Panel 5: The Politics and Economics of Land and Housing (March 24, 2011)

1. The 21st Century Indian City -Developing an Agenda for Urbanization in India March 23-25, 2011 Panel 5: The Politics and Economics of Land and Housing (March 24, 2011) R. V. Verma National Housing Bank India

2. Indian Mortgage Market • Steady growth • Served by specialised HFCs & Commercial Banks - synergies • Proactive and Risk based Regulation • Conservative lending practices; Originate to hold • NPAs well contained • Shift from high-end market to Affordable housing • Market segmentation – diversified risk • Broad based stakeholding – induces stability 2

3. Fiscal and Credit Policy Support Financial Sector Housing Finance Market Financial Market NHB HFCs Banks MFIs Capital Market Informal Sector Affordability Real Sector Housing Market Land & Construction Infrastructure Public Agencies Private Developers 3

4. Outstanding Housing Loans

5. Trends in Housing Finance Disbursals (INR in billion)

6. Housing Loans outstanding 7.9% of GDP Supportive Regulatory/Fiscal Policies Financial Deepening Supply Responses: Demand Driven Main beneficiaries - salaried class, professionals and tax payers Challenge for Low Income Housing – “Accessibility” and “Affordability” Trends in Housing Finance

7. Financial Environment • Financial Sector and Capital Markets - Development • Interest rates deregulation • Growing Disintermediation • Shift towards Market Oriented Resource Mobilisaiton • Level Playing Environment • Market Determined Cost Bearing on • Affordability • Availability • Accessibility

8. Issues in Low Income Housing • Rapid growth in housing sector has bypassed Low-Income Households • Demand Identification • Risk Perception • Price Rise, Interest Rates - Impact on Low Income Housing • Market/Subsidy based Approach

9. Issues in Financing • Limited access to housing credits • Cannot contract debts on terms of the financial market • Unstable income and unstable cash flows • High risk & high cost - to - service customers • Role of Guarantee/Risk Fund • Role of Government & Financing Institutions in Market Environment • Leveraging effect of Subsidy

10. Competing Demand on Land and Finance Land supply is constrained: Land availability Land use rules Efficient use of Land Title and Tenure Finance Flow Constrained Stability Growth Risk Perception Need for ‘Integrated Approach’ Supply Constraints

11. Affordability Issues • Financial Sector • Project Finance • Individual Loans • Supply of Funds • Cost of Funds • Whether market based solution? Role of Incentives Subsidized Housing Credit Subsidized House Prices Real Sector • Land Supply • Cost of Land • Land market functioning • Infrastructure provision • Construction & Delivery • Role of Public & Private Sector

12. In Other Words Ensuring access to housing with infrastructure at affordable prices Supply Side • Land Acquisition • Infrastructure Provision • Sale of Land • Housing Construction • Housing Sale • Role of Public Agencies/ Developers • Credit Delivery Demand Side • Purchase Price • Income Level • Affordability • Loan eligibility • Subsidy component • Risk Mitigation • Role of NGOs/MFIs • Demand Aggregation

13. Formal sector accounts for only 25% of the total investments in housing; skewed distribution of credit Affordability and security; perceived higher risk Financial assistance through informal sector at nascent stage Subsidized housing programmes: limitations Targeting and sustainability of such programmes Challenges

14. Market’s limitations / Subsidy Limitation Private Capital and Public Objective Formal & informal sectors compartmentalized Demand aggregation, demand registration, intermediation and risk mitigation Incentives for Savings Policy Reforms Challenges

15. Where is the Disconnect? • Not enough supply at lower prices. Impact of lowering prices on the stock of housing, the flow of housing and housing finance • Price – Supply relationship. Profit on Value or Volume Profitability to excite the suppliers/builders. Price/cost structure • Demand sensitive to price but supply not forthcoming • Measures to convert the investor’s market into consumer’s market

16. Partnership Approach : Public/Private/Community Innovative instruments for benefit of All Incentives for Low Income Housing Credit Demand led Incentives for Low Income Housing Construction Search for Synergies

17. Sector Profile – Wide Stakeholding Real Sector Central Government Financial Sector Policy & Programmes Policy & Programmes PUBLIC PRIVATE Partnership Instns & Products Facilitator & Enabler State/Local Governments Financial Institutions Formal Sector Informal Sector Affordable Housing for All and Financial Inclusion –Mutually Consistent Themes

18. Government Support Liquidity Pricing Risk Mitigation Targeting - Low Income Housing Guarantee Fund / Subsidy Subsidy support to EWS/LIG housing Leverage institutional finance Institutional Support 18

19. Policy Issues GOVERNMENT INTERVENTION The Government could consider enabling legal and regulatory reforms and create an enabling environment • through efficient functioning of the land market • Streamlining of all approval processes • provision of efficient infrastructure • e-governance viz. introducing electronic record for land and bringing in more transparency in the record of land and houses

20. Growth of Housing Finance Sector • Specialized Institutions vs. Universal Institutions • Augmenting funds for the sector • Resource Mobilization & Deployment • Facilitating the growth of Secondary market • Lending Discipline & Quality of Assets • Tapping Overseas Market – Lendings & Investments

21. Policy Reforms • Housing Policy at National & Regional level • Integrated with Financial Sector • Fiscal & Financial Sector Policy • Institution-Building & Product Innovation (Supply & Demand Side) • Deregulation with closer Supervision (Finance & Construction Sector ) • Flow of Funds & Efficient Housing Market

22. Market Segments • Identify subsidy-based and market-based segments and nature of interventions • Complementarities • Ensure adequate and sustained funding for both segments • Ensure adequate supply of land and housing for both segments • Market-based approach and state/local level policy interventions

23. Policy Prescriptions • De-risk the segment through suitable risk mitigants both in the financial segment and the real sector segment (demand and supply side) • Develop a role for the government in low income housing, consistent with the market orientation of the rest of the segments (without conflicting) • Develop securitisation for funding • Revisit the fiscal and credit regime to ensure that housing gets its fair share of financing from the system • Develop policies so that housing is able to compete fairly with other sectors for funds

24. Institutional Stakeholders Construction Finance Banks/ HFCs/ MFIs Individual Loans Specialized Funding Agency Borrowers SPV Project State Govt./ Builders Enabling Fiscal and Credit Policy Enabling Land Policy for Construction Subsidy/ Guarantee Fund/ Credit Enhancement Land Tenure First / Second Loss Facility

25. Summing Up • No Broad-brush Approach • Need for Segmented Intervention • Role of State Governments & Public Agencies • Supportive Fiscal & Credit Policy • Market/Subsidy based Approach • Developing innovative products and institutional mechanism

26. Summing Up • Identify land for construction • Liberalize construction finance for low income housing • Project approach and economies of scale • Price determination – a critical consideration • Develop mechanism for Demand Registration • Tap Savings potential – building borrowers’ equity • Actively involve supply side agencies, private and public

27. Widening stakeholders’ base Broadening Institutional infrastructure Securitisation through Government support Risk Mitigation Vehicle Funding Source and Delivery Channels Construction and Finance Delivery Going Forward

28. Conclusion INCLUSIVE GROWTH WITH STABILITY • Affordable House Price • Affordable Credit • State Govt./Municipal Bodies to provide land and infrastructure • Public/Private builders to construct • Pricing & Credit critical • Credit Risk Mitigation • Credit Guarantee Fund

29. Thank You