Key Trends in The Indian Housing Finance Sector

The housing finance timeline below depicts the evolution of the Indian housing finance sector over the years. Key Players in the Indian Housing Finance Mar et

The ey players are depicted below!

Key Funding Sources The ey funding sources for the Indian housing finance mar et include! "an s o Savings and current accounts o #oan assignment through Inter "an Participation $etificates o %efinance from &H" Housing Finance $ompanies o $ommercial ban s o "onds and 'ebentures o International(multilateral funding o %efinance from &H" o Term 'eposits )HF$s not allowed to have Term and Savings account* o #oan assignment o Mortgage "ac ed Securitisation +ther trends in the housing loan mar et include! Changing Profile of Borrowers: Traditionally, late -.s and early /.s was the age profile of borrowers for procuring a housing loan, but liberali0ation, rising incomes, and easily accessible and attractive loan options, have propelled the younger generation, typically in their -.s, to borrow for their house purchases. 1ccording to 21 Study of %esidential Housing 'emand in India2, conducted by the &ational Institute of "an Management )&I"M* in 1pril 3..4 for &ational Housing "an )&H"*! o Though most of the borrowers are in the age group of /.56., a significant 367 are below -6 years of age. It is also found that there is a falling trend in the average age profile of the housing finance. o The demand for house5si0e is found to be inversely related with the age of the borrowers. 1lso, more the number of dependents in a family, less is the affordability and hence the si0e of the house. The changing age profile has resulted in! #ong5term #oans! The distinct shift in the age profile of the borrowers allows Housing Finance $ompanies to structure loans for longer terms. Till a few years ago, the ma8imum tenure was 9. years. Today, most

lenders offer 3.5year loans, although the 965year tenure is the most popular. Innovative #oan Products! The changing age profile is spurring the Housing Finance $ompanies and ban s to go beyond the vanilla loan products and offer more innovative products to attract young people. :oung borrowers are offered loans in which the ;MI is initially low but increases with the years when the borrower<s income would also rise. 1nother favourite is the loan with a floating rate of interest, which means the ;MI will vary with changes in interest rates. To ma e it easier for borrowers to choose between a fi8ed or floating rate loan, blended options are being offered wherein the customer can hedge part of the interest rate ris by opting for a combination of fi8ed and floating rates. #enders are introducing various schemes such as free home insurance, refinance, etc. $ross5selling of products and services is rather popular. Thus, a person loo ing for a housing loan is also offered life insurance, home protection insurance, and other privileges or ban ing facilities. Method of computation of interest is different for various housing finance institutions. $orporate loans are offered by financiers to corporate bodies for the construction or purchase of new residential housing for the use of their employees anywhere in India. #oans to $orporates for non5residential premises are also readily available. Some financiers provide loans against rent receivables. The larger housing finance players offer 'eveloper #oans to approved developers for the construction of housing pro=ects which are secured on rent receivables from their tenants. 'eveloper loans are typically for a term of one to two years. Financiers generally re>uire security by way of mortgage over the property, including a personal guarantee in respect of the amounts due under the loan.

Flexible Repayment Options: Most players offer fle8ible repayment options, catering to the individual<s needs. For instance, there are various repayment options such as! o Step Up Repayment Facility where the repayment schedule is lin ed to the customers< e8pected growth in income and repayment is accelerated proportionately with the assumed increase in income. o Flexible Loan Installment Plan where an initial higher installment followed by a lower installment for the balance term. o PrePayment Facility where repayment is made from a financial investment, such as an insurance policy or bond, which is assigned as security for the loan.

Higher Loan to Value (L V! Ratio: Initially, the ban s and HF$s were e8tending only about ?67 of the value of the house proposed to be purchased. "ut with competition among the housing finance lenders becoming very hot in late nineties, borrowers could raise up to 9..7 or 99.7 of the value of property from lenders. @ith the recent downward trend in property prices as well as the prescription of lower ris weights for housing loans with lower #TA ratio by the %eserve "an of India and &ational Housing "an , the #TA ratio has fallen to B.7.

