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The Indian Housing Finance

The Indian Housing Finance

GROUP 6
A Presentation on the Housing Finance Industry in India
-The Trend, Challenges and Future Prospects

Prepared by (Group 6) Soumya Ranjan (253) Yamini Kalwani (249) Ashish Jain (242) Payoj Jain (225) Nikhil Gupta (216)
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The Flow of the Presentation


Introduction Role of Housing Finance in Economy Evolution of Housing Finance in India Types of Home Loans Structure of Housing Finance in India National Housing Bank & its role Environmental Analysis SWOT Conducive growth environment given strong demand drivers Industry Stats HFCs Share of the market Top HFCs and performance Banks and their aggregate performance Growth of Housing Finance over the next 5 years The Future Conclusion
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The Indian Picture


The total housing shortage in the country stands at 24.71 million dwelling units. In India, up to the late 1970s ,housing finance was a key constraint , an individual could think of owning a home only at the time of retirement, when he would receive the benefits of retirement. The housing finance scene changed after the establishment of HDFC & HUDCO .

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Housing Finance
Hosing finance is a business of financial intermediation wherein the money raised through various sources such as public deposits ( which are subject to the regulatory stipulations of NHB), institutional borrowings( from banks), refinance from NHB & their own capital , is lent to borrowers for purchasing a house. The intermediaries lend money by accepting mortgage by deposit of title deeds of the residential property.(section 96 of Transfer of Property Act,1882)

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Role of Housing Finance in the Economy


The housing industry is the second largest employment generator in the country Housing is an industry with tremendous potential for contributing towards the economic growth of any country. It is one of the top employment generators for the economy. It has both forward as well as backward linkage with over 250 industries, including such core industries like cement ,steel, timber,ceramics,tiles, etc. Can boost multiplier effects in the economy through generation of demand.

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Role of Housing Finance in the Economy


( Amount in ` Crore
Particulars Outstanding Housing Loans Outstanding Total Loans Percentage of Housing loans to Total Loans (%) As on 31.3.2009 126,823.50 176,535.29 71.84 % As on 31.3.2010 153,188.73 204,992.78 74.73 % As on 31.3.2011 186438.25 247781.18 75.24 %

(Source : NHB,2011 report)


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Trend in Domestic Housing Credit

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Housing Credit as a percentage of GDP

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Evolution of Housing Finance in India


Indian Housing finance has far moved from the stages of being a solely government provided service during the 1970s to a very competitive sector with more than 50 housing finance entities providing housing loans worth Rs 781,000 million to home buyers across India
History: The housing finance revolution in India can be divided into five distinct phases .

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Phases of Indian Housing Finance

Phases of Indian Housing Finance


Phase I Phase II Phase III Phase IV Phase V Before 1970 1970-1980 1980-1990 1990-2000 2000-present Govt. Dominations HUDCO & HDFC established Establishment of NHB Liberalisation of interest rate High Growth

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Phases of Indian Housing Finance

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Policy Initiative & Measures to Develop Housing Sector in India


The National Housing & Habitat Policy (NHHP) formulated in 1998. The National Urban Housing & Habitat Policy ) formulated in 2007 The Golden Jubilee Rural Housing Finance scheme (GJRHFS) launched in 1997-98. India awas Yojna, Bharat Nirman,Rural Housing Fund etc. SARFAESI act enacted in 2002. FDI allowed up to 100 % under the automatic route in township,housing,built-up infrastructure & construction development projects.
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Types of Home Loans


HOME PURCHASE LOAN This is the common loan for purchasing a home. HOME IMPROVEMENT LOAN This loan is given for undertaking repairs, renovations and/or upgradation to your home. HOME CONSTRUCTION LOAN This loan is available for the construction of a new home. HOME EXTENSION LOAN Home extension loans are given for expanding or extending an existing home. For example, addition of an extra room, etc.

