Housing finance in India

1. Housing finance in India

2. Housing – A Macro View 1 (in million)(Source: Census of India, 2001)

3. Housing Finance - A Key Driver for Economy • It 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 capita income. • is an engine of growth, for the national economy

4. Housing Finance - A Key Driver for Economy • 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.

6. Reasons for growth of housing finance in India • Liquidity in the System • Lower Inflation Rate • Softer Interest Rate Regime • Housing Loan has the Lowest Non Performing Assets (NPAs) • Fiscal Concessions • Legal Reforms • Wider Network - Banks/Housing Finance Companies • Consumer Friendly Products/Approach • Increasing number of Real Estate Developers

7. Housing Finance Interest Rates in India

8. Characteristics of housing finance • Long term finance with repayments spread over 15-20 years • Most of the people prefer loan at fixed interest rate. • The concept of variable interest rate is slowly picking up with the expectation of further southward movement of interest rate.

9. Characteristics of housing finance • Market is becoming very competitive after the entry of banks in financial institutions in retail lending. • The spreads are declining the competition and unless long term funds at reasonable interest rates are made available, it would be very difficult to maintain bottomline.

10. Housing shortage and resource requirement • Housing shortage • India is a vast countrywith a population of over 1 billion people. More than 50 million people are living in slums. • India has a current housing shortage of 22 million units (both in rural and urban areas). It will increase to 42 million by the end of 9th five-year plan. • Rural areas are still neglected, both under infrastructure and housing, resulting in shift towards urban centres.

11. Housing shortage and resource requirement • India is far behind Asian Countries such as Singapore, Hongkong, Malaysia, Bangkok, Korea and China in fulfilling this basic human need. • These Countries made home ownership their prime objective in the early 60's, gave stimulus to the construction industry, made massive investment in physical infrastructure.

12. Housing shortage and resource requirement B. Resources requirement • It is difficult to make a correct assessment of requirement of resources required to meet the huge shortfall in India. • But the estimatedrequirement of resources for meeting the existing shortfall is Rs. 150000 crores. • Bulk of these resources will come from the formal sector such as HFCs, Banks and FIs.

13. Housing loan market in India • The size of mortgage loan market is relatively very small compared to developed countries. Our estimated size of mortgage loans with HFCs is about Rs. 32000 crores. • In developed countries like UK and USA, the outstanding mortgage loan to GDP is above 55%, Japan 33%, Korea over 10%, in Malaysia over 20% and Hongkong over 30%. • In India the ratio is just around 1.6%. After including other indirect agencies like Govt. and institutions, the percentage share will be less than 2%

14. Problems of long term finance in India • The mortgage loans are long term loans for 15-20 years. • In some countries such as Japan these are also available for 25-30 years • There are very limited options for availability of funds for such a long period and at a fixed interest rate.

15. Problems of long term finance in India • The long term Debt market has not so far developed or stabilised in India. • Most of the institutions are suffering from asset liability mismatch and the consequences would be felt when liabilities will mature for payment. • The interest rate risk will be exposed once the interest rates start moving northwards.

16. What is primary and secondary market • The primary market constitutes housing loan companies (HFC’ s) and the borrower. • The (HFC’ s) hold the mortgages of a borrower in their books. • The participants in the secondary market are specialised institution, to whom housing loan mortgages are sold by (HFC’ s) at a market determined interest rate.

17. What is primary and secondary market • These loans are sold in the market to interested buyers in the form of mortgage backed securities (MBS). • These interested buyers could be insurance companies, pension funds, mutual funds and even individuals. • By this process, the avenues for funds are increased, there is a greater participation of individuals and the housing finance company is able to raise the long-term funds from the secondary market.

18. Mortgage loan insurance • In developed economies, the risk of default under mortgage loans is covered under an Insurance Policy for a nominal premium. • As a result the Mortgage loans become risk free and only 50% risk weight is allotted on Housing Loans, which vastly improves Capital adequacy ratio. • In India, in the absence of such Insurance cover, the risk of non-payment/ failure exists to a larger extent and hence the risk weight is 100%.

19. Thanks to NHB, who want to introduce this Scheme by starting a separate Subsidiary. • The success of this Scheme will depend on the premium rate. • Indians are traditionally and emotionally attached to their own house therefore, the default ratio is low. • the recovery percentage is as high as 98 to 99%. Taking this factor into consideration, RBI has now reduced the Risk weight to 75% taking into account the good asset quality.

