2. Let me start with the thoughts of Gurudev Rabindra Nath
Tagore on owning a dream house reflecting the pangs of
our teeming millions who do not own a house and wish to
have one.
“Long did I cherish a desire,
neither for wealth nor fame, but a tiny house tucked away
in a corner
of the earth,
where I could be with my thoughts.”
Rabindra
Nath
3. What is housing finance?
• Housing finance is generally understood to mean
government provision for housing through subsidized
house building and subsidized rent……
• …….Also identification of sources of capital funds for
construction dwellings and with the provision of private
(mortgage) finance for housing consumers.
4. Why housing finance is needed?
• Meets housing demand (Urbanization, Demographics).
• Prevents Slum proliferation.
• An engine of equitable economic growth – Investments,
Savings, Wealth.
• Contributes to poverty reduction (asset building,
retirement, empowerment, community strengthening,
better quality of life).
5. Different Types Of Raising Housing
Finance
Variable-rate
• Here the interest rate charged fluctuates in line with the market
levels.
Fixed-rate
• The interest rate is set for a specified term.
Mix Of The Two
• The rate charged is often fixed or capped for the first year of the
loan and then it may become variable.
7. A Diversified Housing Finance System
Housing & urban development corporation
Housing & urban development corporation
Central and state governments
Central and state governments
Insurance organizations /corporations
Insurance organizations /corporations
Commercial & cooperative banks
Commercial & cooperative banks
Housing finance institutions (HFIs)
Housing finance institutions (HFIs)
8. National Housing Bank (NHB)
• Established in 1988 by an Act of Parliament
• 100% owned by Reserve Bank of India
• Headquarters at Delhi
• Financial and other support incidental
9. Objectives of NHB
“To operate as a principal agency to promote
housing and to provide to such institutions and
for matters connected therewith …
… shall act on business principles with due
regard to public interest.”
(National Housing Bank Act, 1987 finance
institutions both at local and regional levels )
11. Central And State Governments
• Laying down broad principles
• Providing necessary advice
• Rendering financial assistance in the form of loans
• Providing equity support to HUDCO and guaranteeing bonds issued by it
• STATE GOVERNMENTS are the actual implementing agencies
12. Housing And Urban Development
Corporation (HUDCO)
Established in April 1970
OBJECTIVES
1. To provide long term finance for construction of houses for
residential purpose
2. To finance the setting-up of new satellite towns
13. 3. To finance the setting-up of the building materials
industry
4. To administer the money received from GOI and other
such grants for purpose of financing and undertaking
housing and urban development programmes.
5. To subscribe to the debentures and bonds to be issued
by the state housing boards, improvement trusts,
development authorities and so on.
14. Insurance
Organizations/Corporations
• LIC and GIC support housing activity both directly and
indirectly.
• LIC Home Finance LTD.- JUNE 1989
• GIC Housing Finance LTD.- JULY 1990
15. Commercial Banks
In terms of the RBI Guidelines, Scheduled Commercial
Banks are required to allocate 1.5% of their
incremental deposits for disbursing home loan every
year of which
a) 50% is for subscription to HUDCO and NHB Bonds.
b) 20% is for DIRECT HOUSING LOAN
c) 30% is for INDIRECT LENDING by way of term loans
to HFIs, HFCs, and public housing agencies
16. Cooperative Banks
Finance Individuals, cooperative Group Housing
Societies, Housing Boards and others who
undertake housing projects foe Economically
Weaker Sections, Lower Income Groups and
Middle-Income Groups
17. Specialized Housing Finance
Institutions
• They cater only to the needs of housing sector.
• They can be further classified as
~ HFCs in public/ joint/ private sector
~ Cooperative housing finance societies
18. Essentials of Choosing a Right HFC
What should be borne in mind?
Rate of
Interest After-Sales
Service
Exact Loan
Amount Housing F Co.
