20063800-housing-finance

INTRODUCTION

The basic needs of mankind have been the food, shelter and

clothing. Keeping this in mind, lots of efforts have been made to provide

food through the poverty alleviation programmes since substantial

portion of the Indian population are still in the clutches of object poverty.

The poverty alleviation programmes both credit oriented and non-credit

oriented ones described in earlier Units would have thrown light on the

efforts taken in providing food for the poor which is primary among the

basic needs. However, it is an irony of life that a large section of the

population in India and other developing countries do not afford these

needs both in their quantitative as well as qualitative dimensions. In fact,

non-affordability of these facilities is a sine quo non of poverty. This Unit

highlights the need for housing and the efforts taken by the Government

in housing.

The responsibility to provide housing finance largely rested with

the Government of India till the mid-eighties. The setting up of the

National Housing Bank (NHB), a fully owned subsidiary of the Reserve

Bank of India (RBI) in 1988, as the apex institution, marked the

beginning of the emergence of housing finance as a fund-based financial

service in the country. It has grown in volume and depth with the entry of

a number of specialised financial institutions / companies in the public,

private and joint sectors, although it is at an early stage of development.

The implementation of housing finance policies presupposes

efficient institutional arrangements. Although there were a large number

of agencies providing direct finance to individuals for house construction,

there was no well established finance system till the mid-eighties in as

much as it had not been integrated with the main financial system of the

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

country. The setting-up of the National Housing Bank (NHB), a fully

owned subsidiary of the Reserve Bank of India, as an apex institution was

the culmination of the fulfillment of a long overdue need of the housing

finance industry in India. The system has also been characterised by the

emergence of several specialised financial institutions that have

considerably strengthened the organisation of the housing finance system

in the country. At present, there are about 320 housing finance

companies, of which 26 are registered with the NHB and which account

for 98 per cent of the total housing loan disbursed.

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CENTRAL AND STATE GOVERNMENTS

Till the mid-eighties, the responsibility to provide housing finance

rested, by and large, with the government. The Central and state

Governments indirectly support the housing building effort. The Central

Government has introduced, from time to time, various social housing

schemes. The role of the Central Government visa-versa these schemes is

confined to laying down broad principles, providing necessary advice and

rendering financial assistance in the form of loans and subsidies to the

state governments and union territories. The Central Government has set

up the Housing and Urban Development Corporation (HUDCO) to

finance and undertake housing and urban development programmes,

development of land for satellite towns, besides setting up of a building

materials industry.

The Central Government provides equity support to the HUDCO

and guarantees the bonds issued by it Apart from this, both Central and

state Governments provide house building advances to their employees.

While the Central Government formulates housing schemes, the State

Governments are the actual implementing agencies.

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HOUSING PATTERN IN INDIA

It is a known fact that year after year more people are added to the

category of homeless as the population is on the increasing trend. The

weaker sections that constitute this group are handicapped in getting

shelter at affordable cost. Housing, as such, in any country depends or the

following factors:

- Demand factor - Growth in population, formation of households,

development of new townships, and increase in income.

- Supply factor - Availability of institutional credit, cost of construction,

availability of land and building materials, and fiscal and legal

provisions affecting building construction.

Though both the type of factors play their role equally, it is to be

understood that everyone wants to have a house constructed either

through own money or borrowed funds. But the growing population

makes it impossible to construct houses and satisfy this need for all the

people in desired proportions.

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The National Sample Survey 44th Round compiled data on the types of

dwellings in India. Some aspects of these data are presented in Table 1.

Table 1. Types of Dwellings in India

Types Percentage Distribution

Rural % Urban %

a. Independent houses 82.6 52.4

b. Flats 2.7 17.2

c. Chawls 3.0 10.8

d. Others 11.7 90.6

Total 100 100

From the above table it could be seen that the rural areas have more

independent houses compared to urban centers. However, there has been

some tendency to go in for flats also, trend of which is more perceptible in

urban areas. This pattern is due to the fact that while some space is

available for construction of small dwellings in rural areas, it is a critical

constraining factor in urban areas. This necessitates the urban house

aspirants to go in for flats. The NSS further observed that in rural India,

39.4% houses are kutcha houses, 34% semi-pucca and 27% pucca ones

while in urban areas the percentages for the above categories of houses

being 11, 18 and 71 respectively. This also shows that an urbanite is

interested to have a pucca house while a ruralite is prepared to live in a

house in whatsoever may be the type of construction. Again, the socio-

economic conditions of the ruralites do not permit them to go in for a big

permanent dwelling. Yet another observation made by the NSS indicates

that in the past three decades, there has been an increase in the pucca

houses in the rural areas on one hand and the kutcha houses are on a

declining trend in urban centers on the other.

Some trends and progress in housing in India over years as reported

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by the NSS are presents in Table 2:

Year No of house holds No of occupied addition

during residential houses

Decades - house

holdsR U T R U T R U T

1951 53.6 12.3 65.9 54.1 10.3 64.4 - - -

1961 68.9 15.6 84.5 65.1 13.8 78.9 1

5.0

3.3 18.6

1971 79.6 20.9 100.5 72.7 18.1 90.8 1

0.7

5.3 16.0

1981 94.1 29.3 123.4 88.7 28.0 116.7 1

4.5

8.4 22.9

R – Rural, U – Urban, T - Total

The conclusions that emerge from the table are as follows:

# On an average, about 90% of the total households have occupied

residential houses throughout the past.

# within this overall pattern the percentage of occupied residential

houses is more in rural areas as compared to urban centers.

# The number of households added during decades had shown

fluctuations in rural areas but there was a steady increase in urban centers.

The addition to the number of households was more during the

decade of 1971-81.

While indicating the relative growth of housing stock in the inter-

censor period, the NSS report analysed whether the growth in the housing

stock is commensurate with the growth in the population. The Table 3

seeks to provide an answer to the above issue.

Inter – census period Annual growth of the dwelling per 1000

increase in the population

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Rural Urban Total

1951-61 3.4 5.2 3.3

1961-71 1.9 4.5 2.4

1971-81 3.4 7.9 4.0

• The growth of the dwellings per 1000 increase in population was

slow during the period 1961-71. It needs to be noted that during this

period, the total population growth was more than yester years. The

percentage increase in population during this decade was 24.8%

which was, in fact, the highest during the period under reference.

• The rate of addition of dwellings in relation to the population in rural

areas was lower as compared with the urban centers.

• The decade of 1971 -81, witnessed a large increase in the annual

growth of dwellings per - 1000 population and like the earlier

patterns, the increase was more in urban centers. It is interesting to

mention here that during this period, the increase in urban

population was as high as 50% which was almost three times of

18% experienced in rural area

• All these facts lead to the conclusion that the growth rate in housing

did not keep pace with the rate of growth in population in the entire

country. The extent of shortfall was more pronounced in rural areas.

The ultimate result has been the housing shortage in both rural and

urban areas. In 1971, the Banking Commission, headed by Shri. Bhabatosh

Datta submitted its report on the Non-Banking Financial Intermediaries.

This report, besides other aspects of banking systems, dealt at length with

the present and prospective housing finance and the need for a specialised

institution for housing. The Commission made the following

observations:

a. The house construction, as indicated earlier, depends on the demand

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and supply factors with the demand side including the population,

income etc. and the supply side covering institutions, policy etc.

The following are the three indicators for housing shortage:

The first indicator was provided by the proportion of pucca

dwellings to the total housing stock. According to an estimate, this

proportion in India was only 23% as compared to 96-99% in some of the

Western countries like USA, Canada and Japan. An idea of the over-

crowding in dwellings could be obtained from the fact that about 77% of

the total dwellings are of 1-2 room size, whereas in developed countries

only about 5% of the houses are in this category (Palvia, 1969).

The second indicator for the housing shortage was the

comparison between the number of dwellings and the number of

households. At the end of 1967, the report indicated that there were an

estimated 6.2 million urban pucca housing units for an estimated 18

million urban households. Thus there was only one pucca house for

every three households in urban areas. In rural areas, for an estimated

81.6 million households, the number of pucca housing units was only 12

million. The estimated rate of living constructions in India was around

two dwellings per 1000 population per annum as against 10 per 1000

population as recommended by the United Nations in developing

countries during the development decade of 1961-71.

The third indicator, according to this report, was the investment

in housing as proportion of the total investment in the public and

private sectors. The percentage of total investments allocated to the

housing sector had declined from 34% in the First Plan to 12% in Fourth

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Plan.

The Table 4 giving the housing scenario will further indicate the

housing shortage in the past and the prospective housing shortage by

2001.

