HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

INTRODUCTION

The basic needs of mankind have been the food, shelter and clothing. Keeping this in mind, lots of efforts have been made to provide food through the poverty alleviation programmes since substantial portion of the Indian population are still in the clutches of object poverty. The poverty alleviation programmes both credit oriented and non-credit oriented ones described in earlier Units would have thrown light on the efforts taken in providing food for the poor which is primary among the basic needs. However, it is an irony of life that a large section of the population in India and other developing countries do not afford these needs both in their quantitative as well as qualitative dimensions. In fact, non-affordability of these facilities is a sine quo non of poverty. This Unit highlights the need for housing and the efforts taken by the Government in housing. The responsibility to provide housing finance largely rested with the Government of India till the mid-eighties. The setting up of the National Housing Bank (NHB), a fully owned subsidiary of the Reserve Bank of India (RBI) in 1988, as the apex institution, marked the beginning of the emergence of housing finance as a fund-based financial service in the country. It has grown in volume and depth with the entry of a number of specialised financial institutions / companies in the public, private and joint sectors, although it is at an early stage of development. The implementation of housing finance policies presupposes efficient institutional arrangements. Although there were a large number of agencies providing direct finance to individuals for house construction, there was no well established finance system till the mid-eighties in as much as it had not been integrated with the main financial system of the

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

country. The setting-up of the National Housing Bank (NHB), a fully owned subsidiary of the Reserve Bank of India, as an apex institution was the culmination of the fulfillment of a long overdue need of the housing finance industry in India. The system has also been characterised by the emergence of several specialised financial institutions that have considerably strengthened the organisation of the housing finance system in the country. At present, there are about 320 housing finance companies, of which 26 are registered with the NHB and which account for 98 per cent of the total housing loan disbursed.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

CENTRAL AND STATE GOVERNMENTS

Till the mid-eighties, the responsibility to provide housing finance rested, by and large, with the government. The Central and state Governments indirectly support the housing building effort. The Central Government has introduced, from time to time, various social housing schemes. The role of the Central Government visa-versa these schemes is confined to laying down broad principles, providing necessary advice and rendering financial assistance in the form of loans and subsidies to the state governments and union territories. The Central Government has set up the Housing and Urban Development Corporation (HUDCO) to finance and undertake housing and urban development programmes, development of land for satellite towns, besides setting up of a building materials industry. The Central Government provides equity support to the HUDCO and guarantees the bonds issued by it Apart from this, both Central and state Governments provide house building advances to their employees. While the Central Government formulates housing schemes, the State Governments are the actual implementing agencies.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

HOUSING PATTERN IN INDIA
It is a known fact that year after year more people are added to the category of homeless as the population is on the increasing trend. The weaker sections that constitute this group are handicapped in getting shelter at affordable cost. Housing, as such, in any country depends or the following factors: - Demand factor - Growth in population, formation of households, development of new townships, and increase in income.
-

Supply factor - Availability of institutional credit, cost of construction, availability of land and building materials, and fiscal and legal provisions affecting building construction. Though both the type of factors play their role equally, it is to be

understood that everyone wants to have a house constructed either through own money or borrowed funds. But the growing population makes it impossible to construct houses and satisfy this need for all the people in desired proportions.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

The National Sample Survey 44th Round compiled data on the types of dwellings in India. Some aspects of these data are presented in Table 1. Table 1. Types of Dwellings in India
Types

Percentage Distribution Rural % Urban % 52.4 17.2 10.8 90.6 100 Independent houses Flats Chawls Others 82.6 2.7 3.0 11.7 100

a. b. c. d. Total

From the above table it could be seen that the rural areas have more independent houses compared to urban centers. However, there has been some tendency to go in for flats also, trend of which is more perceptible in urban areas. This pattern is due to the fact that while some space is available for construction of small dwellings in rural areas, it is a critical constraining factor in urban areas. This necessitates the urban house aspirants to go in for flats. The NSS further observed that in rural India, 39.4% houses are kutcha houses, 34% semi-pucca and 27% pucca ones while in urban areas the percentages for the above categories of houses being 11, 18 and 71 respectively. This also shows that an urbanite is interested to have a pucca house while a ruralite is prepared to live in a house in whatsoever may be the type of construction. Again, the socioeconomic conditions of the ruralites do not permit them to go in for a big permanent dwelling. Yet another observation made by the NSS indicates that in the past three decades, there has been an increase in the pucca houses in the rural areas on one hand and the kutcha houses are on a declining trend in urban centers on the other. Some trends and progress in housing in India over years as reported
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

by the NSS are presents in Table 2: Year No of house holds R 1951 1961 1971 1981 53.6 68.9 79.6 94.1 U 12.3 15.6 20.9 29.3 T 65.9 84.5 100.5 123.4 No of occupied addition Decades during residential houses R U T 54.1 65.1 72.7 88.7 10.3 13.8 18.1 28.0 64.4 78.9 90.8 116.7 holds R U 1 5.0 1 0.7 1 4.5 R – Rural, U – Urban, T - Total The conclusions that emerge from the table are as follows:
#

house T 18.6 16.0 22.9

3.3 5.3 8.4

On an average, about 90% of the total households have occupied

residential houses throughout the past.
#

within this overall pattern the percentage of occupied residential

houses is more in rural areas as compared to urban centers.
#

The number of households added during decades had shown

fluctuations in rural areas but there was a steady increase in urban centers. The addition to the number of households was more during the decade of 1971-81. While indicating the relative growth of housing stock in the intercensor period, the NSS report analysed whether the growth in the housing stock is commensurate with the growth in the population. The Table 3 seeks to provide an answer to the above issue. Inter – census period Annual growth of the dwelling per 1000 increase in the population
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Rural 1951-61 1961-71 1971-81

Urban 5.2 4.5 7.9

Total 3.3 2.4 4.0

3.4 1.9 3.4

The growth of the dwellings per 1000 increase in population was slow during the period 1961-71. It needs to be noted that during this period, the total population growth was more than yester years. The percentage increase in population during this decade was 24.8% which was, in fact, the highest during the period under reference. The rate of addition of dwellings in relation to the population in rural areas was lower as compared with the urban centers. The decade of 1971 -81, witnessed a large increase in the annual growth of dwellings per - 1000 population and like the earlier patterns, the increase was more in urban centers. It is interesting to mention here that during this period, the increase in urban population was as high as 50% which was almost three times of 18% experienced in rural area All these facts lead to the conclusion that the growth rate in housing did not keep pace with the rate of growth in population in the entire country. The extent of shortfall was more pronounced in rural areas. The ultimate result has been the housing shortage in both rural and

urban areas. In 1971, the Banking Commission, headed by Shri. Bhabatosh Datta submitted its report on the Non-Banking Financial Intermediaries. This report, besides other aspects of banking systems, dealt at length with the present and prospective housing finance and the need for a specialised institution for housing. The Commission made the following observations:
a.

The house construction, as indicated earlier, depends on the demand
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

and supply factors with the demand side including the population, income etc. and the supply side covering institutions, policy etc.

The following are the three indicators for housing shortage: The first indicator was provided by the proportion of pucca dwellings to the total housing stock. According to an estimate, this proportion in India was only 23% as compared to 96-99% in some of the Western countries like USA, Canada and Japan. An idea of the overcrowding in dwellings could be obtained from the fact that about 77% of the total dwellings are of 1-2 room size, whereas in developed countries only about 5% of the houses are in this category (Palvia, 1969). The second indicator for the housing shortage was the comparison between the number of dwellings and the number of households. At the end of 1967, the report indicated that there were an estimated 6.2 million urban pucca housing units for an estimated 18 million urban households. Thus there was only one pucca house for every three households in urban areas. In rural areas, for an estimated 81.6 million households, the number of pucca housing units was only 12 million. The estimated rate of living constructions in India was around two dwellings per 1000 population per annum as against 10 per 1000 population as recommended by the United Nations in developing countries during the development decade of 1961-71.

