Slide 1

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGHousing finance:Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers.

For example, what is understood by the term housing finance in a developed country may be very different to what is understood by the term in a developing country.

Housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a countrys legal environment or culture, economic makeup, regulatory environment, or political system

(2009) Loc Chiquier and Michael Lea, Housing Finance Policy in Emerging Markets, p. xxx.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGHousing finance:In addition, the concept of housing finance and housing finance systems has been evolving over time.

Looking at definitions from the mid-1980s, we see that housing finance was defined primarily in terms of residential mortgage finance:

The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.

(1985) Mark Boleat, National Housing Finance Systems A Comparative Study, p. 1.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGHousing finance:However, in more recent years, a number of other much wider definitions have appeared:

Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nations housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.

(2009) Peter King, Understanding Housing Finance Meeting Needs and Making Choices, p.3.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGHousing finance:Or simply

There is recognition of other relevant forms of housing finance [apart from residential mortgage finance] such as developer finance, rental finance, or microfinance applied to housing. Developer finance is often in the form of unregulated advance payments by buyers, and developers sometimes provide long-term finance to buyers through instalments sales when mortgages markets are not accessible. Microfinance for housing is typically used for home improvement or progressive housing purposes. Loans are typically granted without pledging properties. Although the overall impact of microfinance in housing remains limited, this activity can represent an important source of funding for those in the informal sector.

(2009) Loc Chiquier and Michael Lea, Housing Finance Policy in Emerging Markets, p. xxxii.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGA. What is the Housing Finance Problem? There is more than one way to look at housing finance and according to the viewpoint chosen significantly different answers are given to the question of what constitutes "the" housing finance problem.

From the viewpoint of a household the problem is the possibility of obtaining a loan at affordable terms.

For ministry of housing officials the problem is the lack of resources to carry out public housing programs.

From the viewpoint of ministries of finance and central banks the problem is to prevent financial instability and to maintain confidence in the financial system.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGA. What is the Housing Finance Problem? National planning agencies are interested in the contribution that housing finance can make to the mobilization of resources and their effective use.

For the manager of a housing bank the problem is how to expand the scope of financial services while maintaining a viable institution.

In the case of a capital market analyst the housing finance problem is that of mobilizing short term resources while providing long term financing (term transformation) in an inflationary environment; in other words, how to generate long-term loans.

For international agencies with a mandate to make loans which will, reach the lowest 50 percent of the household income distribution, the problem is to develop sustainable financial programs for low income housing.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGThe Indian Housing Finance IndustryThe housing is the single largest investment of an individual. The Housing finance is growing at a rapid speed. The major sources of finance for housing for both buyer as well as builders have been largely from the unorganized sector (Dangwal R C 1998), but today banks are making their efforts to bring in formal system.In India most of the people depend on their provident fund and gratuity amounts received after retirement for buying a house. The people started relying upon the housing finance Institutions (both banks and housing finance companies). India has changed socially and there is no stigma attached today to going in for borrowed funds. The emergence of housing finance is a major business in the country. The housing finance institutions fulfill the shortage of housing in India. The demand for housing loans is rapidly increasing In recent years. The reason for this are easy affordability of housing, declined property prices, reduced interest rates and attractive tax incentives.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGThe Indian Housing Finance Industry

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFormal and Informal Systems of Finance:Housing Finance is an important element of housing policies persuaded by the Governments of developed and developing countries of the world. In India the flow of credit into the housing sector comes from two sources that is formal and informal sectors.

According to Dr. Rangarajan Committee Report in the year 1987, the formal sector comprises of :Central and State Governments' budgetary allocationGeneral financial institution, namely LIC, GIC, and its subsidiaries, scheduled commercial banks and Provident Funds. Specialized housing finance institutions like National Housing Bank (NHB) & the HUDCO.

Apex and Cooperative finance institutions are in the public sector while HDFC and other housing finance companies are in the private sector. The informal sector consists of the households themselves, public and private employers extending house loans to their employees and project financing by HUDCO and other agencies outside the budgetary processes.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFormal and Informal Systems of Finance:The formal financing channels like banks loans relay on documents, and informal financing channels that largely rely on reputation, trust and reciprocity with little legal supervision.

