CHAPTER II

RECENT DEVELOPMENTS IN THE ECONOMY

AND THE HOUSING SECTOR
2:1 INTRODUCTION 68
2:1:1 ECONOMIC STATUS 68-69
2:1:2 HOUSING INVESTMENT AND GDP 69-70
2:1:3 FISCAL CONCESSIONS AND ITS IMPACT
ON HOUSING LOANS 70-71
2:1:4 HOUSING LOAN PRODUCTS BY PRIMARY
LENDING INSTITUTIONS 71-72
2:1:5 LENDING PRACTISES 72-73
2:1:6 GOVERNMENT AND RBI INITIATIVES 73-76

2:2 INDIAN FINANCIAL SYSTEM, GLOBAL

FINANCIAL SYSTEM
2:2:1 HOME LOANS IN INDIA 77-80
2:2:2 NATIONAL HOUSING BANK
(AMENDMENT ACT), 2000 81
2:2:3 HOUSING SHORTAGE AND RESOURCE
REQUIREMENT 81-87
2:3 THE STATE OF HOUSING AND HOUSING POLICIES
IN INDIA
2:2:1 INTRODUCTION 88-90
2:4 GOVERNMENT INITIATIVES IN RURAL HOUSING 91-93
2:5 GLOBAL FINANCIAL SYSTEM 94-101

67
 CHAPTER II

RECENT DEVELOPMENTS IN THE ECONOMY

AND THE HOUSING SECTOR

2:1 INTRODUCTION

Population growth and increasing urbanization has a direct bearing on the

requirements of housing in India. With the increase in the disposable
income level of the people especially the middle income groups coupled
with easy accessibility and availability of institutional finance and tax sops
attached to housing, a new dimension to housing sector as a viable
investment proposition, has emerged of late. As a result, there has been not
only increase in the supply of new houses but also improvement in the
conditions of the existing housing stock.

2:1:1 ECONOMIC STATUS

1. The Indian economy exhibited strong performances over the years

especially after the liberalisation of monetary and fiscal policies
encouraging investments in the key sectors like infrastructure,
services, manufacturing and external trade etc. According to the
Central Statistical Organisation (CSO) estimates, the real Gross
Domestic Product (GDP) growth accelerated from 7.5 per cent in
2004-05 to 8.1 per cent in 2005-06 (more recent estimates places the
growth rate at 8.4 per cent in 2005-06). The construction sector
including housing, exhibited double digit growth rate over a three
year period.

68
 2. Indian financial markets remained orderly during 2005-06. Also, the
inflation remained within manageable limits of 5 per cent or slightly
above and has remained stable. RBI's Annual Policy Statement for
the year 2006-07 indicated price stability in the economy.

3. Gross Domestic Savings as per percentage of Gross Domestic

Product GDP increased from 28.9 per cent in 2003-04 to 29.10 per
cent in 2005-06 despite a 1.5 per cent decline in the household's
savings. During the year 2005-06, the saving rate went upto 30 per
cent.

4. The interest rates remained competitively affordable though the rate

has started to move up and during 2004 the interest rates on housing
loans have been increased twice by about 50 bps. Fig: 2.1 indicates
the movement of SBI PLR, as well as interest rates on housing loans
over a period 1997-2007.

Fig 2.1 Movement of Interest Rates

20-

15-

10

'r " "r " "I ' I " I I' I I r i —

1996- 1998- 2000- 2002- 2004- 2006-
97 99 01 03 2005 07

Movement of Interest Rates of Housing Loans

2:1:2 HOUSING INVESTMENT AND GDP

The accelerated growth of housing finance has resulted in an increase in its

share in the GDP. Outstanding housing loans as a percentage of GDP has
risen from 3.4 percent in 2001 to 7.25 percent in 2005 and 2005 and 8.50

69
per cent in 2006 (estimated). The figure has been pegged at about 9 per
cent by the end of the 10th Plan i.e. 2007. In view of the increased
investment in the services sector, which contributes about 50 per cent to the
nation's GDP, and growth in urbanization, it is expected that the share of
housing in GDP and GFCF would go up substantially in the coming years.

2:1:3 FISCAL CONCESSIONS AND ITS IMPACT ON HOUSING

LOANS

The fiscal concessions provided to individuals under Section 88 of the

Income Tax Act (now Section 80 C wherein the deductible amount is up to
Rs. 1 lakh as compared to Rs.20,000 earlier u/s 88 of the IT Act) in 1995
and Section 24 (B) in 1999 (deductible amount of interest repayment is up
to Rs. 1.50 lakh), have led to an increase in demand for housing loans
resulting in increased disbursements of housing finance by primary lenders
over the years. As a result, housing stock in the country increased from 148
million units in 1991 to 187 million units in 2001 and is expected to have
further gone to 218 million units in 2007. The following Fig 2.2 indicates
the position of housing stock vis-a-vis the housing finance during the
period 1996-2007(Estimated).

70
Fig 2:2 Impact of enabling fiscal environment on growth of housing stock and housing
finance disbursals by Banks & HFCs.

