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Housing Finance fmg18 Y

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This is presentation being presented by Shivi Aggarwal, Radhika Gupta, Sweta Agarwal and Madhusudan Partani Students of FORE School of Management ( FMG-18). …

This is presentation being presented by Shivi Aggarwal, Radhika Gupta, Sweta Agarwal and Madhusudan Partani Students of FORE School of Management ( FMG-18).

It has Guidelines of HFC, Busniess Model of HDFC

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  • 1. Business Model of Housing Finance Company in India
  • 2. Members
    Group 4
  • 3. Housing Industry
    From 28%(300 m) the Urban Population to increase to 40% (600 m) by 2030
    70% of New jobs to be created in Cities*
    Young people aspire to be come home owners
    Change in Socio Culture of Society
    * as per McKinsey Global Industry research
  • 4. Source: NHB- Residex data
  • 5. Source: NHB- Residex data
  • 6. Source: NHB- Residex data
  • 7. Source: NHB- Residex data
  • 8. Source: NHB and IndiaStat
  • 9. Housing Finance
    Housing finance connotes finance for meeting the various needs relating to housing
  • 10. Understanding Housing Loan
  • 11. Housing Loan
    Interest Rate:
    Guarantee/ Collateral
    New Home/ Expansion/ Equity
    Land Purchase/Acquisition of House
    Fixed, Floating, Teaser
  • 12. Mortgage Vs Lien
  • 13. Importance of Housing finance
  • 14.
  • 15. Housing Finance system in India
    Reasons for a high annual growth in this sector:
  • Industry structure
  • 24. Players
  • 25. National Housing Bank (NHB)
    Set-up in 1988 as the Apex level institution for housing.
    To promote housing finance institutions both at local and regional levels
    NHB is wholly owned by Reserve Bank of India
    Ensures a sound and healthy housing finance system through effective regulation and supervision of housing finance institutions.
  • 26. Functions
    Promotion function
    Regulatory function
    Financing function
  • 27. Promotion function
    With the setting up of NHB, there have been sustained efforts at creating and supporting a new set of specialized institutions to serve as dedicated centers for housing credit.
  • 28. Regulatory function
    The requirement of regulation emanates from the need for a credible and stable housing finance system.
    It has come out with guidelines for approving HFCs for financial assistance and for participating in their equity.
    It has also issued the Housing Finance Companies (HFC) Directions and guidelines for prudential norms for income recognition, assets classification etc.
  • 29. Financing function
    To provide financial assistance to various banks and housing finance institutions.
    The principal focus of NHB’s programs is to generate large scale involvement of various primary lending institutions to serve as dedicated outlets for assistance to the housing sector.
    The refinance assistance provided by NHB to HFCs has enabled them to increase their operations and cover a larger section of the population.
  • 30.
  • 31.
  • 32. Critical Success Factor for HFCs
    Cost of Funds
    Low Margins, High Volume
    Management of NPAs
    Product features
    Distribution reach
  • 33.
  • 34. For Starting
    To commence on business, every HFC set-up as a company should
    • Obtain a certificate of registration from the NHB and
    • 35. Have the net owned funds of Rs 25 lakh or such other higher amounts as may be specified by NHB from time to time.
  • Capital adequacy
    Every housing finance company shall maintain a minimum capital ratio consisting of Tier-I and Tier-II capital which shall not be less than 12% of its aggregate risk weighted assets and of risk adjusted value of off balance sheet items.
    The total Tier-II capital, at any point of time, shall not exceed 100% of Tier-I capital.
  • 36. Public deposits
    Any HFC having net owned fund of Rs. 25 lacs or more cannot accept or renew an amount exceeding five times of its NOF
    No HFC can have maximum deposits, inclusive of public deposits, exceeding 16 times its NOF
    A HFC can accept or renew public deposit for a minimum period of 12 months and a maximum of 36 months from the date of acceptance or renewal.
    At present HFC cannot pay more than 12.5% interest on its public deposit.
  • 37. Asset classification
    Standard assets: an asset in respect of which, no default in repayment of principal or payment of interest is perceived
    Sub-standard assets: an asset, which has been classified as non-performing asset for a period not exceeding twelve months
    Doubtful assets: an asset which remains a sub-standard asset for a period exceeding twelve months.
    Loss assets: an asset that has not been written off by the housing finance company and an asset which is adversely affected by a potential threat of non recoverability
  • 38. Provision
    Sub-standard Assets: A general provision of 10% of total outstanding should be made in case of it.
    Loss Assets: The entire assets shall be written off. If the assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.
  • 39. Doubtful Assets
    100% provision to the extent to which the advance is not covered by the realizable value of the security to which the housing finance company has a valid recourse.
    In addition, depending upon the period for which the asset has remained doubtful, provision shall be made on the following basis:
  • 40. RBI Mid-term Review Highlights pertaining to Housing Sector
    The RBI in its mid-term review policy, released on 2nd November, 2010 made the norms for housing loans more stringent to curb the excessive borrowing that has pushed property prices in most metros to levels seen before the global financial meltdown and even beyond.
    Among the steps mandated by the RBI are:
  • 41. Increase in the risk weight of high-value loans of Rs 75 lakh and above to 125 per cent. Increasing the risk weight means banks will have to keep more money aside against high value loans.
