A COMPARATIVE ANALYSIS OF

HOUSING FINANCE COMPANIES AND

FACTORS AFFECTING THE PROFITABILITY
PATTERN AND VALUE CREATION

SYNOPSIS OF END TERM PAPER - FMIS

Submitted By:
Karan Arora - 281026
Muskan Sharma – 281031
Bhanu Pratap Bhujabal - 281072
Nabhi Bansal – 281089

SUBMITTED TO:
PROF. VINAY KUMAR DUTTA
 SYNOPSIS

Purpose - The purpose of this research project is to understand the Housing Finance in India and factors
affecting it

Approach - A quantitative approach has been used by ascertaining variables and using statistical
techniques to understand the impact on the performance of Housing Finance.

INTRODUCTION

Good housing is a pre-requisite for human development and welfare. It provides shelter, security,
amenities and privacy to the human beings for decent living. Without good housing, people cannot realize
their full potential and carry on the life they want to lead. Good housing reflects the general welfare of the
community, whereas bad housing leads to serious consequences such as diseases, immorality, and juvenile
delinquency. Deprivation of a decent housing, in fact, becomes a threat to social harmony and economic
prosperity. Housing is also an investment activity and provides impetus to economic growth. It has both
forward and backward linkages. Because of its forward and backward linkages, even a small initiative in
housing will propel multiplier effect in the economy through the generation of employment and demand.
Recognizing the critical importance of human settlement in developing countries, the Universal
Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights,
have recognized the right to housing as a human right. The UN also declared the year 1987 as International
Year for Shelter for the Homeless and Poor. Since then, there has been a growing concern to address
various forms of housing deprivation particularly in developing countries, where with the growing
population pressure, meeting the housing needs of all families

In view of acute housing shortage in the country, and keeping in mind the social – economic role of
commercial banks in the present times, the RBI advised banks to encourage the flow of credit for housing
finance. With the RBI reducing bank rate, the home loan market rates nose-diving by 50 basis points. The
HDFC Bank and Standard chartered bank has become the first player in this sector to announce a housing
loan for a 20 years period. No doubt it will enhance the end cost people to plan their house over longer
duration now; it has been made easy for a person to buy that dream house which he dreamt of long ago.

HDFC also provides with Home Improvement Loan for internal and external repairs and other structural
improvements like painting, waterproofing, plumbing and electric works, tiling and flooring, grills and
aluminum windows. HDFC finances up to 85% of the cost of renovation (100% for existing customers).

Current status is that HDFC reduced home loan rates by 50 basis points for all its existing floating rate
customers.

ADVANTAGES OF HOME LOANS:

The various benefits of home loans arising to the customers are:

1. Attractive interest rates: The various banks offer attractive interest rates to boost and help their
customers. Many banks provide loans on fixed or floating rates to facilitate consumers as per their
needs.

2. Help in owning a home: The home availed by a person with the help of banks, because they provide
technical and financial assistance to customers for owning their dream home.

3. No requirement of guarantor: The commercial banks now a day, liberalize their laws regarding
home loans. Some of banks don’t even require the guarantor to grant loan to their consumers. They
also make consumers free by reliving him to find a guarantor to complete the proceedings of availing
loan.

4. Door-Step Services: These door to step services are provided from enquiry stage to the final
disbursement takes place such services are beneficial for customers in present busy life. Banks like
ICICI bank and standard chartered bank provide door to step services to customers to borrow loan.

5. Loan period: There are many banks which provide maximum loan tenures up to 15-20 years based
on the loan amount and the credibility of customers. This relieves the customers to repay loan amount
with ease at a pace that they are comfortable in and it adds to their growth and develops customer
loyalty.

6. For accidental death insurance: Some banks provide free accidental death insurance with housing
loan which is also beneficial for the customers.

These benefits or advantages of home loans are responsible for making than so popular among customer
that a person who don’t have their home and want to buy, they do it with home loan. Home loans help
such persons in making their dream home.