"efault Rate: 1ccording to the $%ISI#, the leading credit rating agency in India, Indians are least li ely to default on a housing loan among all their liabilities. The level of non5performing assets in the housing loan segment was close to /7 in 3..?. 1lthough paying rent for a house is far more affordable than the ;MIs, paying the ;MIs helps to generate an asset, which leads to higher comfort levels and hence controls housing loan delin>uencies. 1ccording to the findings of 21 Study of %esidential Housing 'emand in India2, conducted by the &ational Institute of "an Management )&I"M* in 1pril 3..4 for &ational Housing "an )&H"*! o "igger the si0e of house )in s>uare meter*, lower is the ris of default. o Higher the monthly income, lower the chance of default because of higher ability to pay. o Creater the value of asset, lesser the ris of default because of greater affordability due to wealth effect. o Higher the security margin available to the ban , lower is the chance of default in housing loan. o 'ecrease in #TA increases the odds of default. o Increase in ;MI to Income ratio increases the li elihood of default. o The li elihood of default in housing loan decreases significantly with the presence of additional collateral. The presence of more number of co5 borrowers reduces the ris of default. Interestingly, higher the co5 borrower<s monthly income, lesser is the chance of default because of availability of second line of source of income. o 1s number of dependents increases, probability of default also significantly rises because of higher financial burden. o %ural and semi urban people are ris ier than the urban borrowers. However, borrowers located in big cities are ris ier than medium and smaller cities. This may be because of easy access to finance which ma es borrowers prone to overstretching their financial commitments, and this conse>uently increases possibility of housing loan default. o 1n increase in C'P growth rate reduces the li elihood of default.

ax Benefits: The Covernment of India offers various ta8 incentives to housing loan borrowers to promote home ownership. 1s per the provisions of the Income Ta8 1ct, 9DB9, borrowers can claim ta8 benefits on both the principal )under Section 4.$* and interest components Eunder Section 3/)b*F of the housing loan. These deductions are available to borrowers who have ta en a loan to either buy or build a house. The principal payment up to %s. +ne la h is eligible for ta8 e8emption under Section 4.$ of the IT 1ct. Further, Section 3/ of the Income Ta8 1ct, pertaining to income from house property, allows individuals an interest deduction of up to %s 96.,... on housing loans. These ta8 benefits have considerably reduced the effective rate of interest on a loan, to the e8tent that it is beneficial to borrow from a ban or an HF$ rather than use one<s own funds. )%ead @hat ta8 benefits can you avail on a home loanG)To be lin ed to the phase 9 article**

Sources http!((www.ficci.com $%ISI# %eports http!((www.hdfc.com(pdf(H'F$5IHHF./.pdf http!((www.ta8guru.in(income5ta8(all5about5deduction5under5section54.c5and5ta85 planning.html

$omparative Study of "an s 1nd HF$S The housing finance sector witnessed an enormous growth since the early 9DD.s. Total home loan disbursements by ban s and housing finance companies rose considerably. "an s, despite being late entrants in the field of Housing Finance have ta en over Housing Finance $ompanies in the home loan mar et. The data on outstanding housing loans, as depicted below, shows that the Housing Finance $ompanies )HF$s* were at the forefront till 3..-53../. In 3..953..3, the HF$s en=oyed about 69..B per cent mar et share whereas the share of $ommercial "an s was about -6.D.7. However, the trend has been reversed over the subse>uent years. In 3..65 .B while the share of $ommercial "an s has risen from -6.D. per cent to 69..B per cent for the same period. +n the other hand the share of HF$s was reduced to -6.D. per cent from 69..B per cent. The pie charts below clearly depicts that $ommercial "an s have benefited from the business of Housing Finance.

Share of $ommercial "an s as compared to the share of Housing Finance $ompanies

Ma=or HF$s in India include H'F$ #td., #I$ Housing Finance #td, 'ewan Housing Finance $orporation #td., I$I$I Home Finance #td. Some of the ma=or $ommercial "an s focusing on housing finance include State "an of India )S"I*, $iti"an , Standard $hartered "an .