1100
1000
900
800
700
600 !Housing Stock (mn)
500 iHousing FmancB (Rs. In bn)
400
300

I
187 21
200 148
100
0 ^
• . •. 1, i J
\ 1 1 \ 1 T 1 I I

•f^ ^ # ..«•
^
-F P = Pnojecflons

Source: Report on trends and progress of housing in India 2005 National Housing Bank
1 Census Data on Houses for 1991 and 2001
2 Housing stock upto 2007 is estimated based upon the trend in growth of housing stock recorded during
1991-2001.3 Housing loans disbursed by banks upto 2005 based on data received from RBI and HFCs
while the disbursements figures for 2006 and 2007 are estimated based upon the earlier growth trends

2:1:4 HOUSING LOAN PRODUCTS BY PRIMARY LENDING

INSTITUTIONS

Primary lending institutions (PLIs) i.e. Scheduled Commercial Banks

(SCBs), Housing Finance Companies (HFCs), and Apex Co-operative
Housing Finance Societies, (ACHFS) are offering various housing loan
products which include:

a. Home Loans for construction including purchase of land/ acquisition of

new houses/built in flats.
b. Home Improvement Loans for repairs, renovation.
c. Home Extension Loans for upgradation of existing houses.
d. Home Equity Loans.
e. Finance to public and private builders to increase the supply of land
suitable for building houses.

71
f. Financing for housing to Self Help Groups (SHGs)/Micro Financing
Institutions (MFIs).

These housing loan products are available with various options with regard
to interest rates (floating/fixed), repayment options, security etc.

General practices being followed by PLIs while sanctioning and disbursing

housing loans are as follows:

2:1:5 LENDING PRACTICES

INTEREST RATES: The concept of Prime Lending Rate (PLR) has now
become the benchmark in extending loans of different types depending
upon the risk profile of the borrower or the project. In housing, the rate of
interest, terms and conditions applicable for various types of loan products
are different e.g. a loan for purchase or construction of a house is priced
lower as compared to loan to builders or corporate/s for project finance.

SECURITY: Generally, the individual housing loans are secured by

mortgage of title deeds while in the case of builders or corporates (project
finance) it is secured by book debts and receivables.

ADMINISTRATIVE AND PROCESSING FEE: Generally the lenders

charge a reasonable percentage e.g. 0.50 per cent of the loan amount as
administrative and processing fee to cover some portion of their operational
expenses.

PREPAYMENT CHARGES: Housing loan borrowers rarely intend to

carry the loan for its entire period of 15-20 years and therefore, close the
loan prematurely. Hence prepayment charges in the range of 0.50 per cent
72
to 1 per cent of the outstanding amount at the time of prepayment has
become a common feature of our housing finance system.

CONSUMER CREDIT SCORING. The borrower is accorded

appropriate scoring by the lenders depending upon his economic profile.
Therefore, the financial system has started moving rapidly towards the
"Risk Based Pricing".

2:1:6 GOVERNMENT & RBI INITIATIVES

The Government of India and the Reserve Bank of India have been
constantly providing an enabling environment for the promotion and
development of the housing finance sector. Some of the initiatives taken by
the Government and the Reserve Bank of India are enumerated below.

• GOVERNMENT INITIATIVES

1. The National Housing and Habitat Policy was adopted by the

Government in 1998 with the main aim of facilitating an investment
environment for housing. It was revisited in 2005. Accordingly, the Task
Force set up by the Ministry of Urban Affairs and Employment submitted
its recommendation on Urban Housing and Habitat Policy, suggesting
inter-alia, setting up of a National Shelter Fund and Risk Fund with the
initial corpus from the Government, to serve the under-served segments.

2. Fiscal concessions to individuals increased under Section 80C of the IT

Act [rebate up to Rs. 1 lakh in respect of repayment of principal], Section
24(2) [interest deduction up to a limit of Rs. 1.50 lakh in respect of
properties acquired or constructed with borrowed capital and self
occupied.]

73
3. Two Million Housing Programme which is being monitored annually by
the Ministry of Urban Affairs and Poverty Alleviation. This includes credit
cum subsidy scheme being undertaken by various State Governments.

4. To strengthen the recovery mechanism, Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act) was enacted and Housing Finance Institutions
(HFIs) included in the eligible list of institutions.

5. Setting up of a High Level Group to suggest amendments in Securities

Act including RMBS for improving liquidity.

6. Launching of the Jawahar Lai Nehru National Urban Renewal Mission

to facilitate States'/Urban Local bodies to bring necessary amendments in
their existing legislation for encouraging increase public and private sector
investment for urban infrastructure including housing.

7. To improve the habitat conditions in rural areas, construction of 60 lakh

houses in rural areas under "Bharat Nirman" announced.

8. Foreign Direct Investments (FDIs) allowed up to 100 percent under the

automatic route in townships, housing, built-up infrastructure and
construction development projects to catalyze investment in a vital
infrastructural sector of the economy. FDI has also been opened up for
construction-development projects over 50,000 square meters including
housing, hotels and resorts, hospitals, commercial premises and educational
institutes. However, a minimum investment cap of $10 million in 100
percent FDI projects and $5 million in joint venture projects has been

74
prescribed. Further, the existing 40- hectare stipulation has been reduced to
10 hectares for investment under FDI.

9. A policy was introduced in April, 2000 for setting up of Special

Economic Zones (SEZ) in the country with a view to provide an
internationally competitive and hassle free environment for exports. The
policy provides for setting up of SEZ's in the public, private, joint sector or
by State Governments. In terms of this policy, the SEZs will include inter-
alia the facilities like world class residential premises and social services .

• RBFS INITIATIVES

1. Directions to SCBs to lend at least 3 per cent of their incremental

deposit for housing.