DISADVANTAGES OF HOME LOANS:

The main disadvantages of home loans are high lightened as below:

1. Delays in processing: At times, there are huge delays in processing of providing home loans because
various formulations to be fulfilled in this process. These delays customers feel mentally as well as
financially weak

2. Fluctuating interest rates: Some banks give home loans at floating rates, which fluctuate at Different
intervals due to some reasons. These changes sometimes, may lead to increase in interest rate which
will increase the cost of home loans to the customers
3. High Cost: The public sector banks charge high processing cost for home loan’s sanctioning. They
are forced to pay serious charges at various stages to fulfill the requirements. Some consumers are not
able to pay such charges so such people could not avail the benefits of home loan schemes.

4. Problems in Disbursement: There are many problems in disbursement of home loan amount. There
is some delay in disbursement of loan amount to the customers due to legal formalities. This causes
problems to the customers.

These are limitations or disadvantages of home loans. But sometimes some banks charges high
installments to repay loan amount. Such also causes problem to customers. These limitations can be
removed by providing good and promote services to the customers.

DISBURSEMENT OF HOME LOANS:

Every bank has its own procedure to disburse the loan amount among customers. After choosing your
right home, the next step is disbursement of home loans. The loan amount is disbursed after identifying
and selecting the property or home that are purchased and submit the requisite legal documents. In the
disbursement of home loans, a clear title and full verification to ensure that a person has full rights on his
house. The 230A clearance of seller and /or 371 clearances from the appropriate authority of income tax
is also needed.

 Eligibility criteria:
However, if one is a resident or non-resident individual who is planning to buy a house in India, one
can apply for a home loan. If a person has decided to buy a property in the near future, he/she can
apply for a loan before even selecting the property. Once the maximum amount to put into the property
has been decided, the Housing Finance Institutions or Banks will let the customer know that how much
he/she is eligible for and this helps to plan out the budget.

 General Terms and Conditions:

The following are the terms and conditions applicable to the basic home loan product only. These are
likely to change on the basis of the variations of the home loan product. Typically, in general home
loans, the following conditions are applicable:
o The loan to value ratio (LTV) cannot exceed a particular percentage. This differs from product
to product and from one Housing Finance Institutional Bank (HFI/B) to another. The
components of the value of the Property calculated here are covered under cost of property.
o The maximum tenure of the bank is nominally fixed by HFI/Bs. However, HFls/Bs do provide
for different tenures with different terms and conditions.
o The installment that one pay is normally restricted to about-50-per cent of the monthly-gross
income of the candidate.
o The total monthly outflow towards all the loans that have been availed of, including the current
loan is normally restricted to 50% of the gross monthly income.
 o One will be eligible for a loan amount which is the lowest as per one's eligibility. This is
calculated as per the LTV norms, the HR, norms and the FOIR norms as mentioned above.
o Most HFls/Bs consider the profile before they judge the repayment capacity. The judgement
is based on age, qualifications, number of dependents, employment details, employer
credentials, work experience, previous track record of repayment of any loans that have been
availed of, occupation, the industry to which the candidate's business relates to, if he/she is
self-employed, then the turnover in the last 3-4 years etc.
o Some HFIs/Bs insists on guarantees from other individuals for the repayment of the loan. In
such cases, the customers have to arrange for the personal guarantee before the disbursement
of the loan takes place.
o The property should be technically clear before the HFIs/Bs disburses the loans amount. Most
of institutions and banks have a team of technical experts who visit the site to get a technical
report before the disbursement of loan. This is also beneficial to the customer as they check
for the technical quality and compliance with local laws.
o The property should be legally clear before one can avail of a disbursement of the loan amount.
Housing-Finance Institutions /Banks (HFIs/Bs) take legal clearance from their lawyers before
the disbursement of amount. This proves to be beneficial to the customers as a legal expert
checks his/her documentation to ensure that he/she get a proper title to the property.
o The disbursement of the loan is as per the progress of construction of the property unless it is
a ready property in which case the disbursement will be by one single cheque. PEMI or simple
interest on the loan amount disbursed to the customer in case of a part disbursement will be
payable by the customer on the disbursement.
o The disbursement in most cases will be favoring the builder or the seller or the society or the
development authority as the case may be. The disbursement will come in the customer's favor
under special circumstances only.
o The repayment of loan can be made either through deduction against salary, post-dated
cheques, standing instructions or Auto debit instructions to bank.
o The principle is amortized either on annual reducing or monthly reducing basis as the case may
be.

