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Northern India

Regional Presentation by
Council of ICAI R. V. Verma
Executive Director
National Housing Bank

Overview of
Housing
Sector

Seminar on Professional Opportunities in


Infrastructure Sector
at New Delhi
NHB on Saturday, the 15th October, 2005
Slide 1
Northern India
Regional Presentation Outline
Council of ICAI
• Real Estate and Housing
• National Housing Bank
• Housing Finance System in India
• Housing – Shortage
• Industry Performance
• Housing Finance – Trends
• Credit Growth to Housing & Real Estate
Overview of • Housing Finance Interest Rate in India
Housing • Policy Profile
Sector • Supportive Policy Regime
• Fiscal Regime for Housing
• Supportive Credit & Regulatory Policy of RBI
• About National Housing Bank
• Financing Agencies
• National Housing and Habitat Policy
• Need for Mortgage Backed Securities (MBS)
• MBS : Benefits to Banks / FIs
• MBS : Institutional Framework
NHB • Issues in Indian Context
• Opportunities
Slide 2
Northern India
Regional Real Estate and Housing …
Council of ICAI
• Real estate is a legal term that encompasses land along with
anything permanently affixed to the land, such as
buildings/houses.

• Reserve Bank of India clarifies exposure to,


Overview of – Residential Mortgages, as lendings fully secured by
Housing mortgages on residential property that is or will be
Sector occupied by the borrower or that is rented;
– Commercial Real Estate, as lendings secured by
mortgages on commercial real estates (office buildings,
retail space, multi-purpose commercial premises, multi-
family residential buildings, multi-tenanted commercial
premises, industrial or warehouse space, hotels, land
acquisition, development and construction, etc.)

NHB
Slide 3
Northern India
Regional … Real Estate and Housing
Council of ICAI
• In India, about three fourth (3/4) of real estate development
is for residential use and balance one fourth (1/4) is
predominantly for commercial use.
• Indian Real Estate and Housing Industry
– is growing annually at around 30 per cent.
Overview of – has significant backward and forward linkages with
Housing over 250 ancillary industries.
Sector – is the second largest employment generator, next to
agriculture.
– can create a significant impact on our economic growth,
over the medium term.
– can play a prominent role in the healthy development of
our Nation.
• From every Rupee spent on construction, an estimated 75 –
NHB 80 paise is added to GDP.

Slide 4
Northern India
Regional National Housing Bank (NHB)
Council of ICAI
• Multi-Functional, Development Finance Institution in
Housing Sector, wholly owned by the Reserve Bank of
India
– Promotion & Development
– Regulation & Supervision
– Financing
Overview of
• NHB’s Approach
Housing
Sector – Integrated: Aimed at confidence-building among
Savers, Borrowers, Lenders and Investors.
– Multi-pronged: Simultaneous intervention on both the
demand (financial) and supply (real) side of the housing
sector
– Multi-Agency: Wide coverage of schemes to include
various actors in the field of housing credit delivery,
spread over a vast geographical area in order to achieve
“extensive” outreach
NHB
Slide 5
Northern India
Regional Housing Finance System in India
Council of ICAI
Households, Corporations, Trusts, Provident Funds

Government Reserve Bank External


of India of India Sources

Overview of
Schedul
Housing State LIC/
ed
GIC/
Sector Governments
UTI Banks

National Housing Bank

State Apex CHFS

HUDCO Housing
Public Agencies/ Finance
Primary CHFS SHGs/MFIs Cos.