2. Housing loans up to Rs.l5 lakhs brought under Priority Sector

lending of banks.
3. To provide impetus to rural housing credit, guidelines regarding
synchronisation of loan repayment installments with the crop cycle,
issued.
4. Increase in risk weight to 125 per cent to discourage financing to
commercial real estate by banks so as to combat the inflationary
tendencies of land prices. The facilitating role of the government and
other financial institutions along with private intervention in
facilitating finance to address the housing needs of the society is an
indication of the significance of the sector in overall development of
the economy.

The National Agenda for Governance, which envisages the construction of

2 million dwelling units every year, also emphasizes that housing activity

75
would be an engine for substantial generation of employment in the
country. To this end, efforts are being made to identity the legal and
administrative impediments and addressing them suitably. The earlier
dependence on the public agencies is now slowly giving way to create a
strong Public - Private partnership for tackling the housing and habitat
issues. The Government's intervention will be limited through fiscal
concessions, legal and regulatory reforms and creating an enabling
environment, while the private sector as the other partner would be
encouraged to take up land assembly, housing construction and invest in
infrastructure services.

(References : Trends and Progress report of Housing in India 2000,2001,2002.2003.2004,2005,2006,2007)

76
 2:2 INDIAN FINANCIAL SYSTEM, GLOBAL
FINANCIAL SYSTEM

2:2:1 Home Loans in India

The Home loan sector in India is the pivotal role player in the growth of
the real estate scenario in India. With tax incentives given to the housing
finance sector in the annual budget of 2001, transactions related to buying
and selling of residential properties increased considerably and was much
higher as compared to previous years. Though the buyer of a real estate
property could be of different types - corporate, individual, trust or a group
of individuals; a new class of investors is bom in India owing to rising
incomes, younger working couples, boom in service sector, disposable IT
and IT enabled income services and nuclear families. But the common
requirements of all these buyers are funds. The need for loans is taken care
of by specialized housing finance companies, foreign banks and
nationalized banks spread across the country that are set to play the most
important role in the development of the real estate industry and are the end
users.

Since the new class of buyers are relatively younger set of customers who
are more aware about legal documentation and approvals, buyers are now
more 'end-users' rather than investors; the property market in India
undergoes transformation to align itself with global standards with an
increased emphasis on quality & cost control and documentation methods.
In the current economy of India, the real estate sector has the maximum
propensity to generate income and demand for materials, equipment and
services. It can be said that housing finance companies were formed for co-
existing with buyer's requirements of housing loans for investing in
properties. Home loans are made available by financial institutions to both

77
Indian and NRI customers at floating and fixed rate of interest and also at
attractive EMI options.

• For construction or buying a new home

• For home repairs and renovations
• For purchase of plots
• Against mortgage of property

The Home loan market in India has never been so good. With real estate
boom, growth in home loans and falling interest rates, the Housing Finance
Companies (HFCs) are offering its customers various alternatives to choose
from while buying a home loan starting from types of loans to flexible
tenures and repayment options. Today, the amount of money that a city
dweller spends on rent is roughly the same, or only slightly less than the
amount he pays as an EMI on a housing loan. Earlier the home loan sector
in India was solely dependent on nationalized and public sector banks, but
the entry of public sector banks into the housing finance business marked
the beginning of the first round of interest rate cuts. And this reduction in
interest rates has enhanced the borrowing power of customers. Moreover,
HFCs are offering incentives to attract investors like

• Some companies sanction the housing loan without requiring you to

identify property as a pre-requisite for eligibility
• Free accident insurance & property insurance
• Waiving of pre-payment penalty
• Waiving of processing fee

There are a few documents which the finance companies require for setting
up criteria for eligibility of Home loans.

78
 • SALARIED EMPLOYEE

The latest salary-slip showing statutory deductions Form 16 (showing tax

deducted at source by employer)

Proof of age (birth certificate/voter identity card/passport/school-leaving

certificate/valid driving license

Proof of residence (phone bill/electricity bill/ration card).

• SELF-EMPLOYED

Computation of income for the previous two years, certified by a Chartered

Accountant

Profit & Loss Account and Balance Sheet for the previous two years,
certified by a Chartered Accountant

Proof of age (birth certificate/voter identity card/passport/school-leaving

certificate/valid driving license)

Proof of residence (phone bill/electricity bill/ration card).

The realty boom in India has given a new dimension to the finance sector
in India - both in Home Loans and Home Insurance segments. This has
not only given a competitive edge to the finance companies to provide
attractive options to customers but has also contributed to the increased
investments in the real estate sector.

79
 • MAJOR HOME LOAN PROVIDERS

Banks & Public Sector Housing Finance :

State Bank of India, Corporation Bank, Punjab National Bank, Central

Bank, Dena Bank, Allahabad Bank, Bank of Maharashtra, Bank of Baroda
Housing Finance, Can Fin etc

Private Banks, Companies, NBFCs :

Homes, GIC Housing Finance, LIC Housing Finance, PNB Housing

Finance, SBI Home Finance, Centbank Home Finance, HUDCO, LIC,
HDFC, DHFL,, HSBC, Standard Chartered- Grindlays, IDBI Bank, etc

• CHARACTERISTICS OF HOUSING FINANCE

• Long termfinancewith repayments spread over 15-20 years

• Most of the people prefer loan at fixed interest rate. The concept of
variable interest rate is slowly picking up with the expectation of
fiirther southward movement of interest rate.