The above terms and conditions are generally true for most Housing finance Institutions/Banks with
respect to the general Home Loans. However, the specific terms and conditions vary with respect to special
Housing Finance Institutions or Banks.

 Charges applicable to home loans:

The different kinds of charges applicable to home loans are discussed below:

o Processing fees:
First of all, comes the process fee. This is a charge that is levied by most HFls/Bs. This has to
be paid at the time of submission of the application form. It's normally charged as a percentage
of the loan amount sanctioned. Some HFls also charge a flat fee based on the loan amount
 instead of a percentage. When a lower amount is sanctioned the excess fees paid at the time of
submission of the application is adjusted with the charges, which one make to the HFI/B
subsequently. Most HFls/Bs refund the processing fee if the loan application is rejected.
o Administrative fees:
This charge is again, normally, a percentage of the loan amount sanctioned. It is collected by
the HFI/B for the maintenance of customer's records, issuing interest certificates, legal charges,
technical charges, etc. though the tenure of the loan. It is payable by the customer when he/she
accepts the offer letter given by the HFI/B. This payment has to be made before the ailment of
the disbursement. The mode of collection of these fees varies from one HFI/B to another.
o Rate of interest: -
This is the rate of interest applicable on the loan amount through the tenure of the loan. It is
charged on the principal monthly reducing method. Most HFIs/Bs give an option to select
either a fixed rate of interest or a variable rate of interest.
o Legal Charges: -
Some HFIs/Bs mainly Public Sector Banks levy legal charges that they incur on getting the
property documents vetted by their panel of lawyers.
o Technical Charges: -
These charges are also levied by certain Housing Finance Institutions/Banks (HFIs/Bs) to meet
their expenses on the technical site visits to the customer's property. This ensures quality of
construction and construction within the norms as stipulated by the respective approval
authority.
o Stamp duty and registration charges:
HFIs that go in for a registered mortgage pass these charges on to the customer. These are
rather heavy in certain states depending on the laws laid down by the state where one buys a
property.
o Personal Guarantee from Charges: -
Since the personal guarantee provided by the customer need to be stamped, these charges are
also recovered from the customer. They are charged to him by HFIs who demand for
Guarantees.
o Cheque Bounce Charges: -
In case the cheques through which one make a payment to HFls get dishonored, some minimum
charges are levied by the HFI. The same are recovered from the customer.
o Delayed payment charges: -
HFls/Bs charge delayed payment charges from the customer if he/she delays the payment of
installments beyond the due date.
 Additional charges: -
These are levied as a percentage on the delayed payment charges by most HFls. They are levied if one
fail to pay the dues within the stipulated time after a delay has taken place
Rating Methodology for Housing Finance Companies

The Housing Finance Companies play a pivotal role in the Indian Financial Market. The are rivals to the
banks and other financial institutions, offering home loans and similar products. Some of these products
are Loans Against Property, Builder Loans, and Lease Rental Discounting. The National Housing Bank
(NHB) is the regulating body for these HFCs. The major point of difference between these HFCs and
banks are that these HFCs enjoy a greater flexibility in matters concerned with governance structure and
operations, lend money independent of sector targets and minimal statutory reserve requirements.
These HFCs are rated as per a framework prescribed by ICRA i.e. ICRA’s Risk Analysis Framework.
These ratings are determined based on the “going concern’ concept rather than just an analysis of there
assets and debt levels. They assess the business and financial risks of an HFC. A broad frame work is as
follows:
1. Business Risk Profile
a. Operating Environment
b. Business Mix of the company
c. Management Style, Systems Information, Shareholder Pattern
d. Governance Structure
2. Financial Risk Profile
a. Asset Quality
b. Liquidity
c. Profitability
d. Capital Adequacy
The credit ratings assigned ICRA are an outlying portrait to its present opinion on the relative credit risk
involved with the instruments offered. The relative importance of these parameters vary across companies
and industries, as per their ability to manage their overall risk profile.
 RESEARCH METHODOLOGY