The third indicator, according to this report, was the investment in housing as proportion of the total investment in the public and private sectors. The percentage of total investments allocated to the housing sector had declined from 34% in the First Plan to 12% in Fourth

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Plan.

The Table 4 giving the housing scenario will further indicate the housing shortage in the past and the prospective housing shortage by 2001. Housing shortage in India Rural 1 1991 981 a. No. of house 94.1 holds b . Households adjusted for 88.7 106. 2 which 77.8 92.9 20.6 112 25.5 23.7 7 36.7 10.4 56.7 15.5 101. 5 23.3 128 28 94.1 113.5 137 30.7 47.1 7 42.6 64.8 72.2 2 Urban 1981 1991 29.3 45 2 001 69 Total 1981 1991 123. 4 124. 8 158. 4 160. 6 193 168 41 209 2001 206

001 113.5 137

congestion c. Housing stock d . Of acceptable

116.7 148. 8 129. 6 31

e. Housing gap 16.3

The above table leads to the following inferences: •A sizable number of people are without any house and every year more and more people continue to be added to the category of homeless.
•The

housing gap goes on increasing over years. This was indicated

earlier by the fact that the annual growth rate in number of dwellings for every 1000 increase in population was very less leading to housing shortage.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK
•The

housing gap was prominent in rural areas as compared to urban

centers. This might, be due to the reason that in rural areas still people are inclined to go in for independent: houses whereas there is a trend towards flats in urban centers. Besides the needs and likings of the rural people regarding separate houses, it should also be remembered that the flat system of houses which needs a multi-storied structure requires a special infrastructure which is just not available in rural areas at present.
•The

houses of acceptable conditions were almost 86% of the housing

stock in both the rural and urban areas.
•Each

of the households had on average 5-6 members both in rural as

well as urban areas.
•The

report also indicated that more number of persons lives in a room and

lack of privacy connotes the need to augment housing supply. An analysis was made in various studies on the cause for the housing shortage in developing countries like India. The conclusion arrived at by studies has been that developing countries are giving low priority to housing and this is again due to factors like large capital resources required, high capital-output ratio and top priority given to sectors like the agriculture, industries, power, communication etc. as compared to housing. All these go to show that there is a need to give priority to housing since it is the basic need for the mankind. The growing rate of population needs more investment in the housing sector. The importance of finance as a factor in house construction may also be examined from the point of view of individual who wants to own a house. Houses can not usually be built out of the current income of the individual. It is estimated that in India, 4.9 years' income of an unskilled labour is require to get 30 sq.m. House. It is also indicated that

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

in an economy like ours, about 75% of house-buying involves loan finance and over 5C% of all new and old houses are encumbered with debt. The rate of interest charged also plays a role in housing finance. All these go to indicate the need for housing finance and assistance for a common Indian. How far our planning has taken care of the housing sector over years is given in the succeeding paragraphs.

HOUSING AND FIVE YEAR PLANS

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Even though housing sector got a relatively low priority in the allocation of public outlay in the five year plans, the sector is not altogether neglected. In fact, over the years, housing has been recognised as an important element in the poverty alleviation programmes. This section highlights the treatment given to the housing in different Five Year Plans. The First Five Year Plan (1950-56) aimed at enhancing the housing stock of minimum standards over next few years. It suggested reducing the cost of construction of houses especially with regard to material and labour by encouraging economical, architectural and structural designs. The First Plan gave due consideration to the role of private sector to help solving the problem of housing shortage. Two schemes viz., Subsidised Industrial Housing Scheme (1952) and Low Income Group Housing Scheme (1954) were introduced during this period. The Second Five Year Plan (1956-61) continued its emphasis on the Subsidised Industrial Housing and Low Income Group Housing Schemes. Seven specific schemes were introduced during this period. They are as follows: • Plantation Labour Housing Scheme (1956) • Slum Clearance and Improvement Scheme (1956) • Village Housing Project Scheme (1957) • Middle Income Group Housing Scheme (1959) • Land Development and Assistance Scheme (1959) • Rental Housing Scheme for State Government Employees (1959)

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

• Jhuggee and Jhopri Removal Scheme (1960) It should be noted that all the above mentioned schemes aimed at improving the quality of housing for lower income category of population. The Third Five Year Plan (1961-66) aimed at land acquisition and development as also an effective control on urban land. The Annual Plans (1966-69) brought in the concept of "economically weaker sections". The annual plans integrated this concept with the Subsidised Industrial Housing Scheme which was in operation since the First plan. Up to 1970, the bulk of funds were provided by the Government of India and Life Insurance Corporation of India as loans and subsidies. The schemes of housing have social objectives because they were meant for people belonging to the SC/STs or to the specified classes of employees and income groups. The extent of finance made available was usually 80% of the cost of construction as maximum and this varied from scheme to scheme. In case of Land Acquisition and Development Scheme, 100% financial assistance as loan was given to Local Bodies / Urban Estate Department. The Fourth Five Year Plan (1969-74) emphasised the low cost housing schemes in view of (a) High cost of construction of the dwelling units (b) Insufficient contribution by the private and Cooperative sectors to meet the growing needs of houses for the poorer sections, and (c) Deteriorating condition of older slums.

It was in April 1970, that the Housing and Urban Development

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Corporation (HUDCO) was started. Various State Governments started Housing Boards funded through State budgetary allocation and the Slum Clearance Schemes were initiated. The Housing Boards of the States started issuing debentures on State Government Guarantee to which institutions like the nationalised banks contributed. The Housing Boards are essentially construction agencies and not funding agencies. This function is to create and manage the housing stocks. It was during 1977, that the Housing Development Finance Corporation (HDFC) was started for housing finance. It was an important addition to this sector. The Fifth Plan (1975-80) aimed at providing house sites to four million landless labour and intensifying research on low cost housing mainly through manufacture of low cost building materials. It decided to enhance the financial assistance to the State Housing Board* and Local Bodies. A scheme for improving the existing housing was also introduced during the Fifth Plan. In 1974, the Minimum Needs Programme and in 1975, the Twenty Point Economic Programme were launched which emphasised providing housing for the poor and housing construct through wage employment. The Sixth Plan (1980-85) attempted to use the public sector resources in such a way that they yield optimum results and provide maximum possible houses to absolutely shelter less people. The Seventh Plan (1985-90) estimated the housing shortage at 24.7 million units. It called for establishment of proper and diversified institutional credit for housing and construction to cater to the needs of housing development. It also stressed the need to strengthen the HUDCO and creation of new Cooperative Building Societies. The plan period added a feather in the cap of housing by the establishment of National Housing Bank in 1988. This gave a new direction to the decentralised housing
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

finance system by promoting housing finance institutions and facilitating proper cooperation amongst various agencies relating to housing. The data in Table 5 indicate the relative share of housing in the investment in the economy during the Plan periods. Plans Total Investment in Investment the plan (Rs. Crores ) First Second Third Fourth Fifth Sixth Seventh 3340 6750 10,400 22,635 47,561 1,56,000 3,49,148 Housing (Rs. Crores) 1150 1300 1550 2800 4436 19,491 31,438 in Percentage Investment 34.2 19.2 14.9 12.4 9.3 12.5 9.0 of Housing to total

The conclusion that could be drawn from the above table is: - The First Plan gave top priority to housing next to food since majority of the population was poor. - There have been fluctuations in percentage of housing investments to the total investment in economy during different periods. - There have been a decline in the investment in housing during VII Plan which was disproportionate to the total investment in economy. The Eighth Plan (1992-97) covered the strategy of creating an enabling environment for housing activity by eliminating various constraints and providing direct assistance to the disadvantaged groups consisting of the rural and urban poor, self employed, physically handicapped, widows and single women. It was during the 8th Plan, that

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

the Shelter Up gradation Scheme under the Prime Minister's Integrated Poverty Eradication Programme was initiated with a loan component of Rs. 10000/- to be arranged from the HUDCO/any other financial institution including Commercial Banks, subject to the condition that the borrower holds the title to the land. This has a subsidy component too. The 8th Plan outlay on housing has been Rs.20000 - 25000 cores. During 1995-96, the HUDCO sanctioned Rs.1967 cores as loans and actually released Rs. 1229.5 cores. About 90% was spent on dwellings for the weaker sections and low income groups. The Ninth Plan Approach paper indicates that housing will be given priority as one of the seven principles of development. The analysis of the above facts on housing and investments during the plan periods indicates the need for more funds for housing. Therefore, the role of institutional finance for housing has assumed vital importance and many agencies are drawn into the fold of housing finance.