• Market has become very competitive after the entry of banks in

financial institutions in retail lending.

• The spreads are declining due to competition and unless long term
funds at reasonable interest rates are made available, it would be
very difficult to maintain bottom line.

80
2:2:2 NATIONAL HOUSING BANK (AMENDMENT) ACT, 2000:

• The parliament passed the 'National Housing Bank (Amendment)

Act, 2000 which has come into force from 16th June 2000.

• The need for a summary procedure was long felt for housing finance
institutions for giving impetus for creation of 'Secondary Mortgage
Market'.

• A new chapter VA has been introduced simplifying the foreclosure

norms by permitting summary proceedings through Recovery
Officer and creation of Appellate Tribunal on the lines of Debt
Recovery Tribunal in case of banks.

• In the definition of approved institutions, the Govt, has also included

scheduled banks.

2:2:3 HOUSING SHORTAGE AND RESOURCE REQUIREMENT

India is a vast country with the second highest population in the world, and
a 50 million people in India live in the slums. The housing shortage in both
rural and urban areas rise two-fold every Five - year plan. Rural areas are
neglected resulting in a shift towards the urban areas. The urban slum areas
are on the rise due to this reason.

India is far behind Asian Countries such as Singapore, Hong-Kong,

Malaysia, Korea and China in fulfilling this basic human need. These
countries made home ownership their prime programme during the 1960s.
Incentives were given to the construction industry to create housing and
huge revenues were pumped in by these governments in infra-structure.

81
 Fig.2.3 The Housing Finance System in India

GRQUy HHM?SOW CHAMNEL

NHB
Development Financial
Institutions -C
NABARD
Hnancial Institutions

Housing r-inana'
\ o n Banking Finance Companies
Companies ^
OthiT NBFCs

Private Sector Banks

Scheduted Commercial U
Banks
Banks Pubhc Sector Banks

Scheduled Urban Co
operative Banks

District Co-operative
Co-opCTalive Banks
Banks

Scheduled State Co
operative Banks

Agriculture & Rural Primary Land

Development Banks Devekipment Banks
Othei Institaiions
^
Apex Co-operative I lousing Societies
Housing Soaeties

Source: Report on Trends and Progress of Housing in India, 2006, NHB, New Delhi

Housing finance formal system is dominated by two major types of

institutions, Commercial Banks (CBs) and Housing Finance Companies
(HFCs) and a very small share of the market (0.5%) goes to the third group
which is the Co operative sector institutions.

In spite of the fact that, investment in housing finance is an important

driver of economic development of any nation, in India, housing finance
remained as an activity that failed to occupy the key position that it should
have, during the initial years of planned development, post independence.

82
During the late seventies there was an organized attempt to set up an
institutional mechanism for providing housing finance for the needy
section of the society.

In 1977 HDFC (Housing Development Finance Corporation) became the

pioneer development institution for housing finance in India in the private
sector. Prior to HDFC the fiilly owned government company HUDCO
(Housing & Urban Development Corporation) was set up in 1970 to
undertake housing and urban development programmes. It was in 1988,
when National Housing Bank (NHB) was formed, is when a formal
housing finance system emerged in India. At that time, 80% of the housing
stock in the country wasfinancedfi"ominformal sources (RBI, Committee on
Financial Sector Assessment (CFSA), India's Financial Sector: an Assessment,2009)

NHB was formed in 1988 as a fully owned subsidiary of the RBI, with a
mandate 'to operate as a principal agency to promote housing finance
institutions both at local and regional levels and to provide financial and
other supports to such institutions and for matters connected therewith or
incidental thereto'.

During that time, there were about 400 housing finance companies (HFCs)
in India, functioning as NBFCs (Non-Banking Finance Companies)
regulated by the RBI. These companies included many small ones with
restricted or localized activities and also those engaged in
construction/development, but offering housing credit as well.
Though, HDFC has been an exception in this regard. HDFC has been the
pioneer HFC in India and amongst the HFCs, the largest.

There are 43 HFCs registered with the NHB (as on August 2009), out of
which 20 HFCs are permitted to provide housing finance and also accept

83
public deposits, while the remaining 23 are permitted only to provide
housing finance. Housing sector has been given priority status by the
successive Union Governments and special allocations were made in
various Plans, also, fiscal and monetary incentives were introduced in the
industry to promote it. The Tenth Plan (2002-2007) was the benchmark to
promote the housing sector in India. The ongoing Eleventh Plan (2007-
2012) also supports the housing sector in a big way. Table 2.1 gives the
details.

Table 2.1: Investment for Housing during the various Plan periods.

Five Year Plan Public Investment Private Total

Investment Investment
First Plan (1951-56) 250 900 1150
Second Plan (1956-61) 300 1000 1300
Third Plan (1961-66) 425 1125 1550
Fourth Plan (1969-74) 625 2175 2800
Fifth Plan (1974-78) 796 3640 4436
Sixth Plan (1980-85) 1491 18000 19491
Seventh Plan (1992-97) 2458 29000 31458
Eight Plan (1992-97) 31500 66000 97500
Ninth Plan (1997-2002) 52000 99000 151000
Tenth Plan (2002-07) 415000 311300 726300

Source : I. Report on Trends and Progress of Housing in India, 2003. NHB, New Delhi

In the post-reform era, the growth in the housing finance intermediaries has
been remarkable in the sector. Among these agencies, Commercial Banks
(CBs), Housing Finance Companies (HFCs) are the prominent ones. The
third agency ACHFs (Apex co-operative Housing Federation), which caters
to the needs of the common man, is becoming insignificant year after year.
Approximately, nearly two-third of the current market is owned by CBs
and the balance one-third by the HFCs.

