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India Housing Finance

Report, 2017

TABLE OF CONTENTS

Abbreviations .......................................................................................................................................... 7

Foreword ................................................................................................................................................. 9

Executive Summary ............................................................................................................................... 11

Introduction .......................................................................................................................................... 13

Housing shortage in India ................................................................................................................. 16

Rural housing shortage ................................................................................................................. 16

Urban housing shortage ................................................................................................................ 17

Access to finance............................................................................................................................... 20

Housing Finance Market In India .......................................................................................................... 22

Growth of the housing finance market in India ................................................................................ 22

State of the market ........................................................................................................................... 23

Major participants in the housing finance market ........................................................................... 24

Performance of Banks ....................................................................................................................... 26

Sources of funding for Banks .................................................................................................... 29

Public Deposits ...................................................................................................................... 29

Borrowings (including bonds and debentures) ..................................................................... 31

Performance of HFCs ........................................................................................................................ 32

Sources of funding by HFCs ........................................................................................................... 36

Cost of financing in case of HFCs .................................................................................................. 38

Peer Analysis – Housing Finance Companies .................................................................................... 39

Comparative analysis – Performance of Top 4 HFCs .................................................................... 41

Comparative Analysis – Performance of Mid-size HFCs ............................................................... 43

Branch Analysis ............................................................................................................................. 45

Existing regulatory policy for HFCs ....................................................................................................... 46

Regulatory controls on HFCs ............................................................................................................. 46

Deposit-taking and non-deposit-taking HFCs: .............................................................................. 46

Minimum Net Owned Fund (NOF) Requirement .......................................................................... 46

Capital Adequacy .......................................................................................................................... 46

Risk Weighted Assets: on-balance sheet and off-balance items .................................................. 46

Creation of Reserve Fund .............................................................................................................. 47

Maintenance of percentage of assets ........................................................................................... 47

Prudential Norms .......................................................................................................................... 48

Income Recognition .................................................................................................................. 48

Income from investments ......................................................................................................... 48

Accounting Standards ............................................................................................................... 48

Accounting for investments ...................................................................................................... 48

Policy on Demand/ Call Loans ................................................................................................... 49

Asset Classification .................................................................................................................... 49

Provisioning Requirement......................................................................................................... 49

LTV Requirement ...................................................................................................................... 49

Maintenance of records in compliance with PMLA ...................................................................... 49

Asset-Liability Mismatch (ALM) and Risk Management Policy ..................................................... 50

Know Your Customer Norms ......................................................................................................... 50

Fair Practice Code ......................................................................................................................... 50

Disclosure requirements ............................................................................................................... 51

Disclosure in the Balance Sheet ................................................................................................ 51

Portfolio Allocation and Investments by HFCs .............................................................................. 51

Investment in real estate .......................................................................................................... 51

Acquisition of shares etc. .......................................................................................................... 52

Investment Restrictions ................................................................................................................ 53

Engagement of Brokers ................................................................................................................. 53

Lending Restrictions ...................................................................................................................... 53

Submission of Data to Credit Information Companies ................................................................. 54

Issuance of NCDs on private placement basis .............................................................................. 54

List of policies to be framed .......................................................................................................... 56

Reporting requirements by HFCs .................................................................................................. 57

Regulatory changes in the housing finance sector ............................................................................... 59

Credit Linked Subsidy Scheme .............................................................................................................. 64

Scope of CLSS .................................................................................................................................... 64

CLSS for EWS/ LIG .......................................................................................................................... 65

CLSS for MIG .................................................................................................................................. 65

CLSS Nodal Agencies ......................................................................................................................... 66

Mechanism for release of Subsidy .................................................................................................... 66

Processing Fees ................................................................................................................................. 66

Procedure of claiming subsidy under CLSS ....................................................................................... 67

Future Outlook ...................................................................................................................................... 70

LIST OF FIGURES Figure 1: Growth in the rate of urban population in India ................................................................... 18

Figure 2: Budget wise end user demand in top cities (Q4 FY 17) ......................................................... 19

Figure 3: Budget wise units launched in top 9-cities ............................................................................ 20

Figure 4: Budget wise units sold in top 9-cities .................................................................................... 20

Figure 5: Demand and supply of housing finance at various income levels ......................................... 21

Figure 6: Mortgage penetration in different countries ........................................................................ 23

Figure 7: Trend of housing credit in India ............................................................................................. 24

Figure 8: Market share of housing finance players ............................................................................... 25

Figure 9: Interest rate charged by Banks and HFCs .............................................................................. 25

Figure 10: Credit growth of housing finance players ............................................................................ 26

Figure 11: Composition of retail loans by banks ................................................................................... 27

Figure 12: Proportion of slab-wise disbursement of housing loans by PSB ......................................... 28

Figure 13: Proportion of area-wise outstanding housing loans by PSB ................................................ 29