NATIONAL HOUSING POLICY
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

According to an estimate made by the Sub group of Urban Ministry on the "Magnitude of Housing Problem", about 64.4 million new houses will be needed by 2001. The total funding to create so many units is estimated to be around Rs 2,35,000 crores based on the price index of 1985. This being a herculean task, it needs the cooperation of Centre and the States and the private sector to increase the availability of houses at affordable rates. For this purpose, a comprehensive policy on housing was felt essential. Hence the Comprehensive National Housing Policy prepared by the Ministry of Urban Development was placed before the Parliament in 1988 and was discussed subsequently in 1990 at the Home Ministers Conference. The objectives of the National Housing Policy (NHP) are as follows:
•To

assist all people and in particular the homeless and inadequately

housed and vulnerable sections, to secure for themselves affordable shelter through access to developed land, building materials, finance and technology;
•To

create an enabling environment for housing activity by eliminating

constraints and by developing an efficient system for delivery of housing inputs;
•To

expand infrastructural facilities in rural and urban areas in order to

improve the environment of human settlement, increase the access of poorer households to basic services and to increase the supply of developed land for housing;

•To

undertake, within the overall context of policies for poverty

alleviation and employment, steps for improving the housing

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

situation of the poorest sections and vulnerable groups by direct initiative and financial support of the state;
•To

help mobilise resources and facilitate expansion of investment

in housing in order to meet the needs of housing construction and up-gradation and augmentation of infrastructure, and • To promote a more equal distribution of land and houses in urban and rural areas and to curb speculation in land and housing in consonance with the macro-economic policies for efficient and equitable growth. To achieve these objectives, the Government should take initiatives for directing the activities of public agencies towards increasing the supply of serviced land for various groups and essential purposes directing towards poorer sections. The weakness of the NHP has been that it did not set any time bound targets owing to resources constraints. In order to achieve the NHP, the following steps were taken. • Setting up of an apex institution - National Housing Bank (NHB) as a subsidiary of Reserve Bank of India under the NHB Act, 1987. • Floating of specialised housing finance subsidiaries by the Scheduled Commercial. Banks.

• Large flow of credit through the Housing and Urban Development Corporation (HUDCO).
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

• Emergence of LIC as an important contributor of housing Finance. • Financing for housing through Government Schemes. Involving the private sector in housing finance For the past decade, the Government of India attempted to strengthen the housing sector by introducing various loan schemes for the rural and urban population. The first attempt in this regard was the National Housing Policy (NHP), which was introduced in 1988. However, the growing realization of the insufficiency of public funds to meet the demands for financial schemes in the housing sector is evident in the aims of the 2007 policy. Innovative financial instruments that will spur the flow of funds from the private sector is one of the focal points of this policy. Until now, most financial companies were reluctant to lend to low-income groups because the small amounts do not justify the costs. Profit is the overarching goal, and these institutions try to efficient in the mobilisation, disbursement and recovery of funds. Finance companies are able to mobilize funds from shareholders and investors by offering competitive rates of interests. These funds will be disbursed to those who are deemed eligible, after assessment of application forms and personal interviews. There are difficulties in assessing credit risks and a lack of clarity on recoveries, land title and possession. These problems have led to a scenario where the popular perception was that the requirements of low-income housing were incompatible with formal housing finance. Whereas today, in low-cost housing, the government is the sole financier, the Ministry of Urban Development is exploring a new financial architecture that will make loans for low-cost houses affordable for both

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

the lenders and borrowers. Despite the frenetic pace of growth in housing finance over the past 5 years in India, mortgage penetration as a percentage of GDP continues to remain low, at 4 percent. This means that there are considerable growth opportunities in housing finance. This is further corroborated by the fact that despite the impressive rate of growth in the housing finance sector in the recent period, financing through the organised sector continues to account for only 25 percent of the total housing investment in India. The lending criteria set out by formal financiers are more appropriate to the life style of the middle-level income group. To obtain a housing loan, a combination of conventional (assets that can be mortgaged) and nonconventional collateral such as peer pressure is required. Lack of mortgage insurance is also a reason why the private formal sector bypasses the low-income segment.

DEVELOPMENT OF HOUSING FINANCE IN INDIA The early development of housing finance in India is a result of the
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

housing policies implemented by the government. In the first Five Year Plan (1951-56), housing was introduced into the policy framework at the national level. Affordability was emphasized, and government support through subsidies and loans were deemed necessary. This plan in fact became the benchmark for subsequent Five Year Plans for the next two decades. The second plan (1956-61) strengthened the schemes of the first plan by expanding coverage, and gave rise to State Housing Boards that still remain in existence. Despite these efforts, by the fourth plan (196974), the government was faced with the dual problem of a rapidly growing population and a slow growing housing stock. For the first time, the government decided to encourage private and co-operative housing schemes by providing financial assistance. However, the majority of activity still remained within the public sector. The government also recognized the need to provide housing finance to low-income groups and thus set up the Housing and Urban Development Corporation (HUDCO) in 1970. HUDCOs mandate was to provide such groups with loans below peak interest rates and with longer repayment periods. It was during the fifth plan (1974-79) that as a completely private sector initiative, in 1977, the first retail housing finance company, Housing Development Finance Corporation (HDFC) was set up, seeking to provide financial assistance to individuals, groups, co-operative societies and companies for staff housing. During the Sixth Plan period, other housing finance companies also entered the market. Towards the mid and late 1980s a few housing finance companies were set up either as private limited companies (e.g.
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Dewan Housing Finance Limited) or as a joint venture with partnership from the state government (e.g. Gujarat Rural Housing Finance Corporation) or bank sponsored housing finance companies (e.g. Can Fin Homes, SBI Home Finance, PNB Housing Finance). Even state owned insurance companies like the Life Insurance Corporation and the General Insurance Corporation of India set up housing finance arms. The seventh plan period saw the UN Global Shelter Strategy, of which India subscribed to, being passed in the UN General Assembly in 1988. This gave the impetus to the drafting of a National Housing Policy for the first time. Another major reform that took place at the time was the founding of the National Housing Bank (NHB) in 1988. The NHB was founded to promote and regulate housing finance companies and to mobilize additional resources for housing. The National Housing Bank (NHB) was established in July 1988 under an act of Parliament viz. the National Housing Bank Act, 1987. The act empowers the National Housing Bank to first, issue directions to housing finance institutions to ensure their growth on sound lines. Secondly, make loans and advances or render financial assistance to scheduled banks and housing finance institutions or to any such authority established by or under any central, state or provincial act and engaged in slum improvement. It may also formulate schemes for the purpose of mobilisation of resources and extension of credit for housing. Public housing finance corporations have schemes that encourage beneficiaries to invest their own money in their dwellings, but do not offer opportunities for beneficiaries to deposit savings. The beneficiaries are granted larger housing loans, than what may be available from informal sources. To make housing loans affordable for the urban poor,
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

direct subsidies are given for construction cost (e.g. the VAMBAY scheme) and/or indirect subsidies on interest rates are provided. The latter could be in the form of the interest differential subsidy amounts being remitted directly in the HFC loan accounts of the borrowers, so as to bring down their loan liability. These loans are characterised by conventional mortgage lending, have a longer-term tenor and repayments are in equal monthly installments (EMIs). The eighth plan recommended that reforms be made on both, the financial and legal aspects to allow the mortgage market to develop further. It laid special emphasis on government incentives to enhance the flow of credit to the housing sector through housing finance institutions. Both the ninth (1997-2002) and tenth (2003-2007) plan recommended further reforms to enable the government to play its role as a facilitator and encourage the development of the mortgage market. Emphasis was particularly laid on market friendly reforms for improving both taxes and infrastructure to help increase investments into housing. The ninth and tenth five-year plans are also characterised by the aggressive entry of commercial banks into housing finance.