Types of Home Loans


HOME CONVERSION LOAN Available for those who have financed the present home with a Home Loan and wish to purchase and move to another home for which some additional funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new home, including the additional amount required, eliminating the need for prepayment of the previous loan. LAND PURCHASE LOAN This type of loan is sanctioned for purchase of land for home construction.

Types of Home Loans

BRIDGE LOAN The Bridge Loan is designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home. BALANCE TRANSFER LOAN Balance Transfer loans help you pay off an existing home loan by availing a new loan from another willing lender institution. REFINANCE LOAN This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.

Structure of the Housing Finance System

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National Housing Bank (NHB)


It is the apex level financial institution for the Housing sector. NHB is wholly owned by Reserve Bank of India and the regulator of the non banking Housing Finance Companies(HFCs). NHB was set up on July 9, 1988 under the National Housing Bank Act, 1987 of the Parliament. The Act empowers NHB to: i. Issue directives to Housing Finance Institutions (HFIs) to ensure their growth on sound lines, ii.Make loans & advances and render any form of assistance required for slum improvement iii.Formulate schemes for the mobilization of resources and extension of credit for housing.

Role of NHB in Housing Finance


Promotion and development of HFIs Regulation and supervision of HFCs Refinancing Project Lending Development of a secondary mortgage market

ENVIRONMENTAL ANALSIS

SWOT Analysis

Strengths: Large & Growing Market Effective Regulatory Framework Marginal Cost is very low

Weakness: Interest Rate war persistent Lack of uniformity Increase in default rates

Opportunities: Increasing Urbanization Tax rebate on house loans Lower CRR will enhance liquidity, so more loans can be offered

Threats: High Cost of Home ownership is dampening the demand at one end NHBs refinance assistance mainly directed towards developed players

INFLUENCING FACTORS
Socio-Cultural Economic Technology Regulatory
Age factor Growing Population Regional Shifts Interest rates Inflation Economic Cycle

Financial engineering Information processing

RBI Requirements NHB Directives

Conducive growth environment given strong demand drivers

Customer profile and his mortgage needs


In 2010-11, the average age of the borrower is estimated to have been in the age bracket of 35-36 years. Mortgage industry in India is characterized by the first-time home borrower primarily in working class group and with limited liability. Comfortable loan-to-value and instalment/income ratio with adequate credit appraisal has ensured growth with stable asset quality to the lender. This trend, coupled with tax incentives in place for interest and principal repayments, has prompted more and more young people to buy houses.

Source: CRISIL Research

Interest rates
Financiers offer two types of interest rate loans to customers - fixed and floating interest rate loans. In a fixed interest rate loan, the interest rate remains constant over the tenure of the loan. In a floating interest rate loan, the borrower has to pay at a rate that is linked to the base rates.

Proportion of floating rate loans

Interest rates and loan growth Interest rates have had minimal impact in past
The analysis depicts that interest rates have minimal impact on mortgage demand in the past. This is clearly evident from the fact that over the last decade, despite volatile interest rate regime (8.25%-12.75%), HDFC has witnessed healthy 24% CAGR in its loan book. Further, any rise in rates has been passed through in the form of increased repayment tenure or higher EMI.

Source: Company, Emkay Research

Interest Rates in the market


Bank Name
State Bank Of India ICICI Bank

Floating Interest rate


10% Scheme I :10.25% (Fixed 1 yr) Scheme II : 10.25% (Fixed 2yrs) Scheme III : 10.50% (Fixed 3yrs) then 10.25% Scheme I : 10.75% (Upto 10Lacs) (Fixed for 10yrs), then 11% (Fixed for 10yrs) Scheme II:10.25%

Processing Fee
5,000 + service tax (Upto 30lacs), 10,000 + service tax (above 30lacs) 0.50% of loan amount upto 1 crore 0.5% or maximum 10,000+service tax (12.36%) 1% of the loan amount applied for, subject to a minimum of Rs 10000 plus service tax. This fee is payable on application and is not refundable Up to 50 lacs : 10,000 +(Service tax) 50 lacs & above : 15,000 +(service tax) 0.5% of the loan amount Rs.7500/- + Service tax 1% for Salaried & 1.5% for SENP

