HOUSING FINANCE MARKET IN INDIA

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Workshop on Housing Finance, Mongolia

June 27, 2011Mongolia

ECONOMIC HIGHLIGHTS

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Social Demographics

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• Population: 1.03 billion (2001 Census) of which about 28% reside in the urban areas. Increasing trends of urbanization with mass migration towards cities.

• Young population with median age around 24.9 years. Approximately 54% of the population aged 24 years and below.

• A significant proportion (57.7%) of the population in the working age group of (15 – 59) years.

• Around 26.1% of the population living below the poverty line.

• Increasing per capita income in recent years has led to the growth of an emerging middle class with growing purchasing power, providing necessary impetus for growth of consumerism.

INDIAN ECONOMY - HIGHLIGHTS

• Strong macroeconomic fundamentals backed by sustained growth.• Services sector accounts for around 65-70% of the GDP.• One of the most attractive destinations for FDI globally. Indication of strong investor confidence.• Progressive measures towards Deregulation and Globalization leading to global integration.• Financial sector reforms backed by robust regulatory and prudential norms leading to a well-developed banking system and vibrant capital market.• ‘India’s “Mega-Cities” of Mumbai & Delhi will be the word’s 2nd and 3rd largest cities by 2015.’ – Jones Lang LaSalle.

Rapid GDP Growth

Shift towards market based approach

All round Infrastructure improvements – roads, telecom, ports

Financial Sector Reforms

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Indian Economy – Recent Trends

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• Economic recovery during 2010-11 with GDP growth estimated at 8.6% as compared to 8% during 2009-10. (CSO Estimates)

• Industrial growth recorded at 8% during 2010-11, while the Services sector grew at 9.6% during the period.

• Accentuated inflationary pressures in the economy mainly attributed to spurt in food prices during the year mainly due to supply side bottlenecks.

• Phased exodus from expansionary monetary policy towards monetary tightening so as to curb mounting inflationary pressures.

• Trade Deficit declined to US$ 88.96 billion during 2010-11 (April-Jan) from a peak of US$ 118.4 billion during 2008-09.

• Foreign Exchange Reserves stood at US$299.2 billion (January, 2011) as compared to US$ 252 billion (March, 2009)

GDP Growth Trend

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Source: Macro-economic & Monetary Developments,

RBI, 2010-11

HOUSING CONDITIONS

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Housing Stock

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• As per Census 2001, total housing stock in India was about 249 million units.

• 29% of the housing stock was in the urban areas and 71% in rural areas.

• Growing population and sustained urbanization have kept the available housing stock under increasing pressure.

• Sustained improvement in the quality of housing stock in the country between 1961-2001.

• A majority of the households live in permanent (pucca) or semi-permanent (semi-katcha) houses in rural as well as urban areas.

Housing Shortage & Slum Population

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• Housing shortage in India has witnessed an increasing trend over the years.

• The housing shortage in urban areas at the beginning of 2007 is about 24.71 million units and is likely to go up to 26.53 million units by 2012.

• In rural areas – housing shortage is estimated to reach 47.43 million units by 2012.

• 99% of the shortage in urban areas pertains to Economically Weaker Sections and Lower Income Groups.

• As per the Report of the Committee on Slum Statistics/Census, GOI, the slum population in 2001 was 75.26 million (26.31% of the urban population).

• One out of every four persons reside in slums in India’s cities and towns with the proportion of population living in slums and squatter settlements significantly higher in metropolitan cities.

• Slum population is expected to increase to 93 million by 2011 and 104.6 million by 2017.

Stakeholders in Housing

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Stakeholders Extent of Participation Focus Areas

Government – Central and State Level

Formulating and implementing policies and programs particularly for the EWS/LIG sections

Monitoring and evaluation exercises

Policy formulation and implementation of special programs for EWS/LIG sections

Supportive and conducive environment

Public Sector Housing Boards, Development Authorities, Public Agencies, Municipal Corporations etc.

Provision of land and basic infrastructure

Focus on EWS/LIG/MIG housing

Private Sector DevelopersBuildersConstruction Companies

Integrated Township Development particularly in metro and semi-metro areas.Focus on MIG/HIG segments

Individuals/SHGs/NGOs Self Builders – sub-contractingCooperative societies

Individual housesCooperative societiesSelf Help Groups

Housing: An agent for Financial Inclusion

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• Housing has direct impact on employment and income generation - An engine for Equitable and Balanced Economic Growth.

• Impact in terms of Improved habitat, Living, Educational, Social and Cultural standards leading to Human Capital Formation and thereby the future Income capabilities.

• Improved productivity leads to enhanced Income, Savings and Repayment potential on sustainable lines.

• Sustainable Human Settlement: An Effective tool towards “Financial Inclusion” with Financial Stability and Social Inclusion

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Housing Demographics

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HOUSING FINANCE IN INDIA

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Evolution & Growth

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• Predominantly comprised of informal sources of credit till the late eighties as there were very few takers of housing loans and no support for formalized institutions.