The main problem of the poorer people in any country is that they do not have access to institutional finance. It is, therefore, necessary to find out ways in which these people can be brought to the fold of the institutional finance. Secondly, most of these people belong to what is commonly known as the unorganized or informal sector. Although India can be proud of a mature primary market, the efforts of all HFIs and banks, including the foreign banks, tend to be focused around the formal sector i.e., on the employee class. To some extent, housing loans are also being accessed by professionals such as lawyers and doctors, but by and large, the informal sector comprising smaller businessmen, traders and others has not even been conceptualized as a target market for housing.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFormal and Informal Systems of Finance:There are a course factors that preclude the provision of financial information by borrowers in this sector in a form and manner required by the financial institutions and therefore, this segment of the population look for non-institutional credit.

Recently, a number of initiatives have been taken in India to bring in a majority of such population to the formal sector financial institution fold.

The reserve bank of India had set up an working group to study the functioning of the self help groups (SHG) and Non-Governmental Organization (NGOs) for expanding their activities and deepening their role, linking of SHGs with banks, capacity building of NGOs, etc. Similarly, the emergence of microfinance sector is also of recent origin in India. A few community based financial institutions (CFIs) also emerged. While initially, all these institutions provided funds to the people to set up income generation activities, over a period of time some of them have provided funds for shelter improvement also.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFormal and Informal Systems of Finance:While the exact number of micro financing institutions in the country has not been ascertained, it has been estimated that there could be 250-300 voluntary agencies in micro-finance each with 50-100 SHGs. NHB has formulated a refinance scheme for the loans advanced by the housing finance companies to the community based finance institutions. Six projects involving a linkage between CFIs and housing finance companies were identified under the technical assistance programme from Asian Development Bank to improve the understanding of the informal sector lending for housing as well as the willingness on the part of the formal and informal institutions to provide affordable credit to urban and rural poor. Of the six projects, two are well underway with the disbursal of the first tranche of the loan amounting to Rs. 6.6 million disbursed to about 200 beneficiaries. Sanction letters have been issued in respect of another two projects.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFormal and Informal Systems of Finance:Some major institutional concerns and operational problems have emerged from this experience. Some of these relate to the rate of interest, security for the loan, selection of borrowers and credit appraisal, loan processing fee, end use of funds, organizational problems at the SHG level like the capacity to manage long term loans, etc. these are being analyzed to find out a solution before the same could be replicated elsewhere in the country.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGInstitutions providing Housing Finance:In India, the following types of institutions provide long term finance for housing:Commercial banks,Cooperative banks,Regional rural banks,Agriculture and rural development banks,Housing finance companies andCooperative housing finance societies.

The Housing finance sector in India has no doubt, experienced unprecedented change in its structure from its formulation stage. Indian Housing finance has far moved from the stages of being a solely government provided service during the 1970s to a very competitive sector with more than 45 housing finance entities providing housing loans worth Rs 781,000 million to home buyers across India.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGInstitutions providing Housing Finance:Commercial banks:The largest mobiliser of savings in the country.However, in the past, the savings mobilized were not being ploughed back to the households for shelter purposes.The reluctance on the part of the banks to extend credit for housing as a regular part of their business was basically due to their perceived role as being limited to financing of working capital needs of commerce, industry and trade.Yet another factor was that the banks did not want to tie up their short-term resources in extending long-term housing loans.However, after the nationalization of some of the banks in 1969, the banks became more responsive to the social needs of the community.

Co-operative banks:The state co-operative banks are the apex level institutions of the state co-operative credit structure.While the co-operative banks and the Regional Rural Banks are allowed to lend for housing, they have not been very active in this field.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGInstitutions providing Housing Finance:Agricultural and Rural Development Banks:They are term lending institutions operating exclusively in the rural sector.Housing finance was not originally within the ambit of their functions.Following the thrust given to the housing sector in the late eighties and more particularly after the establishment of NHB, several states have amended their respective acts to enable these institutions to lend for housing in the rural areas.

Housing Finance Companies:the housing finance companies are basically non-banking financial companies.A non-banking financial company is classified as an housing finance company if providing housing finance is the principal object of the company or where there are more than one principal object as per the Memorandum and Articles of Association, housing finance should form a major share of the companys asset pattern as revealed by its latest balance sheet.There are 29 major companies which account for more than 95% of the total housing loans sanctioned by all these companies put together.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGInstitutions providing Housing Finance:Housing Finance Companies:To be eligible for approval for availing refinance facility from NHB, a minimum of 75% of the capital employed should have been by way of long-term finance for housing.