Statement of Problem

To understand and evaluate the relation of Value Creation and Profitability in Home Loan
Financing Companies

Objective of the Study

The main objectives of the study are to evaluate and measure the role of profitability in value creation,
compare the HFCs and find out which factor of profitability is highly responsible for value creation in the
Housing Finance Industry

Scope of the Study

The Indian housing finance industry has grown by leaps and bound in few years. total home loans
disbursements by banks has risen which witnesses phenomenal growth from last 5 years. There are greater
number of borrowers of home loans. so, by this study shall focus on the financials of these companies by
comparing their Financial Statements such as Balance Sheet and P&L Account and Financial ratios such
as ROA, ROP, ROE, ROI, Total Assets ratio, Expense Ratio etc.

Statistical Design

The statistical design of the study is as follows:

1. Correlation – Correlation studies the relationship or connection between two or more variables. In this
study, correlation will be used to understand and analyses the relationship between financial ratios of
different companies to the industry average

2. Regression – Regression is a statistical tool used in finance to measure the impact of one dependent
variable and a series of other changing variables. In this study, regression will be used to identify and
analyses the impact of these financial rations on the value creation of the companies and industry as well.

3. Comparative Analysis of Financial Statements – The Financial Statements of different HFCs shall
be compared and studied.

Hypothesis Development

Ho: The market share, firm size, firm performance does not have an impact on the profitability
performance of the HFC and do not add to the shareholder wealth.
H1: The market share, firm size, firm performance has a significant impact on the profitability
performance of the HFC and add to the shareholder wealth.

LIMITATIONS OF THE STUDY

This study also includes some limitations which have been discussed as follows:

 Access to a large number of respondents shall be difficult due to reasons such as non-cooperative
attitude of respondents
 There is limitation of time to conduct the analysis
 Limited knowledge of the market
 The limited amount of secondary data available on verified secondary sources
 Limited number of variables being studied to conduct the analysis as the industry is affected by
a large number of factors
 LITERATURE REVIEW

Housing finance in India: an overview

Author: Renu sud Karnad

India has had a meteoric economic rise since its liberalisation in 1991. Prior to this, India’s true economic
potential had never been tapped. Majorly, India faces two challenges that currently impede the country
from attaining a higher rung of economic achievement - inadequate infrastructure and finding
appropriate solutions for affordable housing. Housing plays an important role in terms of the multiplier
effect it has on the economy due to its strong backward and forward linkages with various industries and
as a direct and indirect employment generator. In 1970, the central government set up the Housing and
Urban Development Corporation (HUDCO) as a wholesale lender to finance housing and urban
infrastructure activities. It was only in 1977 that the first retail housing finance company was established,
Housing Development Finance Corporation - India (HDFC).
In India, there is now a growing recognition that the country’s aspirations towards achieving a
sustainable double-digit growth rate can only happen if there is a complete commitment to financial
inclusion. Providing effective housing finance solutions across all income segments will form a crucial
component of India’s financial inclusion agenda. Housing finance players, policymakers and other
stakeholders need to work together and strive towards the challenge of housing more people in India.
The provision of housing finance is a logical extension of the “Fortune at the Bottom of the Pyramid”.
This is because nothing can be more beneficial to a nation than a property-owning democracy

Non-performing Assets in Public Sector Commercial Banks- A Retrospect

Author: C. Mangala Gowri, Venkata Ramanaiah. Malepati, B. Bhagavan Reddy

This article discusses the importance of managing the non-performing assets in Public Sector Commercial
Banks (PSCBs) in India by covering asset classification norms, identification of non-performing assets,
provisioning against advances etc. PSCBs provide finances to the needy covering various categories
including priority, no-priority and public sectors.
The percentage of NPAs to total advances has declined till 2009. However, the vulnerability of NPAs is
highest in priority sector in nationalized banks as well as SBI group followed by non-priority sector and
public sector. This indicates that the policy makers should take due care while sanctioning loans and
advances under priority sector. Being a public sector commercial bank there is no scope to escape from
the social banking in terms of sanctioning loans and advances to the downtrodden and masses in order
to uplift their economic condition. However, bankers need to take enough care while sanctioning loans
to priority section. Proper awareness to be created among borrowers about norms and conditions of
loans, repayment terms, rebate or reduction in interest payments for quick repayment of loans etc. The
firm commitment, abiding of prudential norms, consciousness of authorities, feeling responsibility etc.
At every level of loan process may bring NPAs to minimum level.

