Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 1

Presentation by R. V. Verma Executive Director National Housing Bank

Seminar on Professional Opportunities in Infrastructure Sector at New Delhi on Saturday, the 15th October, 2005

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 2

Presentation Outline

• Real Estate and Housing• National Housing Bank• Housing Finance System in India• Housing – Shortage• Industry Performance• Housing Finance – Trends• Credit Growth to Housing & Real Estate• Housing Finance Interest Rate in India• Policy Profile• Supportive Policy Regime• Fiscal Regime for Housing• Supportive Credit & Regulatory Policy of RBI• About National Housing Bank• Financing Agencies• National Housing and Habitat Policy• Need for Mortgage Backed Securities (MBS)• MBS : Benefits to Banks / FIs• MBS : Institutional Framework• Issues in Indian Context• Opportunities

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 3

Real Estate and Housing …

• Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings/houses.

• Reserve Bank of India clarifies exposure to,– Residential Mortgages, as lendings fully

secured by mortgages on residential property that is or will be occupied by the borrower or that is rented;

– Commercial Real Estate, as lendings secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.)

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 4

… Real Estate and Housing

• In India, about three fourth (3/4) of real estate development is for residential use and balance one fourth (1/4) is predominantly for commercial use.

• Indian Real Estate and Housing Industry– is growing annually at around 30 per cent.– has significant backward and forward linkages

with over 250 ancillary industries.– is the second largest employment generator, next

to agriculture.– can create a significant impact on our economic

growth, over the medium term.– can play a prominent role in the healthy

development of our Nation.• From every Rupee spent on construction, an

estimated 75 – 80 paise is added to GDP.

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 5

National Housing Bank (NHB)

• Multi-Functional, Development Finance Institution in Housing Sector, wholly owned by the Reserve Bank of India– Promotion & Development– Regulation & Supervision– Financing

• NHB’s Approach– Integrated: Aimed at confidence-building among

Savers, Borrowers, Lenders and Investors.– Multi-pronged: Simultaneous intervention on

both the demand (financial) and supply (real) side of the housing sector

– Multi-Agency: Wide coverage of schemes to include various actors in the field of housing credit delivery, spread over a vast geographical area in order to achieve “extensive” outreach

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 6

Housing Finance System in India

Households, Corporations, Trusts, Provident Funds

Governmentof India

Reserve Bankof India

ExternalSources

National Housing Bank

Scheduled

Banks

LIC : Life Insurance Corporation of IndiaGIC : General Insurance Corporation of India

UTI : Unit Trust of IndiaHUDCO : Housing & Urban Development Corporation

CHFS : Co-operative Housing Finance Societies

Households & Corporations

Housing Finance

Cos.

LIC/GIC/UTI

StateGovernments

HUDCO

State Apex CHFS

Primary CHFSPublic Agencies/

SHGs/MFIs

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 7

Housing Shortage

11.6

16.314.7

8.2 7.1

14.6

23.3 22.9

31.1

24.0

3.0

7.0

0

5

10

15

20

25

30

35

1971 1981 1991 2001

Rural Urban Total

( in million )

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 8

Industry Performance

0

100

200

300

400

500

600

1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04year

T otal HFCs Banks Cooper atives

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 9

Housing Finance – Trends …

• Housing– is a basic necessity, for an individual– supports economic activities, for a family /

community– is a catalyst, for creating multiplier effect in other

sectors– is a labour intensive activity, for increasing the

per capita income – is an engine of growth, for the national economy

• Housing Finance– Strengthens the Financial System – Leads to

Investment Demand– Increases the Assets Formation – Leads to

Formation of Household Physical Assets– Serves the Social Cause – Key to Development of

Human Settlement

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 10

… Housing Finance - Trends

• Liquidity in the System

• Lower Inflation Rate

• Softer Interest Rate Regime

• Housing Loan has the Lowest Non Performing Assets (NPAs) (as at the end of March, 2004) (RBI)

• Fiscal Concessions (Tax Concessions, etc.)

• Legal Reforms (Repeal of ULCR Act, SARFEASI Act, etc.)