Co-operative Housing:The other set of specialized housing finance institutions are the co-operative housing finance societies.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSING

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGThe housing finance revolution in India can be divided into five distinct phases:

First Phase:The first phase began before 1970 when the sole provider of any house building support was the government of India through its various social schemes for public housing. The government implemented these schemes through state housing boards which were responsible for allocating serviced land and houses to individuals based on social equity principles.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGSecond Phase:The second phase starts with the establishment of the public housing company, Housing and Urban Development Corporation (HUDCO). HUDCO was created to assist and promote housing and urban development programs with government agency. HUDCO still plays an important role in implementing government initiatives such as the Valmiki Ambedkar Awas Yojna, was launched by Govt. Of India in 2001-02 to provide shelter or upgrade the existing shelter for people living below poverty line in urban slums. Another important private player, Housing development finance Company HDFC, was created in 1977. HDFC pioneered in individual lending based on market principles. HDFC today, is one of the largest home loan providers of the country and its success displayed that financing homes can be a very profitable business. The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGThird Phase:The third phase covers the decade of 1980, which is marked by the establishment of the countrys housing finance regulator- National Housing Bank in 1987. The era also saw government involvement in directing various agencies like insurance companies, commercial banks( Under priority lending requirements which allowed banks to allocate 1.5% of their incremental deposits to housing under RBI guidelines.), provident funds and mutual funds to invest part of their increment sources on housing.

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 directly through their housing subsidiaries (both established in 1989) and indirectly through a mandated requirement to invest a certain proportion of their annual accretion in socially oriented schemes which includes housing.

The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGCommercial banks:Later, the commercial banks are asked to earmark a minimum of 3% of their incremental deposits for extending to the housing sector during the late 90s. During the year 1999-2000, this works out to Rs. 36,000 million.The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFourth Phase:The fourth phase is the era after liberalization and is characterized by dramatic changes in pricing of loans. Before 1994, the pricing of home loans were regulated by the NHB based on a differential rates charged according to the size of the loan. This policy was amended in 1994 and providers were free to charge market rates for loans above Rs 25000. The fourth phase saw a dominance of fixed interest rates, but variable rate offers started emerging at the end of the decade. The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFourth Phase:Towards the end of the 1990s, against the backdrop of lower interest rates, industrial slowdown, sluggish credit off-take and ample liquidity, and financial deregulation commercial banks shifted their focus from the wholesale segment to 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.The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFifth Phase:The fifth Phase of rapid growth in the sector started after the millennium.

Home loan disbursements rapidly grew during the first few years of this phase.

The lower interest rate regime, rising disposable incomes, stable property prices and fiscal incentives made housing finance attractive business.

Home loan disbursements grew to Rs 768191.90 million in 2005 from Rs 147012.00 million in 2001.

The year 2003 witnessed an annual growth rate of 76% in loan disbursements. The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSING

The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGFifth PhaseWith the growth and profitability in housing finance evident, commercial banks gave more impetus to this sector, aggressively increasing their market share. Banks overtook housing finance companies in the market capturing 72% of the market in 2006 from a previous share of 27% at the beginning of this phase in 2001.

The latter part of this phase witnessed a slowdown in the rate of growth in home loan disbursements. High lending rates coupled with high property prices led to a slowdown in housing loan demand. The growth rate reduced to 5.46% in 2006 slowing drastically from the rates of 41.5% in the previous year. The recession in 2008 and the consequent correction in house prices are expected to reduce the size of disbursements in 2009 by 1%. The housing finance revolution in India can be divided into five distinct phases:

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGThe Housing finance sector in India has no doubt, experienced unprecedented change in its structure from its formulation stage.

The structure of the Indian housing finance market rapidly changed with the arrival of commercial banks in the late nineties. (including foreign banks)

These banks with their aggressive marketing and pricing strategies have now overtaken the housing finance companies.

With the liberalisation of the housing finance sector and developments like the introduction of mortgage backed securities in the markets, we are increasingly moving towards the market structures which exist in the more mature markets. The housing finance revolution in India can be divided into five distinct phases: (concluding remarks)

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGDuring the last one decade, Asia Pacific economies have made significant progress in developing private housing market and market based systems for financing home purchases.

Government sponsored housing finance strategies have become more and more non-viable due to budget constraints.

Post 1997, Asian financial crisis, the respective Governments in Asia stepped up their effort to improve the structure of the housing finance system.

Many countries even in other parts of the globe have experienced the waves of financial liberalization and deregulation.

House prices have increased in most industrialized and emerging economics and in many countries housing debt per capita and house prices have reached new all-time highs (BIS, 2006).

