case study on housin finance

8/14/2019 Case Study on Housin Finance

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CASE STUDY ON INDIAS HOUSING FINANCE

INDUSTRY

Current Market Scenario:

Indias housing finance industry, which comprises of banks and housing finance

companies, has registered a compounded annual growth rate of over 30 per cent for

the last three years.

Banks have garnered a larger share of the business, and today they meet more than

three-fourths of the incremental housing finance requirements. Housing loan

industry started to pick up from early 90s with banks concentrating on housing

loans to salaried customers. In India still the market is dominated by salaried

customers and there is a huge potential on the self employed segment which is still

underserved. Slowly and steadily the average tenor of the person taking a loan

showed a declining trend as more and more salaried customers opted for housingloan at a very young age. Now with the property prices on the peak major banks

have made a shift from housing loans to Loan against property and are

concentrating on self employed segment too. Hence with this the country has also

witnessed a big surge in home equity, primarily known as loan against property.

The booming economy has added up a lot of avenues to self employed segment to

expand or diversify their existing business on a larger scale and to meet the fund

requirement, a lot of institutions have come up with the product called Loan

Against Property. The ratio is highly skewed toward the self employed in this

segment. The market is witnessing a dramatic shift in borrower profile: the age mix

of the borrower is tilted towards the youth, and the income levels of borrowers are

on the rise. The underwriting standards have also seen a change, and the industry

has moved towards higher loan-to-value ratios and longer tenors and higher debt

equity ratio.

However, the consistent rise in both property prices and interest rates is

increasingly threatening the affordability of housing for the Indian middle class.

The asset quality of the lenders is being questioned, especially in light of the

weaker credit profile of borrowers as a result of the change in underwritingstandards.


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Loan against property

The loan against property market in India has just started establishing itself with

major banks entering this segment around 2 years earlier. The Indian consumer is

in general averse to the idea of mortgaging his home and this explains the very lowlevel of mortgage as a percentage of GDP that is a characteristic of India.

The low penetration of mortgages as a percentage of the GDP points out to an

enormous potential in this market. The market size currently is 1000 crores per

month in India which translates to about 9000 to 10000 units per month, which is a

disturbingly small figure.

The loan against property product is mainly aimed at the self employed, especially

SMEs who would require cash for business expansion. A personal loan would be

inadequate to provide for such a borrowers needs, as typically personal loans areof the size of 10 lakhs. Personal loans prove to be costly for the customer too, since

it would be lent at rates as high as 18-20%, and would be typically lower in tenor.

This translates into higher EMIs for the borrower and hence a LAP would appeal

to him/her.

LAPs prove to be profitable from point of view of the banks and financial services

providers too. The cost of financing would be around 9-11%, while on an average

the lending rate is around 14-15%. This means an average spread of 3-4%, more


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than in home loans. With the home loan market slowing down, the loan against

property would be a point of focus for many banks.

Key Drivers to business:

1) Portfolio Quality/ Stability

2) Quality of Distribution3) Price for risk. Risk reward proposition.

4) Working as a cohesive business unit for overall growth

Industry Fundamentals:

1) Data, Data, Data!!

2) Property Price Information

3) Do we have accurate valuations at originations

4) Originator default history5) Most accurate predictor of default in India.

LTV, Debt Burden, Location etc.

Typical SEMP Non professional customer profile:

A normal customer profile is a retailer or a trader, who has been in business for the

last 3 to 5 years. Comes from business family background and owns his shop in a

business area. Majority of his transactions happens by cash and a large of money

saved is invested back into business towards expansion.

Normally deals with Local banks thru current or saving account.

Would have some small overdraft/CC facility.

Would own an ancestral property or would have bought a property in self

and spouses name.

Would have distributed his family income into various ITRs of Family

members

Would have purchased the property at low agreement value to save on the

stamp duty and have paid the balance portion in cash.

Would have a loan on the property/CC/OD from Nationalized bank/ Coop

bank.


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Risks/ Challenges on Lending these Profiles:

1) Rising property prices: Due to increase in prices of property, an

individuals intangible value on the asset has increased resulting into a

higher eligibility on LTV front. Though Collateral value being the parameter

for lending the challenge is to establish ones affordability of the loan as

well as his ability to service the EMI.

At present Purchase money mortgage market is showing signs of slow down

and slight correction on the property prices is anticipated. This in turn affects

the current portfolio which may be exposed to higher risks on the LTV front.

Hence there has to be a constant watch on the property prices in a way to

develop a proper property price index which helps us to understand the

trends as well as to identify areas for lending.

Also property price index helps as a check on the valuations done by valuersand take necessary actions on the product w.r.t locations where there is a lot

of variance in prices.

2) Self Employed segment: More and more banks are concentrating on the self

employed segment. This is an underserved market in India with a huge scope

of lending. These segments have average financials and bank statements.

Challenge in lending to these profiles is to establish their cash flows and

giving them the right loan amount. This can be established through various

surrogates.

Majority of thecustomers fall under the surrogate category due to low

declared and high cash income for most of SEMPs. Also most of the

customers have car loans, personal loans, housing loans which can act as

surrogates to establish customers cash flows.

3) Rising Debt burden: Due to Easy availability of loans, and intense

competition amongst various financial institutions, a lot of self employed

customers have raised debt for acquiring various assets like cars, houses,expansion/diversification of business, etc. This has resulted into a higher

debt burden and over leveraging.

More and more customers are now opting for consolidation of debts.

Challenge is to identify the right affordability of the customer w.r.t his cash

flows.