HOUSING FINANCE: INSTITUTIONS, SCHEMES & SUPPORT

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

COMMERCIAL BANKS The trend of commercial banks lending to individuals for housing emerged in the wake of the report of the working group on the Role of Banking System in Providing Finance for Housing Schemes. (R C Shah Working Group, the RBI, 1978). They have been lending to the housing sector based on annual credit allocations made by the RBI. In terms of the RBI guidelines, scheduled commercial banks are required to allocate 1.5 per cent of their incremental deposits for disbursing as housing finance every year. Of this allocation, 20 per cent has to be by way of direct housing loans of which again at least half, that is, 10 per cent of the allocation has to be in rural and semi-urban areas. Another 30 per cent could be for indirect lending by way of term loans to housing finance institutions (HFIs), housing finance companies (HFCs) and public housing agencies for the acquisition and development of land and to private builders for construction. The balance 50 per cent is for subscription to the HUDCO, and the NHB bonds.

HOUSING FINANCE THROUGH COMMERCIAL BANKS The Reserve Bank of India has brought the Commercial Banks too under the fold of housing finance which did not exist prior to 1979. The basic question that needs to be debated is as to why the commercial banks are interested in extending loans for the housing facilities particularly to the poorer sections of the society. In general it is believed that the residential house is a non-productive asset. It does not generate any income by itself so as to make the loan self liquidating. The question is to be understood in the larger developmental context. The investment decision and the activity pattern of any family are influenced to a large extent by the location and type of residential accommodation. The
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

banker's relationship with the prospective borrowers for a productive activity is of long term nature and the banker has to communicate with the borrower before the loan disbursement and more so during the post loan period. The settled borrower, therefore, is a lesser risk for the banker. The reasonable housing facility is one of the facilitating factors for the borrower to take up and maintain a productive enterprise. The housing finance for the poor people, therefore, is capable of creating a better production environment. All these factors have induced the policy makers in India to include the housing loan for the poor in the priority sector lending. The RBI in its priority sector lending guidelines clearly stated that 1.5% of the Bank's incremental deposit as at the end of the previous financial year should be earmarked for housing and ensures that the bank finance for housing flows to the needy segments of the society. The finance will be in terms of both direct and indirect mode. Thirty per cent of the total allocation for housing should be by way of direct finance and of which half should be extended as direct housing loans in rural and semi urban areas. Further 30% will be utilized by way of term loans to housing finance companies, housing boards and other public housing agencies. The balance 40% of the allocation for housing should be provided in the form of subscription to guaranteed bonds and debentures of the National Housing Bank and HUDCO only.

The "housing finance'' by the banks is granted for the following types of construction: •Residential houses to be constructed by public housing agencies like the
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

HUDCO, Housing Boards, local bodies, individuals, Cooperative Societies or employers, priority being given for economically weaker sections, low and middle income groups.
•Educational,

health, social, cultural other institutions/centers which are

part of housing project and which are necessary for the development of settlements or townships.
•Shopping

Complexes, markets and such other centers catering to the day-

to-day needs of the residents of housing colonies and forming part of a housing project.
•Construction

meant for improving the condition of the slum areas for

which credit is extended directly to the slum dwellers on the guarantee of the Government or indirectly to them through the State Government. •To bodies constituted for undertaking repairs and for individuals either singly or collectively, in buildings owned or occupied backed by security or guarantee. There is no ceiling on housing finance for housing construction. Banks may consider additional finance as per their terms and conditions too. Housing finance is extended to persons affected by natural calamities for house repairs / constructions also. For regular housing finance, the repayment period is fixed at not exceeding 15 years (including a moratorium, at the option of the beneficiary, till the completion of construction or 18 months from the disbursement of the loan, whichever is earlier) with graduated installments. Some of Government sponsored schemes like the Differential Rate of Interest have the component for housing for the weaker sections. In the DRI scheme, housing finance can be given to an individuals belonging to SC/ST up to Rs.5000/- which is besides the normal
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

assistance. In schemes like the PIUPEP, Shelter Up-gradation Scheme with a loan component of Rs. 10000/- is arranged through HUDCO/any other financial institution and a subsidy of Rs.2500/- per unit was given. Under the Nehru Rozgar Yojana, the Government provides a subsidy of Rs.1000/- per household for up-gradation of housing of urban poor along with a loan from the HUDCO. In the Jawahar Rozgar Yojana, a non-credit linked programme, less than one of its components viz., Indira Awaas Yojana, emphasis has been laid on housing finance. During 1996-97, a sum of Rs.1194 crores was allotted under the Indira Awaas Yojana. The Indira Awaas Yojana provides houses for the poverty sticken people and those belonging to SC/ST and freed bonded labour in rural areas. During 1995-96, about 8.64 lakh houses were constructed and till October, 1996, 2.82 lakh houses were constructed and 3, 56 lakh houses were under progress against which Rs.424.78 crores was spent. The banks extend loans to the housing finance institutions as indirect advance. These are term loans given taking into consideration the institution's debt-equity ratio, track record, recovery performance and other relevant factors. The term loans are given to HUDCO, HDFC and Housing Finance Companies promoted/sponsored by the commercial banks. Banks extend loans to the State Housing Boards and other public agencies for housing also. In view of the need to increase the availability of land and housing sites for increasing the housing stock, the banks are extending finance to the public agencies for acquits ion and development of land, provided, that it is a part of the complete project for infrastructural development. A major development in the area of housing in recent years has been the entry of the commercial banks by establishing subsidiaries either on their own or in collaboration with other financial institutions including

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

HUDCO and HDFC which have done pioneering work in the fie»d of housing finance. The public sector banks like the State Bank of India, Canara Bank, Punjab National Bank, Indian Bank, Bank of Baroda and Central Bank of India from the public sector and Vysya Bank limited from the private side have started separate subsidiaries for housing finance. The amount of public deposits which the housing companies can raise under the Housing Companies (NHB) Directions, 1989, is equal to 10 times of their Net Owned Funds. With the emergence of housing subsidiaries together with the apex institution- National Housing Bank, the housing finance scenario has taken a new turn. HOUSING FINANCE THROUGH OTHER INSTITUTIONS Some specific Organizations are extending housing finance as described below: LIFE INSURANCE CORPORATION OF INDIA The LIC of India is the oldest organizations connected with housing finance. It gives long term credit for housing. It makes available every year certain amount to Central Government for financing certain specified housing schemes of various State Governments. The Government of India makes allocation to different states out of the said amount. The LIC also advances to the Apex Cooperative Housing Finance Societies on guarantee from the State Governments and those societies in turn make advance to the Primary Cooperative Housing Finance Societies for house construction, in addition, the LIC has "Own Your House" scheme for its policy holders against mortgage of immovable property. It also finances for approved parties for construction of housing/commercial/office complexes, to public limited companies for the purchase of houses for their employees. The LIC spent Rs.1570
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