The housing finance revolution Asia Specific Economies:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGThe key factors triggering the progressive growth on the demand side are declining interest rates over a period of years, rapid increasing in income levels, tax benefits extended to borrowers whereas from the supply side the emerging competition in the housing finance sector between lenders, an increasing number of new entrants to the housing finance market, the introduction of several new products by lending institutions to meet the needs of a wide variety of customers and increasing collaboration between lending institutions and housing developers.

Introduction of home loans at floating rates become popular among borrowers in Asian countries especially in India, China and Sri Lanka as the perception among the borrowers is that they could enjoy lower short-term rate which is comparatively less than long-term fixed rate (Piayasiri, 2006).The housing finance revolution Asia Specific Economies:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGHousing Affordability in relation with demographic, social and economic status:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSING

It is evident from the above table that one in every three Indians is under the age of 15, and only one in three is older than 35. When comparing with other countries such as China, USA and Japan, India have the unique advantage of the higher level of middle aged and lower level of aged people. Housing Affordability in relation with demographic, social and economic status:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSING

Housing Affordability in relation with demographic, social and economic status:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGIndian GDP has grown at 6% for the past 10 years and 8% for the last 3 years and interestingly service sector accounts for 60% of GDP (Parekh, D, 2006).

It could be seen from the above table that in spite of the merits highlighted in the preceding paragraphs, house mortgage as a percentage of GDP, India stands the lowest.

Amongst the Asian countries, Hong Kong is the topper, followed by Taiwan, Malaysia, Thailand and Korea.Housing Affordability in relation with demographic, social and economic status:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSING

It could be inferred from the above exhibit that the consumption pattern in amongst Indian population is expected to change as indicated above by 2013. The strivers are less but aspirers and rich are significant higher comparing to the 2003 status.

The housing finance sector in India has undergone unprecedented change over the past two decades. Housing Affordability in relation with demographic, social and economic status:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSING

Housing Affordability in relation with demographic, social and economic status:The existing housing finance system

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSING

Housing Affordability in relation with demographic, social and economic status:The transition of existing housing finance system

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGHousing Affordability in relation with demographic, social and economic status:Survey Findings:For the purpose of knowing more about the housing finance market in India, the centre (Indu Center for Real Estate and Infrastructure) conducted a survey across 17 major housing finance Institutions in India.

These institutions represent more than 90% of the market share; hence we believe that the results obtained are very insightful.

The survey intended to capture the scale of demand for home loan products, the products and incentives offered to customers, target customer base, government policies and support in place, and sentiments on the current market conditions and future prospects.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGHousing Affordability in relation with demographic, social and economic status:Survey Findings:Interest Rates: Unlike other countries, floating rate mortgages constitute 80% of the market share in India. All institutions surveyed said that Variable interest rates are more popular in their banks. This is mainly because finance providers in India incentivize floating rate loans by keeping a huge spread (sometimes 275 bps) between fixed rate and floating rate loans. The average interest rates varied from 8- 15%.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGHousing Affordability in relation with demographic, social and economic status:Loan tenure: The survey showed that most banks offered loan tenure of 20 years.

The costumers chose to take a shorter tenure.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGHousing Affordability in relation with demographic, social and economic status:Loan to value ratio: Even though banks offer a loan which is 75- 80% of the value, most consumers prefer taking a loan for half the value of the house.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGHousing Affordability in relation with demographic, social and economic status:Borrower profile: The survey showed that most consumers belong to the age group of 35-40 years. The average income group of the borrower is seen to be around 4.2 lakhs per annum.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGThe importance of the housing sector in India can be judged by the estimate that for every Indian rupee (INR) invested in the construction of houses, INR 0.78 is added to the gross domestic product of the country and the real estate sector is subservient to the development of 269 other industries.

The real estate sector is also the second largest employment generator in the country.

Housing Affordability in relation with demographic, social and economic status:

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGDirect and Indirect Incentives for Housing Development Incentives may be broadly defined, as in everything that motivates or stimulates people to act (Giger 1996).

McNeely (1988) also makes the useful distinction between incentives, disincentives and perverse incentives. In contrast to incentives, which we have described above, disincentives are purposely designed to discourage particular behaviours and can include taxes, fines and various other penalties or moral suasion.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGDirect and Indirect Incentives for Housing Development Tax Incentives by the government: Tax sops given by the government for housing loans have been instrumental in driving growth in this sector. The government allows tax benefits to both the home loan consumer and the lender.

A home loan consumer is allowed tax deductions on the following: Interest paid on home loan: As per Sec 24 (b) of the Income Tax Act, 1961, annual interest payments up to Rs 1,50,000 on housing loans can be claimed as a deduction from taxable income.