Foreclosure
Benefits
National
Presence
20. Housing Finance Interest Rates High
- An Overview
• Home loan rates have shot up from 7% in 2003 to 12% in 2007 with its
impact massively following across the board including genuine buyers,
speculators, real estate developers and bankers.
• It is expected that interest rates will further go up by at least 1.5% over the
next 6-12 months.
• Slowly but relentlessly the floating interest rates for housing loans have
soared by close to 200 basis points, from 7.25 per cent a couple of years
back to over 9 per cent today.
• Default rates on installment payment of home loans have risen around 4.5%
• Indian real estate market estimated at US$ 14 billion is likely to be US$ 90
billion by 2015 as demand for both commercial and residential property is
surpassing supplies.
21. Why home loan rates are rising??
Aggressive Banks
• Reserve Bank of India (RBI) has called for stricter provisioning norms on
home loans. This means that home loan companies will now have to provide
for a larger sum of money against their home loan assets. Banks have
passed on a portion of this burden to the consumer by hiking home loan
rates.
• Several banks have been aggressively pricing their home loan products.
While the Reserve Bank of India revised the repo and reverse repo rates by
25 basis points, most banks hiked housing loan rates by 50 basis points and
above.
• Following RBI’s policy, most banks raised their deposit rates. The rising
deposit rates and continuing credit growth have put pressure on the net
interest margins of all banks.
• Home loans are among the most finely priced lending products and banks
are unable to maintain the interest rates.
• The advent of Real Estate Mutual Fund is expected to heighten this interest
further.
22. It’s Negative impact - An Overview
• Any slow down in house building activities would have a cascading impact
on the overall economic development.
• Over 250 industries have forward or backward linkages with the housing
sector, including such core segments as cement and steel, and
economically vibrant paint, ceramic tiles, sanitary ware, plumbing, and
electrical units.
• If initiatives in housing could generate varied demands and have a multiplier
effect on the entire economy, a decline in housing demand could kindle
economic recession as well.
• As most potential customers will be making lifetime investment, they would
rather wait for the interest rate regime to stabilize or soften, rather than take
a decision in haste. This would definitely lead to a piling up of the backlog of
housing requirements of the country.
23. GET THE REAL PICTURE
Fixed rate (%) Floating rate (%)
Before Now Before Now
HDFC Bank 9.75 10.50 9.00 9.25
IDBI Bank 9.50 10.00 8.50 9.00
ICICI Bank 9.75 10.25 8.50 9.00
Please note that rates given above are only indicative. Companies
are known to offer varying rates on case-to-case basis.
24. Negative Impact On Various Sectors
Speculators
Banking
Sector
HFCs me
ng ho s
Risi te
loa n ra
Real Estate
Housing
Sector Infrastructure
25. Housing sector affected by rising home
loan rates
• The sector has witnessed a massive fall of 26.6 per cent in 2006-07 from
29.1 per cent in 2005-06.
• And is expected to slow down further to touch between 17 and 20 per cent
in the current fiscal.
• The real estate market has already seen a drop of 60 per cent in sales. It
could further worsen if reversal in rising interest rates for housing is not
addressed urgently.
• Several projects are being delayed from the developers end, because of the
hesitancy shown by the buyers end, in depositing advance amount at the
time of pre-launch bookings.
• The approximate change in EMI for housing loan of Rs.10 lakh works out to
be Rs.3,250 and puts an additional burden of Rs.39,000 per annum on end-
users.
26. HFCs Fear To Loose Market Share To
Banks
• The profits of housing finance companies (HFCs) are likely to be majorly
affected by the race among banks and rising home loan interest rates.
• Incremental net profitability margins of HFCs are believed to have fallen to
1.52% in the first half of 2006-07, from 1.76% in 2004-05.
• HFCs may loose against banks in gaining market share race. From 23% of
the incremental market, the share of these companies is likely to fall to 20%
at the end of the financial year.
• Banks seem to be on safer side this time because of their resource profile.
They can easily attract deposits and also have current and saving accounts.