Creation of Non-Performing Assets in the Banking Sector

Author: Tamma Koti Reddy and Siddhartha Arora

NPAs or Non-Performing Loans (NPLs) have become a critical factor for the performance of a bank. An
asset is considered as “non-performing” if the interest or installments of principal due remain unpaid for
a period of more than 90 days. Any NPA would migrate from the substandard to doubtful category after
12 months. The asset can remain in the doubtful category for three years and further, it will be classified
as a loss asset if it is irrecoverable or only marginally collectible. The problem of NPAs is ravaging even
in economies such as China, although the level of NPAs in China is considered to be much higher as
compared to that of India.
The problem of nonperforming Loans has a deleterious effect on the balance sheet of the banks and
more importantly has wider macroeconomic implications. The reasons for NPAs are broadly classified
into two types—external and internal. Whereas the external factors are outside the banks’ control, the
internal factors are within the control of the bank. Diversion of funds, lack of efficient post-sanction
monitoring, economic recession along with company specific factors such as an inefficient management
and/or inadequate entrepreneurial skills have been the major reasons for accounts turning bad. By
taking these factors into account, the bank might devise a strategy to mitigate its risks in the future.

HOUSING MARKET IN INDIA: A COMPARISON WITH THE US AND SPAIN

Author: CHARAN SINGH

The housing sector plays an important role in any economy. House prices in India are rapidly rising due
to lack of a well-developed market and a chronic shortage of housing. The shortage was broadly
attributed to congestion followed by obsolescence and homelessness. In India, housing generally
embodies lifetime savings of many individuals and therefore the government, state and Centre, needs
to be sensitive to housing sector. Spain and the US are classic cases where the crisis erupted from the
housing sector and even after half a decade, economic recovery though started, continues to be sluggish.
In a matured economy like that of the US, institutional arrangements to facilitate a well-developed
housing sector were planned nearly a century ago, which has enabled it to withstand the shock of a great
recession. Therefore, decline in housing prices during the financial crisis has been less than that in some
countries of Europe, including Spain. However, in both the cases, given that commercial banks were the
major players in the housing market; one factor that emerges clearly is the soft touch regulation of the
banking system.
ASSET QUALITY AND ACCOUNTING JUGGLERY IN INDIAN BANKS
Author: Bashir Ahmad Joo

Asset quality is widely accepted as the fundamental concept for the study of banking stability. Banks
have become broad based financial institutions engaging in full spectrum of financial services their credit
risk exposures have become more complex and interdependent. The risk and sensitivity of bank failures
due to poor asset quality triggers a chain reaction and generates negative externalities for the whole
financial system. Revenue slippage analysis and financial ratio analysis has been used to analyze the asset
quality in banks. There is a stringent need for appropriate regulations and proper asset quality
surveillance by the national monetary authorities for macro prudential supervision. The NPA for both
public and private sector banks though have shown decline in NPAs but asset quality of private is better
than public. The slippage analysis depicts that revenue loss due poor asset quality is highest in case of
public sector compared to private sector banks. However, within the private sector banks the better
asset quality is witnessed in case of young private sector banks thus they have also less revenue leakage.
In the near future Indian banking sector needs to present transparent and correct picture of NPAs so as
to support growth momentum in the economy while paying due importance to RBI classification and
provisioning norms of advances together with adherence to AS-9.