• In 1988 NHB was established as the promoter, financer and regulator of housing finance institutions in India.

• Since 1988, number of HFCs have increased in the public as well as the private sector.

• Commercial Banks, which were initially reluctant to lend, are now into disbursement of housing loans in a major way.

• Low interest rates, rising disposable income, stable property prices and fiscal incentives have made housing finance an attractive proposition.

• Increase in market share of Banks from 31% in 2000-01 to over 60% in 2008-09; the growth is mainly attributed to their large network, access to low cost deposits and equity support from Govt. which have helped in offering home loans at lower rates of interest.

• Share of HFCs decreased from 69% in 2000-01 to about 38% in 2008-09.

Key Trends

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• Sustained growth in recent years with a CAGR of around 21% during 2003-11 supported by a prudent regulatory regime and robust performance of Banks and specialized HFCs.

• Prudent and well-regulated lending practices have helped keep the NPA’s comfortably low.

• Market segmentation based on borrower profile has helped diversify risk.

• Significant demand for housing as affordability and accessibility are major challenges for the low and moderate income population. Resultant shift in market focus towards Affordable Housing.

• Estimated outstanding housing loan as a percentage of GDP has risen from 3.4% in 2001 to 7.25% in 2007. However, continues to be abysmally low compared to other countries.

Mortgage Debt as a % of GDP

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54% 57%

40%

34%

17%

7.25% 7%

0%

10%

20%

30%

40%

50%

60%

USA U.K. EuropeanUnion

Malaysia Thailand India China

Demand-Driven Growth

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• Changing borrower demographic profile

• Increasing demand for housing backed by rising disposable income and growing social aspirations for early home ownership.

• Fiscal benefits associated with interest payment on home loans.

• Aggressive and innovative lending practices implemented by PLIs in recent years

Housing Loan Housing Loan Outstanding Outstanding

(Rs./billion)

$ 104 billion

$ 122 billion

$ 71 billion

$ 59 billion

$ 44 billion

$ 32 billion

$ 22 billion

$ 17 billion$ 13 billion

$ 82 billion

$ 90 billion

*Provisional 18

Housing Finance Housing Finance DisbursementsDisbursements

Disbursals (INR in Disbursals (INR in billionbillion)

*Provisional

$ 5 billion

$ 9 billion

$ 12 billion

$ 17 billion

$ 19 billion

$ 23 billion

$ 27 billion

$ 29 billion

$ 34 billion

$ 40 billion

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Institutional Hierarchy

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Kind of Institutions Regulator Target Groups

All India Level Financial Institutions such as NHB, NABARD

Reserve Bank of India Refinancing Institutions catering to all segments of the society with particular focus on EWS/LIG and rural sections.

Banks including Regional Rural Banks, State Co-operative Banks and Foreign Banks

Reserve Bank of India All segments of society in both urban and rural areas. Initiated major steps towards linking the informal sector with the formal sector..

Housing Finance Companies National Housing Bank Dedicated institutions which lend towards housing. Catering largely to the middle and higher income groups particularly in the urban and semi urban areas, they have limited presence and reach in rural areas.

Cooperative sector Institutions

State Cooperative Acts Deep presence across the country, particularly in the rural areas, however, has had limited success in lending for housing due to poor financials.

Microfinance Institutions/NGOs/SHGs

Unregulated(Act to be introduced for

regulating the same)

Recent foray into housing particularly in respect of home improvement finance for the poor and lower income segments.

Governance

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• Housing Finance Companies promoted and regulated by National Housing Bank.

• Banks regulated and supervised by the Reserve Bank of India.

• Cooperative sector institutions adopt norms as defined under the Registrar of Co-operatives Societies registered in each State. Resultantly, such institutions can have varied norms depending upon the State laws etc.

• MFIs/NGOs/SHGs are currently unregulated and are guided and governed by their respective norms/principles etc.

• Regulatory bodies under their respective acts also frame guidelines and directions on areas such as lending norms, prudential norms, provisioning requirements, asset quality and capital, asset liability management, customer guidelines, fair practice codes, anti-money laundering requirements of capital, etc.

Products Offered/Terms & Conditions

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Parameter Banks HFCs Co-operative Sector/MFIs/NGOs

Housing Product offered

Wide range of products ranging from new home loans, home improvement loans, land purchase loans etc.

Products include home improvement loans, homeextension loan, short term bridgeloans, land purchase loan, homeequity etc

Limited products mainly catering to

home improvement loans being

integrated with livelihood finance.

Average LTV Ratio

Maximum 80% Maximum 80% Maximum 75%

Average IIR Maximum 40% Maximum 40% Maximum 35%

Loan Size Average size INR 0.4-0.5 million

Average size INR 0.6 million Usually up to INR 0.05 million

Loan Tenure Maximum 20 years Maximum 15 years Maximum 5 years

Interest rates Linked to Base Rates and are usually competitive on account of low borrowing cost. Both floating and fixed being offered.

Slightly higher than Banks however more competitive than CSOs/MFIs.Both floating and fixed rates are offered.