Contrary to this, HFCs are largely dependent on wholesale borrowings.
• The ratings on HFCs do not show any significant changes.
• But the large companies like LIC Housing and HDFC are still in a better
situation, concerning 70% market share among housing companies.
27. Hit To Real Estate Developers
• Real estate companies are facing the brunt of a housing industry slowdown
caused by the high cost of mortgage financing.
• When home loan rates declined to the 6.5-7 per cent level, a lot of people
borrowed money to invest in a second house. But with interest rates now
becoming so burdensome, this will stop. Now only those who need a house
for self-use will take a loan.
• Real estate shares fell after the policy of RBI of interest rate hike.
Realty stocks like DLF, Puravankara Projects, Indiabulls Real Estate fell
marginally at about 1%.
• The hardest hit were companies such as Unitech, HDIL and Omaxe whose
shares fell down 5.59%, 5.47% and 2.12% respectively. Sobha Developers
on the other hand, closed at Rs 772.75, up 2.02% from the previous close.
28. Bank stocks, under pressure
• Higher interest rates means a higher price for home loan funds,
plummeting the demand. For example, in June 2005, ICICI Bank’s
floating interest rate for home loans was 7.25 per cent per annum.
Today it is 11 per cent, with no guarantee of leveling off.
• Increasing interest rates are also bound to have an impact on loan
recoveries, however small—a higher cost of funds always puts
pressure on the marginal borrower, We can’t help but recall the old
banking maxim ‘Good times make for bad loans.
In sum, the pain is far from over , for banking stocks.
29. Impact on Speculators
Growth
Growth Framework
Framework Impact
Impact
The low interest rate Thespeculators usually
The low interest rate The speculators usually
With the funds
With the funds
regime had served
regime had served buy units
buy units becoming dearer, there
becoming dearer, there
as a breeding
as a breeding in bulk by paying
in bulk by paying has been a significant
ground for margin money has been a significant
ground for margin money slow down in
speculators for creating slow down in
speculators for creating speculated
which included an artificial speculated
which included an artificial purchasing
small property brokers, shortage, purchasing
small property brokers, shortage, activities by
big or small retail putting pressure activities by
big or small retail putting pressure Investors for
investors apart from big on the prices. Investors for
investors apart from big on the prices. at least short term.
players. at least short term.
players.
30. Impact on some other sectors
Stock Cement Paint
Savings
valuation Industry industry
Interest rate when the capital Housing demand
changes also values become consumes Housing sector
affect the flow of unaffordable to almost 70% of will not continue
financial savings. the end users, the country's to drive demand
They have they go for rental cement. If this for paints, as
effects on accommodation support wanes, it there is rise in
retained profits which in turn could tilt the interest rates for
and, thus, affect triggers demand odds against the home loans.
corporate sector and therefore cement
savings rise in values. manufacturers.
31. Recommendations
Rising interest rates are a concern to any economy's growth prospects.
In the Indian context, the specter of rising interest rates is troubling
the government, as well as the investor community……
32. Recommendations
For the Government
• The twin problems of affordability and accessibility that thwart the progress
of housing need to be addressed.
• Governments have to withdraw from direct participation in the housing and
housing finance sector and instead need take on the role as facilitators to
create the enabling environment to encourage private sector capital.
• Efforts of the government are required to strengthen foreclosure laws, land
records need to be computerized and archaic land laws especially rental
laws need a complete overhaul.
• Small steps such as encouraging credit bureaus, introducing mortgage
insurance, allowing real estate mutual funds and creating a favorable
environment to facilitate foreign direct investment in housing will help
stimulate the housing finance sector.
• After dousing inflation, the Government should strive to ensure greater
liquidity and smother rising interest rates in the ensuing Monetary Policy
Reviews.
Else, the country's aspirations of inclusive development may remain a distant
dream.
33. Recommendations
For The Investors
• He can also opt for a hybrid interest scheme
…………….that is part fixed and part floating - depending on his expectation
about the future rate of interest, the ratio of loan taken under the two
schemes can be varied.