84
 Table 2.2 : Housing Loan Disbursements by various Institutional Agencies
(Rupees In Crores)
Agency FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007
CBs 553.11 8566.41 23553.70 32816.39 50398.00 58623.00 69859.00
HFCs 12637.85 14614.44 17832.01 20862.23 26000.00 30109.00 40140.00
ACHFs 867.72 677.58 641.48 623.08 421.10 520.00 550.00
Total 19058.68 23858.43 42026.86 54301.70 76819.10 89252.00 110550.00
Growth - 25.18% 76.15% 29.21% 41.47% 16.18% 23.86%
%
Source: 1) ]fleport on Trends & Progress Of Housing in India 2001-2006, NHB New Delh
2) Report on Trends and Progress of Banking in India 2007-2008, RBI, New Delhi
Notes : @Exactfiguresof co-operative housing disbursals are not available from
RBI/NABARD/NHB Sources

In spite of the remarkable growth seen in the housing finance sector in

India, the housing shortage is still on the rise, particularly since the 2000s.
As of 2007(viz. the end of the X Plan, 2002-2007), the total urban housing
shortage itself in India was 24.71 million units. (Besides, there is another 7
million units towards the rural housing shortage) (RBI.2009) (1)

Table :2.3 Housing Stock & Shortage, 1991-2007

(million)
Year Pucca Semi- Kutcha Total Housing
pucca Shortage
1991 29.80 06.20 03.20 40.70 08.23
1997 40.07 06.64 03.35 50.08 07.57
1998 42.13 06.72 03.37 51.85 07.36
1999 44.28 06.80 03.40 53.67 07.18
2000 46.55 06.83 03.42 55.56 06.93
2002 41.17 08.08 02.74 55.80 10.56
2007 47.49 9.16 02.18 66.30 24.71

Source : Compiled from : Annual Report 2006-2007,Ministry of Housing & Urban Poverty
Allievation, Govt of India;in The Economic Times dt 13 Aug.2007.

From these statistics it is evident that housing shortage is acute in India,

indicative of a need for an innovative models for inclusive housing
development in India- one that offers affordable houses to the masses. The
housing shortage grew almost 4 times during the period FY 1991-2007.
Though India's shortage of housing position has improved significantly

85
 from 3.4% (2001) to 7.40% (2008), its current status is no where when
compared with other nations. (Table :2.4)

Table: 2.4 Mortgage to GDP Ratio in selected countries (as <5f FY 2005)
(in Percentages)
ountry India China Thailand Korea Malaysia Singapore Taiwan Hng USA UK
Kng
^GR# 7.4 12 17 26 29 32 39 41 80 86

Sources : European Mortgage Federation (2007), Asian Development Bank (2007), RBI (2009)
Notes: *As of FY 2008,RBI (2009), # MGR stands for Mortgage to GDP Ratio.

Fig: 2.4 Mortgage to GDP Ratio in selected countries of the world (2007)

India Thailand Malaysia Taiwan USA

Sources: European Mortgage Federation (2007), Asian Development Bank (2007), RBI (2009)

During the second phase of the financial sector reforms, active participation
of the Commercial banks (CBs) in the housing credit resulting in constant
increase in the market share of the housing finance industry. The HFCs in
the housing finance market is seen declining over the years (Table 2.5), but
at a pace much slower than that of CBs thus resulting in their relative share
constantly coming down as noted (Table 2.5). Table: 2.6 gives the growth
rates of the different agencies and a gradual slow down is visible.

86
Table : 2.5 Relative Share of Major Institutional Agencies in the Housing Finance
Market
(in Percentages)
Agency FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007
CBs 29.14 35.91 56.04 60.43 65.61 65.73 63.19
MFCs 66.31 61.25 42.43 38.42 33.84 33.76 36.31
ACHFs 04.55 02.84 01.53 01.15 00.55 00.51 00.50
Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Table 2.6 : Growth Rates (Y to Y) of the Major Players in the Housing

Finance Industry

Agency FY2002 FY2003 FY2004 FY2005 FY2006 FY2007

CBs 54.26 174.95 39.33 53.58 16.32 19.17
HFCs 15.64 22.02 16.99 24.63 15.80 33.32
ACHFs -21.91 -05.33 -02.87 -02.88 23.49 05.77
Total 25.18 76.15 29.21 41.47 16.18 23.86

From the above tables (2.5, 2.6) and statistics it is evident that the housing
finance sector in India is on the growth trajectory. Though in comparison to
the developed nations within the Asian region, there is still a long way to a
reformed and a more organised housing finance sector.

87
2.3 THE STATE OF HOUSING AND HOUSING POLICIES
IN INDIA

2:3:1 INTRODUCTION

Housing is an important indicator of the social and economic development.

"Affordable Housing" has been an important national agenda of the
Government. Various policy initiatives taken by the Government and RBI
have resulted in significant increase in housing stock situation with a
mature housing finance market. However, total numbers of households
have always outpaced the available number of houses used for residential
and residential cum other purposes. As per census 2001, there were 191.96
million households (83.50 million in 1961) as against 187.1 million
occupied houses used as residential and residential cum other purposes
(79,2 million in 1961), indicating absolute housing shortage of 4.86 million
units (4.30 million units in 1961).