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4) Tenor: There is risk involved even in the higher tenor loans. The increment

in the tenor might spill over in the period when the borrower no longer has

stable cash flows. The normal industry average in case of mortgage loans is

in the range of 5 to 7 years.

5) Legal System: Still in many places in India we do not have proper legal

records. Hence there is a risk on lending as we might not be able to trace outtitle records of the property with the registrar for past 13 years.

6) Credit Bureau on a nascent stage: CIBIL has just being introduced in

India. All details of a customer are presently not available with CIBIL and

hence there is a risk of over leveraging a customer.

7) Retail property: In case of retail property there is no clear defined zones of

commercial properties. This can be mitigated by stability of the business,

Shop license etc.

8) Business Cycle:Normally average tenor of the loan is 10 years. During the

entire tenor the customer may run thru various business cycles. All

businesses will not have the same growth pattern for the entire loan tenor.

During his slump period, chances of default are high. This can be mitigated

as seen from the general market trend typically customers foreclose these

loans in a span of 7 years approx. Also by this time the company would have

built a book sufficient enough to digest such kind of risks.

9) Customer Behavior: Different customers behave differently but the samecan be classified w.r.t ticket sizes and locations.

Normally a customer with a loan of Rs 5 10 lacs in a metro cities are more

vulnerable to default as they typically tend to over leverage them selves thru

some personal loans, unorganized sector lendings etc. Also there is not

much difference between their ITR income and their regular cash flows.

These people would have been in business for about 5 years. They lack

normal banking habits. Collateral offered to the institution as mortgage is

difficult to sell. Hence these customers can be categorized as more risky

customers

Customers with a loan of Rs 10 30 lacs would have gone thru some ups

and down in business as his business would typically be a second generation

business. These customerss would have proven track record and hence

would have proved their intension as well as ability to a certain extent.

These customers will normally have good cash flows compared to their IT

returns and hence would be able to service our Emis regularly. These

people tend to take a term loan with a targeted end use like getting cash

discounts, diversifying their existing business etc.


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Customers with a loan of Rs 30 50 lacs would have a business experience

of more than 10 year + with multiple track records and a proven credit

history. These customers would typically have made investments in various

stocks, MF, LIC, Property etc. Also underwriting these customers tends to

be safer as they have audited financials, business stability, Good

investments, and decent collateral.

Customers with a loan of Rs 50 100 lacs would have a stable business, if

not family business with good cash flows but would have disclosed low ITR

income in order to save taxes. Also collateral offered would be good with a

good margin on LTV. He would have good banking habits and would bank

with few foreign banks. These customers typically run a CC/ OD at a higher

rate of interest and look at a term loan for consolidating these facilities.

Hence lending to these profiles would be more or less for debt consolidation.

Financial institution should look at these profiles after building a sizable

book size with an appetite to absorb some unforeseen circumstances.


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CHALLENGES

1. Product proposition: During start upchallenge is to have a product

proposition which is competitive enough in the market and also enable to

build a book size with lower delinquencies and a proper portfolio mix.

Surrogate products should cover about 80 85 % of the portfolio.

2. Underwriting Standards: Set up various underwriting standards which are

capable enough to identify right customer as well as able to deliver the right

loan amount to him. Underwriting standards should be made in a manner to

understand cash flows of the customer well enough which could involve

meeting up the customer by a local credit underwriter at his office. Also to

set up branch based underwriting model is a challenge in addition to finding

out right people on the job.

3 Sourcing quality: This is mainly a sales function. The right quality of

sourcing plays an important role initially. As all products are new and would

have been tested in the market right king of sourcing would definitely play a

critical role.

4 Portfolio Analysis. In order to have a good product portfolio we need

to regularly track our portfolio performance w.r.t Ticket size, Product ,

Location wise , Underwriter wise, Loan amount wise, Channel wise

performance, Income method wise, Ratio wise , Collateral value wise,

Tenure wise, Property usage wise etc. This can be developed through

various system enhancements

5 Regulatory Environment and External Factors: Increase in COF,

RBI regulations, Competitors actions etc.


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SUPPORT REQUIRED

1) Underwriting : Finalizing local credit underwriters for locations to be

started in phase 1

2) System developments: We need to develop an in-house system for theentire mortgage process with detailed data so as to have a detailed data of

customers readily available. This will in turn help to track our portfolio

better. Also system should be able to do a de duplication check on the

customer, property. All initiations of credit checks to be done through

systems. We also need to have an access to CIBIL database for our

customer.

3) Vendor Controls: Appointment of renowned vendors for the job. This

would involve some costs but would benefit in long turn.

4) Support required for analysis: Stronger systems with complete data

capturing of the customers in order to have a complete and a detailed

analysis of the portfolio on a regular basis.

5) Quality Analysis: Support is required for analysis of file quality,

Underwriting quality, tracking vendor performance etc.

6) Customer service representative: In long run we need to have a dedicatedcustomer service representative sitting at the branch office catering to

customer request and complains.


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PLAN OF ACTION:

Steps:

1) Collection of information of various banks with respect to location to be

started in phase 1. This can take about 20 days

2) Making a policy document. Time frame of about 30 days

3) Visiting locations to be started in phase 1 to understand the market

dynamics. Time frame 20 days

4) Identify local credit underwriters. Time Frame 30 days

5) Training underwriters on policy. Time Frame 15 days

6) Appointment of various agencies for credit checks. Time frame 15 days

7) Empowering local credit underwriters with credit authorities for approval of

files. Time Frame: On going process with a minimum of 30 days.

8) Working with channel partners in order to understand their requirements as

well as to impart training to them on the policy. Time frame 20 days

Simultaneously we need to develop robust end to end systems to take care of

the entire mortgage business.

case study on housin finance

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