Institutions Providing Housing Finance In India

"efore the advent of $ommercial "an s that e8tended Home #oans, borrowers depended on local lenders, family and friends to underta e house buying decisions. The Housing Finance providers in India can be divided into two categories! Formal Mechanism Informal Mechanism Formal Mechanism The setting up of Housing and Hrban 'evelopment $orporation #td. )HH'$+* in 9D?. for providing Housing #oans to #ow Income Croups, and to finance urban infrastructure activities furthered the cause of Formal Housing Finance in India. Housing 'evelopment Finance $orporation #td. )H'F$* in 9D?? was IndiaIs first private sector enterprise set up to provide financial assistance to individuals, groups, cooperative societies and companies for staff housing. The main Institutions providing formal long5term Housing Finance in India include! Commer#ial Ban$s: +ver years the share of $ommercial "an s in the home loan mar et has overta en that of Housing Finance $ompanies )HF$s* who are facing severe competition from the former in view of their competitive rates and reach. Today, the $ommercial "an s in India are also re>uired by %"I to earmar a minimum of -7 of their incremental deposits for e8tending housing loans. %tate Cooperati&e Ban$s an' Regional Rural Ban$s: These "an s are State(%egional5level credit institutions. @hile these "an s are allowed to provide Housing Finance, they have not been very active in the field. (gri#ultural an' Rural "e&elopment Ban$s ((R"Bs!: They are term lending institutions operating e8clusively in the rural sector. 1t present there are various 1%'"s in India operating through their own branches or through branches of primary $ooperative 1griculture and %ural 'evelopment "an s. Housing Finan#e Companies: They are &on "an ing Financial $ompanies, whose principal ob=ect is to provide Housing Finance. Cooperati&e Housing Finan#e %o#ieties: They have a two5tier structure comprising 1pe8 $ooperative Housing Finance societies at the State level and the Primary $ooperative Housing Finance societies at the retail level. )i#rofinan#e *nstitutions ()F*s!: There are a number of MFIs in India such as S;@1. 'H1&, and SH1%;, providing finance for housing to low income group of their members.

&ational Housing "an 1lthough &H" does not e8tend Housing Finance directly, it plays a very significant role in the development of Housing Finance mar et by e8tending financial support to the

primary lending institutions. The refinance products of &H" are for different maturities and they are also e8tended on fi8ed or floating rate basis, depending on the re>uirements of Primary #ending Institutions. &H" has also formulated schemes to support most of the Housing Finance providers catering to the ;@S(%ural Segments at concessional terms so as to cater to the housing needs of the society at large. Please visit http!((www.nhb.org.in(Financial(&ewJSchemes.PHP for the role of &H" and the products offered by them to Housing Finance providers. 1lso %ead! http!((www.rbi.org.in(scripts(ban lin s.asp8 Informal Mechanism The Informal Financial sources generally include funds available from family sources or local money lenders. The local money lenders charge e8orbitant interest rates, generally ranging from -B7 to B.7, due to their monopoly in the absence of any other source of credit. However, recogni0ing the need of many in the Informal Financial Sector, several organi0ations provide assistance through fle8ible repayment schemes, lower rates of interest, etc. The e8perience of these informal intermediaries shows that although the savings of group members are small in nature and do not attract high returns, it is still a preferred choice due to security reasons and for availing loans at lower rates compared to those available from money lenders. %ead Housing Finance $lassification 1lso %ead! #ist of "an s and HF$s India

Crowth of Housing Finance Through The Five :ear Plans Housing and housing finance have grown hand in hand in India. The table below traces the evolution of both sectors through the five year plans.

Fi&e +ear Plan ,ey Housing Highlights 9st Five5:ear Introduction of Housing in the Plan )9D6956B* national policy framewor , and affordability emphasised as the ey issue 3nd Five5:ear Setting up of State Housing Plan )9D6B5B9* "oards -rd Five5:ear Plan )9DB95BB* )followed by a triennial plan )9DBB5BD* /th Five5:ear Plan )9DBD5?/* ;mphasis on planned development and land ac>uisition, particularly for urban areas

,ey Housing Finan#e Highlights Covernment support through subsidies and loans was deemed necessary. Covernment provided assistance to State Covernments to develop low5income housing, instead of directly providing loans to low5income group Covernment assistance to State Covernments continued to support low5 income housing

Private and co5operative The Housing and Hrban 'evelopment housing schemes introduced $orporation )HH'$+* was set up in with funding from Covernment 9D?. to provide housing finance to low5 income groups and to finance urban development activities to help decongest cities. IndiaIs first retail housing finance company, Housing 'evelopment Finance $orporation )H'F$* was set up in 9D??. H'F$ sought to provide financial assistance to individuals, groups and cooperative societies, as well as to companies for staff housing.