Prepayment Charges
Nil

N.A No prepayment charges shall be payable for partial or full prepayments irrespective of the source

HDFC Ltd

HSBC Bank

10% to 13%

Nil

LIC Housing ING Vysya Standard Chartered

Scheme I : 10.25% (Fixed for 2 yrs) Scheme II : 10.70% (Fixed for 3 yrs) 11.15% (Fixed for 5 yrs) Scheme III : 10.95%(Fixed for 10 yrs) 10.75% 9.99% (Upto 25Lacs), then 10.40%

Nil NIL NIL

DHFL
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11.25%

NIL
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Property Prices

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Mortgage finance companies like HDFC, Dewan Housing witnessing increasing demand from tier-II and tier-III cities like Indore, Baroda, Surat, Pune, Jaipur, Bangalore etc. Number of people increasing who migrating from smaller towns to tier-II and tier-III cities. Important Factors
Employment opportunities Affordable property prices Availability of easy finance

Other Factors Higher income via sixth pay commission Teaser rate loan schemes by mortgage financing companies

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Credit flow by banking sector to housing industry, for 19-districts spread across India the analysis revealed that over the longer run (ie FY04-10) it remained at healthy 27% CAGR.

Loan CAGR%
29 28 27 26 25 24 Tier-1 Tier-2

Loan CAGR%

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Asset Quality
It is an evaluation of an asset to measure the credit risk associated with it. In India, the mortgage demand is primarily dominated by first time home buyers so the borrower is unlikely to default on loan repayments linked to the apartments, in which they are residing. So, the mortgage market has remained upbeat given the nature of borrower and their risk-averse behavior.

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Government Participation
The finance ministry had announced interest subvention scheme after the financial crisis. Further, to stimulate housing demand, particularly in lower and middle income groups, an amount of Rs10bn was allocated as interest subsidy for a period of one year beginning Oct2009 to Sep2010. Projects taken under the Public-Private Partnership Models in 'Affordable Housing schemes like
B e n g a l A m b u j a Ho u s i n g Development Ltd Dharavi Slum Redevelopment Program, Mumbai Affordable Housing Policy of the Government of Rajasthan New Town, Rajarhat, Kolkata SEWA's Parivartan Project, Ahmedabad J N N U R M funded slum redevelopment Schemes across India Private developers on Government Land or private land

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Demographic improvement aiding higher penetration


Mortgage / GDP ratio is at 10%, reported a remarkable 400bps improvement in the last six-years (6% in FY05 10% in FY11) and it is expected to move to 13% (+300bps) by end-FY15. Factors are
Increasing income levels and improved affordability Urbanization including emergence of tier-II and tier-III cities and evolution of nuclear family concept Easy availability of finance & Tax incentives under the Income Tax Act.

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Regulatory Intervention
There are some measures have been introduced across the globe to cap any leakages after the housing crisis in the form of reduced amortization period, new subsidies to middle-income housing sectors, lower tax incentives including criteria for land-development projects, mortgageinterest tax relief, lower LTV ratio. National Housing Board (NHB),keep track of housing finance companies for their exposure limits, asset quality and capital requirement. Measures introduced in FY11 and thereafter : Loan-to-value ratio (LTV) for individual loans upto Rs2mn was capped at 90% of the value and at 80% for individual loans above Rs2mn. Risk weights on loan portfolio were raised by 50-125bps based on loan-tovalue ratio. In addition to provisions towards non-performing assets, NHB also stated for general provision at 0.4% on outstanding standard non-housing loan portfolio and a 2% standard asset provisioning on standard assets under dual (teaser) rate home loan scheme.
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Crisis Management System

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Mortgage Industry growth rate

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The Industry Stats


Housing loan portfolio grew by 21.76 per cent during the FY 201011 over the FY 2009-10. Total loan portfolio of HFCs grew by 20.92 per cent during the FY 2010-11 over the FY 2009-10. Housing loans which were 74.72 per cent of the total loans as on March, 2010 marginally increased and stood at 75.24 per cent as at end of March, 2011. Non housing loans grew by 18.42 per cent during the FY 2010-11, as compared to FY 2009-10. Total borrowings of the registered HFCs increased by 19.84 per cent during the FY 2010-11 over the FY 2009-10. Public Deposits outstanding at the end of March 2010 were 27036 crore which increased to 28694 crore at the end of the March 2011, thereby registering a growth of 6.13 per cent during the year.