Housing shortage in India

Rural Urban Total1

981

1991 2

001

1981 1991 2

001

1981 1991 2001

a. No. of house

holds

94.1 113.5 137 29.3 45 69 123.

4

158.

4

206

b

.

Households

adjusted for

congestion

94.1 113.5 137 30.7 47.1

7

72.2 124.

8

160.

6

209

c. Housing

stock

88.7 106.

2

128 28 42.6 64.8 116.7 148.

8

193

d

.

Of which

acceptable

77.8 92.9 112 23.7 36.7 56.7 101.

5

129.

6

168

e. Housing gap 16.3 20.6 25.5 7 10.4 15.5 23.3 31 41

The above table leads to the following inferences:

•A sizable number of people are without any house and every year more

and more people continue to be added to the category of homeless.

•The housing gap goes on increasing over years. This was indicated

earlier by the fact that the annual growth rate in number of dwellings for

every 1000 increase in population was very less leading to housing

shortage.

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•The housing gap was prominent in rural areas as compared to urban

centers. This might, be due to the reason that in rural areas still people are

inclined to go in for independent: houses whereas there is a trend towards

flats in urban centers. Besides the needs and likings of the rural people

regarding separate houses, it should also be remembered that the flat

system of houses which needs a multi-storied structure requires a special

infrastructure which is just not available in rural areas at present.

•The houses of acceptable conditions were almost 86% of the housing

stock in both the rural and urban areas.

•Each of the households had on average 5-6 members both in rural as

well as urban areas.

•The report also indicated that more number of persons lives in a room and

lack of privacy connotes the need to augment housing supply.

An analysis was made in various studies on the cause for the

housing shortage in developing countries like India. The conclusion

arrived at by studies has been that developing countries are giving low

priority to housing and this is again due to factors like large capital

resources required, high capital-output ratio and top priority given to

sectors like the agriculture, industries, power, communication etc. as

compared to housing. All these go to show that there is a need to give

priority to housing since it is the basic need for the mankind.

The growing rate of population needs more investment in the

housing sector. The importance of finance as a factor in house construction

may also be examined from the point of view of individual who wants to

own a house. Houses can not usually be built out of the current income of

the individual. It is estimated that in India, 4.9 years' income of an

unskilled labour is require to get 30 sq.m. House. It is also indicated that

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in an economy like ours, about 75% of house-buying involves loan finance

and over 5C% of all new and old houses are encumbered with debt. The

rate of interest charged also plays a role in housing finance. All these go

to indicate the need for housing finance and assistance for a common

Indian. How far our planning has taken care of the housing sector over

years is given in the succeeding paragraphs.

HOUSING AND FIVE YEAR PLANS

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Even though housing sector got a relatively low priority in the

allocation of public outlay in the five year plans, the sector is not

altogether neglected. In fact, over the years, housing has been recognised

as an important element in the poverty alleviation programmes. This

section highlights the treatment given to the housing in different Five

Year Plans.

The First Five Year Plan (1950-56) aimed at enhancing the housing

stock of minimum standards over next few years. It suggested reducing

the cost of construction of houses especially with regard to material and

labour by encouraging economical, architectural and structural designs.

The First Plan gave due consideration to the role of private sector to help

solving the problem of housing shortage. Two schemes viz., Subsidised

Industrial Housing Scheme (1952) and Low Income Group Housing

Scheme (1954) were introduced during this period.

The Second Five Year Plan (1956-61) continued its emphasis on

the Subsidised Industrial Housing and Low Income Group Housing

Schemes. Seven specific schemes were introduced during this period.

They are as follows:

• Plantation Labour Housing Scheme (1956)

• Slum Clearance and Improvement Scheme (1956)

• Village Housing Project Scheme (1957)

• Middle Income Group Housing Scheme (1959)

• Land Development and Assistance Scheme (1959)

• Rental Housing Scheme for State Government Employees (1959)

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• Jhuggee and Jhopri Removal Scheme (1960)

It should be noted that all the above mentioned schemes aimed at

improving the quality of housing for lower income category of

population.

The Third Five Year Plan (1961-66) aimed at land acquisition and

development as also an effective control on urban land. The Annual Plans

(1966-69) brought in the concept of "economically weaker sections". The

annual plans integrated this concept with the Subsidised Industrial

Housing Scheme which was in operation since the First plan. Up to 1970,

the bulk of funds were provided by the Government of India and Life

Insurance Corporation of India as loans and subsidies. The schemes of

housing have social objectives because they were meant for people

belonging to the SC/STs or to the specified classes of employees and

income groups. The extent of finance made available was usually 80% of

the cost of construction as maximum and this varied from scheme to

scheme. In case of Land Acquisition and Development Scheme, 100%

financial assistance as loan was given to Local Bodies / Urban Estate

Department.

The Fourth Five Year Plan (1969-74) emphasised the low cost

housing schemes in view of

(a) High cost of construction of the dwelling units

(b) Insufficient contribution by the private and Cooperative sectors to

meet the growing needs of houses for the poorer sections, and

(c) Deteriorating condition of older slums.

It was in April 1970, that the Housing and Urban Development

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Corporation (HUDCO) was started. Various State Governments started

Housing Boards funded through State budgetary allocation and the Slum

Clearance Schemes were initiated. The Housing Boards of the States

started issuing debentures on State Government Guarantee to which

institutions like the nationalised banks contributed. The Housing Boards are

essentially construction agencies and not funding agencies. This function

is to create and manage the housing stocks. It was during 1977, that the

Housing Development Finance Corporation (HDFC) was started for

housing finance. It was an important addition to this sector.

The Fifth Plan (1975-80) aimed at providing house sites to four

million landless labour and intensifying research on low cost housing

mainly through manufacture of low cost building materials. It decided to

enhance the financial assistance to the State Housing Board* and Local

Bodies. A scheme for improving the existing housing was also introduced

during the Fifth Plan. In 1974, the Minimum Needs Programme and in

1975, the Twenty Point Economic Programme were launched which

emphasised providing housing for the poor and housing construct through

wage employment.

The Sixth Plan (1980-85) attempted to use the public sector

resources in such a way that they yield optimum results and provide

maximum possible houses to absolutely shelter less people.

The Seventh Plan (1985-90) estimated the housing shortage at 24.7

million units. It called for establishment of proper and diversified

institutional credit for housing and construction to cater to the needs of

housing development. It also stressed the need to strengthen the HUDCO

and creation of new Cooperative Building Societies. The plan period added

a feather in the cap of housing by the establishment of National Housing

Bank in 1988. This gave a new direction to the decentralised housing

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finance system by promoting housing finance institutions and facilitating

proper cooperation amongst various agencies relating to housing.

The data in Table 5 indicate the relative share of housing in the

investment in the economy during the Plan periods.

Plans Total Investment in

the plan (Rs. Crores )

Investment in

Housing

(Rs. Crores)

Percentage of

Housing to total

InvestmentFirst 3340 1150 34.2

Second 6750 1300 19.2

Third 10,400 1550 14.9

Fourth 22,635 2800 12.4

Fifth 47,561 4436 9.3

Sixth 1,56,000 19,491 12.5

Seventh 3,49,148 31,438 9.0

The conclusion that could be drawn from the above table is:

- The First Plan gave top priority to housing next to food since majority

of the population was poor.

- There have been fluctuations in percentage of housing investments to

the total investment in economy during different periods.

- There have been a decline in the investment in housing during VII Plan

which was disproportionate to the total investment in economy.

The Eighth Plan (1992-97) covered the strategy of creating an

enabling environment for housing activity by eliminating various

constraints and providing direct assistance to the disadvantaged groups

consisting of the rural and urban poor, self employed, physically

handicapped, widows and single women. It was during the 8th Plan, that

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the Shelter Up gradation Scheme under the Prime Minister's Integrated

Poverty Eradication Programme was initiated with a loan component of

Rs. 10000/- to be arranged from the HUDCO/any other financial

institution including Commercial Banks, subject to the condition that the

borrower holds the title to the land. This has a subsidy component too.

The 8th Plan outlay on housing has been Rs.20000 - 25000 cores. During

1995-96, the HUDCO sanctioned Rs.1967 cores as loans and actually

released Rs. 1229.5 cores. About 90% was spent on dwellings for the

weaker sections and low income groups.

The Ninth Plan Approach paper indicates that housing will be

given priority as one of the seven principles of development. The analysis

of the above facts on housing and investments during the plan periods

indicates the need for more funds for housing. Therefore, the role of

institutional finance for housing has assumed vital importance and many

agencies are drawn into the fold of housing finance.