crores during Seventh Plan towards housing. HOUSING AND URBAN DEVELOPMENT CORPORATION (HUDCO) Established as a Government of India undertaking in 1970, the chief objective of HUDCO is to finance housing and urban development particularly for the poorer sections of the society. It provides finance for the schemes formed by the State Housing Boards, State Finance Societies in the urban and rural areas and Improvement Trusts. HUDCO's loan schemes are on soft terms, the repayment period extending up to 22 years and interest rate ranging from 4% to 15% per annum. HOUSING REFINANCE The National Housing Bank extends refinance to the Commercial Banks on the housing finance extended by them. The rate of interest charged by the NHB to the banks on the refinance is linked to the purpose of loan and the geographic regions. For instance, the refinance rate o interest for acquisition or construction of new units in rural areas ranges from 10 to 15% and 11. to 15 per cent in urban areas. The corresponding rate for the loans for the up-gradation in run areas is 10% while it is 11 to 13.5 per cent in urban areas. However, except in up-gradation i rural areas where there is a ceiling for charging interest from bank to borrower, for others, the banks are free to fix the rates of interest. The refinance provided by the NHB up to March, 1995 was of the order of Rs.2254.04 crores. Considering the Golden Jubilee of Indian Independence, a Golden Jubilee Rural He Refinance Scheme has been introduced by the NHB. The objective of the scheme is to provide refinance to the institutions that finance for housing in rural areas which would facilitate the ruralites for access to housing credit to build modest new house or to improve or add to
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

the old dwelling. This scheme is applicable to Scheduled Commercial Banks, State Cooperative Bank, Regional Rural Banks, State Cooperative Agriculture and Rural Development Banks, Cooperative Housing Finance Societies and Housing Finance Companies. The NHB will be extending 100% refinance under the scheme. The aggregate amount of assistance from the NHB will in no case exceed the aggregate amount of outstanding housing loans from the primary lending institutions to the borrowers (excluding overdues). Scope Refinance would be provided only in respect of direct lending to individuals/groups of individuals (formal or informal, including cooperative housing societies). Overdue loans/bought over loans from any other HFCs banks, loans given for acquisition of old housing units/second sale would, however, not be eligible for refinance under the scheme. Eligibility Criteria
(i)

Only such HFCs that conform to the 'Guidelines for Extending Refinance Support to Housing Finance Companies', as amended from time to time, and which have been approved by the NHB (discussed earlier) for the purposes of refinance support are eligible to avail refinance from the NHB,

(ii)

Overdue housing loans of the HFCs, including those covered under the NHB refinance, should not exceed 10 per cent of the total housing demand (including overdues) for the preceding twelve months. The level of overdues should be assessed, taking into account only the amounts overdue for over three months,

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

(iii)

The percentage of net non-performing assets should not exceed risk weighted assets by more that 5 per cent.

Period of Refinance Refinance from NHB to HFCs would be repayable during a period not exceed 15 years, based on the weighted average period of housing loans (WAPOL) in respect of which refinance is claimed. Security for Refinance Refinance from the NHB would be secured by charge on the book debts of the HFC. Additional security such as charge on immovable properties/movable properties, guarantee of promoters, additional margins and so on may be stipulated at the NHB's discretion. If at any time the NHB is of the opinion that the security provided by the HFC has become inadequate to cover the outstanding refinance, it may advise the HFC to provide and furnish to the satisfaction of the NHB, such additional security as may be acceptable to the NHB to cover such deficiency. The NHB may get the loan accounts and associated documents verified, either by its own officers or a firm of chartered accounts appointed by it for the purpose, with respect to the loans included in a particular refinance application. It may, at its discretion, recover the cost of such verification from the concerned HFC. Procedure Application for Annual Refinance Limit The refinance operations of the NHB are centralised at New Delhi. Refinance, in a particular year, is released on the basis of the refinance limit sanctioned to the HFC for the year (July to June). Any HFC approved for the purpose of refinance should submit to the NHB its
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

annual projections for sanction of refinance limit, in the prescribed annual credit review format, together Other Terms and Conditions Separate Books Separate and proper books of accounts, registers and so on should be maintained branch-wise by the HFC with respect to housing loans for which refinance has been extended by the NHB and these should be kept up-to-date. The list of loan accounts along with necessary details, in terms of the NHB's refinance, should be readily available with the respective branches. Life Span of Dwelling Units Since the repayment period should not exceed the life span of the house/unit financed out of the housing loan, it should be ensured that the construction is pucca/semi-pucca, with a life span of not less than 30 years. Post-disbursal Discipline There should be proper post-disbursement supervision and followup of housing loans to ensure proper end use of funds as also timely and regular repayment of the loans. It should conduct its business with due diligence and efficiency and have due regard to these principles in the conduct of its business.

Maintenance of Recovery Performance Continuance of refinance facility under the scheme would be subject to maintenance of satisfactory a recovery performance by the HFC, from the beneficiaries. Recall of Refinance

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

The NHB reserves the right to recall the refinance in the event of diversion of the relative funds for purposes other than housing or for suppression of any material information by the borrowing bank. NHB's Right to Modify the Scheme The NHB may modify the clauses of the Refinance Scheme in respect of all HFCs, or in respect of any one HFC, depending on its performance. Such modifications are being brought out in the form of circulars/letters, from time to time, and have become part of the scheme. NHB's Right to Call for Information The NHB may call for any information or returns from the HFC availing of refinance, in respect of housing loans and refinance sanctioned under this scheme. It would also have the right to collect such information directly from the HFC's constituents, its lenders, auditors, credit rating agencies and so on. Insisting on Deposits from Borrowers The HFCs availing of refinance from the NHB should not insist that borrowers place part of the housing loans disbursed to them in deposit accounts or retain the entire proceeds disbursed as deposits or insist on deposits as a precondition for sanctioning housing loans.

Borrowings from Institutions other than the NHB In case the HFC borrows funds from banks/financial institutions other than the NHB, it should inform the NHB about the same, giving particulars about the security offered for such borrowings and obtain a 'no objection' from the NHB. They are required to follow the necessary procedures and furnish details of their borrowings.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Compliance with HFCs (NHB) Directions, Guidelines on Prudential Norms The HFC (NHB) Directions, 2001, as amended from time to time, prudential norms for income recognition, accounting standards, provisioning for bad and doubtful debts, capital adequacy and concentration of credit/ investments, 2001 and guidelines for refinance support to HFCs, as amended from time to time, should be deemed to be a part of this refinance scheme.

NATIONAL HOUSING BANK (NHB)

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

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 • 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 mobilisation of resources and extension of credit for housing Management The general superintendence, direction and management of the affairs and business of the.NHB are vested in its Board of Directors, which exercises all powers and executes all acts and things on its behalf. Subject to the provisions of the NHB Act, the Board, while discharging its functions, has to act on business principles, with due regard to public interest. In general, (a) the Chairman, if he is a whole-time Director or if he is holding offices both as a Chairman and a Managing Director (CMD) or (b) the MD, if the Chairman is not whole-time director or is absent, can also exercise these powers of the Board. The MD has to follow, in the discharge of his powers and functions, all directions given by the Chairman. In the discharge of its functions, the NHB is to be guided by the directions given in writing by the Government in consultation with the RBI, or by the RBI in matters of policy involving public interest.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

The Board of Directors of the NHB consists of
(i)

a Chairman and a Managing Director (CMD), two Directors from amongst experts in the field of housing, architecture, engineering, sociology, finance, law, management and corporate planning, or in any other field, special knowledge of which is considered useful to the NHB, two Directors who are persons with experience in the working of institutions involved in providing finance for housing or engaged in housing development or have experience in the working of financial institutions/banks, two Directors elected by shareholders other than the by

(ii)

(iii)

(iv)

RBI/Government/other Government, (v)
(vi) (vii)

institutions

owned/controlled

two Directors from out of the RBI Directors, three Directors from amongst Central Government officials and Two Directors from amongst State Governments' officials. The CMD an other Directors, excepting the RBI's Directors and those elected by the shareholders, are appointed by the Government in consultation with the RBI. The RBI nominates its Directors on the NHB.