20. The national housing bank (amendment) Act, 2000 • The parliament passed the 'National Housing Bank (Amendment) Act, 2000'which has come into force from 16th June 2000. • The need for a summary procedure was long felt for housing finance institutions for giving impetus for creation of 'Secondary Mortgage Market'.

21. National Housing BankProfile • The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. • The Act, inter alia, empowers NHB to: • Issue directions to housing finance institutions to ensure their growth on sound lines

22. National Housing BankProfile • Make loans and advances and render any other form of financial assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement and • Formulate schemes for the purpose of mobilization of resources and extension of credit for housing

23. National Housing BankObjectives • NHB has been established to achieve, inter alia, the following objectives: • a. To promote a sound, healthy, viable and cost effective housing finance system to cater to all segments of the population and to integrate the housing finance system with the overall financial system. • b. To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups. • c. To augment resources for the sector and canalize them for housing.

24. National Housing BankObjectives • d. To make housing credit more affordable. • e. To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act. • f. To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country. • g. To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.

25. National Housing BankBusiness Activities • NHB, as the Apex level financial institution for the housing sector in the country, performs the following roles: • (a) Promotion and Development: • NHB operates as a multifunctional Development Finance Institution (DFI) for the housing sector. • The Bank's policies are directed towards promotion and development of housing finance institutions. NHB has framed guidelines for HFC’s with a view to promoting their development on sound and healthy lines. • The guidelines are reviewed and modified from time to time in the light of developments in the financial and housing sectors.

26. National Housing BankBusiness Activities • All HFC’ s registered with the National Housing Bank u/s 29A of the National Housing Bank Act, 1987 and inter alia having minimum net owned funds of Rs.10.0 crores are eligible for refinance support. • It has also contributed to the equity capital of five HFC’ s. • NHB has a dedicated Training Division which organizes regular training programs in areas relating to housing and housing finance for development of management capabilities of officials working in the sector. • NHB‘ s promotional endeavors are also directed towards capacity building for the housing finance system besides enlarging the credit absorption capacity.

27. National Housing BankBusiness Activities • (b) Regulation and Supervision: • NHB exercises regulatory and supervisory authority over the HFC’ s in the matter of acceptance of deposits by them pursuant to the powers vested in it under the Act. • As per the amendments to certain provisions of the Act, which came into effect from June 12, 2000, NHB is • vested with powers to grant Certificate of Registration to companies for commencing/carrying on the business of a housing finance institution.

28. National Housing BankBusiness Activities • Besides, NHB regulates the deposit acceptance activities in accordance with the Housing Finance Companies (NHB) Directions, 2001, amended from time to time, in the matter of ceiling on borrowings (including public deposits, rate of interest, period, liquid assets, etc). • NHB has also issued Directions on prudential norms in regard to capital adequacy, asset classification, concentration of credit, income recognition, provisioning for bad and doubtful debts etc. NHB supervises the working of HFCs through on-site inspection and off-site surveillance.

29. National Housing BankBusiness Activities • C. Finance • NHB raises resources for the housing sector towards increasing new housing stock and provides refinance to a large set of retail lending institutions. • These include scheduled commercial banks, scheduled state cooperative banks, scheduled urban cooperative banks, specialized housing finance institutions, apex co-operative housing finance societies and agriculture and rural development banks.

30. National Housing BankBusiness Activities • Refinance is provided by NHB under various schemes, which are formulated taking into account, several aspects of the National Housing Policy, the constraints facing the sector etc. • NHB has also a window for direct lending to Public Agencies such as, State Level Housing Boards and Area Development Authorities for large scale integrated housing projects and slum redevelopment projects. • NHB is also operating a special window for extending financial assistance to the people affected by natural calamities viz. earthquake, cyclone etc.

31. National Housing BankBusiness Activities • (d) Resources of NHB • NHB raises resources from diversified sources, both domestic and external by issuing Bonds/ debentures, borrowing from RBI and financial institutions/organizations etc. • Under the Act, NHB is authorized to issue and sell Bonds with or without the guarantee of the Central Government for the purpose of carrying on its functions.

32. National Housing BankBusiness Activities • (e) Rural Housing: • NHB launched the "Swarna Jayanti Rural Housing Finance Scheme" to mark the golden jubilee of India's Independence. • The Scheme seeks to provide improved access to housing loans to borrowers for construction/acquisition/ up-gradation of a house in rural areas of the country.

33. National Housing BankBusiness Activities • (f) Recent Initiatives • Securitization of mortgage loans of the retail lending institutions facilitates for canalizing household savings into the housing sector is seen as a potentially viable market oriented alternative. • Support to Mortgage backed securitization is a major policy initiative of the Government as manifested in its National Housing and Habitat Policy announced in 1998.