NATIONAL HOUSING POLICY

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According to an estimate made by the Sub group of Urban

Ministry on the "Magnitude of Housing Problem", about 64.4 million new

houses will be needed by 2001. The total funding to create so many units

is estimated to be around Rs 2,35,000 crores based on the price index of

1985. This being a herculean task, it needs the cooperation of Centre and

the States and the private sector to increase the availability of houses at

affordable rates. For this purpose, a comprehensive policy on housing

was felt essential. Hence the Comprehensive National Housing Policy

prepared by the Ministry of Urban Development was placed before the

Parliament in 1988 and was discussed subsequently in 1990 at the Home

Ministers Conference. The objectives of the National Housing Policy

(NHP) are as follows:

•To assist all people and in particular the homeless and inadequately

housed and vulnerable sections, to secure for themselves affordable

shelter through access to developed land, building materials, finance and

technology;

•To create an enabling environment for housing activity by eliminating

constraints and by developing an efficient system for delivery of housing

inputs;

•To expand infrastructural facilities in rural and urban areas in order to

improve the environment of human settlement, increase the access of

poorer households to basic services and to increase the supply of

developed land for housing;

•To undertake, within the overall context of policies for poverty

alleviation and employment, steps for improving the housing

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situation of the poorest sections and vulnerable groups by direct

initiative and financial support of the state;

•To help mobilise resources and facilitate expansion of investment

in housing in order to meet the needs of housing construction and

up-gradation and augmentation of infrastructure, and

• To promote a more equal distribution of land and houses in

urban and rural areas and to curb speculation in land and housing in

consonance with the macro-economic policies for efficient and

equitable growth.

To achieve these objectives, the Government should take

initiatives for directing the activities of public agencies towards

increasing the supply of serviced land for various groups and

essential purposes directing towards poorer sections. The weakness of

the NHP has been that it did not set any time bound targets owing to

resources constraints.

In order to achieve the NHP, the following steps were taken.

• Setting up of an apex institution - National Housing Bank (NHB)

as a subsidiary of Reserve Bank of India under the NHB Act,

1987.

• Floating of specialised housing finance subsidiaries by the

Scheduled Commercial. Banks.

• Large flow of credit through the Housing and Urban Development

Corporation (HUDCO).

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• Emergence of LIC as an important contributor of housing

Finance.

• Financing for housing through Government Schemes.

Involving the private sector in housing finance

For the past decade, the Government of India attempted to

strengthen the housing sector by introducing various loan schemes for the

rural and urban population. The first attempt in this regard was the

National Housing Policy (NHP), which was introduced in 1988.

However, the growing realization of the insufficiency of public funds to

meet the demands for financial schemes in the housing sector is evident

in the aims of the 2007 policy. Innovative financial instruments that will

spur the flow of funds from the private sector is one of the focal points of

this policy. Until now, most financial companies were reluctant to lend to

low-income groups because the small amounts do not justify the costs.

Profit is the overarching goal, and these institutions try to efficient in the

mobilisation, disbursement and recovery of funds. Finance companies are

able to mobilize funds from shareholders and investors by offering

competitive rates of interests. These funds will be disbursed to those who

are deemed eligible, after assessment of application forms and personal

interviews. There are difficulties in assessing credit risks and a lack of

clarity on recoveries, land title and possession. These problems have led

to a scenario where the popular perception was that the requirements of

low-income housing were incompatible with formal housing finance.

Whereas today, in low-cost housing, the government is the sole financier,

the Ministry of Urban Development is exploring a new financial

architecture that will make loans for low-cost houses affordable for both

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the lenders and borrowers. Despite the frenetic pace of growth in housing

finance over the past 5 years in India, mortgage penetration as a

percentage of GDP continues to remain low, at 4 percent. This means that

there are considerable growth opportunities in housing finance. This is

further corroborated by the fact that despite the impressive rate of growth

in the housing finance sector in the recent period, financing through the

organised sector continues to account for only 25 percent of the total

housing investment in India.

The lending criteria set out by formal financiers are more appropriate to

the life style of the middle-level income group. To obtain a housing loan,

a combination of conventional (assets that can be mortgaged) and non-

conventional collateral such as peer pressure is required. Lack of

mortgage insurance is also a reason why the private formal sector

bypasses the low-income segment.

DEVELOPMENT OF HOUSING FINANCE IN INDIA

The early development of housing finance in India is a result of the

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housing policies implemented by the government. In the first Five Year

Plan (1951-56), housing was introduced into the policy framework at the

national level. Affordability was emphasized, and government support

through subsidies and loans were deemed necessary. This plan in fact

became the benchmark for subsequent Five Year Plans for the next two

decades.

The second plan (1956-61) strengthened the schemes of the first

plan by expanding coverage, and gave rise to State Housing Boards that

still remain in existence. Despite these efforts, by the fourth plan (1969-

74), the government was faced with the dual problem of a rapidly

growing population and a slow growing housing stock. For the first time,

the government decided to encourage private and co-operative housing

schemes by providing financial assistance. However, the majority of

activity still remained within the public sector. The government also

recognized the need to provide housing finance to low-income groups

and thus set up the Housing and Urban Development Corporation

(HUDCO) in 1970. HUDCOs mandate was to provide such groups with

loans below peak interest rates and with longer repayment periods.

It was during the fifth plan (1974-79) that as a completely private

sector initiative, in 1977, the first retail housing finance company,

Housing Development Finance Corporation (HDFC) was set up, seeking

to provide financial assistance to individuals, groups, co-operative

societies and companies for staff housing.

During the Sixth Plan period, other housing finance companies also

entered the market. Towards the mid and late 1980s a few housing

finance companies were set up either as private limited companies (e.g.

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Dewan Housing Finance Limited) or as a joint venture with partnership

from the state government (e.g. Gujarat Rural Housing Finance

Corporation) or bank sponsored housing finance companies (e.g. Can Fin

Homes, SBI Home Finance, PNB Housing Finance). Even state owned

insurance companies like the Life Insurance Corporation and the General

Insurance Corporation of India set up housing finance arms. The seventh

plan period saw the UN Global Shelter Strategy, of which India

subscribed to, being passed in the UN General Assembly in 1988. This

gave the impetus to the drafting of a National Housing Policy for the first

time. Another major reform that took place at the time was the founding

of the National Housing Bank (NHB) in 1988. The NHB was founded to

promote and regulate housing finance companies and to mobilize

additional resources for housing.

The National Housing Bank (NHB) was established in July 1988

under an act of Parliament viz. the National Housing Bank Act, 1987. The

act empowers the National Housing Bank to first, issue directions to

housing finance institutions to ensure their growth on sound lines.

Secondly, make loans and advances or render financial assistance to

scheduled banks and housing finance institutions or to any such authority

established by or under any central, state or provincial act and engaged in

slum improvement. It may also formulate schemes for the purpose of

mobilisation of resources and extension of credit for housing.

Public housing finance corporations have schemes that encourage

beneficiaries to invest their own money in their dwellings, but do not

offer opportunities for beneficiaries to deposit savings. The beneficiaries

are granted larger housing loans, than what may be available from

informal sources. To make housing loans affordable for the urban poor,

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direct subsidies are given for construction cost (e.g. the VAMBAY

scheme) and/or indirect subsidies on interest rates are provided. The latter

could be in the form of the interest differential subsidy amounts being

remitted directly in the HFC loan accounts of the borrowers, so as to

bring down their loan liability. These loans are characterised by

conventional mortgage lending, have a longer-term tenor and repayments

are in equal monthly installments (EMIs).

The eighth plan recommended that reforms be made on both, the

financial and legal aspects to allow the mortgage market to develop

further. It laid special emphasis on government incentives to enhance the

flow of credit to the housing sector through housing finance institutions.

Both the ninth (1997-2002) and tenth (2003-2007) plan recommended

further reforms to enable the government to play its role as a facilitator

and encourage the development of the mortgage market. Emphasis was

particularly laid on market friendly reforms for improving both taxes and

infrastructure to help increase investments into housing. The ninth and

tenth five-year plans are also characterised by the aggressive entry of

commercial banks into housing finance.

HOUSING FINANCE: INSTITUTIONS, SCHEMES &

SUPPORT

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COMMERCIAL BANKS

The trend of commercial banks lending to individuals for housing

emerged in the wake of the report of the working group on the Role of

Banking System in Providing Finance for Housing Schemes. (R C Shah

Working Group, the RBI, 1978). They have been lending to the housing

sector based on annual credit allocations made by the RBI. In terms of the

RBI guidelines, scheduled commercial banks are required to allocate 1.5

per cent of their incremental deposits for disbursing as housing finance

every year. Of this allocation, 20 per cent has to be by way of direct

housing loans of which again at least half, that is, 10 per cent of the

allocation has to be in rural and semi-urban areas. Another 30 per cent

could be for indirect lending by way of term loans to housing finance

institutions (HFIs), housing finance companies (HFCs) and public

housing agencies for the acquisition and development of land and to

private builders for construction. The balance 50 per cent is for

subscription to the HUDCO, and the NHB bonds.