• Home loan seekers should consider opting for a 2-in-1 loan
…………….where the rate of interest is fixed for 3-5 years. This will protect
them from a potential interest rate hike in the near term. At the end of this
term, they have the option to either continue with the 'fixed' rate (if interest
rates continue to rise) or migrate to a floating rate loan.
• They may consider selecting the ‘truly’ fixed rate loans
…………………..Such loans have a fixed rate throughout the tenure of the
loan. However, if interest rates were to decline going forward, the truly fixed
rate loan will not reflect the fall in interest rates and the consumer will forfeit
any chance of benefiting from a decline in interest rates.
35. India : A Turnaround Story
• The housing finance sector in India has undergone unprecedented change
over the past five years.
• For every Indian rupee (INR) invested in the construction of houses, INR
0.78 is added to the gross domestic product of the country.
• The real estate sector is submissive to the development of 269 other
industries. The real estate sector is also the second largest employment
generator in the country.
• The housing finance industry has been observed to have outperformed
everyone's expectations in the previous years. Loan disbursements have
grown at a CAGR of over 35% in the last five years.
• There are approximately 383 housing finance companies (HFCs) in the
country now. This number does not include numerous banks that have also
entered into the fray recently.
36. Traditional structure of the mortgage
market in India
• In 1970, the central government set up the Housing and Urban
Development Corporation (HUDCO) to finance housing and urban
infrastructure activities.
• In 1977, Housing Development Finance Corporation (HDFC) was the first
housing finance company in the private sector to be set up in India.
• The public sector insurance companies – Life Insurance Corporation of
India (LIC) and General Insurance Corporation of India (GIC) were also
mandated to support housing finance activities (both established in 1989).
• In 1988, the National Housing Bank (NHB) was established as a 100%
subsidiary of the RBI, to promote housing finance through a refinance
mechanism to banks, housing finance companies (HFCs) and other
institutions.
• Several banks had set up housing finance subsidiaries which functioned as
independent units with little support or interest from their parent bank.
37. The Trigger of Change
• Towards the end of the 1990s, against the backdrop of lower interest rates,
industrial slowdown, sluggish credit off-take and ample liquidity, commercial
banks recognized that if they had to maintain their profit margins, they
needed to shift their focus from the wholesale segment and build their retail
portfolios.
• The lower interest rate regime, rising disposable incomes, stable property
prices and fiscal incentives made housing finance attractive business.
• Further, housing finance traditionally has been characterized by low
nonperforming assets NPAs and given the vast demand for housing loans,
almost all the major commercial banks plunged into the business of housing
finance and thus began the rollercoaster ride!
38. Sufficient Room for All Players
• The total number of houses that would be required cumulatively during the
Tenth Plan period (2002-2007) is estimated at 22.44 million dwelling units.
However, this official estimate is based on the 1991 Census and unofficial
estimates peg the current housing shortage in India at around 40 million.
• Further, the Tenth Five Year Plan has estimated an outlay of INR 7,263
billion to the housing sector, of which the contribution envisaged from public
institutional sources are only INR 4,150 billion.
• Therefore, substantial contribution from private sector players would
necessarily be required to tackle the growing housing shortage.
• Given the wide range of choice, customer retention is the greatest challenge
for the Indian housing finance industry.
39. Global Experiences
India’s Home Loan GDP Ratio 5%, versus 50% In US & UK
• With 90% of first timer home loans borrowers, home loans GDP ratio in India
continues to be at meager 5% as against 50% in US and UK and therefore suggested
that it can be more than doubled in budget proposals for 2008-09.
• ASSOCHAM (Associated chambers of commerce and industry of India) findings:-
Since buying a home requires huge investment, especially for first time buyers, higher
home loan GDP ratio is necessary as 90% of borrowers are the first time borrowers.