However, if the unserviceable kutcha houses needing immediate

replacement are also taken into consideration, the housing shortage is
always at higher than what is projected.

However, there has been marked improvement in the conditions of housing

structures during 1961-2001. The total number of pucca houses which were
only 18.8 per cent of the total occupied houses in 1961 has gone up
significantly to a level of 51.65 per cent in 2001. As a result, the percentage
of kutcha houses which were 44.6 per cent in 1961 has gone down to 18.2
per cent in 2001.

88
India is undergoing a transition from rural to urban society and as a result,
the percentage share of urban population which was 18 percent of the total
population in 1961, has gone upto 27.8 per cent in 2001 and it is expected
that by 2025, nearly 36 per cent of India's population will be residing in
urban areas. As a result, the requirements for housing would be more in
urban areas. As per estimates by NBO, Government of India, housing
shortage in urban areas at the beginning of 2007 is about 24.71 million
units and is likely to go up to 26.53 million units by 2012. Similarly in
rural areas, the housing shortage is estimated to be 47.43 million units by
2012 (draft technical report of Working Group set up by Ministry of Rural
Development, Government of India).

In view of the above, National Housing and Habitat Policy (NHHP) was
framed in 1998, aimed at creation of surpluses in housing stock with
quality and cost effective options to poor and vulnerable groups and
removing legal, financial and administrative barriers for facilitating access
to land, finance and technology etc.

The fast emerging trends in urbanization and growing requirements of

shelter and related infrastructure has resulted in growing disequilibrium
between demand and supply of sites and services at affordable costs. The
inability of most new and poorer urban settlers to access formal land
markets due to high costs and their own low incomes leading to
unsustainable situations has increased the slum and squatter settlements. A
need for new and urban NHHP was felt focusing on such issues.

Accordingly, the National Urban Housing and Habitat Policy 2005 , was
established for facilitating accelerated supply of serviced land and housing
with particular focus to EWS and LIG categories, facilitating upgradation
of infrastructure of towns and cities, ensuring easy accessibility of basic

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amenities, promotion of larger flow of funds to meet the revenue
requirements of housing and infrastructure, using appropriate technology
to meet the housing needs of poor, progressive shift to a demand driven
approach, encouraging private sector participation to build houses for
EWS/LIG segments at affordable rates etc. The main thrust of the policy is
to provide "affordable housing to all".

A Working Group on Rural Housing for formulation of the 11th Plan was
set up by the Ministry of Rural Development, Government Of India, to
focus inter-alia on issues like role of Government agencies in facilitating
the convergence of land, finance, technology and delivery systems for
improved access to shelter for the rural poor, facilitating use of cost
effective construction technologies in rural housing, to outline a National
Strategy for addressing the problem of rural shelters and suggest
administrative, legal, fiscal and any other operational changes required for
tackling rural shelter problems by the end of the 11th Plan Period.

Apart from creating a supportive and conducive fiscal, monetary and legal
environment for increased flow of institutional credit and investment in
housing. Central and State Governments have continued with various
housing schemes to address the housing problems of the poor, EWS and
LIG segments both in rural and urban areas.

The progress of some of these housing schemes is summarized as follows:

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2:3:2 GOVERNMENT INITIATIVES IN RURAL HOUSING

INDIRA AWAS YOJANA (lAY)

lAY is a rural housing scheme launched by the Government of India in

1985-86 as a sub-scheme of Rural Landless Employment Guarantee
Programme (RLEGP) and from 1989 is a sub-scheme of Jawahar Rojagar
Yojana (JRY). JRY has become an independent scheme from 1^' January
1996. lAY is a cash subsidy scheme for rural Below Poverty Line (BPL)
families for constructing dwelling units on their own using indigenous
designs and techniques. Presently, the per unit assistance is Rs.25000/- in
plain terrains, and Rs.27,500/- in hilly terrains. Funds under this scheme is
provided by Centre and State in the ratio of 75:25.

BHARAT NIRMAN

Bharat Nirman programme was announced by the Hon'ble Prime Minister

on 15'*' August 2005. The programme covers six components of rural
infrastructure, irrigation, roads, housing, telecommunication, power and
water supply. Under this programme 60 lakh houses were to be built in
rural areas during 2005-09 i.e 15 lakh houses per year.

STATE-RUN HOUSING SCHEMES

Many states have been implementing their own rural housing schemes.
Nearly 15 states/UTs have their own schemes enabling them to increase
their coverage to a much larger group than what is possible under Indira
Awas Yojana (lAY). The state run rural housing programmes follow the
lAY pattern of providing subsidy for construction of houses and are
financed through state budgetary allocations. However, the ceiling on

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assistance varies from state to state. These schemes target different groups
of beneficiaries and each have a range of unit cost with varying proportions
of subsidy, credit and beneficiary contributions.

VALMIKIAMBEDKAR AWAS YOJANA (VAMBAY)

VAMBAY is a Central Government sponsored programme launched in

2001-02 to improve the conditions of urban slum dwellers living below
poverty line, who do not have an adequate shelter. This scheme facilitates
construction and upgradation of dwelling units for urban slum dwellers.
Under this scheme, the Government of India provides subsidy of 50 per
cent and the balance 50 per cent is arranged by the State Government.

VAMBAY has been subsumed in a new scheme called Integrated Housing

and Slum Development Programme (IHSDP).