NHB Households & Corporations


LIC : Life Insurance Corporation of India UTI : Unit Trust of India CHFS : Co-operative Housing Finance Societies
GIC : General Insurance Corporation of India HUDCO : Housing & Urban Development Corporation
Slide 6
Northern India
Regional Housing Shortage
Council of ICAI

( in million )

35
31.1
30
Rural Urban Total
23.3 24.0
25 22.9
Overview of
Housing 20
Sector 14.6
16.3
14.7
15 11.6

10 8.2
7.0 7.1

5 3.0

0
1971 1981 1991 2001
NHB
Slide 7
Northern India
Regional Industry Performance
Council of ICAI
600

500

400
Overview of
T otal HFC s B anks C ooper ati ves
Housing
Sector 300

200

100

0
NHB year
1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04

Slide 8
Northern India
Regional Housing Finance – Trends …
Council of ICAI
• Housing
– is a basic necessity, for an individual
– supports economic activities, for a family / community
– is a catalyst, for creating multiplier effect in other sectors
– is a labour intensive activity, for increasing the per
Overview of capita income
Housing – is an engine of growth, for the national economy
Sector
• Housing Finance
– Strengthens the Financial System – Leads to
Investment Demand
– Increases the Assets Formation – Leads to Formation of
Household Physical Assets
– Serves the Social Cause – Key to Development of
Human Settlement
NHB
Slide 9
Northern India
Regional … Housing Finance - Trends
Council of ICAI
• Liquidity in the System

• Lower Inflation Rate

• Softer Interest Rate Regime

Overview of
• Housing Loan has the Lowest Non Performing Assets (NPAs)
Housing (as at the end of March, 2004) (RBI)
Sector Retail Portfolio of Housing Consumer Credit Card Other TOTAL TOTAL
Banks Loan Durables Receivables Personal Retail Loans &
Loans Loans Advances
Net NPAs
as % of outstanding loans 1.4 4.0 2.4 1.6 1.6 2.8

• Fiscal Concessions (Tax Concessions, etc.)

• Legal Reforms (Repeal of ULCR Act, SARFEASI Act, etc.)


NHB
Slide 10
Northern India
Regional Credit Growth to Housing & Real Estate
Council of ICAI
• Outstanding Gross Bank Credit (Rs. crore) (Source: RBI)
Particulars 23-Mar-01 22-Mar-02 21-Mar-03 19-Mar-04 18-Mar-05
Gross Bank Credit (GBC) 4,69,153 5,36,727 6,69,534 7,64,383 9,72,587
Housing 16,143 22,346 36,587 51,981 75,173
Hsg. as % of GBC 3.44 4.16 5.46 6.80 7.73
Real Estate Loans (RELs) 1,766 2,596 5,894 5,577 10,612
RELs as % GBC 0.38 0.48 0.88 0.73 1.09
Overview of
• Outstanding Credit by HFCs (Rs. crore) (Source: NHB)
Housing
Particulars 2000-01 2001-02 2002-03 2003-04 2004-05
Sector Housing Loans 33,250 41,844 49,238 59,144 * 72,500
Other Loans 8,163 9,666 13,358 15,847 * 16,300

• Direct Housing Finance Disbursals (Rs. crore) (Source: NHB)


Primary Lending Institutions (PLIs) 2000-01 2001-02 2002-03 2003-04 2004-05
1. Commercial Banks 5,553 8,566 23,553 32,816 * 45,700
2. Housing Finance Companies 12,638 14,614 17,832 20,862 26000
3. Co-operative Institutions 868 678 642 623 ---
4. TOTAL 19,059 23,858 42,027 54,301 71,700
NHB 5. Annual Growth (in %) 35.07 25.18 76.15 29.21 32.04
* - Estimated
Slide 11
Northern India
Regional Housing Finance Interest Rate in India
Council of ICAI
Source: HDFC, 2004

19.00
20.00%

17.00
18.00%

16.00

15.50
15.50

15.00
Overview of 16.00%

Housing

12.50
13.00
14.00%

Sector

11.25
12.00%

10.00
10.00%

8.50

8.75
8.00%

6.00%
95

97

98

99

00

03

04

4
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Months

NHB
Slide 12
Northern India
Regional Policy Development
Council of ICAI
• Changing Profile of Housing Sector

• From “Social Sector” to “Economic Sector”

• Government’s growing thrust on Housing


Overview of
Housing • Institutional building and financial deepening of the
Sector housing sector