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PLAYERS OF THE INDUSTRY


HFCs Banks

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Housing Finance Cos.


Housing Finance Companies (specialized institutions lending for housing) registered with the National Housing Bank are a major component of the mortgage lending institutions in India. The 53 HFCs registered with the National Housing Bank as on March 31, 2011 have a network of approximately 1300 branches spread across the country. The growth in the housing loan portfolio of HFCs has been encouraging and an increase of 22 per cent was registered in their outstanding housing loan portfolio during the year 201011. The market share of HFCs is approximately 30-35 per cent of the retail housing finance market catering primarily to the borrowers in the formal sector
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Key Indicators for the HFCs


The housing loans outstanding at the end of March, 2010 were 153188.73 crore which increased to 186438.25 crore at the end of March, 2011, thereby registering a growth of 21.71 per cent during the year. The Public Deposits grew by 6.13 per cent from 27,035.75 crore at the end of March, 2010 to 28,694.34 crore at the end of March, 2011. The paid-up capital has also increased to 5167.72 crore at the end of March, 2011 from 4890.47 crore at the end of March, 2010. Free reserves and Net Owned Fund have also increased by 20.19 per cent and 16.15 per cent respectively at the end of March, 2011 as compared to March, 2010.
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The Top HFCs


HDFC LIC Housing Finance Deewan Housing Finance Corp. GIC Housing Finance Ltd. Can Fin Homes Ltd.

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Loan Disbursement
Rs. Billions
800

700

600

500 HDFC LICHF 400 DHFC

GICHFL
300 CFHL

200

100

0 2008-09 2009-10 2010-11

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Loan Disbursement
Rs. Billions
1024 512 256 128 64 32 16 8 4 2 1 2008-09 2009-10 2010-11

HDFC LICHF DHFC

GICHFL
CFHL

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Outstanding Loans
Rs. Billions
1600

1400

1200

1000 HDFC LICHF 800 DHFC

GICHFL
600 CFHL

400

200

0 2008-09 2009-10 2010-11

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Outstanding Loans
Rs. Billions
2048 1024 512 256 128 HDFC 64 32 16 8 LICHF DHFC

GICHFL
CFHL

4
2 1 2008-09 2009-10 2010-11

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Earnings Spread
Yield on Average Funds Deployed Cost of Funds %
6

4 HDFC LICHF 3 DHFC

GICHFL
CFHL 2

0 2008-09 2009-10 2010-11

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Banks
Banks are one of the largest mobilizers of households' savings and a major source of credit for different sectors of the economy. During the last decade, Banks have assumed a dominant role in the provision of mortgage finance in the country. The housing loan portfolio of banks has been on the rise during recent times. On account of their large network, they have made considerable in-roads in making housing credit available to far flung areas and today account for 60-65 per cent of the market share.
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Performance of Banks
The outstanding housing loans of SCBs has increased to 3,67,364 crore as at end of March 2011 from 3,15,862 crore as at end of March 2010, registering a growth of approximately 16.3 per cent which is lower than the growth of 20.0 per cent during 2009-10. The percentage share of outstanding housing credit to gross bank credit has declined from 10.0 per cent in 2009 to 9.15 per cent in March 2010. Based on the trend, the percentage share of outstanding housing credit to gross bank credit was highest at 12.03 per cent in 2006 and has been showing a gradual decline since then.
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THE PRESENT & FUTURE