Retail Portfolio of Banks

Housing Loan

Consumer Durables

Credit Card Receivables

Other Personal

Loans

TOTAL Retail Loans

TOTAL Loans &

Advances

Net NPAs as % of outstanding loans 1.4 4.0 2.4 1.6 1.6 2.8

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 11

Credit Growth to Housing & Real Estate• Outstanding Gross Bank Credit (Rs. crore)

(Source: RBI)

• Outstanding Credit by HFCs (Rs. crore) (Source: NHB)

• Direct Housing Finance Disbursals (Rs. crore) (Source: NHB)

Particulars 23-Mar-01 22-Mar-02 21-Mar-03 19-Mar-04 18-Mar-05

Gross Bank Credit (GBC) 4,69,153 5,36,727 6,69,534 7,64,383 9,72,587

Housing 16,143 22,346 36,587 51,981 75,173

Hsg. as % of GBC 3.44 4.16 5.46 6.80 7.73

Real Estate Loans (RELs) 1,766 2,596 5,894 5,577 10,612

RELs as % GBC 0.38 0.48 0.88 0.73 1.09

Primary Lending Institutions (PLIs) 2000-01 2001-02 2002-03 2003-04 2004-05

1. Commercial Banks 5,553 8,566 23,553 32,816 * 45,700

2. Housing Finance Companies 12,638 14,614 17,832 20,862 26000

3. Co-operative Institutions 868 678 642 623 ---

4. TOTAL 19,059 23,858 42,027 54,301 71,700

5. Annual Growth (in %) 35.07 25.18 76.15 29.21 32.04

Particulars 2000-01 2001-02 2002-03 2003-04 2004-05

Housing Loans 33,250 41,844 49,238 59,144 * 72,500

Other Loans 8,163 9,666 13,358 15,847 * 16,300

* - Estimated

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 12

Housing Finance Interest Rate in India

Source: HDFC, 2004

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Months

15.5

0

19.0

0

15.0

0

13.0

0

11.2

5

10.0

0

8.50

8.75

15.5

0

16.0

0

12.5

0

17.0

0

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 13

Policy Development

• Changing Profile of Housing Sector

• From “Social Sector” to “Economic Sector”

• Government’s growing thrust on Housing

• Institutional building and financial deepening of the housing sector

• Growing dependence on the market – Major shift in policies since early 1990s

• Deregulated environment – but “Accessibility” and “Affordability” continue to be major challenges

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 14

Supportive Policy Regime

• Housing as a “Lead Sector” for all-round economic development

• Role of all agencies – Private, Public, Cooperative Sector, Central and State Governments – duly recognized in the policy framework

• Continued fiscal provisions/tax benefits for borrowers, lenders, corporates engaged in housing finance

• Repayment of principal and interest on housing loans are eligible deductions

• Lenders can transfer 40% of their profit to special reserve, exempted from tax

• Supportive fiscal regime has led to sustained increase in demand for housing loans

• Borrowers’ changing preferences – from debt averse to market savvy – Preference for loans

• Lower interest rates and higher incomes have reinforced demands for housing loans

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 15

Fiscal Regime for Housing

• Individuals:– Interest on capital borrowed for purchase/ construction of a

house property allowable as deduction upto Rs. 1.50 lakh subject to certain conditions [Section 24(b) of IT Act]

– Deduction u/s 80 C of IT Act for repayment of Principal amount of housing loans available from AY 2006-07 onwards upto Rs. 1 lakh

– Tax Rebate u/s 88 of IT Act available upto 2005-06 in respect of repayment of housing loan upto Rs. 20,000/- discontinued

• Corporates:– Deduction available not exceeding 40% of the profits derived

from the business of providing LT finance carried to special reserve account [Section 36(1)(viii) of IT Act]

• Investors:– U/s 54EC of IT Act, Capital gain on transfer of a LT capital

asset by an assessee will not be charged if the same is invested in bonds issued by NHB, NABARD, NHAI, REC or SIDBI

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 16

Supportive Credit & Regulatory Policy of RBI• Risk weight on housing loans reduced from 100%

to 50% (raised to 75% in September 2004 by RBI in the mid-term review of credit policy)

• Priority Sector lending includes individual housing loans upto Rs.15 lakh (raised from Rs.10 lakh )

• Banks’ indirect lending to HFCs can also be covered under priority sector

• At least 3% of incremental deposits of the Banks to be lent for housing – directed credit

• Low NPA levels in housing sector has encouraged the lending agencies

• Supportive regulatory policy has led to sustained increase in lending for housing finance

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 17

About National Housing Bank (NHB)

• Established in 1988 by an Act of the Parliament• Preamble of the National Housing Bank Act, 1987

“An Act to establish a bank to be known as the National Housing Bank to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions and for matters connected therewith or incidental thereto.”

