (in the Depositoty) works out to be a miniscule share (0.09 per cent) of the total.

Loan Portfolio
At present HDFC has 3,14.000 loan accounts with an excellent

record of loan recovery with a most sophisticated Management Information cover only 0.69 per cent of its System and loan recoveries. Non-perfonin~.i::..;?ns outstanding portfolio. Other major services rendered by HDFC include the following:
I

Property related services - Property identification, sales and service, property valuat~on~

-. Training - Centre for housing finance, is an effective managerial training

~nstltut~on for houstng finance institutions and for housing finance

\i International Union for housing finance

P Major Consultancy Services - Investment appraisal for housing finance,

Development of mortgage servicing manual, Workshop on housing finance Housing finance companies promoted by HDFC include:

P SBI Home Finance Ltd P Can Fin Homes Ltd

- SBI Capital Market of HDFC - Canara Bank and HDFC and ADB

P GIC Housing finance Ltd. - GIC and HDFC

i

HDFC Bank

- The Bank was promoted by HDFC and commenced

operations in Feb.1995 with a capital of Rs.2 billion of which 25.78 per cent is held by HDFC and 20 per cent Nat West Group. HDFC Bank has 37 branches (31st March 1998). In order to face the cut throat competition from the banks that are entering this sector. HDFC plans to further increase it to reach by adding branches and opening service centres in smaller cities. As it is mainly focused on individual customer it has been able to control -it NPA at 0.52 per cent of its loan portfolio at present. HDFC has a very strong capital adequacy ratio of 20.8 per cent of risk weighted assets. It has been a consistent performer. Its total income from operations has grown to Rs.2012.86 crore on 31st March 2000 as against Rs 1.746.87 in the financial year ended 31st March 1999. The fall in the interest rate did not affect HDFC, as it was able to rate started coming down. raise deposits before ~nterest

Different Home Loan Schemes of HDFC: Home loans for Individuals I Housing Loan I Extension loans I Home Land Purchase Loans. Under these schemes HDFC offers loans for houses for buying or constructing home or even to extend or to improve existing home. Purchase of land, apartments, and multi family bungalow are also allowed

in the scheme.
The maximum loan amount, which can be availed under the scheme, is Rs.50 lakhs to an individual. HDFC will allow 85 per cent of the cost of the property, including the cost of land. Table No. 4.18 The current rate of interest applicable in respect of total loan sanctioned by HDFC Rate of Interest (%) Loan Sanctioned Per annum' 12.50 13.50 14.50 14.50 15.00 Source: HDFC Corporate Profile The current rate of interest applicable in respect of total loan sanctioned is ilj.75 per cent. Rate of interest includes interest taxes. The effective rate of interest varies depending on the term of loan. HDFC reserve the rate to vary the rate of Interest prospectively at any time in response to changes In money market condltron or of a levy, tax on interest or any other charge or burden is imposed or levled by any authority or Government.

Home Loans for N.R.l's: Under this scheme an NRI person can avail a maximum amount of Rs. -50 lakhs or 85 O/o of the cost of the property including cost of the land which ever is less. Home Improvement Loans: Home improvement loans are being sanctioned for:
9 Internal and external repairs
9 Water proofing and roofing

9 Internal and external painting

>

Plumbing and electrical works The loan amount will not exceed Rs. 10 lakhs or 90 per cent of the

cost of the improvement, which ever is lower. Adjustable Rate Home Loans (ARHL): Housing finance market has witnessed periodic fluctuations in interest rate - both downward and upward. That is the loanee stands to gain interest rates drop and vice versa. Adjustable rates are linked to retail Prime Lending Rate (PLR). Kate adjustment takes place evey six months from the date of the first disbursement, if there is change in RPLR .The Current Applicable Rate of lnterest in respect of ARHL is presented in Table No. 4.19

I
I
-

Table No. 4.19 The ~ r r e n ~ i i g " e ~ R z lnterest +of No.

