GROUP 6
A Presentation on the Housing Finance Industry in India
-The Trend, Challenges and Future Prospects
Prepared by (Group 6) Soumya Ranjan (253) Yamini Kalwani (249) Ashish Jain (242) Payoj Jain (225) Nikhil Gupta (216)
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Housing Finance
Hosing finance is a business of financial intermediation wherein the money raised through various sources such as public deposits ( which are subject to the regulatory stipulations of NHB), institutional borrowings( from banks), refinance from NHB & their own capital , is lent to borrowers for purchasing a house. The intermediaries lend money by accepting mortgage by deposit of title deeds of the residential property.(section 96 of Transfer of Property Act,1882)
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BRIDGE LOAN The Bridge Loan is designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home. BALANCE TRANSFER LOAN Balance Transfer loans help you pay off an existing home loan by availing a new loan from another willing lender institution. REFINANCE LOAN This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.
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ENVIRONMENTAL ANALSIS
SWOT Analysis
Strengths: Large & Growing Market Effective Regulatory Framework Marginal Cost is very low
Weakness: Interest Rate war persistent Lack of uniformity Increase in default rates
Opportunities: Increasing Urbanization Tax rebate on house loans Lower CRR will enhance liquidity, so more loans can be offered
Threats: High Cost of Home ownership is dampening the demand at one end NHBs refinance assistance mainly directed towards developed players
INFLUENCING FACTORS
Socio-Cultural Economic Technology Regulatory
Age factor Growing Population Regional Shifts Interest rates Inflation Economic Cycle
Interest rates
Financiers offer two types of interest rate loans to customers - fixed and floating interest rate loans. In a fixed interest rate loan, the interest rate remains constant over the tenure of the loan. In a floating interest rate loan, the borrower has to pay at a rate that is linked to the base rates.
Interest rates and loan growth Interest rates have had minimal impact in past
The analysis depicts that interest rates have minimal impact on mortgage demand in the past. This is clearly evident from the fact that over the last decade, despite volatile interest rate regime (8.25%-12.75%), HDFC has witnessed healthy 24% CAGR in its loan book. Further, any rise in rates has been passed through in the form of increased repayment tenure or higher EMI.
Processing Fee
5,000 + service tax (Upto 30lacs), 10,000 + service tax (above 30lacs) 0.50% of loan amount upto 1 crore 0.5% or maximum 10,000+service tax (12.36%) 1% of the loan amount applied for, subject to a minimum of Rs 10000 plus service tax. This fee is payable on application and is not refundable Up to 50 lacs : 10,000 +(Service tax) 50 lacs & above : 15,000 +(service tax) 0.5% of the loan amount Rs.7500/- + Service tax 1% for Salaried & 1.5% for SENP
Prepayment Charges
Nil
N.A No prepayment charges shall be payable for partial or full prepayments irrespective of the source
HDFC Ltd
HSBC Bank
10% to 13%
Nil
Scheme I : 10.25% (Fixed for 2 yrs) Scheme II : 10.70% (Fixed for 3 yrs) 11.15% (Fixed for 5 yrs) Scheme III : 10.95%(Fixed for 10 yrs) 10.75% 9.99% (Upto 25Lacs), then 10.40%
DHFL
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11.25%
NIL
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Property Prices
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Mortgage finance companies like HDFC, Dewan Housing witnessing increasing demand from tier-II and tier-III cities like Indore, Baroda, Surat, Pune, Jaipur, Bangalore etc. Number of people increasing who migrating from smaller towns to tier-II and tier-III cities. Important Factors
Employment opportunities Affordable property prices Availability of easy finance
Other Factors Higher income via sixth pay commission Teaser rate loan schemes by mortgage financing companies
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Credit flow by banking sector to housing industry, for 19-districts spread across India the analysis revealed that over the longer run (ie FY04-10) it remained at healthy 27% CAGR.
Loan CAGR%
29 28 27 26 25 24 Tier-1 Tier-2
Loan CAGR%
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Asset Quality
It is an evaluation of an asset to measure the credit risk associated with it. In India, the mortgage demand is primarily dominated by first time home buyers so the borrower is unlikely to default on loan repayments linked to the apartments, in which they are residing. So, the mortgage market has remained upbeat given the nature of borrower and their risk-averse behavior.