HOUSING FINANCE THROUGH COMMERCIAL BANKS

The Reserve Bank of India has brought the Commercial Banks too

under the fold of housing finance which did not exist prior to 1979. The

basic question that needs to be debated is as to why the commercial banks

are interested in extending loans for the housing facilities particularly to

the poorer sections of the society. In general it is believed that the

residential house is a non-productive asset. It does not generate any

income by itself so as to make the loan self liquidating. The question is to

be understood in the larger developmental context. The investment

decision and the activity pattern of any family are influenced to a large

extent by the location and type of residential accommodation. The

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banker's relationship with the prospective borrowers for a productive

activity is of long term nature and the banker has to communicate with

the borrower before the loan disbursement and more so during the post

loan period. The settled borrower, therefore, is a lesser risk for the banker.

The reasonable housing facility is one of the facilitating factors for the

borrower to take up and maintain a productive enterprise. The housing

finance for the poor people, therefore, is capable of creating a better

production environment. All these factors have induced the policy makers

in India to include the housing loan for the poor in the priority sector

lending.

The RBI in its priority sector lending guidelines clearly stated that

1.5% of the Bank's incremental deposit as at the end of the previous

financial year should be earmarked for housing and ensures that the bank

finance for housing flows to the needy segments of the society. The

finance will be in terms of both direct and indirect mode. Thirty per cent

of the total allocation for housing should be by way of direct finance and

of which half should be extended as direct housing loans in rural and

semi urban areas. Further 30% will be utilized by way of term loans to

housing finance companies, housing boards and other public housing

agencies. The balance 40% of the allocation for housing should be

provided in the form of subscription to guaranteed bonds and debentures

of the National Housing Bank and HUDCO only.

The "housing finance'' by the banks is granted for the following types of

construction:

•Residential houses to be constructed by public housing agencies like the

25


HUDCO, Housing Boards, local bodies, individuals, Cooperative

Societies or employers, priority being given for economically weaker

sections, low and middle income groups.

•Educational, health, social, cultural other institutions/centers which are

part of housing project and which are necessary for the development of

settlements or townships.

•Shopping Complexes, markets and such other centers catering to the day-

to-day needs of the residents of housing colonies and forming part of a

housing project.

•Construction meant for improving the condition of the slum areas for

which credit is extended directly to the slum dwellers on the guarantee of

the Government or indirectly to them through the State Government.

•To bodies constituted for undertaking repairs and for individuals either

singly or collectively, in buildings owned or occupied backed by security

or guarantee.

There is no ceiling on housing finance for housing construction.

Banks may consider additional finance as per their terms and conditions

too. Housing finance is extended to persons affected by natural calamities

for house repairs / constructions also. For regular housing finance, the

repayment period is fixed at not exceeding 15 years (including a

moratorium, at the option of the beneficiary, till the completion of

construction or 18 months from the disbursement of the loan, whichever

is earlier) with graduated installments.

Some of Government sponsored schemes like the Differential Rate

of Interest have the component for housing for the weaker sections. In

the DRI scheme, housing finance can be given to an individuals

belonging to SC/ST up to Rs.5000/- which is besides the normal

26


assistance. In schemes like the PIUPEP, Shelter Up-gradation Scheme

with a loan component of Rs. 10000/- is arranged through HUDCO/any

other financial institution and a subsidy of Rs.2500/- per unit was given.

Under the Nehru Rozgar Yojana, the Government provides a subsidy of

Rs.1000/- per household for up-gradation of housing of urban poor along

with a loan from the HUDCO. In the Jawahar Rozgar Yojana, a non-credit

linked programme, less than one of its components viz., Indira Awaas

Yojana, emphasis has been laid on housing finance. During 1996-97, a

sum of Rs.1194 crores was allotted under the Indira Awaas Yojana. The

Indira Awaas Yojana provides houses for the poverty sticken people and

those belonging to SC/ST and freed bonded labour in rural areas. During

1995-96, about 8.64 lakh houses were constructed and till October, 1996,

2.82 lakh houses were constructed and 3, 56 lakh houses were under

progress against which Rs.424.78 crores was spent.

The banks extend loans to the housing finance institutions as

indirect advance. These are term loans given taking into consideration the

institution's debt-equity ratio, track record, recovery performance and

other relevant factors. The term loans are given to HUDCO, HDFC and

Housing Finance Companies promoted/sponsored by the commercial

banks. Banks extend loans to the State Housing Boards and other public

agencies for housing also. In view of the need to increase the availability

of land and housing sites for increasing the housing stock, the banks are

extending finance to the public agencies for acquits ion and development

of land, provided, that it is a part of the complete project for

infrastructural development.

A major development in the area of housing in recent years has

been the entry of the commercial banks by establishing subsidiaries either

on their own or in collaboration with other financial institutions including

27


HUDCO and HDFC which have done pioneering work in the fie»d of

housing finance. The public sector banks like the State Bank of India,

Canara Bank, Punjab National Bank, Indian Bank, Bank of Baroda and

Central Bank of India from the public sector and Vysya Bank limited

from the private side have started separate subsidiaries for housing

finance. The amount of public deposits which the housing companies can

raise under the Housing Companies (NHB) Directions, 1989, is equal to

10 times of their Net Owned Funds. With the emergence of housing

subsidiaries together with the apex institution- National Housing Bank, the

housing finance scenario has taken a new turn.

HOUSING FINANCE THROUGH OTHER INSTITUTIONS

Some specific Organizations are extending housing finance as

described below:

LIFE INSURANCE CORPORATION OF INDIA

The LIC of India is the oldest organizations connected with

housing finance. It gives long term credit for housing. It makes available

every year certain amount to Central Government for financing certain

specified housing schemes of various State Governments. The

Government of India makes allocation to different states out of the said

amount. The LIC also advances to the Apex Cooperative Housing

Finance Societies on guarantee from the State Governments and those

societies in turn make advance to the Primary Cooperative Housing

Finance Societies for house construction, in addition, the LIC has "Own

Your House" scheme for its policy holders against mortgage of

immovable property. It also finances for approved parties for construction

of housing/commercial/office complexes, to public limited companies for

the purchase of houses for their employees. The LIC spent Rs.1570

28


crores during Seventh Plan towards housing.

HOUSING AND URBAN DEVELOPMENT CORPORATION

(HUDCO)

Established as a Government of India undertaking in 1970, the

chief objective of HUDCO is to finance housing and urban development

particularly for the poorer sections of the society. It provides finance for

the schemes formed by the State Housing Boards, State Finance Societies

in the urban and rural areas and Improvement Trusts. HUDCO's loan

schemes are on soft terms, the repayment period extending up to 22 years

and interest rate ranging from 4% to 15% per annum.

HOUSING REFINANCE

The National Housing Bank extends refinance to the Commercial

Banks on the housing finance extended by them. The rate of interest

charged by the NHB to the banks on the refinance is linked to the purpose

of loan and the geographic regions. For instance, the refinance rate o

interest for acquisition or construction of new units in rural areas ranges

from 10 to 15% and 11. to 15 per cent in urban areas. The corresponding

rate for the loans for the up-gradation in run areas is 10% while it is 11 to

13.5 per cent in urban areas. However, except in up-gradation i rural areas

where there is a ceiling for charging interest from bank to borrower, for

others, the banks are free to fix the rates of interest. The refinance provided

by the NHB up to March, 1995 was of the order of Rs.2254.04 crores.

Considering the Golden Jubilee of Indian Independence, a Golden

Jubilee Rural He Refinance Scheme has been introduced by the NHB. The

objective of the scheme is to provide refinance to the institutions that

finance for housing in rural areas which would facilitate the ruralites for

access to housing credit to build modest new house or to improve or add to

29


the old dwelling. This scheme is applicable to Scheduled Commercial

Banks, State Cooperative Bank, Regional Rural Banks, State Cooperative

Agriculture and Rural Development Banks, Cooperative Housing Finance

Societies and Housing Finance Companies. The NHB will be extending

100% refinance under the scheme. The aggregate amount of assistance

from the NHB will in no case exceed the aggregate amount of

outstanding housing loans from the primary lending institutions to the

borrowers (excluding overdues).