Figure 14: Volume of public deposits accepted by SCBs (Figures in INR billion) .................................. 30

Figure 15: Volume of public deposits accepted by SCBs (Figures in INR billion) .................................. 30

Figure 16: Proportion of Public Deposits and Borrowings accepted by SCBs ....................................... 31

Figure 17: Number of housing finance companies in India .................................................................. 33

Figure 18: Disbursements made by the HFCs in the low ticket size segment Source: Report of Trend &

Progress of Housing in India, 2015; NHB website ................................................................................. 34

Figure 19: Geographical distinction – disbursement of housing loans in urban and rural areas by HFC

during 2014-15 ...................................................................................................................................... 35

Figure 20: Borrowing profile of HFCs .................................................................................................... 37

LIST OF TABLES Table 1: Estimate of housing shortage in rural areas ........................................................................... 17

Table 2: Estimate of housing shortage in rural areas ........................................................................... 18

Table 3: Various housing finance products in India .............................................................................. 22

Table 4: Volume of disbursements by banks ........................................................................................ 28

Table 5: Volume of disbursements by HFCs.......................................................................................... 33

Table 6: Proportion of funds raised by HFCs through capital market instruments .............................. 37

Table 7: Cost of borrowing for select HFCs ........................................................................................... 38

Table 8: Weighted average rate of return of select HFCs ..................................................................... 39

Table 9: Disbursement by some of the leading HFCs in India ............................................................... 40

Table 10: Peer analysis of some leading HFCs in India ......................................................................... 42

Table 11: Peer analysis of some leading HFCs in India ......................................................................... 44

Table 12: HFC Branch Analysis .............................................................................................................. 45

Table 13: Details of the CLSS for EWS/ LIG ........................................................................................... 65

Table 14: Details of the CLSS for MIG ................................................................................................... 65

Table 15: Net interest margin of some of the leading HFCs in the country ......................................... 70

ABBREVIATIONS Abbreviations Full Form

ALCO Asset Liabilty Management Committee

ALM Asset Liabilty Mismatch

ALM Asset Liabilty Mismatch

AUM Asset Under Management

CAGR Compound Annual Growth Rate

CAN Central Nodal Agencies

CASA Current Account and Savings Account

CCF Credit Conversion Factors

CDR Corporate Debt Restructuring

CDs Certificate of Deposits

CERSAI Central Registry of Securitisation Asset Reconstruction and Security Interest of India

CIC Credit Information Company

CISA Certified Information System Auditor

CKYCR Central KYC Record Registry

CLSS Credit Linked Subsidy Scheme

CRAR Capital to Risk Assets Ratio

CRR Cash Reserve Ratio

ECB External Commercial Borrowings

EMI Equated Monthly Instalments

EWS Economically Weaker Section

FIU-IND Financial Intelligence Unit India

GDP Gross Domestic Product

HFC Housing Finance Company

HIG High Income Group

HUDCO Housing and Urban Development Corporation

INR Indian Rupees

LAP Loan Against Properties

LIG Low Income Group

LTIB Long Term Infrastructure Bonds

LTV ratio Loan to Value ratio

MFI Micro Finance Institutions

MIG Middle Income Group

MoHUPA Ministry of Housing & Urban Poverty Alleviation Government of India

MOU Memorandum of Understanding

NBFC Non Banking Finance Company

NCD Non Convertible Debentures

NGO Non Governmental Organisations

NHB National Housing Bank

NIM Net Interest Margin

NOC No Objection Certificate

NOF Net Owned Funds

NPA Non-Performing Assets

ORMIS Online Reporting Management Information System

PLIs Primary Lending Institutions

PMAY Pradhan Mantri Awas Yojna

PMLA Prevention of Money Laundering Act

PSB Public Sector Bank

RERA Real Estate Regulatory Authority

RRBs Regional Rural Banks

SCB Scheduled Commercial Bank

SLR Statutory Liquidity Ratio

UT Union Territory (ies)

VCF Venture Capital Fund

FOREWORD The demand for housing is ever-increasing with the growing population and

urbanisation and access to housing finance needs to keep pace with it;

therefore, the regulators, lenders and other market participants need to be

incentivised to continue to progressively cater to the growing housing

finance needs. Enhancing access to housing finance plays a quintessential

role in meeting the growing demand for housing.

A large population of the country lives in substandard living conditions and

there is dire need for improved sanitation, basic infrastructure and

affordable housing. Deep, resilient and affordable housing finance markets

are necessary for the middle and lower income households to manage

formal housing.