US Fed (the Federal Open Market Committee) reduced the interest
rates by 75 basis points
• Because of the sub prime crisis in the US, US Fed (the Federal Open Market
Committee) reduced the interest rates by 75 basis points. This naturally has created a
wide gap between US and Indian interest rates, leading to arbitrage opportunities in
the economy.
• US investors not only get the currency appreciation returns, but also higher interest
income. If it happens, there will be substantial addition to liquidity in the Indian
economy. This may in turn fuel further currency appreciation, hurting exports. Thus,
this was a strong case in favor of curtailing interest rates.
42. Factors Attributing To This Shortage
• Population growth rate- 1.6% p.a.
• GDP growth rate – 9%p.a.
• Per capita income is expected to quadruple by 2020.
• Average real income likely to grow by 2025 in
Urban India: 5.7%
Rural India:3.6%
• India’s middle class expected to expand from 50 million to 583
million in next 18 years.
43. Additional Burden To Customers
• Referring to differentials between EMIs, prevailing at 7% to 12
%,approx.
• Change in EMI for hosing loan:
Rs. 10 lakh
Rs. 3250 costing Rs. 39,000
extra per annum.
Rs. 20 lakh
Rs. 6520 costing Rs. 78,240 extra p.a.
Rs. 30 lakh
Rs. 9770 costing Rs. 1,17,240 extra p.a.
44. Highlights
• Repo rate kept unchanged at 7.75%.
• Reverse repo rate unchanged at 6%.
• Bank rate unchanged at 6%.
• Cash Reserve Ratio increased by 50 basis points to
7.5% in its mid-term review of annual policy w.e.f.
Nov. 2007.
45. Change In Repo And Reverse Repo Rate
• These set the direction for other lending rates.
• The repo rate hike is indicative of more expensive credit.
• A rise in the reverse repo rate raises the cost of borrowing
funds of banks, leading to a rise in lending as well deposit
rates.
• It will hit banks to the extent banks are dependent on RBI for
their borrowings.
• For protecting its net margin, a bank typically factors in a rise
in the reverse repo rate by increasing its lending rates on all
retail loans including housing loan.
• Ultimately, it is the customer who has to pay a higher price.
46. • Reserve Bank of India announced yet another hike in interest rates.
• After its second revision since June, the reverse repo stands at 6 per
cent and the repo at 7 per cent.
• The CRR has gone up by 30% in June 2007 over June 2006.
• there was a 17% rise in the PLR in June 2007 over June 2006.
• As expected, soon after this, SBI,HDFC, PNB, Oriental Bank of
Commerce, LIC Housing Finance and Bank of Baroda has hiked
their home loan rates in the range of 0.25-1 percentage points.
• IDBI Ltd raised retail lending rates by 0.25 percentage points. ICICI
Bank also raised its prime lending rate by 0.5 percentage points to
11.75 per cent.
• State Bank of India has hiked interest rates on its home loans by
0.25 to 0.75 percentage points, across all tenors in the floating and
fixed interest rate category effective from March 1, 2006.
• Home loans earlier increased by 50 per cent in 2004-05.
47. • Real estate prices risen substantially.
• Tax Benefits available on home loan interest and
repayment .
• As per the current regulations, individuals can claim up
to Rs 1 lakh per annum as deduction for home loan
principal repayment and additional deduction of Rs1.5
lakh towards interest payments.
48. A tete-a-tete with Mrs. Laxmi
Kant Chanana , Manager of PNB
Housing Finance
Date of interview: 23 dec 2007
49. Some Excerpts::::
Q Impact of interest rate hikes on client volume?
Q . Do you expect an early rate cut this year? To what
extent?
Q . With realty prices shooting up and then taking a
steep plunge, can this be rated as a housing bubble?
Was this correction reqd.?
50. Q Consumers generally complain that they never receive
the benefits of falling rates even though banks are
prompt in hiking rates at the drop of a hat. Do you
agree?
Q Do all HFCs have same lending rates? Are they regulated
by RBI?