Scope

Refinance would be provided only in respect of direct lending to

individuals/groups of individuals (formal or informal, including

cooperative housing societies). Overdue loans/bought over loans from

any other HFCs banks, loans given for acquisition of old housing

units/second sale would, however, not be eligible for refinance under the

scheme.

Eligibility Criteria

(i) Only such HFCs that conform to the 'Guidelines for Extending

Refinance Support to Housing Finance Companies', as amended

from time to time, and which have been approved by the NHB

(discussed earlier) for the purposes of refinance support are

eligible to avail refinance from the NHB,

(ii) Overdue housing loans of the HFCs, including those covered under

the NHB refinance, should not exceed 10 per cent of the total

housing demand (including overdues) for the preceding twelve

months. The level of overdues should be assessed, taking into

account only the amounts overdue for over three months,

30


(iii) The percentage of net non-performing assets should not exceed

risk weighted assets by more that 5 per cent.

Period of Refinance

Refinance from NHB to HFCs would be repayable during a period

not exceed 15 years, based on the weighted average period of housing

loans (WAPOL) in respect of which refinance is claimed.

Security for Refinance

Refinance from the NHB would be secured by charge on the book

debts of the HFC. Additional security such as charge on immovable

properties/movable properties, guarantee of promoters, additional

margins and so on may be stipulated at the NHB's discretion. If at any

time the NHB is of the opinion that the security provided by the HFC has

become inadequate to cover the outstanding refinance, it may advise the

HFC to provide and furnish to the satisfaction of the NHB, such

additional security as may be acceptable to the NHB to cover such

deficiency. The NHB may get the loan accounts and associated

documents verified, either by its own officers or a firm of chartered

accounts appointed by it for the purpose, with respect to the loans

included in a particular refinance application. It may, at its discretion,

recover the cost of such verification from the concerned HFC.

Procedure

Application for Annual Refinance Limit

The refinance operations of the NHB are centralised at New Delhi.

Refinance, in a particular year, is released on the basis of the refinance

limit sanctioned to the HFC for the year (July to June). Any HFC

approved for the purpose of refinance should submit to the NHB its

31


annual projections for sanction of refinance limit, in the prescribed annual

credit review format, together

Other Terms and Conditions

Separate Books Separate and proper books of accounts, registers and

so on should be maintained branch-wise by the HFC with respect to

housing loans for which refinance has been extended by the NHB and

these should be kept up-to-date. The list of loan accounts along with

necessary details, in terms of the NHB's refinance, should be readily

available with the respective branches.

Life Span of Dwelling Units

Since the repayment period should not exceed the life span of the

house/unit financed out of the housing loan, it should be ensured that the

construction is pucca/semi-pucca, with a life span of not less than 30

years.

Post-disbursal Discipline

There should be proper post-disbursement supervision and follow-

up of housing loans to ensure proper end use of funds as also timely and

regular repayment of the loans. It should conduct its business with due

diligence and efficiency and have due regard to these principles in the

conduct of its business.

Maintenance of Recovery

Performance Continuance of refinance facility under the scheme

would be subject to maintenance of satisfactory a recovery performance

by the HFC, from the beneficiaries.

Recall of Refinance

32


The NHB reserves the right to recall the refinance in the event of

diversion of the relative funds for purposes other than housing or for

suppression of any material information by the borrowing bank.

NHB's Right to Modify the Scheme

The NHB may modify the clauses of the Refinance Scheme in

respect of all HFCs, or in respect of any one HFC, depending on its

performance. Such modifications are being brought out in the form of

circulars/letters, from time to time, and have become part of the scheme.

NHB's Right to Call for Information

The NHB may call for any information or returns from the HFC

availing of refinance, in respect of housing loans and refinance

sanctioned under this scheme. It would also have the right to collect such

information directly from the HFC's constituents, its lenders, auditors,

credit rating agencies and so on.

Insisting on Deposits from Borrowers

The HFCs availing of refinance from the NHB should not insist

that borrowers place part of the housing loans disbursed to them in

deposit accounts or retain the entire proceeds disbursed as deposits or

insist on deposits as a precondition for sanctioning housing loans.

Borrowings from Institutions other than the NHB

In case the HFC borrows funds from banks/financial institutions

other than the NHB, it should inform the NHB about the same, giving

particulars about the security offered for such borrowings and obtain a 'no

objection' from the NHB. They are required to follow the necessary

procedures and furnish details of their borrowings.

33


Compliance with HFCs (NHB) Directions, Guidelines on Prudential

Norms

The HFC (NHB) Directions, 2001, as amended from time to time,

prudential norms for income recognition, accounting standards,

provisioning for bad and doubtful debts, capital adequacy and

concentration of credit/

investments, 2001 and guidelines for refinance support to HFCs, as

amended from time to time, should be deemed to be a part of this

refinance scheme.

NATIONAL HOUSING BANK (NHB)

34


The National Housing Bank (NHB) was established on 9th July

1988 under an Act of the Parliament viz. the National Housing Bank

Act, 1987 to function as a principal agency to promote Housing

Finance Institutions and to provide financial and other support to such

institutions. The Act, inter alia, empowers NHB to:

• Issue directions to housing finance institutions to ensure their

growth on sound lines

• Make loans and advances and render any other form of

financial assistance to scheduled banks and housing finance

institutions or to any authority established by or under any Central,

State or Provincial Act and engaged in slum improvement and

• Formulate schemes for the purpose of mobilisation of

resources and extension of credit for housing

Management

The general superintendence, direction and management of the

affairs and business of the.NHB are vested in its Board of Directors,

which exercises all powers and executes all acts and things on its behalf.

Subject to the provisions of the NHB Act, the Board, while discharging

its functions, has to act on business principles, with due regard to public

interest. In general, (a) the Chairman, if he is a whole-time Director or if

he is holding offices both as a Chairman and a Managing Director

(CMD) or (b) the MD, if the Chairman is not whole-time director or is

absent, can also exercise these powers of the Board. The MD has to

follow, in the discharge of his powers and functions, all directions given

by the Chairman. In the discharge of its functions, the NHB is to be

guided by the directions given in writing by the Government in

consultation with the RBI, or by the RBI in matters of policy involving

public interest.

35


The Board of Directors of the NHB consists of

(i) a Chairman and a Managing Director (CMD),

(ii) two Directors from amongst experts in the field of housing,

architecture, engineering, sociology, finance, law, management

and corporate planning, or in any other field, special knowledge of

which is considered useful to the NHB,

(iii) two Directors who are persons with experience in the working of

institutions involved in providing finance for housing or engaged

in housing development or have experience in the working of

financial institutions/banks,

(iv) two Directors elected by shareholders other than the

RBI/Government/other institutions owned/controlled by

Government,

(v) two Directors from out of the RBI Directors,

(vi) three Directors from amongst Central Government officials and

(vii) Two Directors from amongst State Governments' officials. The

CMD an other Directors, excepting the RBI's Directors and those

elected by the shareholders, are appointed by the Government in

consultation with the RBI. The RBI nominates its Directors on the

NHB.

BUSINESS ACTIVITIES

NHB, as the Apex level financial institution for the housing sector

in the country, performs the following roles:

(a) Promotion and Development:

36


NHB operates as a multifunctional Development Finance

Institution (DFI) for the housing sector. The Bank's policies are directed

towards promotion and development of housing finance institutions.

NHB has framed guidelines for HFCs with a view to promoting their

development on sound and healthy lines. The guidelines are reviewed and

modified from time to time in the light of developments in the financial

and housing sectors. All HFCs registered with the National Housing Bank

u/s 29A of the National Housing Bank Act, 1987 and inter alia having

minimum net owned funds of Rs.10.0 crores are eligible for refinance

support. It has also contributed to the equity capital of five HFCs. NHB

has a dedicated Training Division which organises regular training

programmes in areas relating to housing and housing finance for

development of management capabilities of officials working in the

sector. NHB's promotional endeavors are also directed towards capacity

building for the housing finance system besides enlarging the credit

absorption capacity.

(b) Regulation and Supervision:

NHB exercises regulatory and supervisory authority over the HFCs

in the matter of acceptance of deposits by them pursuant to the powers

vested in it under the Act. As per the amendments to certain provisions of

the Act, which came into effect from June 12, 2000, NHB is vested with

powers to grant Certificate of Registration to companies for

commencing/carrying on the business of a housing finance institution.