Principal repayment of home loan: As per Sections 80 C read with section 80 CCE of the Income Tax Act, 1961 principal repayment up to Rs 1,00,000 on home loan is allowed as a deduction from gross total income.

UNIT 5 HOUSING FINANCE28th HOURURBAN AND RURAL HOUSINGDirect and Indirect Incentives for Housing Development Tax Incentives by the government:

The lender is also allowed tax deduction:Under Section 36 (1) (viii) of the Indian Income Tax Act 1961, with respect to any special reserve created and maintained by a financial corporation engaged in providing long-term finance for construction or purchase of houses in India for residential purposes, a maximum amount of 20 per cent (earlier it was 40 per cent) of the profits derived from such business (computed under the head profits and gains of business or profession) and carried to such special reserve is tax deductible.

This deduction is available only up to twice the total amount of the companys paid-up share capital and its general reserves.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:NHB:NHB is of the opinion that intervention through institutional credit can be made more effective by adoption of different approaches to cater to the needs of different income groups.

The households above the average income could well be served by institutions which raises resources through the open market and deliver credit with minimum necessary prudential regulations by the regulator.

For the households below the poverty line, the institutional credit will have to take into account the employment and poverty alleviation programmes having an element of subsidy.

It is the middle group which constitutes nearly half the total number of households that needs to be taken care of.

NHB is encouraging the financial institutions to lend to this segment through its refinance schemes.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:NHB:National Housing Bank (NHB), a wholly owned subsidiary of Reserve Bank of India (RBI), was set up by an Act of Parliament in 1987.

NHB is an apex financial institution for housing.

It commenced its operations in 9th July 1988.

NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.

NHB registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:NHB:Activities of National Housing Bank: Broadly, the activities of the National Housing Bank can be divided into the following three major sub-heads:

Regulation and Supervision: NHB exercises regulatory and supervisory authority over the Housing Finance Companies (HFCs). These Companies are required to obtain Certificate of Registration (CoR) from NHB for commencing/carrying on the business of a housing finance institution under Section 29 A of the NHB Act; and are required to comply with Directions, Guidelines and other directives issued by NHB.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:NHB:Activities of National Housing Bank: Broadly, the activities of the National Housing Bank can be divided into the following three major sub-heads: b. Promotion and Development: NHB operates as the apex Development Finance Institution (DFI) for the housing sector. The policies of NHB are directed towards promotion and development of housing finance institutions and the sector in general. The development of human resources is sought through training programmes, seminars and symposia on matters related to housing for the officials of the Housing Finance Companies (HFCs), Commercial Banks and Public Housing Agencies. Besides, NHB has taken up a number of Research Studies to facilitate development of sector on sound and healthy lines. The Bank has also launched NHB Residex; a price index for residential properties in six cities to begin with; and the same is proposed to be extended to various other cities in due course.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:NHB:Activities of National Housing Bank: Broadly, the activities of the National Housing Bank can be divided into the following three major sub-heads: c. Financing: NHB raises resources for deployment towards increasing new housing stock and provides housing refinance to a large set of retail institutions.

These include eligible scheduled commercial banks, scheduled state cooperative banks, scheduled urban cooperative banks, specialized housing finance institutions, apex cooperative housing finance societies and agriculture and rural development banks. In addition, the Bank has also extended financial support to the housing schemes formulated by Public Housing Agencies. Non Government Organisations (NGOs) and Micro Finance Institutions (MFIs) are also considered for financing to cater to the needs of the economically weaker sections of the society.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:NHB:NHB has been established to achieve, inter alia, the following objectives 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.

To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups. To augment resources for the sector and channelize them for housing. To make housing credit more affordable.To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.

To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country.

To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:Types of Housing Loans (General):Most of the institutions offer a standard fixed or floating rate mortgage to the prospective borrowers.

Usually, the housing loan can be repaid over a maximum period of 10, 15 or 20 years.

Repayment does not extend beyond the retirement age of a person (60 years) if employed or 65 years of age if self employed.

Repayment of the loan is done through the equated monthly installment method.

In case of borrowers expecting a reasonable growth in their future income, installments can be on graduated basis.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:Types of Housing Loans (General):Besides, interest rate, the borrower also has to meet certain other costs viz. interest tax, processing fee and administration fee.

The lender is required to pay a tax to the government on his interest income at the rate of 2% per annum.

The lenders usually pass on this tax burden to the borrower.