    Bringing down the ceiling limit on housing loans to 80 per cent of the property value. This is intended to dissuade excessive borrowing for housing purposes. Till now, banks used to impose their own ceiling on housing loans, but there was no cap from the RBI side.
  • 42. An increase in the funds to be kept aside by banks as a cushion in case of defaults on loans made at teaser rates. It has increased the standard asset provisioning by banks for all such loans to 2 per cent from the earlier 0.4 per cent.
    It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates.
    The overall policy is designed to check the creation of pricing bubble in the market
  • 43. Business Model
  • 44. Incorporated in 1977
    primary objective of meeting a social need - that of promoting home ownership by providing long-term finance to households for their housing needs
    1505 Employees as on 31st March 2010
  • 45. Snapshots
    Loan Book` 97,967 Crores, 22% growth y-o-y
    Deposits `23,081 crores, 19% growth y-o-y
    Operating Income `11,338.28 Crores
    EPS- `92.47 , 23% growth
    ROE- 20%- Highest in Industry
    Cost to Income Ratio- 72.59% Lowest
    PAT 24.88%
    Loan Turnover 0.12 times
  • 46. Subsidiaries
  • 47. Value Chain
  • 48.
  • 49. Liquidity Cycle
  • 50. Process
  • 51. Process and Risks
  • 52. All Values in ` Crores
    Data has been taken from
    Companies Annual Report
    CMIE Prowess
    NHB and RBI
  • 53.
  • 54. Sources of Funds
  • 55.
  • 56. Application of Funds
  • 57.
  • 58.
  • 59. Revenue Model
  • 60. Average Interest rate on Deposits- 8.59%
    Average Yield on Loans- 10.90%
  • 61.
  • 62. CAGR= 27% over 5 years
  • 63. Financial Evaluation
  • 64. Risk
    Contingent Liabilities Risk
    Foreign Exchange Risk
    Legal/Regulatory Risk
    Credit Risk
    Operations Risk
    Liquidity Risk
    Interest Rate Risk
    Any Time Exit Options on the Loans
    Regulatory changes
    Risk of Competition
    Sensitivity to the Economy and Extraneous Factors
    Real Estate Prices Risk
    Increasing Competition
  • 65. Risk Mitigation
    Stringent Credit Norms
    Regular monitoring of the maturity profiles
    Long term forward contracts, principal only swaps, full currency swaps and currency options
  • 66. Marketing
    279 Outlets
    Complimented by wholly owned distribution company, HDFC Sales Private Limited (HSPL).
    Covers 90 Locations
    Distribution Channel on Sources Loans, No role in credit, technical, legal…
    Organizes fairs
    Through Subsidiaries
  • 67. Products
    Home Improvement Loan
    Home Extension Loan
    Land Acquisition
    Top-Up Loan
    Property Valuation
    Property Identification/Advisory
    Senior Citizen's Deposits
    Cumulative Deposits
    Non-cumulative Deposits
    Monthly Income Plan
    Systematic Savings Plan (SSP)
  • 68. Performance Indicator
    CAGR- 22% over 5 years
    Source : India Stat, Annual Report of HDFC
  • 69. Competition
    L I C Housing Finance Ltd.
    Dewan Housing Finance Corpn. Ltd.
    Deutsche Postbank Home Finance Ltd.
    G I C Housing Finance Ltd.
    I D B I Homefinance Ltd.
    ICICI Bank
    State Bank of India
    Canara Bank
    Punjab National Bank
    IDBI Bank
    Standard Chartered Bank
    Hongkong & Shanghai Bank
  • 70. Commercial Bank Vs HFC
  • 71. Market Share of SCBs
  • 72. Housing Security Market : Primary and Secondary
  • 73. Primary Mortgage Market
    The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction 
    Mortgage brokers, mortgage bankers, credit unions and banks are all participants in the primary mortgage market
  • 74. Secondary Mortgage Market
    The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators (securitizers) and investors
  • 75. Securitization in Secondary Market
  • 76. Benefits of the Secondary Market
  • 77. Downfall of Fannie Mae and Freddie Mac
    Rapid growth in purchases of risky but profitable subprime loans
    Utilised implicit government backing to borrow at will, but without adequate capital to protect them from unexpected losses
    Played down the dangers posed by an inflated housing market
    Did not raise enough new capital to weather the storm as the housing slump expanded
    Over‐estimated the power and accuracy of their computer systems and mathematical formulae to compensate for new more complex products
  • 78.
  • 79. Mortgage Guarantee
  • 80. Tri-partite Guarantee Contract-Purchased by the lender and paid for by the borrower
  • 81. Banks and HFCs pay the MGC a premium (fee) for buying mortgage guarantee for every loan they advance
    The banks/HFCs pass on the cost to borrowers, just like mortgage insurance premiums
    The premium will depend on factors such as borrower's profile, income proof, credit history and security available
    The premium amount collected from thousands of loans by MGC will be pooled into a corpus fund
    When a loan goes bad, the bank/HFC will invoke mortgage guarantee and MGC will pay the outstanding debt to the bank/HFC from the corpus fund
    Modus Operandi of MGC
  • 82. Insurance vs Mortgage Guarantee
    Credit Insurance
    Bi-partite contract
    Business credit insurance
    Regulated by IRDA
    Max FDI is 26%
    Mortgage Guarantee
    Tri-partite contract
    Consumer credit insurance
    Regulated by RBI
    Max FDI is 49%
  • 83. Due Diligence in Mortgage Guarantee
  • 84. Benefits of Mortgage Guarantee
    Make housing more accessible to qualified younger buyers
    Increase accessibility to mortgage loans in underserved regions and communities
    Increase accessibility to mortgage loans for entrepreneurs and the self-employed
  • 85. Benefits of Mortgage Guarantee
    MGC act as credit investigator for credit institutions
    Stimulate the housing resale market because easier finance available to home buyers
    Encourage lenders to bring yields lower on loans that have a mortgage guarantee
    Provide loans with lesser down payments to deserving borrowers
  • 86. Presented By:
    Shivi Agarwal
    Radhika Gupta
    Sweta Agarwal
    Madhusudan Partani
    FMG 18A