Besides, NHB regulates the deposit acceptance activities in accordance

with the Housing Finance Companies (NHB) Directions, 2001, amended

from time to time, in the matter of ceiling on borrowings (including

37


public deposits, rate of interest, period, liquid assets, etc). NHB has also

issued Directions on prudential norms in regard to capital adequacy, asset

classification, concentration of credit, income recognition, provisioning

for bad and doubtful debts etc. NHB supervises the working of HFCs

through on-site inspection and off-site surveillance.

(c) Financing:

NHB raises resources for the housing sector towards increasing

new housing stock and provides refinance to a large set of retail lending

institutions. These include scheduled commercial banks, scheduled state

cooperative banks, scheduled urban cooperative banks, specialised

housing finance institutions, apex co-operative housing finance societies

and agriculture and rural development banks. Refinance is provided by

NHB under various schemes, which are formulated taking into account,

several aspects of the National Housing Policy, the constraints facing the

sector etc. NHB has also a window for direct lending to Public Agencies

such as, State Level Housing Boards and Area Development Authorities

for large scale integrated housing projects and slum redevelopment

projects.

NHB is also operating a special window for extending financial

assistance to the people affected by natural calamities viz. earthquake,

cyclone etc.

(d) Resources of NHB

NHB raises resources from diversified sources, both domestic and

external by issuing Bonds/ debentures, borrowing from RBI and financial

institutions/organisations etc. Under the Act, NHB is authorised to issue

38


and sell Bonds with or without the guarantee of the Central Government

for the purpose of carrying on its functions.

(e) Rural Housing:

NHB launched the "Swarna Jayanti Rural Housing Finance

Scheme" to mark the golden jubilee of India's Independence. The Scheme

seeks to provide improved access to housing loans to borrowers for

construction/acquisition/ up-gradation of a house in rural areas of the

country.

(f) Recent Initiatives

Securitisation of mortgage loans of the retail lending institutions

facilitates for channelising household savings into the housing sector is

seen as a potentially viable market oriented alternative. Support to

Mortgage backed securitisation is a major policy initiative of the

Government as manifested in its National Housing and Habitat Policy

announced in 1998. This policy emphasises NHB's lead role in mortgage-

backed securitisation and development of a secondary mortgage market

in the country. As the apex body in housing finance sector in India, NHB

has been playing a lead role in the sector in matters relating to policy

environment as also operational mechanism for the development of a

secondary mortgage market in India.

In order to resolve the twin problems of affordability and

accessibility affecting the growth of the housing finance business and the

prospect of home ownership, NHB has been entrusted with the

responsibility of launching a Mortgage Credit Guarantee Scheme for

protecting the lenders against default.

39


HFCs Promotion and Development

The principal mandate of the Bank is to promote housing finance

institutions to improve/strengthen the credit delivery network for housing

finance in the country. The Bank has played a facilitator role in this

regard instead of itself opening such dedicated housing finance

institutions. For this purpose, NHB has issued the Model Memorandum

and Articles of Association. NHB has also issued guidelines for

participating in the equity of housing finance companies. All housing

finance companies registered with NHB u/s 29A of the National Housing

Bank Act, 1987 and scheduled commercial/co-operative banks are

eligible for refinance support subject to terms and conditions as laid down

under the respective refinance schemes.

As a part of its promotional role NHB has also formulated a scheme for

guaranteeing the bonds to be issued by the housing finance companies.

Considering the need for trained personnel for the sector NHB has

designed and conducted various training programmes.

CASE STUDY

Of inflation and interest rates

Unless the government penalises speculators and tightens further the

regulations on futures trading, buoyancy in prices is likely to persist.

40


The Headquarters of the Reserve Bank of India in Mumbai.

With inflation as measured by the wholesale price index inching

towards 7 per cent and that measured by the consumer price indices

ruling even higher, the government and the Reserve Bank of India have

decided to sit up and take note. Exports of some essential commodities

have been restrained and the prices of petrol and diesel reduced. The cash

reserve ratio is to be hiked in stages to impound the equivalent of

Rs.14,000 crores of loanable funds. None of these steps has as yet been

effective in curbing inflation. Even if they impact prices with a lag, they

are likely to be neutralised by speculation, facilitated by excess liquidity

and a liberalised futures market. Unless the government penalises

speculators and tightens further the regulations on futures trading,

buoyancy in prices is likely to persist.

An obvious consequence of inflation that is of serious concern is its

impact on the real earnings of the common man, especially since the price

increase is sharper in the case of essential commodities. But a less

discussed fallout could be on interest rates as banks are forced to raise

deposit rates to neutralise the effects of inflation and keep depositors

happy.

41


Since interest rates have already been rising, the latest increase

could take them close to levels that prevailed during the much-maligned,

pre-reform years of `financial repression'. This would in turn necessitate

an increase in lending rates, which would have adverse consequences for

growth.

One of the successes of financial sector reform, according to the

government and RBI, is the reduction in nominal interest rates when

compared with the pre-reform period. These low rates have not only

shored up corporate profits but also encouraged the debt-financed

spending spree, which is an important driver of India's high growth.

Retail lending and housing finance have been growing at a pace that has

forced RBI to warn banks repeatedly against overexposure in these

markets. The danger is that a quick and sharp rise in interest rates may

not just correct such overexposure but dampen debt-financed consumer

spending and housing construction and spoil the party for a government

that prides itself on having moved the country onto a higher growth

trajectory. This effect on demand and growth would be more severe if

rising rates precipitate widespread default of floating rate debt payments.

The evidence shows that even before inflation raised its head

interest rates had been on the rise. Part of the reason was that banks were

being forced to raise deposit rates to attract depositors and were pushed

into raising lending rates to cover the higher cost of funds. Deposit rates

have to be hiked because savers now earn better returns on instruments

such as mutual funds and unit-linked insurance. Those better returns are

drawing savings away from traditional investments such as deposits at a

time when banks are finding new opportunities to lend in the housing and

consumer finance market. To cater to this demand, banks were competing

with one another and with other financial businesses to offer better

42


deposit rates since they were confident of finding people willing to

borrow even when lending rates were raised to cover the higher cost of

funds.

This has created a situation where banks have a special interest in

this year's Budget. Normally, so long as the Budget is `growth-oriented' in

the sense that it is likely to keep growth going or spur it on, banks should

be happy. A booming economy should spell booming business for the

banks. But at the moment banks are finding it difficult to keep their

traditional business going without raising interest rates to mobilise more

deposits. Since this would require raising lending rates as well, it may

prove contrary. Higher interest rates in the retail and housing finance

markets may curb credit demand. Banks today get a significant share of

their income from other areas into which they are diversifying. But

lending based on deposits is what banks still know to do best.

They would, therefore, like a situation where they can continue

with business as usual without raising rates. But for that the differences in

rates of return in different financial markets must not widen.

Unfortunately, the government has been privileging the equity market at

the expense of banks. By relaxing regulations and norms that apply to

both domestic and foreign investors in the stock market, it has

encouraged a flow of funds into that market, which has resulted in a

prolonged boom not warranted by fundamentals. With returns on stock

market investments placed at close to 50 per cent, the security of bank

deposits appears to be a small recompense for the much lower returns

they offer.

In addition, the government has been spurring the market by

encouraging new investors such as those in charge of government pension

43


funds to move into the market and privileging financial savings in forms

other than bank deposits through its tax policies. Tax benefits given on

equity investments, such as the abolition of the long-term capital gains

tax on investments in the stock market and the decision not to tax

dividends in the hands of the recipient, have all discouraged savings in

bank deposits and encouraged investments in other kinds of financial

assets. This is why there are demands being made that the coming Budget

must `level the playing field' for the banks. That would save them from

pushing interest rates to higher levels.

This pressure on the banks notwithstanding, the recent hike in rates

would not have happened if RBI were not also keen on higher rates. The

central bank's call for moving up interest rates is driven by a completely

different motivation: its concern with overheating in the economy,

reflected in rising inflation.

Though RBI had chosen to focus more attention on growth and

exchange rate management during the years of moderate inflation, in the

final analysis, like all conservative central banks, it is inflation that

constitutes its primary concern.

INFLATION CONTROL

RBI has only two levers to control inflation: curbing credit

expansion and raising interest rates. Curbing credit growth is a problem

because RBI has recently been buying up dollars flowing into the

economy in order to prevent an appreciation of the rupee. And in recent

44


months that inflow of foreign exchange has been unrelenting. The rupees

RBI outlays to buy up these dollars are contributing to an increase in

liquidity and money supply.

To limit further credit creation on the basis of this increase in

liquidity, it has recently chosen to raise the cash reserve ratio to be

maintained by banks and expects to pre-empt around Rs.14,000 crores of

loanable funds. But this only increases the desire of banks to increase

their deposit intake so as to maintain credit growth, contributing further

to their tendency to hike interest rates.