HOUSING UNDER TWENTY POINT PROGRAMME

The Ministry of Urban Employment and Poverty Alleviation (now Ministry

of Housing and Urban Poverty Alleviation) has implemented a 20 Point
Programme of Housing schemes for Economically Weaker Section (EWS)
and Low Income Groups (LIG).

EWS HOUSING

Investments under the scheme are made through State/UTs budgetary

provisions supplemented by loan from financial institutions.

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LOW INCOME GROUP HOUSING

The scheme is being executed by the State/UTs through Housing Boards

and Housing Departments through budgetary provisions supplemented by
loans from financial institutions.

TWO MILLION HOUSING PROGRAMME (2MHP)

2MHP was launched in accordance with National Housing and Habitat

Policy 1998. This is a loan based scheme with a view to facilitate
construction of 20 lakh additional houses per annum of which 7 lakh
houses are targeted in urban areas and 13 lakh houses for the rural areas.

This initiative by the Government of India and the State Governments have
reaped the benefit and housing finance has become one of the consistently
growing industries in this country.

References : Reports on Trends and Progress of Housing in India- 2001-2008.

www.nhb.org.in. www.economictimes.com

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 2:4 GLOBAL FINANCIAL SYSTEM

As emerging economies face population growth, rapid urbanization, and

rising expectations from a growing middle class, the need for robust
housing finance systems becomes very important. When housing finance
systems are strong, families can more readily access comfortable homes,
and have another vehicle for accumulating long-term wealth.

When housing finance in a country works well, it contributes to economic

growth and household savings, and it can help households to be more
resilient to drastic economic changes. However, when financial system
does not provide funding at affordable conditions, many problems arise.

The income gaps between the rich and the poor widens, as the top income
group can afford comfortable housing and build real estate assets. Most of
the housing in such circumstances remains in sub-standard conditions.

The Housing Finance Program helps client countries reform or develop

market-based systems that are able to cater to a large portion of the housing
demand and enable governments to focus on the neediest groups. In this
endeavour, a critical challenge is to deal with the under developed state of
the capital markets, which does not provide sufficient resources of required
maturities.

The housing finance team also advises policymakers and regulators with
other issues, such as strength of market infrastructure (legal status of
property rights, land registration systems, enforcement of mortgage
collaterals), efficiency and risk management capability of lending systems,
adjustment of savings and lending products to instable environments,
94
efficiency of subsidy schemes, and adequacy of regulatory and supervisory
frameworks.

Financial markets and intermediaries are globally linked through a vast

international telecommunication network today.

The mechanisms of recent times in the housing finance industry have

initialized optimal use of the finance on one side and has caused serious
economic problems in developed nations and economies like US and the
Europe. This has resulted in the Sub-Prime crisis resulting in the cash-
crunch in the markets, the repercussions of the same are felt directly and
indirectly in the global economy, creating a spiral effect recession during
the 2007-2008 financial year. Although the Asian housing industry which
is in the growth stage has not suffered as much as the US and the European
countries. The sub-prime lending system mechanism has its rationality
though it is very necessary to monitor this system closely.

Housing market booms followed by busts have been associated with

financial instability and significant costs to the economy in many countries
over the years, reflecting the importance of the housing sector. Still, the
degree to which such house price boom-bust episodes have led to more
widespread financial instability differs between countries, in part because
of important differences in countries' housing finance systems, including
the role of government. This chapter analyzes housing finance systems in a
number of representative advanced and emerging economies in order to
identify factors that enhance the stability of housing finance systems and
financial stability more generally. In particular, it examines aspects of
housing finance systems in some advanced economies that contributed to
financial instability in the recent crisis.

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The empirical analysis confirms that rapid mortgage credit growth and
strong house price increases go hand in hand. The analyses also account for
the impact of a number of housing finance characteristics on mortgage
credit and house prices. In particular, they suggest that government
participation in housing finance exacerbated house price swings and
amplified mortgage credit growth during the run-up to the recent crisis,
particularly in advanced economies. Countries with more government
involvement also experienced deeper house price declines. Moreover,
higher loan-to value ratios are significantly associated with higher house
price and credit growth over time for advanced economies, in line with
other studies. This effect disappears when emerging economies are
included in the sample over the most recent period, possibly due to less
formal loan limits in these countries, where lending to a large extent still
takes place in unregulated sectors.

Based on an evaluation of evidence, including the empirical analyses, three

broad areas of best practices for stable housing finance systems emerge:

(l)enhanced risk management, underwriting standards, and

supervision;
(2) more careful calibration of government participation; and
(3) improved alignment of incentives of participants using capital
market funding.

When discussing these best practices, additional aspects that need to be

considered by policymakers in emerging market countries as they set up
their housing finance systems are suggested. Lastly, based on the best

Source : International Monetary Fund | April 2011

96
practices, certain specific recommendations for the housing finance system
in the United States, where the recent crisis in part had its origins.

This system remains unique in many ways and an overhaul is needed. The
U.S. administration's recently released housing finance reform proposal is
a welcome step. Reform of the U.S. housing finance system should address
current gaps in the regulatory, supervisory, and consumer protection
fi-ameworks; aim for better defined and more transparent government
involvement in the housing market, showing relevant items on the
government's budget; reconsider the role of the housing government-
sponsored enterprises, with a view to creating a more level playing field in
mortgage markets; and encourage "safe" private-label securitization,
including by improving the alignment of incentives. Such reforms would
have a significant positive effect on the U.S. financial system and would
help bolster global financial stability.