Usually higher than other institutions on account of higher costs.Only fixed rates of interest offered.

Security/Collateral

Mortgage of the property financed

Mortgage of the property financed

Mortgage of the property financed/Group Guarantee

etc

Service charges Maximum 2% Maximum 2% Not available

Prepayment Charges

Maximum 2% Maximum 2% Not insisted upon

Issues & Challenges

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• The buoyant growth in the housing and housing finance markets in recent years, has not been inclusive.

• A majority of India’s population, especially the poor and slum dwellers, not only lack access to housing and housing finance in the formal sector.

• In India, about 23.1% of the urban population reside in slums where the quality of housing stock and basic amenities like potable water, sanitation, sewerage etc. is extremely poor.

• Around 99% of the housing shortage of 24.7 million at the beginning of the 11th plan period pertains to the EWS and LIG segments.

• Initiatives have been taken by the Govt. and formal and informal institutions, particularly targeting the neglected segments like the EWS/LIG’s etc.

INITIATIVES & POLICY MEASURES

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Policies & Programs

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National Urban Housing and Habitat Policy, 2007 Implemented by Ministry of Housing and Urban Poverty

Alleviation Promote & enhance the role of Government as facilitator

and regulator Focus on habitat with regional planning approach Earmark land for EWS/LIG groups Focus on governments social housing schemes so as to

increase affordable housing Jawaharlal Nehru Urban Renewal Program

Basic Services to the Urban Poor Integrated Housing and Slum Development

Indira Awas Yojana Cash subsidy scheme for rural BPL families

• Impetus on Affordable Housing Interest Subsidy Scheme for Housing the Urban Poor 1% Interest Subvention Scheme

Initiatives by Formal Sector

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• Commercial Banks have successfully linked with SHG’s for on-lending to their customers.

• HFCs have been making continuous and sustained efforts to reach the low/moderate income groups particularly the economically weaker sections.

• State Housing Boards and Development Authorities have strived to play a proactive role in the supply of housing particularly to the EWS and LIG segments

Informal Sector – Scope & Initiatives

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• The role of microfinance institutions , non-governmental organizations and community based organizations has remained limited due to challenges such as funding, land title , loan repayments and products.

• Offering full scale financial services to the poor is critical to the promotion of financial inclusion.

• In India, the EWS and poor sections depend to a large extent, on informal sources of credit including personal moneylenders, pawnbrokers, NGO’s and community based MFI’s.

• Many semi-formal providers of housing finance such as SEWA, SPARC etc. co-operate with or build CBO’s to carry out their community work.

ROLE OF NHB

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Genesis and Objective

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Absence of specialized institutions catering to housing credit needs of the population.

Need for an apex level institution for developing a market-oriented housing finance system in the country.

NHB – Established in 1988 by an Act of Parliament as the Apex Institution for the Housing Finance System.

Wholly owned by the Reserve Bank of India.

“ To operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial

and other support incidental to such institutions and for matters connected therewith …”

“ … shall act on business principles with due regard to public interest.”

(National Housing Bank Act, 1987)

Ideology

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Vision

“Promoting Inclusive expansion with stabilityin the housing finance market”

Mission

“To harness and promote the market potentials to serve the housing needs of all segments of the

population with focus on low and moderate income housing”

Aims and Objectives

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To promote a sound, healthy, viable and efficient housing finance system to cater to all segments of the population.

To support housing finance institutions through financing and capacity building measures.

To catalyze flow of funds to all regions and incomes groups.

To develop market infrastructure for sound growth of housing finance system.

To ensure expansion and stability in the housing finance market.

Integrated Approach

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• Mutually synergic roles Regulation & Supervision Financing Promotion & Development Aimed at confidence-building among Savers, Borrowers,

Lenders and Investors, Policy Makers and International Stakeholders.

• Multi-pronged Simultaneous intervention on both the demand (financial)

and supply (real) side of the housing sector.

• Multi- InstitutionsFinancing a range of institutions for extensive outreach.

• Multiple Products

Vision: “Promoting inclusive expansion with stability in housing finance market”

Role of the National Housing Bank

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Augmenting Resources for the housing sector

Leveraging the liquidity

Support specialized institutions to serve as dedicated centers for housing credit

Fill the credit gaps suffered by low income households by strengthening linkages between formal and informal sector.

Strengthening linkages between formal and informal sector institutions - Financing MFIs

Summing Up

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• The growth in the Indian Housing Finance Sector in recent years has not been inclusive. To ensure success in lending to all segments of the society, particularly the low income households, a broad range of action on many fronts are required.

• SCBs being the largest institutional platform, have to play a vital role in adopting new approaches and introducing customized and flexible mortgage products in active partnership with State & Local Governments and other nonprofit organizations.

• The schemes evolved must not only provide an affordable housing loan product but also a complete habitat-based solution.

• The Govt. has to forge partnerships with various strategic partners in the public as well as the private sectors to ensure the vision of “Affordable Housing for All” is realized.

THANK YOU