This has made the task of the central bank easier when it comes to

the second of the levers it has at hand to curb inflation: raising interest

rates. Not surprisingly what the central bank has done is to signal its

desire to keep interest rates rising by raising the Repo Rate to 7.50 per

cent from 7.25 per cent. This has created a rift between the central bank

and the Finance Ministry. The latter, enamoured by the high growth the

economy is recording, is against raising interest rates since that could

slow down growth. It has, in fact, tried to pressure public sector banks not

to raise interest rates on housing loans. But faced with little option in

protecting their profits, banks are unwilling to oblige. Many public sector

banks have indeed hiked their prime lending and housing finance rates.

The Finance Ministry cannot make the banks pay the cost of its

honeymoon with the stock market.

This raises the question as to which is better for the economy and

the common man: higher or lower interest rates. In principle, higher

interest rates benefit the rentier classes at the expense of those involved in

productive activity.

45


Higher rates, therefore, are not good for a developing economy. In

post-reform India, this feature of high interest rates is worsened by the

fact that growth has come to depend heavily on debt. Higher interest rates

are adverse for entrepreneurs not only because as investors they are hit by

the higher cost of capital, they could also be hit by the fact that expensive

credit can curtail the growth in demand for their products.

This is a fact that is forgotten when low interest rates are

principally seen as reducing the return on deposits by individuals in the

banking system. These individuals are also income earners who could

benefit from a growing economy, unless they are retired senior citizens

depending on interest rates from fixed deposits for their income. This

should influence the Finance Minister not just to focus on inflation but

actually to consider the case of the banks and level the playing field

between the deposit market and the market for other kinds of financial

assets so that they can keep deposit and lending rates down. As is the case

currently, the concerns of senior citizens can be dealt with separately.

But such a move would go contrary to the Finance Ministry's

recent tendency to adopt measures aimed at sustaining the irrational

boom in the stock market. It would require a change in the mindset that

believes that a rising Sensex is a more potent indicator of the success of

reform than low interest rates. If not, the growth rates it proudly reports

could be the casualty.

FORMS

APPLICATION FOR CERTIFICATE OF REGISTRATION (COR) OF HOUSING FINANCE COMPANIES

By Registered Post

From: [Name and address of the Registered Office in BLOCK LETTERS)

46


To The General Manager,Department of Regulation & Supervision, National Housing Bank, India Habitat Centre, Core 5 A, Lodhi Road, NEW DELHI -110 003.

Dear Sir,

THE NATIONAL HOUSING BANK ACT, 1987 - APPLICATION FOR CERTIFICATE OF REGISTRATION TO COMMENCE THE BUSINESS OF A HOUSING FINANCE INSTITUTION

We make this application in terms of Section 29A of the captioned Act for issue of a Certificate of Registration (COR). The required documents/information as per the instructions are enclosed.

2. We are desirous of commencing the business of a housing finance company. We, therefore, request you to issue the necessary Certificate of Registration under Section 29A of the said Act to enable our company to commence the business of a housing finance institution.

3. We declare that to the best of our knowledge and belief the information furnished in the statements enclosed is true, correct and complete.

Yours faithfully,

[Name and Designation]

Common Seal of the Company

Date:Place:

Encl: 1. Certified copy of the Memorandum & Articles of Association

2. Particulars of identification- as Annexure-13. Particulars of Chairman/MD/Directors/CEO etc.- as Annexure-24. Financials for the last three years- as Annexure-3 [if applicable]5. Board Resolution specifically approving the submission of the application and its

content- as Annexure-36. Return on Prudential Norms for the latest period as Annexure-5 [if applicable]

INSTRUCTIONS FOR FILLING UP THE APPLICATION

GENERAL

1. Application should be made in the prescribed form only. Wherever space is insufficient, information may be furnished in separate sheet/s, duly indicating the cross reference.

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2. Application along with enclosures duly completed should be submitted in duplicate, to The General Manager, Department of regulation & Supervision, National Housing Bank, Core 5A, India Habitat Centre, Lodhi Road, New Delhi-110 003.

3. A photo-copy of the application as submitted may be retained with the company for its reference and record.

4. Application should be signed by any of the following officials authorised by the Board of Directors of the company in this behalf (viz., Chairman, Managing Director, Chief Executive Officer, Company Secretary, A whole time Director).

5. Application should bear the common seal of the company.6. An acknowledgment for having submitted the application should be obtained.7. The particulars/information to be furnished in Annexure-IV of the application should

be based on figures as disclosed in the latest annual audited balance-sheet of the company.

ANNEXURE-I

1. S. No. (8) In case the company has changed its name earlier, a list of all the earlier names of the company and date/s of change together with the names of Chief Executive Officer and Chairman at the time of change of name should be furnished.

2. S.No.8 (a) in Annexure I is applicable to those companies which was incorporated with the main object clause other than housing finance and subsequently switched over to housing finance as a principal business and still valid as on the date of submission of the application form.

3. S. No. 8 (b) If the company has ever defaulted in timely repayment of deposit and payment of interest, a list of all such pending cases and the action taken in respect of each case should be furnished. The company should also submit a list containing the details of all the court cases pending against it, including those pending in consumer forum, pertaining to its deposit acceptance activities.

ANNEXURE-IV

La test return relating to prudential norms, as certified by the Auditors to be enclosed. The format should be as given in the Housing Finance Companies (NHB) Directions, 2001 (Format available on Bank's website: nhb.org.in

ANNEXURE-1

PARTICULARS OF IDENTIFICATION (To be filled in BLOCK LETTERS)

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Company Code------------- (To be filled by NHB)

1. Name of the Company

2. Date of incorporation:

3. Date of commencement of business -(if applicable)

4. State in which the company is registered

5. Full Address of the registered Office with Phone Number (with STD code), Fax Number and Email address

6. Full Address of Corporate/Administrative Office with Phone Number (with STD code), Fax Number and Email address

7. Status: (strike out whichever is not applicable)

(a) Public Limited Company

(b) Private Limited Company

(c) Deemed public

(d) Government company

(e) Other (to be specified)

8. Whether the company is transacting the principal business of housing finance- (if applicable)

Yes/No

If yes-

(a) the date of commencement of such business

(b) Whether the company has defaulted in the repayment of principal and/or payment of interest of deposits

Yes/No

9. No. of branches/ offices(To be furnished State-wise)

10. Number of employees (Organisation chart Head Office/Branch to be furnished separately)

11. Name and address of Statutory Auditors with Membership No, Telephone number, Mobile Number and Email address

12. Name(s) & Address(es) of bankers with Telephone/Fax Numbers

13. Particulars of Bank A/c: Type of account/ credit facility enjoyed

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14. Names and addresses of the non-banking financial institutions with which the company has links in any manner

15. Name and Designation of CEO/Authorised official with Telephone, Mobile, Fax numbers and Email Address

Common Seal of the Company

Signature of the Authorised Official: Name: Designation:

Date: Place:

ANNEXURE-2

INFORMATION ABOUT THE PROMOTERS, CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY. (SEPARATE FORM FOR EACH FUNCTIONARY)

Name of the Company: __________________

IPERSONAL DETAILS OF PROMOTERS, CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY

a. Full name

b. Date of Birth

c. Educational Qualifications

d. Relevant Background and Experience

e. Permanent Address

f. Present Address

g. E-mail Address / Telephone Number

h. (a) Permanent Account Number under the Income Tax Act and name and address of Income Tax Circle

(b) Director Identification Number (DIN*)

* It is an unique Identification Number allotted to an individual who is an existing director of a company or intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006)

i. Relevant knowledge and experience

j. Any other information relevant to Directorship of the HFC

II RELEVANT RELATIONSHIPS OF DIRECTOR

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a. List of Relatives if any who are connected with the HFC (Refer Section 6 and Schedule 1A of the Companies Act, 1956)

b. List of entities if any in which he/she is considered as being interested (Refer Section 299(3)(a) and Section 300 of the Companies Act, 1956)

c. List of entities in which he/she is considered as holding *substantial interest.

d. Name of HFC in which he/she is or has been a member of the board (giving details of period during which such office was held)

e. Fund and non-fund facilities, if any, presently availed of by him/her and/or by entities listed in II (b) and (c) above from the HFC.

f. Cases, if any, where the director or entities listed in II (b) and (c) above are in default or have been in default in the last five years in respect of credit facilities obtained from the HFC or any other HFC.

