Business Model of Housing Finance Company in India

Members

Madhu 91029

Shivi 91051

Radhika 91041

Sweta 91059

Group 4

Housing Industry
• From 28%(300 m) the Urban Population to increase to 40% (600 m) by 2030 • 70% of New jobs to be created in Cities* • Young people aspire to be come home owners • Change in Socio Culture of Society

• •

* as per McKinsey Global Industry research

Source: NHB- Residex data

Source: NHB- Residex data

Source: NHB- Residex data

Source: NHB- Residex data

Source: NHB and IndiaStat

Housing Finance
Housing meeting housing finance the connotes needs finance relating for to various

Understanding Housing Loan

Housing Loan
• Term: n g Lo • Security: – Primary: u se Ho – Secondary:a ra n te e / Gu N m / E xp a • Purpose: e wCHool aete ra ln sio n / l Equi ty • Interest La n dFi rch a se /o cqtisitio n Rate: d , FlA a u n g , Pu i xe H o u se Te a se r

of

Mortgage Vs Lien

Importance of Housing finance

Housing Finance system in India
R e a so n s fo r a h i h a n n u a lg ro w th i th i g n s se cto r:
¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡

D em and A ffo rd a b i i l ty C o m p e ti o n ti P o l cy i S e cu ri za ti n ti o U rb a n i ti n za o N u cl a r fa m i i s g ro w i g e le n T a x i ce n ti s n ve

I d u stry stru ctu re n

H O U S IN G F IN A N C E S Y S Y T E M IN IN D IA

Players

National Housing Bank (NHB)
• Set-up in 1988 as the Apex level institution for housing.

• To promote housing finance institutions both at local and regional levels

• NHB is wholly owned by Reserve Bank of India

• Ensures a sound and healthy housing finance system through effective regulation and supervision of housing finance institutions.

Functions
• Promotion function

• Regulatory function

• Financing function

Promotion function
• With the setting up of NHB, there have been sustained efforts at creating and supporting a new set of specialized institutions to serve as dedicated centers for housing credit.

Regulatory function
• The requirement of regulation emanates from the need for a credible and stable housing finance system.

• It has come out with guidelines for approving HFCs for financial assistance and for participating in their equity.

• It has also issued the Housing Finance Companies (HFC) Directions and guidelines for prudential norms for income recognition, assets classification etc.

Financing function
• To provide financial assistance to various banks and housing finance institutions.

• The principal focus of NHB’s programs is to generate large scale involvement of various primary lending institutions to serve as dedicated outlets for assistance to the housing sector.

• The refinance assistance provided by NHB to HFCs has enabled them to increase their operations and cover a larger section of the population.

Critical Success Factor for HFCs
• • • • •

Cost of Funds Low Margins, High Volume Management of NPAs Product features Distribution reach

For Starting
• To commence on business, every HFC setup as a company should

o Obtain a certificate of registration from the NHB and

o Have the net owned funds of Rs 25 lakh or such other higher amounts as may be specified by NHB from time to time.

Capital adequacy
• Every housing finance company shall maintain a minimum capital ratio consisting of Tier-I and Tier-II capital which shall not be less than 12% of its aggregate risk weighted assets and of risk adjusted value of off balance sheet items.

• The total Tier-II capital, at any point of time, shall not exceed 100% of Tier-I capital.

Public deposits
• Any HFC having net owned fund of Rs. 25 lacs or more cannot accept or renew an amount exceeding five times of its NOF

• No HFC can have maximum deposits, inclusive of public deposits, exceeding 16 times its NOF

• A HFC can accept or renew public deposit for a minimum period of 12 months and a maximum of 36 months from the date of acceptance or renewal.

• At present HFC cannot pay more than 12.5%

Asset classification
• Standard assets: an asset in respect of which, no default in repayment of principal or payment of interest is perceived • Sub-standard assets: an asset, which has been classified as non-performing asset for a period not exceeding twelve months • Doubtful assets: an asset which remains a substandard asset for a period exceeding twelve months. • Loss assets: an asset that has not been written off by the housing finance company and an asset which is adversely affected by a potential threat of non recoverability

Provision
• Sub-standard Assets: A general provision of 10% of total outstanding should be made in case of it.

• Loss Assets: The entire assets shall be written off. If the assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.


Doubtful Assets
• 100% provision to the extent to which the advance is not covered by the realizable value of the security to which the housing finance company has a valid recourse. • In addition, depending upon the period for which the asset has remained doubtful, provision shall be made on the the asset % age Period for whichfollowing basis: of Provision
has been considered as doubtful Up to 1 year 1 - 3 years Over 3 years

20 30 50

RBI Mid-term Review Highlights pertaining to Housing Sector
• The RBI in its mid-term review policy, released on 2nd November, 2010 made the norms for housing loans more stringent to curb the excessive borrowing that has pushed property prices in most metros to levels seen before the global financial meltdown and even beyond.

• Among the steps mandated by the RBI are:

• Increase in the risk weight of high-value loans of Rs 75 lakh and above to 125 per cent. Increasing the risk weight means banks will have to keep more money aside against high value loans.

• Bringing down the ceiling limit on housing loans to 80 per cent of the property value. This is intended to dissuade excessive borrowing for housing purposes. Till now, banks used to impose their own ceiling on housing loans, but there was no cap from the RBI side.

