Indian Economy

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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
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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

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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.)

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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.

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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
• NHBs 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

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Housing Finance System in India
Households, Corporations, Trusts, Provident Funds

Government of India
Reserve Bank of India
External Sources
Scheduled Banks
LIC/ GIC/ UTI
State Governments
National Housing Bank
State Apex CHFS
Housing Finance Cos.
HUDCO
Public Agencies/ SHGs/MFIs
Primary CHFS
Households Corporations
LIC Life Insurance Corporation of India GIC
General Insurance Corporation of India
UTI Unit Trust of India HUDCO Housing Urban
Development Corporation
CHFS Co-operative Housing Finance Societies
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Housing Shortage
( in million )
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Industry Performance
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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

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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.)

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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)

- Estimated
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Housing Finance Interest Rate in India
Source HDFC, 2004
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Policy Development

• Changing Profile of Housing Sector
• From Social Sector to Economic Sector
• Governments 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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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MBS Institutional Framework
EMI
Monthly pay-outs
Borrowers
Originator
Servicing Paying Agent
H F I
Loan
Custodian
Investors
Mortgages
Banks
FIs
Custody Agreement
Unrated Mortgages
Declaration of trust
Insurance Cos.
Rating Agency
Servicing Paying Agency Agreement
Mutual Funds
Rated Mortgages
N H B
SPV
Trustee
Registrar Transfer Agent
PTCs
Payment of Consideration by SPV
Issue Arrangers
Pass- through Certificates
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MBS Issues in Indian Context

• Legal
• Accounting
• Taxation
• Capital Market
• Diverse Underwriting Standards and Documentation

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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.

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Thank You