BUSINESS ACTIVITIES NHB, as the Apex level financial institution for the housing sector in the country, performs the following roles: (a) Promotion and Development:

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

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 HFCs 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. All HFCs 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 HFCs. NHB has a dedicated Training Division which organises regular training programmes 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.

(b) Regulation and Supervision: NHB exercises regulatory and supervisory authority over the HFCs 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. 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

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

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. (c) Financing: 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, specialised housing finance institutions, apex co-operative housing finance societies and agriculture and rural development banks. 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. (d) Resources of NHB NHB raises resources from diversified sources, both domestic and external by issuing Bonds/ debentures, borrowing from RBI and financial institutions/organisations etc. Under the Act, NHB is authorised to issue

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

and sell Bonds with or without the guarantee of the Central Government for the purpose of carrying on its functions. (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. (f) Recent Initiatives Securitisation of mortgage loans of the retail lending institutions facilitates for channelising household savings into the housing sector is seen as a potentially viable market oriented alternative. Support to Mortgage backed securitisation is a major policy initiative of the Government as manifested in its National Housing and Habitat Policy announced in 1998. This policy emphasises NHB's lead role in mortgagebacked securitisation 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. 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.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

HFCs Promotion and Development The principal mandate of the Bank is to promote housing finance institutions to improve/strengthen the credit delivery network for housing finance in the country. The Bank has played a facilitator role in this regard instead of itself opening such dedicated housing finance institutions. For this purpose, NHB has issued the Model Memorandum and Articles of Association. NHB has also issued guidelines for participating in the equity of housing finance companies. All housing finance companies registered with NHB u/s 29A of the National Housing Bank Act, 1987 and scheduled commercial/co-operative banks are eligible for refinance support subject to terms and conditions as laid down under the respective refinance schemes. As a part of its promotional role NHB has also formulated a scheme for guaranteeing the bonds to be issued by the housing finance companies. Considering the need for trained personnel for the sector NHB has designed and conducted various training programmes.

CASE STUDY Of inflation and interest rates
Unless the government penalises speculators and tightens further the regulations on futures trading, buoyancy in prices is likely to persist.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

The Headquarters of the Reserve Bank of India in Mumbai. With inflation as measured by the wholesale price index inching towards 7 per cent and that measured by the consumer price indices ruling even higher, the government and the Reserve Bank of India have decided to sit up and take note. Exports of some essential commodities have been restrained and the prices of petrol and diesel reduced. The cash reserve ratio is to be hiked in stages to impound the equivalent of Rs.14,000 crores of loanable funds. None of these steps has as yet been effective in curbing inflation. Even if they impact prices with a lag, they are likely to be neutralised by speculation, facilitated by excess liquidity and a liberalised futures market. Unless the government penalises speculators and tightens further the regulations on futures trading, buoyancy in prices is likely to persist. An obvious consequence of inflation that is of serious concern is its impact on the real earnings of the common man, especially since the price increase is sharper in the case of essential commodities. But a less discussed fallout could be on interest rates as banks are forced to raise deposit rates to neutralise the effects of inflation and keep depositors happy.
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Since interest rates have already been rising, the latest increase could take them close to levels that prevailed during the much-maligned, pre-reform years of `financial repression'. This would in turn necessitate an increase in lending rates, which would have adverse consequences for growth. One of the successes of financial sector reform, according to the government and RBI, is the reduction in nominal interest rates when compared with the pre-reform period. These low rates have not only shored up corporate profits but also encouraged the debt-financed spending spree, which is an important driver of India's high growth. Retail lending and housing finance have been growing at a pace that has forced RBI to warn banks repeatedly against overexposure in these markets. The danger is that a quick and sharp rise in interest rates may not just correct such overexposure but dampen debt-financed consumer spending and housing construction and spoil the party for a government that prides itself on having moved the country onto a higher growth trajectory. This effect on demand and growth would be more severe if rising rates precipitate widespread default of floating rate debt payments. The evidence shows that even before inflation raised its head interest rates had been on the rise. Part of the reason was that banks were being forced to raise deposit rates to attract depositors and were pushed into raising lending rates to cover the higher cost of funds. Deposit rates have to be hiked because savers now earn better returns on instruments such as mutual funds and unit-linked insurance. Those better returns are drawing savings away from traditional investments such as deposits at a time when banks are finding new opportunities to lend in the housing and consumer finance market. To cater to this demand, banks were competing with one another and with other financial businesses to offer better
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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

deposit rates since they were confident of finding people willing to borrow even when lending rates were raised to cover the higher cost of funds. This has created a situation where banks have a special interest in this year's Budget. Normally, so long as the Budget is `growth-oriented' in the sense that it is likely to keep growth going or spur it on, banks should be happy. A booming economy should spell booming business for the banks. But at the moment banks are finding it difficult to keep their traditional business going without raising interest rates to mobilise more deposits. Since this would require raising lending rates as well, it may prove contrary. Higher interest rates in the retail and housing finance markets may curb credit demand. Banks today get a significant share of their income from other areas into which they are diversifying. But lending based on deposits is what banks still know to do best. They would, therefore, like a situation where they can continue with business as usual without raising rates. But for that the differences in rates of return in different financial markets must not widen. Unfortunately, the government has been privileging the equity market at the expense of banks. By relaxing regulations and norms that apply to both domestic and foreign investors in the stock market, it has encouraged a flow of funds into that market, which has resulted in a prolonged boom not warranted by fundamentals. With returns on stock market investments placed at close to 50 per cent, the security of bank deposits appears to be a small recompense for the much lower returns they offer. In addition, the government has been spurring the market by encouraging new investors such as those in charge of government pension

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

funds to move into the market and privileging financial savings in forms other than bank deposits through its tax policies. Tax benefits given on equity investments, such as the abolition of the long-term capital gains tax on investments in the stock market and the decision not to tax dividends in the hands of the recipient, have all discouraged savings in bank deposits and encouraged investments in other kinds of financial assets. This is why there are demands being made that the coming Budget must `level the playing field' for the banks. That would save them from pushing interest rates to higher levels. This pressure on the banks notwithstanding, the recent hike in rates would not have happened if RBI were not also keen on higher rates. The central bank's call for moving up interest rates is driven by a completely different motivation: its concern with overheating in the economy, reflected in rising inflation. Though RBI had chosen to focus more attention on growth and exchange rate management during the years of moderate inflation, in the final analysis, like all conservative central banks, it is inflation that constitutes its primary concern.

INFLATION CONTROL RBI has only two levers to control inflation: curbing credit expansion and raising interest rates. Curbing credit growth is a problem because RBI has recently been buying up dollars flowing into the economy in order to prevent an appreciation of the rupee. And in recent

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

months that inflow of foreign exchange has been unrelenting. The rupees RBI outlays to buy up these dollars are contributing to an increase in liquidity and money supply. To limit further credit creation on the basis of this increase in liquidity, it has recently chosen to raise the cash reserve ratio to be maintained by banks and expects to pre-empt around Rs.14,000 crores of loanable funds. But this only increases the desire of banks to increase their deposit intake so as to maintain credit growth, contributing further to their tendency to hike interest rates. This has made the task of the central bank easier when it comes to the second of the levers it has at hand to curb inflation: raising interest rates. Not surprisingly what the central bank has done is to signal its desire to keep interest rates rising by raising the Repo Rate to 7.50 per cent from 7.25 per cent. This has created a rift between the central bank and the Finance Ministry. The latter, enamoured by the high growth the economy is recording, is against raising interest rates since that could slow down growth. It has, in fact, tried to pressure public sector banks not to raise interest rates on housing loans. But faced with little option in protecting their profits, banks are unwilling to oblige. Many public sector banks have indeed hiked their prime lending and housing finance rates. The Finance Ministry cannot make the banks pay the cost of its honeymoon with the stock market. This raises the question as to which is better for the economy and the common man: higher or lower interest rates. In principle, higher interest rates benefit the rentier classes at the expense of those involved in productive activity.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Higher rates, therefore, are not good for a developing economy. In post-reform India, this feature of high interest rates is worsened by the fact that growth has come to depend heavily on debt. Higher interest rates are adverse for entrepreneurs not only because as investors they are hit by the higher cost of capital, they could also be hit by the fact that expensive credit can curtail the growth in demand for their products. This is a fact that is forgotten when low interest rates are principally seen as reducing the return on deposits by individuals in the banking system. These individuals are also income earners who could benefit from a growing economy, unless they are retired senior citizens depending on interest rates from fixed deposits for their income. This should influence the Finance Minister not just to focus on inflation but actually to consider the case of the banks and level the playing field between the deposit market and the market for other kinds of financial assets so that they can keep deposit and lending rates down. As is the case currently, the concerns of senior citizens can be dealt with separately. But such a move would go contrary to the Finance Ministry's recent tendency to adopt measures aimed at sustaining the irrational boom in the stock market. It would require a change in the mindset that believes that a rising Sensex is a more potent indicator of the success of reform than low interest rates. If not, the growth rates it proudly reports could be the casualty. FORMS
APPLICATION FOR CERTIFICATE OF REGISTRATION (COR) OF HOUSING FINANCE COMPANIES By Registered Post From: [Name and address of the Registered Office in BLOCK LETTERS)