-

of lRHL

Loan Amount
~~~~

Bas~s

~-

~p

R S -~ 1 Crore ~RPLR Wllh effect hwn May 8, 2 W O ( T e r n 20 years -- Repayment by way of EM1 on annual rest basis)

Uq to

Current rate (%) Per annum 12.5 *

Source: HDFC Corporate Profile

The effective interest rate of HDFC with effect from May 8,2000 on different loan schemes were listed in Table No. 4.20 and Table No. 4.21. Table No. 4.20

No:
-

Name of Loans
- -

urchase loan s e p f u r ! loan for

Terms of Repayment
--

:.:
--

lnterest Rates of HDFC Single Rate Irrespective of loan amount ARHZ % Fixed Rate % p.a. p.a.

extension loans1land loans/ land

12.50

13.00

U to W r s

6 years - 10 years

U to 5 m r s 6 ears-loyeam Source: HDFC Brochure.

Table No. 4.21

Fixed Rate Home loans EM1for Rs. ROI % p.a. 1, 00,000 11.50 2,284 1,856 12.50 (for 7 years) Current ratio per annum 11.00 12.00

-----

source HDFC Brochure Future Trends

applicable to Home Loans by HDFC Rate Of Processing of EM1 for a loan Interest of Rs. 10,000 %) P.a. Admission fee 1.00 350 12.50 13.50 1.OO 284 14.50 1 00 246 224 15.50 1 00 (6 years)
P

HDFC has developed a network of institution to serve its customers

with specialized finarlclal services through partnership with the best institutions in thew particular fields of activity

The Government of lndia had constituted a Committee to review the entry of private sector in the insurance scenario and the Committee submitted its report in January 1994, recommending major reforms in the filed of insurance. In the light of the recommendations by the Committee, the Government had taken a decision to deregulate the present nationalized insurance sector and as a result of this the new lnsurance Regulatory Bill was passed in the Parliament permitting the entfy of private sector into the field of insurance. HDFC's next endeavor is to enter into insurance business. lnsurance has direct links with the competitive advantages that

HDFC has

developed over the years. HDFC has a large customer base of shareholders, depositors and borrowers. Insurance has very close links with housing finance. HDFC has also submitted a proposal to the SEBI to launch Real Estate Mutual Fund Guidelines are formulated by SEBI, thus expanding the areas of which it understands best in serving customers professionally and effectively.
4. DEWAN HOUSING FINANCE LIMITED (DHFL): The Premier Housing Finance Corporation in private sector was

incorporated in 1984 under the Companies Act 1956. The Board of Directors consists of eminent personalities having wide exposure and expertise in the field
of Banking and Finance. Union Bank of lndia has acquired an equity participation

In DHFLS capital structure

DHFL lends at the current rate of interest to individuals, corporate bodies, co - operatives and associations of persons for residential houses other than resort houses in lndia.

DHFL is classified as a " Housing Fmance Corporation by the NHB

and recognized by the Government of lndia through its Ministry of Finance.

HOUSING LOAN SCHEMES OF DHFL Double Protection Plan

Free accident risk cover plus property insurance is offered to the extent of loan liability to safeguard the interest of the borrower or his family.

Regressive Payments Scheme

The scheme is meant for applicants who are due for retirements with in five to ten years and have applied joinUy with the eligible younger coapplicants.

Special Rural Housing Scheme (SRHS)

The objective of Special Rural Housing Scheme (SRHS) is to address the problems of rural housing through improved access to housing credit, which would enable an individual to build a modest new house or to improve or to add to his dwelling in 'rural area'. Rural area for the purpose of the scheme is the area
irl

any town, the population ofwhich does not exceed 50,000

as per 1991 Census

Loan w~ll be given for construction, purchase, improvement upgradation, major repairs of houses in free hold !and in rural areas.

The interest rates applicable on home loans of DHFL during 2003 is presented in Table No. 4.22 Table No. 4.22 Details regarding the interest rates applicable on home loans of DHFL during
2003

Annual rates of interests (fixed rates) applicable to the loan amount ranging from Rs. 10,000 t o Rs. 100,00,000 for 1 - 5 years works out to 9.25 per cent per annum, while the same for 6 - 10 years and 11 to 20 years represent

9.75per cent per annum and 10.25 per cent per annum respectively (Table No.
4.22). But the annual rates of interest (variable rate) for the periods mentioned above come to 10 per cent per annum only.
House Loans Account Scheme:

DHFL is authorized to accept HLA deposits by the NHB. The scheme is deslgned to help an aspiring house maker in more ways than one. It inculcates the habit of saving in a planned manner by providing a person considerable incentive by way of concessional interest rate on the housing loans. The scheme matures at the end of five years from opening the account. A person
1 s entitled to a housing loan according to his aggregate savings in the HLA

account, ranging from four times to fifteen times of the savings. The scheme

allows great flexibility in terms of the amount of deposits, frequency of deposits; etc Rented Housing Scheme This scheme has devised for the benef&of employees and workers in the corporate world. Under this scheme proposals for rental housing projects will be considered, provided the proposal is exclusively for the employees or workers Land Development, Shelter Project Scheme: This is a scheme for professional developers, applicable to project of land development of either for plot development or for group housing or a mix

DHFL, slnce its incorporation in 1984, has taken a quantum leap in all facets of its operations to become a front runner among housing finance companies in India. The company has a paid up equity base of Rs. 9.03 crore, having the following share holding pattern. Details regarding the pattern of Share Holding of DHFL are given in Table No. 4.23 Table No. 4 23 Detail-ardtn-epattern -of Share Holding of DHFL
% Of Shares held

I A:

I Name of the Shareholder /

-

.
~

. --

Total -Source: DHFL Brochure.

100.00 -

LIC and Housing Finance With a view to solve the problem of housing shortage in the country LIC has taken massive efforts by providing financial assistance to individuals, Co-operative housing societies and State Governments. LIC has established a new subsidiary called LIC Housing Finance Ltd in 1989. The main objective of this organization is to provide long t e n financial assistance to realize the objective of National Housing society. LIC Housing Finance Ltd (LICHF) with its network of 67 area offices and 6 regional offices has a cumulative housing loan disbursement of over Rs.4536 crore. It has a market share of 25 per cent of the organized housing finance. It ranks second only to HDFC which has 54 per cent of the market share .of the organized housing finance.

CANFIN Homes Ltd

CANFIN Homes Ltd is a housing finance company supported by NHB on a regional level under the Indian Companies Act in the International Year of Shelter for home less (1987) in association with UTI, HDFC, IClCl and Canara bank Financial Services Ltd. The main objective is to lend money to individuals, co-operatives and corporate bodies for acquisition or construction of residential units only. Housing Finance in Co-operative Sector: The principles of mutual aid, self help, practice of thrift which one the basic principles of co operative organizations, generate a sturdy feeling of self reliance which is of basic importance in a democratic way of life. By pooling

their experience and knowledge and by helping one another, members of cooperative societies not only find solutions of individual problems but also become better citizens. The Co-Operabve Societies Act of 1904, the legislation in india with regard to Cooperatives, amended in1912 to permit the formation of solutions for purposes other than credit. The first co operative housing society was set up in lndia in 1909 known as Bangalore Cooperative Society in Mysore state (Karnataka) and Bombay Co-operative housing Association in 1913 in Bombay state (Maharashtra) In lndia in the field of housing there is a three tier co-operative structure with the National Co-operafive Housing Federation at the apex level and the State Housing Federation with middle and the Primary Societies in the lower level. There are different kinds of Housing Cooperatives in lndia, which range from building societies to Co-operatives, Township societies and housing cooperatives, higher purchase companies, etc. The housing structure of co-operative housing societieq in Kerala consists of two levels, i.e, primary and state level societies. In the state level the Kerala State Housing Federation (House Fed) established in 1970 provide loans and advances to primary c:ooperatives. The federation provided financial assistances amounting Rs.1, 00,283 houses up to 1998.
At present the housing society apex co-operatives are getting

finance from LIC. NHH & HUDCO. The apex federation raises more of its funds from LIC, NHB & HUDCO as their effective role of refinance in co-operative