• Growing dependence on the market – Major shift in


policies since early 1990s

• Deregulated environment – but “Accessibility” and


“Affordability” continue to be major challenges
NHB
Slide 13
Northern India
Regional Supportive Policy Regime
Council of ICAI
• Housing as a “Lead Sector” for all-round economic
development
• Role of all agencies – Private, Public, Cooperative Sector,
Central and State Governments – duly recognized in the
policy framework
• Continued fiscal provisions/tax benefits for borrowers,
Overview of lenders, corporates engaged in housing finance
Housing • Repayment of principal and interest on housing loans are
Sector eligible deductions
• Lenders can transfer 40% of their profit to special reserve,
exempted from tax
• Supportive fiscal regime has led to sustained increase in
demand for housing loans
• Borrowers’ changing preferences – from debt averse to
market savvy – Preference for loans
• Lower interest rates and higher incomes have reinforced
NHB demands for housing loans

Slide 14
Northern India
Regional Fiscal Regime for Housing
Council of ICAI
• Individuals:
– Interest on capital borrowed for purchase/ construction of a
house property allowable as deduction upto Rs. 1.50 lakh
subject to certain conditions [Section 24(b) of IT Act]
– Deduction u/s 80 C of IT Act for repayment of Principal
amount of housing loans available from AY 2006-07 onwards
Overview of upto Rs. 1 lakh
Housing – Tax Rebate u/s 88 of IT Act available upto 2005-06 in respect of
Sector repayment of housing loan upto Rs. 20,000/- discontinued
• Corporates:
– Deduction available not exceeding 40% of the profits derived
from the business of providing LT finance carried to special
reserve account [Section 36(1)(viii) of IT Act]
• Investors:
– U/s 54EC of IT Act, Capital gain on transfer of a LT capital asset
by an assessee will not be charged if the same is invested in
NHB bonds issued by NHB, NABARD, NHAI, REC or SIDBI

Slide 15
Northern India
Regional Supportive Credit & Regulatory Policy of RBI
Council of ICAI
• Risk weight on housing loans reduced from 100% to
50% (raised to 75% in September 2004 by RBI in the
mid-term review of credit policy)
• Priority Sector lending includes individual housing
loans upto Rs.15 lakh (raised from Rs.10 lakh )
Overview of • Banks’ indirect lending to HFCs can also be covered
Housing under priority sector
Sector
• At least 3% of incremental deposits of the Banks to be
lent for housing – directed credit
• Low NPA levels in housing sector has encouraged the
lending agencies
• Supportive regulatory policy has led to sustained
increase in lending for housing finance
NHB
Slide 16
Northern India
Regional About National Housing Bank (NHB)
Council of ICAI
• Established in 1988 by an Act of the Parliament
• Preamble of the National Housing Bank Act, 1987
“An Act to establish a bank to be known as the National Housing Bank
to operate as a principal agency to promote housing finance institutions
both at local and regional levels and to provide financial and other
support to such institutions and for matters connected therewith or
incidental thereto.”
• Equity fully held by the Reserve Bank of India
Overview of • An apex institution for housing finance system in India
Housing • Functions
Sector – Promotion & Development of Housing Finance System
• Co-ordination with the Government
• Participation in the equity of HFCs
• Training Programmes /Workshops
• Promotion of RMBS Issues
• Research in Housing & Habitat related areas
– Regulation & Supervision
– Refinance to Primary Lending Institutions
– Project Finance to Public Agencies / SHGs / MFIs
NHB
Slide 17
Northern India
Regional Financing Agencies …
Council of ICAI
• Large number of institutions in the market – supportive
policy framework
• Besides the HFCs, Commercial Banks have emerged as
major players – Public Sector Banks, Private Sector Banks as
well as Foreign Banks
• Commercial Banks currently accounting for 50% of the
market, which is set to further increase
Overview of • Housing sector has registered an annual growth rate of
Housing nearly 32% over the last decade
Sector • Steady growth in number of HFCs – 45 registered HFCs
with NHB and 10 HFCs with assets size more than INR 500
crore
• Dominated by few major players viz. HDFC, LIC Housing
Finance Ltd., CanFin Homes Ltd., Dewan Housing Finance
Corporation Ltd., and HUDCO
• Top 5 HFCs account for nearly 80% of all deposits held by
HFCs and 75% of all lendings done by HFCs
• State level cooperative sector institution – Funding from
insurance company – LIC
NHB
Slide 18
Northern India
Regional … Financing Agencies
Council of ICAI
• With the entry of commercial banks in housing
finance sector, competition has intensified