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

To The General Manager, Department of Regulation & Supervision, National Housing Bank, India Habitat Centre, Core 5 A, Lodhi Road, NEW DELHI -110 003. Dear Sir, THE NATIONAL HOUSING BANK ACT, 1987 APPLICATION FOR CERTIFICATE OF REGISTRATION TO COMMENCE THE BUSINESS OF A HOUSING FINANCE INSTITUTION We make this application in terms of Section 29A of the captioned Act for issue of a Certificate of Registration (COR). The required documents/information as per the instructions are enclosed. 2. We are desirous of commencing the business of a housing finance company. We, therefore, request you to issue the necessary Certificate of Registration under Section 29A of the said Act to enable our company to commence the business of a housing finance institution. 3. We declare that to the best of our knowledge and belief the information furnished in the statements enclosed is true, correct and complete. Yours faithfully, [Name and Designation] Common Seal of the Company Date: Place: Encl: 1. Certified copy of the Memorandum & Articles of Association 2. 3. 4. 5. Particulars of identification- as Annexure-1 Particulars of Chairman/MD/Directors/CEO etc.- as Annexure-2 Financials for the last three years- as Annexure-3 [if applicable] Board Resolution specifically approving the submission of the application and its content- as Annexure-3 6. Return on Prudential Norms for the latest period as Annexure-5 [if applicable] INSTRUCTIONS FOR FILLING UP THE APPLICATION GENERAL 1. Application should be made in the prescribed form only. Wherever space is insufficient, information may be furnished in separate sheet/s, duly indicating the cross reference.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK
2. Application along with enclosures duly completed should be submitted in duplicate, to The General Manager, Department of regulation & Supervision, National Housing Bank, Core 5A, India Habitat Centre, Lodhi Road, New Delhi-110 003. 3. A photo-copy of the application as submitted may be retained with the company for its reference and record. 4. Application should be signed by any of the following officials authorised by the Board of Directors of the company in this behalf (viz., Chairman, Managing Director, Chief Executive Officer, Company Secretary, A whole time Director). 5. Application should bear the common seal of the company. 6. An acknowledgment for having submitted the application should be obtained. 7. The particulars/information to be furnished in Annexure-IV of the application should be based on figures as disclosed in the latest annual audited balance-sheet of the company. ANNEXURE-I 1. S. No. (8) In case the company has changed its name earlier, a list of all the earlier names of the company and date/s of change together with the names of Chief Executive Officer and Chairman at the time of change of name should be furnished. 2. S.No.8 (a) in Annexure I is applicable to those companies which was incorporated with the main object clause other than housing finance and subsequently switched over to housing finance as a principal business and still valid as on the date of submission of the application form. 3. S. No. 8 (b) If the company has ever defaulted in timely repayment of deposit and payment of interest, a list of all such pending cases and the action taken in respect of each case should be furnished. The company should also submit a list containing the details of all the court cases pending against it, including those pending in consumer forum, pertaining to its deposit acceptance activities. ANNEXURE-IV La test return relating to prudential norms, as certified by the Auditors to be enclosed. The format should be as given in the Housing Finance Companies (NHB) Directions, 2001 (Format available on Bank's website: nhb.org.in

ANNEXURE-1 PARTICULARS OF IDENTIFICATION (To be filled in BLOCK LETTERS)

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

Company Code------------(To be filled by NHB) 1. Name of the Company 2. Date of incorporation: 3. Date of commencement of business -(if applicable) 4. State in which the company is registered 5. Full Address of the registered Office with Phone Number (with STD code), Fax Number and Email address 6. Full Address of Corporate/Administrative Office with Phone Number (with STD code), Fax Number and Email address 7. Status: (strike out whichever is not applicable) (a) Public Limited Company (b) Private Limited Company (c) Deemed public (d) Government company (e) Other (to be specified) 8. Whether the company is transacting the principal business of housing finance- (if applicable) If yes(a) the date of commencement of such business (b) Whether the company has defaulted in the repayment of principal and/or payment of interest of deposits 9. No. of branches/ offices (To be furnished State-wise) 10. Number of employees (Organisation chart Head Office/Branch to be furnished separately) 11. Name and address of Statutory Auditors with Membership No, Telephone number, Mobile Number and Email address 12. Name(s) & Address(es) of bankers with Telephone/Fax Numbers 13. Particulars of Bank A/c: Type of account/ credit facility enjoyed Yes/No

Yes/No

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

14. Names and addresses of the non-banking financial institutions with which the company has links in any manner 15. Name and Designation of CEO/Authorised official with Telephone, Mobile, Fax numbers and Email Address Common Seal of the Company Signature of the Authorised Official: Name: Designation: Date: Place: ANNEXURE-2 INFORMATION ABOUT THE PROMOTERS, CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY. (SEPARATE FORM FOR EACH FUNCTIONARY) Name of the Company: __________________ PERSONAL DETAILS OF PROMOTERS, CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY

I

a. Full name b. Date of Birth c. Educational Qualifications d. Relevant Background and Experience e. Permanent Address f. Present Address g. E-mail Address / Telephone Number h. (a) Permanent Account Number under the Income Tax Act and name and address of Income Tax Circle (b) Director Identification Number (DIN*) * It is an unique Identification Number allotted to an individual who is an existing director of a company or intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006) i. j. Relevant knowledge and experience Any other information relevant to Directorship of the HFC

II RELEVANT RELATIONSHIPS OF DIRECTOR

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

a. List of Relatives if any who are connected with the HFC (Refer Section 6 and Schedule 1A of the Companies Act, 1956) b. List of entities if any in which he/she is considered as being interested (Refer Section 299(3)(a) and Section 300 of the Companies Act, 1956) c. List of entities in which he/she is considered as holding *substantial interest. d. Name of HFC in which he/she is or has been a member of the board (giving details of period during which such office was held) e. Fund and non-fund facilities, if any, presently availed of by him/her and/or by entities listed in II (b) and (c) above from the HFC. f. Cases, if any, where the director or entities listed in II (b) and (c) above are in default or have been in default in the last five years in respect of credit facilities obtained from the HFC or any other HFC. III RECORDS OF PROFESSIONAL ACHIEVEMENTS a. Professional achievements relevant PROCEEDINGS, IF ANY, AGAINST THE PROMOTERS, IV CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY a. If the director is a member of a professional association/body, details of disciplinary action, if any, pending or commenced or resulting in conviction in the past against him/her or whether he/she has been banned from entry of at any profession/ occupation at any time. b. Whether associated as Promoter, Chairman, MD, Director with any HFC, NBFC including a Residuary Non- Banking Financial Company which has been prohibited from ccepting deposits/prosecuted by RBI/NHB If yes, the name/s of the company/ies c. Details of prosecution, if any, pending or commenced or resulting in conviction in the past against the director and/or against any of the entities listed in II (b) and (c) above for violation of economic laws and regulations d. Details of criminal prosecution, if any, pending or commenced or resulting in conviction in the last five years against the director e. Whether the director attracts any of the disqualifications envisaged under Section 274 of the Company's Act 1956? Has the director or any of the entities at II (b) and (c) above been subject to any investigation at the instance of f. Government department or agency?