III RECORDS OF PROFESSIONAL ACHIEVEMENTS

a. Professional achievements relevant

IVPROCEEDINGS, IF ANY, AGAINST THE PROMOTERS, CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY

a. If the director is a member of a professional association/body, details of disciplinary action, if any, pending or commenced or resulting in conviction in the past against him/her or whether he/she has been banned from entry of at any profession/ occupation at any time.

b. Whether associated as Promoter, Chairman, MD, Director with any HFC, NBFC including a Residuary Non- Banking Financial Company which has been prohibited from ccepting deposits/prosecuted by RBI/NHB

If yes, the name/s of the company/ies

c. Details of prosecution, if any, pending or commenced or resulting in conviction in the past against the director and/or against any of the entities listed in II (b) and (c) above for violation of economic laws and regulations

d. Details of criminal prosecution, if any, pending or commenced or resulting in conviction in the last five years against the director

e. Whether the director attracts any of the disqualifications envisaged under Section 274 of the Company's Act 1956?

f.

Has the director or any of the entities at II (b) and (c) above been subject to any investigation at the instance of Government department or agency?

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g. Has the director at any time been found guilty of violation of rules/regulations/ legislative requirements by customs/ excise /income tax/foreign exchange /other revenue authorities, if so give particulars

h. Whether the director at any time come to the adverse notice of a regulator such as SEBI, IRDA, DCA.

V

ANY OTHER EXPLANATION / INFORMATION IN REGARD TO ITEMS I TO III AND OTHER INFORMATION CONSIDERED RELEVANT FOR JUDGING FIT AND PROPER

UNDERTAKING:

I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the NHB fully informed, as soon as possible, of all events which take place subsequent to the information provided above.

Place: Signature of Authorised Signatory

Designation:

Date

*‘Substantial interest' means holding of beneficial interest by an individual or his/her spouse or minor child, whether singly or taken together in shares of a company/capital of a firm, the amount paid up on which exceeds 10% of the paid up capital of the company or total capital subscribed by all the partners of a partnership firm.

ANNEXURE-3

Name of the Company: __________________________________

SUMMARY OF FINANCIAL POSITION AND OTHER INFORMATION

Amount-Rs lakhs

S. No A. FINANCIAL POSITION 31/03/ 31/03/ 31/03/

1 Paid up Capital

2 Reserves and Surplus

3Net Owned Fund [as per return on Prudential Norms]

4 Secured Loans

5 Unsecured Loans

(i) Public deposits

(ii) Other deposits/borrowings

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(iii) Aggregate Deposits

6 Loan Funds [4+5(i)+(ii)]

7 Total Funds Employed(3+6)

Towards :

8 Housing Loans[outstanding and % of total assets]

9 Other Loans

10 Fixed Assets

11 Investments

(i) Govt. guaranteed Bonds

(ii) Quoted shares

(iii) Un-quoted shares

12 Current Assets, Loans & Advances

13 LESS : Current Liabilities & Provisions

14 Net Current Assets(12-13)

15 TOTAL

B. WORKING RESULTS

16 Income

17 Expenditure

18 Profit Before Tax(16-17)

19 Provision for Tax

20 Profit After Tax(18-19)

21 (a) Amount transferred to Reserve Fund

(b) Amount available for appropriation

C. OTHER INFORMATION

22 Dividend (%)

23 Earning Per Share

24 Price-Earning Ratio

25 Housing Loans actually disbursed

26 Percentage of over-dues (3 months and above)

27 Admin. Cost-% to outstanding loans

28 IMPORTANT RATIOS:

a] Liquidity Ratio :

Current Ratio

b] Debt Equity Ratio:

Loan Funds to Owned Fund

I) Interest Coverage Ratio [times][PBIT/Interest]

(ii) Return on Equity(PAT*100/Interest)

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(iii) Return on Total Assets[PAT*100/Total Assets]

d] Capital Adequacy Ratio (%)

29 Non-performing assets (Amt. and % to total assets)

30 Asset quality:

(a) Standard

(b) Sub-standard

(c) Doubtful

(d) Loss assets

31 Income not recognised

32 Provision made for NPAs

33 Liquid assets maintained and shortfall, if any:

(i) April-June

(ii) July-September

(iii) October-December

(iv) January-March

34 Position of submission of returns (date):

(a) Annual Return

(b) Annual Report/Audited Balance Sheet

(c) Auditors' Certificate

(d) Advertisement or statement in lieu of advertisement

(e) Half yearly return on prudential norms:

(i) April-September

(ii) October-March

(f) Quarterly return on liquid assets:

(i) April-June

(ii) July-September

(iii) October-December

(iv) January-March

35 Credit rating and validity date

Notes:

i. Position of rectification of deficiencies outstanding, if any, pointed out by NHB [Item-wise position] to be given in a separate sheet.

ii. Annual reports along with audited balance sheet and profit and loss account for the three years should be enclosed.

iii. Present shareholding pattern of the company to be furnished separately.

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SIGNATURE OF THE AUTHORISED SIGNATORY DESIGNATION: Date:

CONCLUSION

The past studies have indicated that any point of time there has

been housing shortage in India and it grows at an alarming proportion to

the population is increasing year after year, lots of efforts are being made

to provide housing finance to the poor who represent the majority of

those facing housing problems .the NHP was the first efforts in this

direction .besides that ,several other organizations like the LIC of India,

HUDCO, HDFC are also involved to a greater extention to housing

finance. All those efforts, it is hoped would reduce the housing shortage

in India to a greater extend.

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BIBLIOGRAPHY

1. Financial services

3rd edition - M. Y. Khan

2. Practical banking advances

UBS publisher’s ltd

3. Report of the study group on non-banking financial institutions and

company.

4. Report on trends and progress of housing in India.

5. The Indian financial system - vasant desai

WEBSITE VISITED

1. www.nhb.org.in

2. www.google.com

3. www.business-standard.com

4. www.unece.org

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http://www.unece.org/

http://www.google.com/

5. www.hinduonnet.com

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http://www.hinduonnet.com/

National Housing Bank

The National Housing Bank has been set up under the National Housing Bank Act of 1987, which was passed on 9th July, 1988. It is wholly owned by the Reserve bank of India and was established to encourage housing- finance institutions and provide them with financial support.

The National Housing Bank also provides several other channels of support for housing-finance institutions, by dint of the authority invested by the National Housing Bank Act. For example, the National Housing Bank can give directions to the housing finance institutions to ensure that their growth takes along appropriate tracks. Besides, the National Housing Bank also makes advances and gives loans to scheduled banks and formulates schemes that lead to the proper use of resources for housing projects.

The various objectives of the National housing bank are:

• To encourage healthy system for housing finance and which meets the needs of all the segments of the society

• To encourage housing finance institutions

• To gather resources and distribute them for housing projects

• To make affordable the credit taken for housing

The places where National housing bank have offices are:

• Head office in New Delhi

• Regional office in Hyderabad

• Regional office in Mumbai

The National Bank for Housing gives registration certification to companies so that they can carry out the business of financing houses. The National Housing Bank also has a training division, besides its lending operations. This division trains officials who are working in the housing finance and housing areas in order to improve their management capabilities. The National housing bank has helped enormously in the growth of the housing sector in India. It needs to work in close coordination with the Reserve Bank of India and the Indian government to ensure the upkeep and feasibility of housing projects in India

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National Housing Bank studies risk in the Indian housing finance marketThe National Housing Bank has undertaken a study to understand the nature of risks endemic to the Indian primary housing finance market, in particular default risk and prepayment risk. The sample size for the study of Credit Risks was over 6,50,000 housing loans sanctioned from January 1988 to October 2004.

The salient findings of the study are:Geography: Loans originated in the West have higher default risk, followed by the Southern,Northern and the Eastern Region.

Origination Period: While default risk for earlier period loans is observed to rise only during the later years of loan age, the loans during the recent period show an increase in probability of default during the earlier years of loan age.

Loan Amount: Smaller loans have higher risk of default during the later years of loan age.

Loan term: Loans with term between 5 to 15 years carry higher risk as compared to the Below 5 years and the Above 15 year loans.

Co-obligant: Presence of co-obligant significantly mitigates the risk of default except in the Northern region.

Borrower profession: Self employed borrowers carry higher risk, except in recent loans.

Loan Purpose: Loans for new dwelling units higher risk compared to the loans for old dwellings.

The Study observes a significant difference in default rate as the Loan to Cost Ratio increases, except in the largest LCR Category.

A negative relationship between interest rate difference (defined as a reduction in interest rate) and the probability of prepayment is observed, i.e., a decline in interest rate of 1% reduces the probability of prepayment by about 30-40% and the probability is observed to increase over time. (National Housing Bank)

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http://www.nhb.org.in/index.htm

20063800-housing-finance

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