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Housing Finance Market in India

Posted in Finance Articles, Total Reads: 12549 , Published on November 26, 2011

Indian Housing Finance Market – An Introduction

A lot has been written about India’s growing strength as an emerging nation. I would however, still like to highlight the following points to build up a base for further discussion:

  1. GDP growth rate averaging over 8% from 2003-2010
  2. Rapid Urbanization, Rising middle Class
  3. Increasing political stability with re-election of last government
  4. Forex Reserves over $250bn
  5. Service Sector contributing 60% of GDP

Importance of Housing in Indian Scenario

  1. 2nd Largest employment generated in this sector (after agriculture)
  2. Fosters development of ancillary industries via strong vertical linkages (forward & backward)
  3. US $110 bn market size

Indian Housing Finance Market – The problem

The major problem plaguing the Indian housing industry is the consistent demand-supply mismatch in housing as pointed out earlier. The shortage was 23.3 million units in 1981, 22.90million in 1991, ~20mn in 2001 and so on. Although a clear downward trend has been visible the fact is that the rate of closure of this gap has been decreasing over time. The recent figures in this respect are worse.

Moreover the growth rate in urban areas is clearly above that in rural areas signifying the urbanization phase India is currently undergoing with more and more people migrating from the rural to urban areas.

Also, India has the following features, which signify the need of ease of access to housing finance for the masses.

  1. Rapid Population Growth
  2. Increasing disposable income
  3. Very High population density
  4. Lack of supporting financial products
  5. Low competition
  6. Regulation & Exchange Risk

However there is a hugedemand-supply disconnect here.

We see that whereas a huge demand for housing finance exists in India, the mortgage/GDP ratio, which is a key indicator of Housing finance penetration, is one of the lowest in the world.

This naturally is a great opportunity waiting to be tapped.

Government Initiatives:

Housing finance problems as outlined above began to surface as early as in the 1970s. The Indian Government has taken various initiatives over time to address these problems:

Competition in Housing Finance Sector in India

The following are providers of housing finance in India, in one form or another:

  1. Commercial Banks: is the largest mobiliser of savings and also in respect of coverage.  Their role has traditionally been limited to providing the working capital needs of business, industry and commerce and hence, they have not been very active participants in the housing finance market. Another reason for the same is that they are funded by short-term resources  which cannot be profitably employed in long term lendings
  2. 2. Cooperative Banks: deploy funds from a common pool of resources to provide for various needs of its members. In Indian Scenario, a lot of reluctance has been noticed by these cooperative banks to provide loans for housing finance. Our analysis states the major reason for this is the high risk and illiquidity in giving housing loans from common corpus.
  3. Regional Rural Banks: Again, they have not been very active in housing finance sector because of the large amounts and low creditworthiness involved leading to illiquidity and losses.
  4. 4. Agricultural and Rural Development Banks: The major function of these banks is not the provision of housing finance. Consequently, there is low threat from these too.
  5. 5. Housing Finance Companies: These are companies with principal objective of lending for housing finance. However, the noticeable aspect our research has revealed is that there are only about 20 companies accounting for greater than 90% of total housing loans provided.
  6. 6. Cooperative housing finance societies: These are specialized institutions established and subsidized by NHB to cater to the housing needs of the masses.

These institutions do not have adequate technical expertise to be able to design right product for the right target. However, state subsidy is major factor in their favour.

Thus, the housing finance market competition in India can be summarized as follows:

Current Housing Credit Products

We visited several banks as customers for housing finance products. In general most of them are providing slight modified schemes of the same basic version. Herein we describe the basic version of Standardized fixed rate mortgage (We have also enclosed the entire list below the text under this heading)

We can see from the table collated below, as to how the basic structure described above is used in Indian Context by various housing finance institutions.

Table 7 and 8 show the terms offered by different bank to salaried and self-employed people. We did not observe any significant difference between the terms offered to the 2 classes of people.
The only significant difference was the requirement for security was much stricter in case of self-employed individuals rather than for salaried individuals.

Terms for Salaried people

Terms for Self-Employed people

Refinancing options

I came across the following sources from which these housing finance institutions fund their products apart from Internal Funding / Ploughing back of profits which is basically Interest income and principal repayments redeployed in these businesses that is used for extending further credit to its clients. Also, securitization is a very common process to refinance the loans, but it basically means transfer or sale of loan assets and hence somewhat different from refinancing in the traditional sense.

The others are as follows:

  1. Bank Deposits (including interbank participation certificates)
  2. Insurance Premiums
  3. Contribution from members
  4. Central & State Government funding (including NHB refinancing) and International funding

Arranging in increasing order of duration (from left to right – bank deposits being the shortest and insurance premium, the longest) for which these refinancing options are available gives us the following chart


From the above analysis, we can now draw an Industry Analysis Map of the Indian Housing Finance Market as follows:

Clearly, from the above analysis we can understand that Indian housing finance market is in its nascent stage of development. Since this is a new formed market for a hitherto unaddressed product, there will be huge first mover advantages. The drawbacks stem only from the event of unfavorable policy changes or uneven competition from state. Both the drawbacks are relatively unlikely on the basis of government’s current policy trends.

Hence, we conclude that the Housing Finance market in India is very attractive and forms a good case for investment.

This article has been authored by Ankit Goel from IIM Bangalore

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