• An increase in the funds to be kept aside by banks as a cushion in case of defaults on loans made at teaser rates. It has increased the standard asset provisioning by banks for all such loans to 2 per cent from the earlier 0.4 per cent.

• It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. • The overall policy is designed to check the creation of pricing bubble in the market

Business Model
P ro ce s se s

R even u e

Exp en s es

P R O F IT S

O p e ra tio n s

M a rk e ti ng

• Incorporated in 1977 • primary objective of meeting a social need - that of promoting home ownership by providing long-term finance to households for their housing needs • 1505 Employees as on 31st March 2010 •

Snapshots
• Loan Book ` 97,967 Crores, 22% growth y-o-y • Deposits ` 23,081 crores, 19% growth y-o-y • Operating Income ` 11,338.28 Crores • EPS- ` 92.47 , 23% growth • ROE- 20%- Highest in Industry
• Cost to Income Ratio- 72.59% Lowest

• PAT 24.88% • Loan Turnover 0.12 times

Subsidiaries

Value Chain

Liquidity Cycle

Process

Process and Risks

• All Values in ` Crores • Data has been taken from
– Companies Annual Report – CMIE Prowess – Capitaline – NHB and RBI

Sources of Funds

Application of Funds

Revenue Model

Average Yield on Loans 10 . 90 %

Average Interest rate on Deposits 8 . 59 %

CAGR = 27 % over 5 years

Financial Evaluation

Risk

INTERNAL RISK FACTORS

EXTERNAL RISK FACTORS

• Contingent Liabilities Risk • Foreign Exchange Risk • Legal/Regulatory Risk • Credit Risk • Operations Risk • Liquidity Risk • Interest Rate Risk • Any Time Exit


• Regulatory changes • Risk of Competition • Sensitivity to the Economy and Extraneous Factors • Real Estate Prices Risk • Increasing Competition

Risk Mitigation
• Stringent Credit Norms • Regular monitoring of the maturity profiles • Long term forward contracts, principal only swaps, full currency swaps and currency options

Marketing
• 279 Outlets • Complimented by wholly owned distribution company, HDFC Sales Private Limited (HSPL). • Covers 90 Locations • Distribution Channel on Sources Loans, No role in credit, technical, legal… • Organizes fairs • Through Subsidiaries

Products
• Home Improvement Loan • Home Extension Loan • Land Acquisition • Top-Up Loan • Property Valuation • Property Identification/Adv isory • Senior Citizen's Deposits • Cumulative Deposits • Non-cumulative Deposits • Monthly Income Plan • Systematic Savings Plan (SSP)

Performance Indicator
CAGR - 22 % over 5 years

Source : India Stat, Annual Report of HD

Competition
• L I C Housing Finance Ltd. • Dewan Housing Finance Corpn. Ltd. • Deutsche Postbank Home Finance Ltd. • G I C Housing Finance Ltd. • IDBI ICICI Bank State Bank of India Canara Bank Punjab National Bank • IDBI Bank • Standard Chartered Bank • Hongkong & Shanghai Bank • • • •

Commercial Bank Vs HFC

Market Share of SCBs

Housing Security Market : Primary and an

Primary Mortgage Market
• The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction  • • Mortgage brokers, mortgage bankers, credit unions and banks are all participants in the primary mortgage market •

Secondary Mortgage Market
• The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators (securitizers) and investors •

Securitization in Secondary Market

Benefits of the Secondary Market

Downfall of Fannie Mae and Freddie Mac
• Rapid growth in purchases of risky but profitable subprime loans


• Utilised implicit government backing to borrow at will, but without adequate capital to protect them from unexpected losses


• Played down the dangers posed by an inflated housing market


• Did not raise enough new capital to weather the storm as the housing slump expanded


• Over‐estimated the power and accuracy of their computer systems and mathematical formulae to compensate for new more complex products

Mortgage Guarantee

Tri-partite Guarantee Contract-Purchased by the lender and paid for by the borrower

Modus Operandi of MGC
1. Banks and HFCs pay the MGC a premium (fee) for buying mortgage guarantee for every loan they advance

2.
3. The banks/HFCs pass on the cost to borrowers, just like mortgage insurance premiums

4.
5. The premium will depend on factors such as borrower's profile, income proof, credit history and security available

6.
7. The premium amount collected from thousands of loans by MGC will be pooled into a corpus fund

8.
9. When a loan goes bad, the bank/HFC will invoke mortgage

Insurance vs Mortgage Guarantee
Credit Insurance • Bi-partite contract

Mortgage Guarantee • Tri-partite contract


• Business credit insurance


• Consumer credit insurance


• Regulated by IRDA


• Regulated by RBI


• Max FDI is 26%


• Max FDI is 49%

Due Diligence in Mortgage Guarantee

Benefits of Mortgage Guarantee
• Make housing more accessible to qualified younger buyers • • Increase accessibility to mortgage loans in underserved regions and communities • • Increase accessibility to mortgage loans for entrepreneurs and the self-employed

Benefits of Mortgage Guarantee
• MGC act as credit investigator for credit institutions


• Stimulate the housing resale market because easier finance available to home buyers


• Encourage lenders to bring yields lower on loans that have a mortgage guarantee


• Provide loans with lesser down payments to deserving borrowers

Presented By: Shivi Agarwal 91051 Radhika Gupta 91041 Sweta Agarwal 91059 Madhusudan Partani 91029 FMG 18A

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