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

g. Has the director at any time been found guilty of violation of rules/regulations/ legislative requirements by customs/ excise /income tax/foreign exchange /other revenue authorities, if so give particulars h. Whether the director at any time come to the adverse notice of a regulator such as SEBI, IRDA, DCA. ANY OTHER EXPLANATION / INFORMATION IN REGARD TO ITEMS I TO III AND OTHER INFORMATION V CONSIDERED RELEVANT FOR JUDGING FIT AND PROPER

UNDERTAKING: I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the NHB fully informed, as soon as possible, of all events which take place subsequent to the information provided above. Place: Signature of Authorised Signatory Designation: Date *‘Substantial interest' means holding of beneficial interest by an individual or his/her spouse or minor child, whether singly or taken together in shares of a company/capital of a firm, the amount paid up on which exceeds 10% of the paid up capital of the company or total capital subscribed by all the partners of a partnership firm.

ANNEXURE-3

Name of the Company: __________________________________ SUMMARY OF FINANCIAL POSITION AND OTHER INFORMATION Amount-Rs lakhs S. No 1 2 3 4 5 A. FINANCIAL POSITION Paid up Capital Reserves and Surplus Net Owned Fund [as per return on Prudential Norms] Secured Loans Unsecured Loans (i) Public deposits (ii) Other deposits/borrowings 31/03/ 31/03/ 31/03/

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

(iii) Aggregate Deposits 6 7 Loan Funds [4+5(i)+(ii)] Total Funds Employed(3+6) Towards : 8 9 10 11 Housing Loans[outstanding and % of total assets] Other Loans Fixed Assets Investments (i) Govt. guaranteed Bonds (ii) Quoted shares (iii) Un-quoted shares 12 13 14 15 Current Assets, Loans & Advances LESS : Current Liabilities & Provisions Net Current Assets(12-13) TOTAL B. WORKING RESULTS 16 17 18 19 20 21 Income Expenditure Profit Before Tax(16-17) Provision for Tax Profit After Tax(18-19) (a) Amount transferred to Reserve Fund (b) Amount available for appropriation C. OTHER INFORMATION 22 23 24 25 26 27 28 Dividend (%) Earning Per Share Price-Earning Ratio Housing Loans actually disbursed Percentage of over-dues (3 months and above) Admin. Cost-% to outstanding loans IMPORTANT RATIOS: a] Liquidity Ratio : Current Ratio b] Debt Equity Ratio: Loan Funds to Owned Fund I) Interest Coverage Ratio [times][PBIT/Interest] (ii) Return on Equity(PAT*100/Interest)

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

(iii) Return on Total Assets[PAT*100/Total Assets] d] Capital Adequacy Ratio (%) 29 30 Non-performing assets (Amt. and % to total assets) Asset quality: (a) Standard (b) Sub-standard (c) Doubtful (d) Loss assets 31 32 33 Income not recognised Provision made for NPAs Liquid assets maintained and shortfall, if any: (i) April-June (ii) July-September (iii) October-December (iv) January-March 34 Position of submission of returns (date): (a) Annual Return (b) Annual Report/Audited Balance Sheet (c) Auditors' Certificate (d) Advertisement or statement in lieu of advertisement (e) Half yearly return on prudential norms: (i) April-September (ii) October-March (f) Quarterly return on liquid assets: (i) April-June (ii) July-September (iii) October-December (iv) January-March 35 Credit rating and validity date

Notes: i. ii. iii. Position of rectification of deficiencies outstanding, if any, pointed out by NHB [Itemwise position] to be given in a separate sheet. Annual reports along with audited balance sheet and profit and loss account for the three years should be enclosed. Present shareholding pattern of the company to be furnished separately.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK
SIGNATURE OF THE AUTHORISED SIGNATORY DESIGNATION: Date:

CONCLUSION
The past studies have indicated that any point of time there has been housing shortage in India and it grows at an alarming proportion to the population is increasing year after year, lots of efforts are being made to provide housing finance to the poor who represent the majority of those facing housing problems .the NHP was the first efforts in this direction .besides that ,several other organizations like the LIC of India, HUDCO, HDFC are also involved to a greater extention to housing finance. All those efforts, it is hoped would reduce the housing shortage in India to a greater extend.

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

BIBLIOGRAPHY
1. Financial services 3rd edition - M. Y. Khan
2.

Practical banking advances UBS publisher’s ltd

3.

Report of the study group on non-banking financial institutions and company.

4. Report on trends and progress of housing in India. 5. The Indian financial system - vasant desai

WEBSITE VISITED
1. www.nhb.org.in
2.

www.google.com

3. www.business-standard.com
4.

www.unece.org

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK
5.

www.hinduonnet.com

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

National Housing Bank
The National Housing Bank has been set up under the National Housing Bank Act of 1987, which was passed on 9th July, 1988. It is wholly owned by the Reserve bank of India and was established to encourage housing- finance institutions and provide them with financial support. The National Housing Bank also provides several other channels of support for housingfinance institutions, by dint of the authority invested by the National Housing Bank Act. For example, the National Housing Bank can give directions to the housing finance institutions to ensure that their growth takes along appropriate tracks. Besides, the National Housing Bank also makes advances and gives loans to scheduled banks and formulates schemes that lead to the proper use of resources for housing projects. The various objectives of the National housing bank are:

• • • •

To encourage healthy system for housing finance and which meets the needs of all the segments of the society To encourage housing finance institutions To gather resources and distribute them for housing projects To make affordable the credit taken for housing

The places where National housing bank have offices are:

• • •

Head office in New Delhi Regional office in Hyderabad Regional office in Mumbai

The National Bank for Housing gives registration certification to companies so that they can carry out the business of financing houses. The National Housing Bank also has a training division, besides its lending operations. This division trains officials who are working in the housing finance and housing areas in order to improve their management capabilities. The National housing bank has helped enormously in the growth of the housing sector in India. It needs to work in close coordination with the Reserve Bank of India and the Indian government to ensure the upkeep and feasibility of housing projects in India

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

National Housing Bank studies risk in the Indian housing finance market
The National Housing Bank has undertaken a study to understand the nature of risks endemic to the Indian primary housing finance market, in particular default risk and prepayment risk. The sample size for the study of Credit Risks was over 6,50,000 housing loans sanctioned from January 1988 to October 2004. The salient findings of the study are: Geography: Loans originated in the West have higher default risk, followed by the Southern,Northern and the Eastern Region. Origination Period: While default risk for earlier period loans is observed to rise only during the later years of loan age, the loans during the recent period show an increase in probability of default during the earlier years of loan age. Loan Amount: Smaller loans have higher risk of default during the later years of loan age. Loan term: Loans with term between 5 to 15 years carry higher risk as compared to the Below 5 years and the Above 15 year loans. Co-obligant: Presence of co-obligant significantly mitigates the risk of default except in the Northern region. Borrower profession: Self employed borrowers carry higher risk, except in recent loans. Loan Purpose: Loans for new dwelling units higher risk compared to the loans for old dwellings. The Study observes a significant difference in default rate as the Loan to Cost Ratio increases, except in the largest LCR Category. A negative relationship between interest rate difference (defined as a reduction in interest rate) and the probability of prepayment is observed, i.e., a decline in interest rate of 1% reduces the probability of prepayment by about 30-40% and the probability is observed to increase over time. (National Housing Bank)

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