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The Drivers
Improved Affordability
Rising disposable income Lower interest rates Tax incentives (interest and principal repayments deductible)

Increasing Urbanisation
Currently only 28% of the Indian population is urban

Favourable Demographics
60% of Indias population is below 30 years of age Rapid rise in new households Increasing number of nuclear families

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Housing finance disbursements to continue to grow at a steady pace


Home loan disbursements CAGR of 16.2%: Between 2010-11 and 2015-16, on account of increase in home sales, rising property prices and steady increase in finance penetration. It is estimated that the housing stock to grow by 3.2-3.4 per cent per annum in urban areas and by 3.8-4.2 per cent per annum in rural areas over the next 5 year.
(Source-CRISIL Research,2012)

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The Projection

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Factors Impacting Disbursement

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Factors Influencing Growth


Average Ticket Size

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Factors Influencing Growth

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The Financial Penetration


Rise in urban finance penetration to propel industry: Increase in finance penetration is also expected to support growth of the industry.
Penetration in India

100% 50% 0%

8.2 39

8.3 40.8 Rural - penetration Growth Urban - penetration Growth

2011-12

2012-13

(Source: KPMG Research)

By 2015-16, it is projected the finance penetration to increase to 43 per cent in urban areas and 8.8 per cent in rural areas.
(Source: KPMG Research)
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(Source: KPMG Research)

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LOW PENETRATION IMPLIES ROOM FOR GROWTH

MORTGAGES AS A % OF GDP

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Increasing Shares of HFCs.

(Source: CRISIL Research)

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The Housing Bubble


The Danger of bubble burst is low in India because: Market is largely end-user driven not speculator driven. Low demand in 2008 saw developers lowering their prices & lowering unit size & the focus shifted to mid-income affordable segment from high-value housing. A large percentage of houses (more than 70% of second class, CRISIL Research) have a cash component which is not funded by banks Very low level of household borrowing. According to 11th plan there is still shortage of 26.53 million dwelling, meaning there is enough scope for banks.
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The Tightness
Indian bank do take risk (teaser loan) but after a lot of calculation before loan is sanctioned to a lower or middle class person. Conservative sentiments Resilience of Indian economy in the aftermath of sub prime crises- Stringent monetary policy by RBI. Though 100% FDI allowed into township, housing ,construction projects, it is not allowed in real estate business. Govt. Intervention.
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Conclusion
Housing shortage in India is a serious issue.
Thanks to Rapid urbanisation and changes in socio economic scenario that have caused the demand for housing to grow at a very rapid pace. The total housing shortage in India is estimated as 26.3 million units, and hence a great market .

Various policy initiatives taken by the govt. to decrease the gap between the number of households and housing units available.
.
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Recommendations
Increasing tax Benefits: Providing more tax benefits on Home Loan to individuals.

Improving Land records and Property data systems : Land records and property data are not easily available and hence verifying the property documents is not an easy task.
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Recommendations
Securitisation: Loan securitization is the only long-term solution to the problem of raising resources for HFIs, the main providers of housing loans in the country .

Advantages of Securitization Through securitization, the loan originator should be able to mobilize funds at a low cost, and thus reduce its lending rates and make housing loans more affordable to home buyers.

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Recommendations
Using technology for Credit screening:
There is a need for developing individual credit rating systems in India. Even though, data on individual loan consumers is impossibility, developing credit rating system for individuals will prove to be very beneficial. This can help consumers with better credit criterions to fetch more affordable rates compared to consumers with past defaults. HFIs suggest provision of a unique id for individuals which can help banks access credit history.

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Recommendations

Encouraging Housing MicroFinance:


As per government estimates, out of the total urban population, 21 per cent live in slums and 35 per cent have only one room to stay. (Source: NHB Website) These sections fall completely out of the reach of Housing finance companies and banks

Government also promotes the rehabilitation of the urban poor by financing the State housing boards under policies like the JNURM
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A property owning democracy ensures social Stability


Presentation by Group 6 PGDM Fin 2012-14 LBSIM
9 February 2013