The policy initiatives of the government of India to propel the access to

housing finance and to make it sustainable and viable for the financiers are

much needed. Increasing access to capital markets, long term funds,

facilitating regulations, etc. have been key efforts from the government and

the regulators. However, there is a lot of ground to cover. National Housing

Bank has also been proactively registering more and more housing finance

companies to cater to areas ignored by conventional lenders thus far. The

recent surge in housing finance companies from 33 to 89 companies1 , and

the urge to spread them geographically also gives a perspective of the

regulator to offer inclusive growth.

Several of these housing finance companies are finding ways and means of

offering financial inclusion by replacing collateral requirements from proper

land titles to pseudo collaterals, introducing qualitative measures for

assessment of low income borrowers, offering developmental housing loans

and more.

The housing finance sector has over the years has been largely driven by

banks or a handful of housing finance companies. The scenario is fast

changing. With the growing number of housing finance companies, the

challenge is not just to render financial inclusion, but to create a conducive

environment for them to sustain and scale and therefore the support from

the regulators will be ever-increasing. The path to a more resilient housing

finance market is difficult one but surely an achievable one and soon.

This Report is our attempt to capture the key developments in the housing

finance space, particularly housing finance companies (HFCs). We have been

1https://nhb.org.in/report-on-trend-progress-of-housing-in-india-june-2000/list-of-

companies/

coming out with this Report for some years now, and we are glad to see the

wide reception that Report has got in the past.

The Report makes an analytical comparison and collation of data abaout

HFCs in the country. The Report also provides a comprehensive view of the

regulations applicable to HFCs, and takes stock of the changes in the

regulatory and business scenario. We also focus on the available means of

finance available for HFCs and make some interesting comparisons about

cost of financing, rates of interest and spreads.

We are glad to present this Report and we do hope that the Report makes a

meaningful contribution to the cause of housing finance in the country.

Nidhi Bothra

Executive Vice President

Vinod Kothari Consultants P Ltd

EXECUTIVE SUMMARY Policy measures have focused on the shortage of housing, and the Pradhan

Mantri Awas Yojana is an ambitious move towards this. Housing finance is a

pre-requisite for meeting housing needs. Therefore, government policy must

focus on creating a facilitative robust environment for housing.

Housing shortage in India can be classified into urban and rural housing.

Both problems have their own dimensions. The urban housing shortage adds

to about 20 million units – therefore, the target of Housing for All is a

daunting number! The problem seems even more acute once we realise that

the population pyramid depicts yawning shortage at the lower segments.

Penetration levels of housing finance in India still remain quite low in global

comparison. The growth rate of housing finance over the last 7 years or so

results a CAGR of 18%; affordable housing finance, though a recent entrant,

promises to have a much higher CAGR.

While the housing finance market in India is served by both banks and HFCs,

but the percentage market share of HFCs is consistently growing. What is

quite an interesting change over time is that the average rates of interest

charged by banks, and by leading HFCs, have almost converged, leading to a

conclusion that HFCs have attained a cost of capital comparable to banks.

As for banks, housing finance is a very important component of retail

lending books of banks. As a major incentive for banks in affordable housing

finance, the RBI allowed banks to issue infrastructure bonds, with

substantial regulatory advantages.

Looking at the aggregate balance sheets of HFCs, it is heartening to note

that the proportion of capital market instruments in the total liability profile

of HFCs has grown impressively over the past, to about 40% of total long

term liabilities. This has also resulted into significant reduction in the cost of

financing for HFCs. Leading HFCs are able to reduce their cost of financing to

as low as 8%, even though one would notice significant differences in the

cost of financing for various companies.

An analysis of the weighted average interest rates charged by different HFCs

reveals that the net interest margin (difference between cost of funds and

weighted average lending rates) may range between 2.5% to 3%,

considering the impact of higher yielding components of the portfolios

including loans against properties.

The growth in business in year 2016-17 was obviously impacted by macro

factors including demonetisation. However, new entrants in housing finance

business continued to spread both geographically as also in terms of

customer profile.

In terms of applicable regulatory regime, one of the most important changes

affecting the housing sector has been the phased implementation of the

Real Estate Regulation Act in different states. Home lenders generally

welcome the move. On the other hand, the implementation of the

Insolvency and Bankruptcy Code has put home lenders into a precarious

situation as several developers, in the middle of the development, have filed

for insolvency, leaving home buyers, and home lenders in the lurch. These

developments are still unravelling.

Housing finance holds a strong promise, both for traditional as well as

affordable housing finance. We expect to see entry of several housing

finance companies still.

FOR FULL REPORT CONTACT US AT

Kolkata Delhi Mumbai 1006-1009, Krishna Building 224 AJC Bose Road, Kolkata-700017, T: 033-22811276/3742/7715

A-11, Hauz Khas (Opp. Vatika Medicare) New Delhi – 110 016 T: 011-4131 5340

403-406, 175 Shreyas Chambers D N Road, Fort Mumbai – 400 002 T: 022 2261 4021

Email: finserv@vinodkothari.com fintrain@vinodkothari.com