Management of Non-performing Assets of Commercial Banks: Evidence from Indian Banking Sector
Author: Dr. Jaynal Ud-din Ahmed

The Indian banking sector is facing a serious problem of mounting quantum of NPAs. The commercial
banks in India in general suffer a tendency to minimize their NPA figures. There is the practice of ‘ever-
greening’ of advances through understated techniques. There are a number of factors responsible for
increasing size of NPAs of commercial banks like Poor credit appraisal system, lack of vision/
foresightedness while sanctioning/ reviewing or enhancing credit limits, Lack of proper monitoring,
reckless advances to achieve the budgetary targets, etc. The NPAs, being an important parameter for
assessing financial performance of banks, reduction is necessary to improve the profitability of the banks
and comply with capital adequacy norms. The quality appraisal, supervision and proper follow up
undoubtedly will assist to solve the problem. In a situation where nature of clientele is a bit complicated,
the management must ensure that the right amount of credit is given to the right client. The judicial
system needs to be restored to have a smooth progress of quick recovery of dues from defaulters.
The management of NPAs has been an immense task before the bankers because it challenges the banks
resistance capacity. The occurrences of NPAs may not be avoidable entirely but they can be managed
effectively. The fresh incidence of NPAs should be avoided but not at the cost of fresh deployment of
credit.
The Impact of Regulation on Mortgage Risk: Evidence from India
Author: John Y. Campbell, Tarun Ramadorai, and Benjamin Ranish

Mortgages are rapidly becoming important financial instruments in emerging markets. Here, financial
regulation is at least as intrusive and much less stable. In addition, long-lasting historical influences are
likely to be less important in emerging markets because their rapid growth and financial evolution reduce
consumer inertia. For this reason, emerging markets are ideal laboratories in which to examine the effects
of mortgage regulation. The study suggests that regulatory subsidies for low-cost housing and less
leveraged loans are associated with higher delinquencies, controlling for interest rates at loan issuance,
and that changes to the definition of non-performing assets impacted behavior in response to early
evidence of payment delinquencies.

Inter-relationship between the housing market and housing finance system: evidence from Malaysia
Author: Rosli SAID, Alaistair, GREAL, Rohayu MAJI

The Malaysian housing market and associated housing finance system have expanded significantly as a
result of rapid urbanisation since the late 1980s. There is a strong inter-relationship between the housing
market and housing finance system. The direction of causality shows that there is a bi-directional
relationship between the housing market and housing finance system. Sound performance of the sub-
markets within the housing finance system is a determinant prerequisite of the robustness of the housing
finance system, if a healthy performance of the housing market is to be achieved. The findings suggest
that changes in the present house prices were determined by current and previous changes in the housing
finance system. The changes in the housing market lead to changes in the housing finance system and vice
versa.
 REFERENCES
Ahmed, D. J.-d. (n.d.). Management of Non-performing Assets of Commercial Banks: Evidence from Indian
Banking Sector. International Journal of Financial Management, 50-61.

Arora, T. K. (2010). Creation of Non-Performing Assets in the Banking Sector. Productivity, 53-68.

C. Mangala Gowri, V. R. (2013). Non-performing Assets in Public Sector Commercial Banks- A Retrospect.
International Journal of Financial Management, 47-53.

John Y. Campbell, T. R. (2015). The Impact of Regulation on Mortgage Risk: Evidence from India. American
Economic Journal: Economic Policy, 71-102.

Joo, B. A. (2014). ASSET QUALITY AND ACCOUNTING JUGGLERY IN INDIAN BANKS. Indian Journal of Commerce &
Management Studies, 105-112.

Karnad, R. S. (2010). Housing Finance in India: An Overview. HOUSING FINANCE INTERNATIONAL Autumn, 42-47.

Rosli SAID, A. R. (2014). INTER-RELATIONSHIP BETWEEN THE HOUSING MARKET AND HOUSING FINANCE
SYSTEM: EVIDENCE FROM MALAYSIA. INTERNATIONAL JOURNAL OF STRATEGIC PROPERTY MANAGEMENT, 138-
150.

Singh, C. (2014). HOUSING MARKET IN INDIA: A COMPARISON WITH THE US AND SPAIN. Indian Journal of
Economics & Business, 219-256.