• Equity fully held by the Reserve Bank of India• An apex institution for housing finance system in

India• Functions

– Promotion & Development of Housing Finance System

• Co-ordination with the Government• Participation in the equity of HFCs• Training Programmes /Workshops• Promotion of RMBS Issues• Research in Housing & Habitat related areas

– Regulation & Supervision– Refinance to Primary Lending Institutions– Project Finance to Public Agencies / SHGs / MFIs

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 18

Financing Agencies …

• Large number of institutions in the market – supportive policy framework

• Besides the HFCs, Commercial Banks have emerged as major players – Public Sector Banks, Private Sector Banks as well as Foreign Banks

• Commercial Banks currently accounting for 50% of the market, which is set to further increase

• Housing sector has registered an annual growth rate of nearly 32% over the last decade

• Steady growth in number of HFCs – 45 registered HFCs with NHB and 10 HFCs with assets size more than INR 500 crore

• Dominated by few major players viz. HDFC, LIC Housing Finance Ltd., CanFin Homes Ltd., Dewan Housing Finance Corporation Ltd., and HUDCO

• Top 5 HFCs account for nearly 80% of all deposits held by HFCs and 75% of all lendings done by HFCs

• State level cooperative sector institution – Funding from insurance company – LIC

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 19

… Financing Agencies

• With the entry of commercial banks in housing finance sector, competition has intensified

• Deposit growth among the HFCs as well as their borrowings from Commercial Banks indicate high level of confidence

• Deposits have grown from Rs. 860 crore in 1992-93 to Rs. 13,500 crore in 2003-04

• Banks’ lending to HFCs has grown from Rs. 2,870 crore in 2000-01 to Rs. 9,850 crore in 2003-04

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 20

National Housing & Habitat Policy

• The Policy has encouraged all stake-holders in the housing sector – a strong advocacy document

• Has sought to build a broad consensus on the approach and strategy

• Prescribes enabling role for the Governments and Public Agencies

• Places reliance on private sector enterprise and potentials

• Envisions strong, efficient and sustainable public-private-partnership (PPP) in all segments of the housing sector

• The Policy has also prescribed a strong collaboration between the formal/informal sector

• Recognizes the potential of MBS and Secondary Mortgage Markets as an important source of funds

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 21

Need for Mortgage Backed Securities (MBS)• Capital deficient housing sector: Huge volume

of funds required• Growing disintermediation• Capital market : Permanent source of funds for

housing in a market oriented environment• Need for integration of housing market with

capital market• Need for long term debt market

– Housing finance : a long term financing activity– Better asset liability management

• Improved balance sheet management by HFIs /Banks

• MBS : a vehicle for carrying forward reforms

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 22

MBS : Benefits to Banks / FIs

• Risk Diversification : Precludes concentration of financial risks within the housing finance circuit

• Risk Transfer : Transfer of 100% RWAs to third parties substantially enhancing own liquidity

• Capital Relief : More loans with no additional capital

• Ability to leverage resources• Continued liquidity and matched funding based

on maturities of assets and liabilities : Better ALM

• Restructuring Debt-Equity Ratio• Facilitates reduction of credit concentration • New sources of fee based income : Servicing

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 23

MBS : Institutional Framework

BorrowersBorrowers Originator

Custodian

Servicing & Paying Agent

SPVTrustee

Registrar &Transfer Agent

Banks

InvestorsInvestors

FIs

Insurance Cos.

Mutual Funds

Issue ArrangersIssue Arrangers

Rating AgencyRating Agency

HHFFII

NNHHBB

EMI

Loan

Mortgages

Unrated Mortgages

Rated Mortgages

Declaration of trust

Custody Agreement

Servicing & Paying Agency

Agreement

Pass- through Certificates

PTCs

Monthly pay-outs

Payment ofConsideration

by SPV

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 24

MBS : Issues in Indian Context

• Legal

• Accounting

• Taxation

• Capital Market

• Diverse Underwriting Standards and Documentation

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 25

Opportunities

• Deregulation has led to competition

• Demand-led growth of the sector

• Competition has led to rate war

• Innovative products in the market – Demand driven products

• Increased awareness among borrowers

• Greater transparency in the Industry

• Low NPA levels

• MBS, Credit Guarantee and Credit Information are some of the emerging Institutional Innovations.

Northern India

Regional Council of

ICAI

Overview of Housing

Sector

N H B Slide 26

Thank You