sector. So the central Government must ensure the regular flow of funds to the housing co-operatives for the execution of their housing projects because the central Government can play an effective.role for the u p l i e n t of this institution. The following chart depicts the channel of f i a n d to cooperative sector.

CHANNEL OF FINANCE

HUDCO

State Co-operqtive Housing Federation

-+
Members

Role of Banks in Housing Finance:

There is a vast scope for housing promotion in India and banks can play a vital role in the promotion of housing. To enable larger flow of resources to the housing sector banks have been allowed to change interest at different rates, provided they are below the prime lending rate in respect of housing finance intermediary agencies. Currently banks advances up to Rs. 3 lakh for housing in rural and semi-urban areas. rhese areas are treated as priority sector advances by banks.
It has been decided to increase the limit up to Rs. 5 lakh for the purpose of

compensation of priority sector advances. The RBI has approved the advances made by commercial banks for construction and repairs as priority sector

advances. Indirect lending through Government housing finance agencies such as HDFC for construction of homes, slum clearances, etc will also be considered as priority sector advancement subject to a ceiling of Rs.3 lakh per housing units. The RBI has removed the margin restricfions on housing finance by banks and has brought about many changes. For instance, the Syndicate Bank provides Housing finance up to 70 per cent of the value of the property, subject to a ceiling of Rs.25 lakh per housing unit. The banking sector received an edge over the housing finance companies because of the lower prime lending rate. Banks also do not levy commitment charges, administrative fees, unlike housing f i a n d companies, which increase the lending cost by 1 to 1.5 per cent. Taking advantage of the cost factor, number of banks has revised their lending rates. ANZ Grindlays Bank have made their home loans easily affordable through scheme like "Home Loans Umbrella, Home loans Banner" for buying, construction, extension and renovation of houses. Syndicate disbursed loans amounting to Rs 80.64 crore in 1997-98 and corporation bank has a target of Rs 150 crore. in the total disbursement of Rs 126 crore in 1997-98.
Rate of Interest in Housing Finance:

Housing finance up to Rs 5 lakhs is being considered as priority sector advance as per the RBI regulations 1997. Bank offers the most competitive rate of riter rest ranging from 12 per cent to 15 per cent. Housing Finance Corporation Banks offers the best rate of interest compared to other housing finance companies ranging from 12 per cent -25 per cent to 14 per cent.

The rates of interest have been steeply decreasing from year to year due to the acute competition among various institutions in the field of housing finance. The Interest rates of Commercial banks and other Housing Finance Corporations are presented in Table No. 4.24.

Table No. 4.24 Details regarding the Interest rates of Commercial Banks and other Housing

CANFIN Homes Construction

8-1 5 years

lClCl

Source: The Mathrubhumi Daily 2001,October 30.p.10.

The Repayment Method :

Considering repayment of loans in comparison with the interest rates, different housing finance companies work out different repayment equations. Some companies calculate interest as a monthly reducing balance compared to HDFC the calculation is in a year reducing basic which is costlier than monthly reducing balance method. Bank of lndia calculates interest on daily balance system. State Bank of lndia uses a quarterly balance system while all other banks uses monthly reducing balancing system. The other requirements for lending housing loans slightly varies from one institution to other such as the repayment period, monthly repayment period (EMI) maximum loan amount, processing charges, administrative fees, penalty for premature closing and number of documents required. Table No. 4.25 clearly shows the comparative procedures for obtaining a housing loan from different housing finance companies.

Table No. 4.25 Comparative procedures for obtaining a housing loan from different Housing Finance Companies and Banks

!
I
I

i 9 '
iI
~
I

Maximum loan amount

Rs. [ 25,00,000

I Penalty for

4 --~

36 times of monthly income or 80 %of total cost

Rs. 25,00,000

85 % of total cost up to Rs. 50,00,000

Rs. 10,00,000

repayment of NIL NIL loan ahead scheduled period I 11 -~ Insurance , Required Source: Brochure of~espective Institutions.

'3

NIL Required

2 Oh redemption charges
Required

NIL Required