The banks and the housing finance companies also levy a fee for processing the application and it varies between 0.5% to 1% of the loan amount.

Besides they also charge what is known as an administration fee of 1% of the loan amount.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:Types of Housing Loans (General):The interest rate on housing loan offered by the housing finance companies has been falling in the recent years and it is now the lowest.

In respect of the banking system, the reserve bank of India has given the freedom to commercial banks prime lending rates which is in the range of 12.5 to 13% per annum.

Since the cost of funds to the banking system is lower than the cost of funds to the specialized institutions, their interest rates are comparatively lower than the rates charged by the specialized housing finance institutions.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGThe major players in the Indian housing finance market are the following: As described earlier, in the current market structure, commercial banks outsize the HFCs in market share.

Banks overtook housing finance companies in the market capturing 72% of the market in 2006 from a previous share of 27% at the beginning of this phase in 2001.

Over the last few years, the share of housing finance companies (HFCs) has increased in the industry on account of robust disbursements growth, supported by greater presence in urban centres and increasing loan size, along with stable asset quality.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:The major players in the Indian housing finance market are the following: HDFC: Housing Development Finance Corporation Limited (HDFC) was incorporated in 1977 as Indias first specialised housing finance institution. It also offers property-related services and deposit products. HDFC has a diversified and stable resource base comprising fixed deposits, bank borrowings, debentures, bonds, securitisation, and foreign currency borrowings. Deposits constituted around 23 per cent of its total borrowings as of March 2009.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:The major players in the Indian housing finance market are the following:HDFC: HDFCs disbursements and outstanding loans posted a CAGR of 25.6 per cent and 24.6 per cent, respectively, between 2003-04 and 2008-09.

Total disbursements during 2008- 09 were Rs 396.5 billion against Rs 328.7 billion in the previous year, representing a growth of 20.6 per cent.

HDFCs outstanding loans rose to Rs 838.6 billion from Rs 730 billion in the previous year, representing a growth of 14.9 per cent.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSING

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSING

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSING

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:The major players in the Indian housing finance market are the following: LICHFL: LIC Housing Finance Limited (LICHFL) was incorporated in 1989. The company was listed in 1994. The company mainly provides housing loans, where it provides long-term finance to individuals for purchase / construction / repair and renovation of new / existing flats / houses. In 2008-09, it disbursed loans to the tune of Rs 87.6 billion, a growth of almost 24 per cent over 2007- 08. It is listed on the BSE, NSE and the Luxembourg Stock Exchange.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:The major players in the Indian housing finance market are the following: GIC Housing Finance Limited: GIC Housing Finance Limited (GICHFL) was incorporated in 1989 as 'GIC Grih Vitta Limited', with the objective of providing shelter to all in view of the governments national housing policy.

The primary business of GICHFL is granting housing loans to individuals and to persons/entities engaged in construction of houses/flats for residential purposes.

GICHFLs disbursements recorded a CAGR of 6 per cent, while outstanding loans posted a CAGR of 18.9 per cent between 2003-04 and 2008-09.

UNIT 5 HOUSING FINANCE29th HOURURBAN AND RURAL HOUSINGFinancing agencies and their Terms of Lending:The major players in the Indian housing finance market are the following: Can Fin Homes Limited: Can Fin Homes Limited (CFHL) was promoted in 1987 by Canara Bank in association with financial institutions, including HDFC and UTI.

CFHL is the first bank-sponsored housing finance company in India.

The company also diversified by launching non-housing finance products like premises loan for practising professionals (venture), mortgage loans (net worth) and loan against rent receivables.

CFHLs disbursements registered a negative CAGR of 5.1 per cent, while outstanding loans recorded a CAGR of 9.7 per cent between 2003-04 and 2008-09.

However, as compared to the previous year, disbursements increased by 20.2 per cent in 2008-09 and outstanding loans remained unchanged.

UNIT 5 HOUSING FINANCE27th HOURURBAN AND RURAL HOUSINGIt was in the year 1970 when Housing and Urban Development Corporation (HUDCO) was established to finance various housing and urban infrastructure activities. However, the Housing Development Finance Corporation (HDFC) was the India's first private sector housing finance company came into existence in 1977. Since then, the housing finance in India has been flying high. It's expected to grow at a growth rate of 36% in the coming years.

As the commercial banks started expanding housing-related disbursements, the market share also started growing up. In 2000, the Indian housing finance companies accounted for 70 per cent of the disbursements, while their collective share decreased to 36 per cent within 5 years. In 2005, banks accounted for 64 per cent of the disbursements.