34. National Housing BankBusiness Activities • This policy emphasizes NHB‘ s lead role in mortgage-backed securitization and development of a secondary mortgage market in the country. • As the apex body in housing finance sector in India, NHB has been playing a lead role in the sector in matters relating to policy environment as also operational mechanism for the development of a secondary mortgage market in India.

35. National Housing BankBusiness Activities • In order to resolve the twin problems of affordability and accessibility affecting the growth of the housing finance business and the prospect of home ownership. • NHB has been entrusted with the responsibility of launching a Mortgage Credit Guarantee Scheme for protecting the lenders against default.

36. Venture capital

37. Venture capital • In India, venture capital has been around for some time now. • The performance has been mixed. • The fundamental principal underlying venture capital fund is "No return without risk and greater the risk, greater the return". • Venture capital is a booster for new entrepreneurs.

38. Venture capital • A venture capital fund is a fund, which in many ways is like mutual fund. • It raises funds from several investors, who generally have a large appetite for risk and are looking out for greater returns.

39. Venture capital • These funds are then invested in several fledging enterprises, which need funds, but are unable to access them through the conventional sources such as banks and financial institutions. • Typically, such enterprises are started by first generation entrepreneurs.

40. Venture capital • Since most of the ventures financed through this route are in new areas, the probability of their success is very low. • The venture capitalist is however not worried because the deal, which succeeds, nets a very high return on his investments. • The return generally comes in the form of selling the stocks when they get listed on the stock exchange. • If the venture fails (more often then not), the entire amount gets written off.

41. Venture capital • Venture capital funding may be by way of investment in the equity of the new enterprise or by way of debt or a combination of both, though equity is the most preferred route. • To conclude, a venture financier is one who funds a start up company, in most cases promoted by a first generation technocrat promoter with equity. • Exit is preferably through listing on stock exchanges.

42. Venture capital • This method has been extremely successful in USA, and venture funds have been credited with the success of technology companies in Silicon Valley. • The entire computer industry thrives on it. • One can ask why venture funding is so successful in USA and has a not-so-impressive track record in India.

43. Venture capital • For any venture idea to succeed, there should be a product which has a growing market with a scalable business model. • The IT industry (which is most suited for venture funding because of its "ideas" nature) in India till recently had a service centric business model. • Products developed for Indian markets lack scale.

44. Venture capital • Also, till early 90s, under the license raj regime, only commodity oriented businesses thrived in a deficit situation. • To fund a cement plant, venture capital is not needed. What was needed was ability to get a license and then get the project funded by the banks and DFI’s. • In most cases, the promoters were well established industrial houses, with no apparent need for funds.

45. Venture capital funding in India • Traditionally, the role of venture capital was an extension of the developmental financial institutions like IDBI, ICICI, SIDBI, State Finance Corporations, etc. • TDICI (now ICICI ventures) and Gujarat Venture were one of the first venture capital organizations in India. • Both these organizations were promoted by the financial institutions.

46. Venture capital funding in India • However, it was realized that the concept of venture capital funding needed to be institutionalized and regulated. • Besides this funding requires different skills in assessing the proposal. • Thus dedicated funds providing only venture capital funds have been formed. • The sources of these funds are normally the financial institutions or foreign institutional investors or pension funds and high net-worth individuals etc.

47. Venture capital funding in India • Though an attempt was also made to raise funds from the public and fund new ventures. • Certain venture capital funds are industry specific (i.e. they fund enterprises only in certain industries such as pharmaceuticals, InfoTech or food processing, etc) whereas others may have a much wider spectrum. • Securities and Exchange Board of India (SEBI) has come out with guidelines to which a venture capital fund has to adhere in order to carry out its activities in India.

48. Venture capital funding in India • There are a number of funds which are currently operational in India and involved in funding start-up ventures. • Most of them are not true venture funds as they do not fund start ups. • What they do is provide mezzanine or bridge funding and are better known as private equity players. • This article aims to give a bird-eye’s view of the various guidelines a venture fund has to adhere to in India.

49. Venture capital funding in India • In 1973, a committee on the development of small and medium-sized enterprises highlighted the need to foster venture capital as a source of funding for new entrepreneurs and technology.

50. Venture capital funding in India • Later, a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector, based on which the Indian government took a policy initiative and announced guidelines for venture capital funds (VCFs) in 1988. • However, these guidelines restricted the setting up of VCFs to the banks or the financial institutions only.