~~~

-~

p -

The demand for housing finance can be attributed to a fall in the rates of interest . Other factors responsible indude the stabilization of real estate in the country is increasing the disposable income of Government employees on account of pay revision and acute shortage of dwelling units in the country. Presently 150 households manage with hundred houses. As per the estimate of Planning commission, the shortage in urban and rural housing will be 93 million units and 29.8 million units respectively by the year 2001; thus taking the total shortage to all most forty million units which requires an investment of Rs. 52,000 crore in the Ninth F i e year Plan period. Housing finance companies on their part are restricting their strategies by opening single window clearance for a number of products and opening new service centers in various cities of the countries to tap the growing demand. It is important for consumer that not only he should feel pleased in the availability of multiple sources of housing finance but also other aspects like the interest rate, pay back facility flexibility in repayment of monthly installment and other legal and economic conditions . The problem of housing still past due to multi dimensional problems encounter by HFC's themselves such as: Availability of Funds: The average lending rate of HFC's varies between 12 to 15 per cent but the cost of raising funds is around 16 per cent in many cases.

Entering into an Era of Rate War Players in the field have entered to an era of rate war due to high competitive market. Risk of Default Since the HFC's are running short of funds, any default by the customers will have a direct impact on the lending capaclty of the companies. When compared to commercial banks HFC's NPA level is only 49 per cent where as the banks NPA comes to 8.20 per cent. The other two major problems faced by the HFC have legal aspects (default by borrower and time to take its settlement) and high stamp duties. Towards improving the quality and quantny of housing stock, housing calls for vast capital resource but adequate incentives are not provided to individuals for investing in instrument of housing finance. Fiscal concessions will go a long way in mobilizing the much needed resources. The law makes compulsory by HFC's to deduct taxes at the source on interest more than Rs.
2,500 a financial year
.

This is a gross discrimination as mutual funds do not

come under its purview and consequently appear attractive. The tax sop in the union budget coupled with falling interest rate have made housing frnance more attractive proposal for the individual today. Most HFC's decide the quantum of loan on the basis of his income and the assessed repayment capac~ty.

Housing finance does not enjoy the status of a priority sector. The role played by everyone operating in this field is not very laudable. Many of the conditions governing their operations are conducive. It is high time that the strategic importance of housing finance is recognized and encouraged. The economy witnessed continuation of reform and the general policy of liberalization especially in the banking sector. This development had important bearing on mobilization and deployment of saving potentials with further deregulation of interest rates. For a significant development the concept

of 'Affordable Housing' is being increasingly seen in terms of cost reduction and

income up gradation rather than in the form of subsidies. This will evolve a sustainable housing solution in the housing market. In the changing economic scenario, it is equally important to integrate the housing financing system with the other sectors of the economy so that surplus funds could be channelised for housing. A large volume of funds is to be injected to the housing sector to improve the lending capacity. Banks and housing finance institution should be empowered to create equitable mortgage by taking the deposits of title deeds and given power of sale in that court intervention. Settling a secondary mortgage market could be
a viable alternative for mobilizing additional resources.
A unlforrn and reasonable stamp duty is to introduce through out

the country to mlttgate the magnitude of the problems.

Amendment of Transfer of Property Act has been called for to recognize the right of flat owners in a co-operative society for the creation of mortgage. Prov~ding housing facilities is a social responsibility of the Government. There fore profa should be secondary, particularly the Government sponsored housing finance company. Removal of Urban Land Ceiling Act, grant of infracture status to housing reduction of interest rate, for housing loan, simplified procedures in the sanctioning of loans, more income tax concessions to individuals will give a boost to construction. With the rapid transformation taking place in financial system, as a result of liberalization and globalization of capital movements, the very structure
of

existing institutions are passing through

the process of

rigorous

transformation. Housing finance companies are also not exception to it and have made great strides in past few years. Restructuring of these institutions and developing appropriate marketing orientations is a major challenges faced by them.

HUDCO's Role in housing Co- operative Finance:

HUDCO started financial assistance to rural housing in 1977-78. In the Ninth Five Year Plan (1997 -2001). HUDCO had sanctioned loan over Rs.14, 000 crore and released more than Rs. 12,000 crore for housing and urban infrastructure The housing loans sanctioned by HUDCO to primary societies belonging different income categories are depicted in Table No. 4.26 Table No. 4.26 The housing loans sanctioned by HUDCO to primary societies belonging to different income categories up to 1-2-1998. Income Categories ,a,icu,ars EWS I LIG MIG . Maximum Estimation . , RS.

A , . -

1 1
3

(in R u p e ) ; . - ) Duration ears lnterest applicable to primary

~

15

10

10

-.

~~

socie -~ Source: HUDCO Brochure: 1998

~

15.2 %

19 %

Table No. 4.26 discloses that more importance is given to more economically weaker section in view of the extent of financing cost, iie., 90 per cent and interest levled on such loans (12 per cent) .The period allowed for repayment of such loans is also the maximum in the case of this category of loanees i.e.. 15 years)