• Deposit growth among the HFCs as well as their


borrowings from Commercial Banks indicate high
Overview of level of confidence
Housing
Sector
• Deposits have grown from Rs. 860 crore in 1992-93 to
Rs. 13,500 crore in 2003-04

• Banks’ lending to HFCs has grown from


Rs. 2,870 crore in 2000-01 to Rs. 9,850 crore in 2003-04

NHB
Slide 19
Northern India
Regional National Housing & Habitat Policy
Council of ICAI
• The Policy has encouraged all stake-holders in the
housing sector – a strong advocacy document
• Has sought to build a broad consensus on the
approach and strategy
• Prescribes enabling role for the Governments and
Public Agencies
Overview of
Housing • Places reliance on private sector enterprise and
Sector potentials
• Envisions strong, efficient and sustainable public-
private-partnership (PPP) in all segments of the
housing sector
• The Policy has also prescribed a strong collaboration
between the formal/informal sector
• Recognizes the potential of MBS and Secondary
Mortgage Markets as an important source of funds
NHB
Slide 20
Northern India
Regional Need for Mortgage Backed Securities (MBS)
Council of ICAI
• Capital deficient housing sector: Huge volume of
funds required
• Growing disintermediation
• Capital market : Permanent source of funds for
housing in a market oriented environment
Overview of • Need for integration of housing market with capital
Housing
market
Sector
• Need for long term debt market
– Housing finance : a long term financing activity
– Better asset liability management
• Improved balance sheet management by HFIs /Banks
• MBS : a vehicle for carrying forward reforms

NHB
Slide 21
Northern India
Regional MBS : Benefits to Banks / FIs
Council of ICAI
• Risk Diversification : Precludes concentration of
financial risks within the housing finance circuit
• Risk Transfer : Transfer of 100% RWAs to third parties
substantially enhancing own liquidity
• Capital Relief : More loans with no additional capital
Overview of • Ability to leverage resources
Housing
Sector • Continued liquidity and matched funding based on
maturities of assets and liabilities : Better ALM
• Restructuring Debt-Equity Ratio
• Facilitates reduction of credit concentration
• New sources of fee based income : Servicing

NHB
Slide 22
Northern India
Regional MBS : Institutional Framework
Council of ICAI
EMI
Loan Monthly
Borrowers Originator Servicing & H pay-outs
Paying Agent F
Mortgages
Custodian I Investors
Banks
Custody Agreement
Overview of Unrated Mortgages
FIs
Housing Servicing &
Sector Rating Agency Declaration Paying Agency Insurance
of trust Agreement Cos.
Rated Mortgages Mutual
Funds
SPV N
Trustee
Registrar & H
PTCs
Transfer Agent B
Payment of
Consideration
Issue Arrangers
NHB by SPV
Pass- through Certificates

Slide 23
Northern India
Regional MBS : Issues in Indian Context
Council of ICAI
• Legal

• Accounting

Overview of
Housing • Taxation
Sector

• Capital Market

• Diverse Underwriting Standards and Documentation


NHB
Slide 24
Northern India
Regional Opportunities
Council of ICAI
• Deregulation has led to competition

• Demand-led growth of the sector

• Competition has led to rate war

Overview of • Innovative products in the market – Demand driven


Housing products
Sector
• Increased awareness among borrowers

• Greater transparency in the Industry

• Low NPA levels

• MBS, Credit Guarantee and Credit Information are some of


the emerging Institutional Innovations.
NHB
Slide 25
Northern India
Regional
Council of ICAI

Overview of
Housing
Sector

Thank You
NHB
Slide 26