6th Five5:ear Hrban #and )$eiling and Plan )9D?/5?D* %egulation* 1ct )H#$%1* was adopted for e>uitable distribution of land

Bth Five5:ear More emphasis on Housing in +ther housing finance companies Plan )9D4.546* small and medium5si0e towns, entered the mar et. Slum Improvement. &ational Housing "an founded in 9D44 ?th Five5:ear %adical reorientation of housing to promote and regulate housing finance companies and to mobilise additional Plan )9D465D.* policies. Ma=or responsibility of house resources for housing. construction left to the private sector, and CovernmentIs role 'uring this period, several housing in promotion of housing sector finance companies were promoted , with emphasised participation from ban s(insurance &ational Housing Policy was corporations. formulated in 9D44 Indira 1was :o=ana introduced for rural poor (Visit Ministry of Rural Housing for details

;ncouragement of Private 4th Five5:ear Sector for housing5related Plan )9DD35D?* activities

Financial and legal reforms recommended for development of the mortgage mar et

Dth )9DD?5 3..3* Five5 :ear Plan

Covernment incentives emphasised to enhance the credit flow to the housing sector through housing finance institutions. 'evelopment of urban areas as Mar et5friendly reforms In both ta8ation economically efficient, socially and infrastructure to increase capital e>uitable and environmentally spending in housing. sustainable entities. Fiscal concessions coupled with Promoting accessibility and legislative measures were initiated to affordability of the poor to encourage increased investment in housing and improvement of housing by individuals and corporate urban environment Private sector and &C+ participation increased 'emocratic decentrali0ation and strengthening of municipal governance 'evelopment of housing in low income groups.

1doption of the &ational Housing and Habitat Policy in 9DD4 Provision of free housing only to the landless S$(ST families $redit cum subsidy scheme for "elow 9.th )3..-53..?* Poverty #ine Five5:ear Plan 1doption of a revised &ational Hrban Housing and Habitat Policy in 3..? %epeal of H#$%1 K a reform in the urban land mar et #aunch of !a"a#arlal $e#ru $ational Urban Rene"al Mission )!$$URM* by the $entral Covernment to fund cities for developing urban

infrastructure and services. Stressed the need for improved housing stoc through urban 99th 1pplication of low cost technologies )3..?53.93* renewal 1ffordable Housing $oncept has Five5:ear Plan e8tended into %eal Sector mar et "harat &irman programme recogni0ed and accorded due Interest Subsidy scheme introduced for priority to end the shelterless urban poor Focus is on targeting the poorest of the poor while targeting the remaining housing shortage with other interventions %a=iv 1was :o=ana launched for urban poor (Visit Ministry of Housing and Urban Po%erty &lle%iation for details

'isbursement of Housing Finance 'isbursement of housing finance based on the data received from Housing Finance $ompanies as per &H"<s Trend and 1nalysis %eport is given. Crowth of Housing #oans The &ational Housing "an )&H"* is the regulatory authority for all Housing Finance $ompanies(Institutions in India. 1ccording to &H"<s Trend and Progress %eport of Housing in India 3..B, the aggregate housing loans of Housing Finance $ompanies )HF$s* which were %s. ?.,6--.44 crore as on March -9, 3..6 increased by 33.9/ per cent to %s. 4B,96/.6B crore as on March -9, 3..B. The average growth rate during 3...5 .6 was 9D.-3 per cent. -RO. H OF HO/%*0- LO(0% FRO) 122341225

Tenure5wise 1nalysis of #oan Portfolio "ased on the data received from HF$s and an analysis of trends, the report observes that the loans with tenure above seven years, which formed 6..B4 per cent of the total housing loans outstanding as on March -9, 3..6 increased to B-.9/ per cent as on March -9, 3..B. This displays borrowers< preference for long5term loans. Term5wise Housing #oan +utstanding by HF$s

6R)4.*%6 HO/%*0- LO(0 O/ % (0"*0- B+ HFCs

Si0e5wise #oan 'isbursal 1ccording to the &H"<s Trend and Progress %eport 3..B, housing loans up to %s. - la h increased from /,6?4./D during 3../5.6 to %s. /,?9?.4/ crore during 3..65.B. However in terms of percentage, there was a minor fall from 3B.D9 per cent of the total housing loans disbursed during 3../5.6 to 39.6? per cent to the total loans disbursed under this category during 3..65.B. Housing loans above %s. 9. la h increased from %s. 6,4./..4 crore during 3../5.6 to %s. D,.3?.96 crore during 3..65.B and accounted for /9.34 per cent of the loans disbursed during 3..65.B. %*764.*%6 "*%B/R%6)60 OF HO/%*0- LO(0 B+ HFCs