In many countries, house price swings have been associated with financial
instability. There are several examples of house price booms and busts over
the past two decades, including in Sweden in the early 1990s, and in
Ireland, Spain, the United Kingdom, and the United States during the
current crisis. These house price gyrations can carry a significant cost to
the economy, reflecting the importance of housing in the construction
industry, household budgets, and overall wealth. Still, the degree to which
such house price boom-bust episodes have led to more widespread
financial instability differs between countries, in part because of important
differences in countries' housing finance systems, including the role of
government in the housing market.

Source : International Monetary Fund | April 2011

97
The recent financial crisis was triggered by problems in the U.S. domestic
subprime mortgage markets, where cumulative loss rates of securitized
subprime loan portfolios exceeded 20 percent by end-2010.
In the wake of the crisis, U.S. housing defaults have accelerated, reaching
their highest level since the 1930s, with 11.1 million residential properties
(or 23.1 percent of the total) having negative equity mortgages (that is,
where the outstanding loan balance is greater than the property value) as of
end-2010.

Researches are carried out to bring theoretical concepts and empirical

evidence to bear on housing finance systems in a number or representative
advanced and emerging economies in order to identify factors conducive to
a stable housing finance system and financial stability more generally.
Aspects of housing finance systems in some advanced economies that have
contributed to financial instability, in part through empirical analyses are
mentionable. Recommendations on how to mitigate these factors by
outlining a number of best practices that emerge from evidence presented
can be understood. The extent to which these best practices might be
applicable in emerging economies as they set up their housing finance
systems are suggested by the IMF.

• HOUSING BOOMS AND BUSTS :

Before examining the effects of housing finance on financial

stability, it is useflil to review why housing markets have been
implicated in many episodes of financial instability. Housing booms
and busts are often associated with systemic financial stress. The
recent experiences in the United States, Spain, Ireland, and, to a
lesser extent, the United
Source : International Monetary Fund | April 2011

98
 Kingdom provide fresh examples of unsustainable housing booms
that have turned into busts, with sizable output losses and banking
crises in some cases.

The six major historical episodes of banking crises in advanced

economies since the mid-1970s were all associated with a housing
bust. This pattern can also be found in many emerging market crises,
including the Asian financial crisis of 1997-98, with the magnitude
of house price declines being broadly similar in both advanced and
emerging market countries. Given that housing busts weaken
household and financial sector balance sheets, housing-linked
recessions are, on average, more severe than recessions that are not
accompanied by housing busts.

• HOUSING FINANCE AND FINANCIAL STABILITY

Housing booms and busts are intimately linked with the provision of
credit. However, there has so far been little discussion about the
extent to which national differences in housing finance relate to
housing booms and busts. Specifically the relationship between
mortgage credit growth, house price movements, financial stability,
and the role of housing finance characteristics in this context can be
seen. Several countries experienced strong growth in mortgage debt
in the last decade before the crisis, including Australia, Denmark,
Ireland, the Netherlands, Spain, Sweden, and the United States. The
ratio of mortgage debt to GDP reached more than 100 percent by
2009 in Denmark and the Netherlands In some emerging European
countries, mortgage debt grew by 25 to 45 percentage points of GDP
over the decade. Based on 2004-05 data, the share of households
with a mortgage rangedfi-omapproximately 45 percent in the United

99
 States to 40 percent in the United Kingdom and 20 percent in the
euro area. While the share of households with a mortgage generally
increases with income level, the share of households with mortgages
in the United States remained higher relative to the euro area for all
income levels; in particular, the percentage of low income
households with mortgage debt, which might have a bearing on
financial stability, was only 4 percent in the euro area, compared
with 10 percent for the United Kingdom and 16 percent for the
United States (ECB, 2009).

The crisis has taken a toll on all mortgage markets, although the
severity of its impact has varied between countries. The mortgage
portfolio performance of U.S. banks has been significantly worse
than that of their counterparts in other countries, reflecting the strong
deterioration in U.S. underwriting standards, as well as the
significant downturn of the real economy. Spain and the United
Kingdom have also seen a substantial increase in mortgage defaults,
but to a much lesser extent than in the United States. In general,
while many countries have seen greater house price volatility
compared with the United States, households in these countries have,
in aggregate, faced lower levels of negative equity and lower default
rates than their U.S. counterparts. Delinquencies on securitized loans
in Europe, Canada, and Australia have increased, but remain well
below those in the United States.

The past years have witnessed slowdown in U.S. economy, resulting

in deceleration of global economic activity. The financial turbulence
and the slowdown in the U.S. economy and the after effects of sub-

Source : International Monetary Fund | April 2011

 prime mortgage crisis, in turn, affects Indian financial market with
upward trend in interest rate scenario. The cost of funding has gone
up disproportionate to the return on lending due to periodical
increases in interest rate by Commercial Banks and also by National
Housing Bank, reflecting pressure on profits. Notwithstanding
various measures initiated by the RBI to curtail inflation, market
conditions remain volatile throughout these years. The steep increase
in prices of Steel, Cement, etc. has resulted in escalation of price of
new houses, as against the expectation or price reduction. The high
interest rate and the price level brought down the demand for new
housing stock, in turn affecting the growth in the Housing Finance.
The present scenario is expected to continue in the coming years till
such time there is a stability and improvement in the global
economic context.

Source : International Monetary Fund | April 2011

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