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Government Participation
The finance ministry had announced interest subvention scheme after the financial crisis. Further, to stimulate housing demand, particularly in lower and middle income groups, an amount of Rs10bn was allocated as interest subsidy for a period of one year beginning Oct2009 to Sep2010. Projects taken under the Public-Private Partnership Models in 'Affordable Housing schemes like
B e n g a l A m b u j a Ho u s i n g Development Ltd Dharavi Slum Redevelopment Program, Mumbai Affordable Housing Policy of the Government of Rajasthan New Town, Rajarhat, Kolkata SEWA's Parivartan Project, Ahmedabad J N N U R M funded slum redevelopment Schemes across India Private developers on Government Land or private land
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Regulatory Intervention
There are some measures have been introduced across the globe to cap any leakages after the housing crisis in the form of reduced amortization period, new subsidies to middle-income housing sectors, lower tax incentives including criteria for land-development projects, mortgageinterest tax relief, lower LTV ratio. National Housing Board (NHB),keep track of housing finance companies for their exposure limits, asset quality and capital requirement. Measures introduced in FY11 and thereafter : Loan-to-value ratio (LTV) for individual loans upto Rs2mn was capped at 90% of the value and at 80% for individual loans above Rs2mn. Risk weights on loan portfolio were raised by 50-125bps based on loan-tovalue ratio. In addition to provisions towards non-performing assets, NHB also stated for general provision at 0.4% on outstanding standard non-housing loan portfolio and a 2% standard asset provisioning on standard assets under dual (teaser) rate home loan scheme.
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Loan Disbursement
Rs. Billions
800
700
600
GICHFL
300 CFHL
200
100
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Loan Disbursement
Rs. Billions
1024 512 256 128 64 32 16 8 4 2 1 2008-09 2009-10 2010-11
GICHFL
CFHL
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Outstanding Loans
Rs. Billions
1600
1400
1200
GICHFL
600 CFHL
400
200
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Outstanding Loans
Rs. Billions
2048 1024 512 256 128 HDFC 64 32 16 8 LICHF DHFC
GICHFL
CFHL
4
2 1 2008-09 2009-10 2010-11
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Earnings Spread
Yield on Average Funds Deployed Cost of Funds %
6
GICHFL
CFHL 2
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Banks
Banks are one of the largest mobilizers of households' savings and a major source of credit for different sectors of the economy. During the last decade, Banks have assumed a dominant role in the provision of mortgage finance in the country. The housing loan portfolio of banks has been on the rise during recent times. On account of their large network, they have made considerable in-roads in making housing credit available to far flung areas and today account for 60-65 per cent of the market share.
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Performance of Banks
The outstanding housing loans of SCBs has increased to 3,67,364 crore as at end of March 2011 from 3,15,862 crore as at end of March 2010, registering a growth of approximately 16.3 per cent which is lower than the growth of 20.0 per cent during 2009-10. The percentage share of outstanding housing credit to gross bank credit has declined from 10.0 per cent in 2009 to 9.15 per cent in March 2010. Based on the trend, the percentage share of outstanding housing credit to gross bank credit was highest at 12.03 per cent in 2006 and has been showing a gradual decline since then.
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The Drivers
Improved Affordability
Rising disposable income Lower interest rates Tax incentives (interest and principal repayments deductible)
Increasing Urbanisation
Currently only 28% of the Indian population is urban
Favourable Demographics
60% of Indias population is below 30 years of age Rapid rise in new households Increasing number of nuclear families
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The Projection
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100% 50% 0%
8.2 39
2011-12
2012-13
By 2015-16, it is projected the finance penetration to increase to 43 per cent in urban areas and 8.8 per cent in rural areas.
(Source: KPMG Research)
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MORTGAGES AS A % OF GDP
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The Tightness
Indian bank do take risk (teaser loan) but after a lot of calculation before loan is sanctioned to a lower or middle class person. Conservative sentiments Resilience of Indian economy in the aftermath of sub prime crises- Stringent monetary policy by RBI. Though 100% FDI allowed into township, housing ,construction projects, it is not allowed in real estate business. Govt. Intervention.
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Conclusion
Housing shortage in India is a serious issue.
Thanks to Rapid urbanisation and changes in socio economic scenario that have caused the demand for housing to grow at a very rapid pace. The total housing shortage in India is estimated as 26.3 million units, and hence a great market .
Various policy initiatives taken by the govt. to decrease the gap between the number of households and housing units available.
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Recommendations
Increasing tax Benefits: Providing more tax benefits on Home Loan to individuals.
Improving Land records and Property data systems : Land records and property data are not easily available and hence verifying the property documents is not an easy task.
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Recommendations
Securitisation: Loan securitization is the only long-term solution to the problem of raising resources for HFIs, the main providers of housing loans in the country .
Advantages of Securitization Through securitization, the loan originator should be able to mobilize funds at a low cost, and thus reduce its lending rates and make housing loans more affordable to home buyers.
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Recommendations
Using technology for Credit screening:
There is a need for developing individual credit rating systems in India. Even though, data on individual loan consumers is impossibility, developing credit rating system for individuals will prove to be very beneficial. This can help consumers with better credit criterions to fetch more affordable rates compared to consumers with past defaults. HFIs suggest provision of a unique id for individuals which can help banks access credit history.
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Recommendations
Government also promotes the rehabilitation of the urban poor by financing the State housing boards under policies like the JNURM
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