Future Outlook

During the year, Dewan Housing Finance Corporation Limited took over the Vysya Bank Housing Finance Corporation Ltd. and IDBI Home finance Limited took over Tata Home Finance in order to expand their housing finance business.

Credit expansion for housing in rural areas continues to be a challenge. Though the average annual growth witnessed in housing loan disbursements is over 30 percent, during the last four years, a major portion of these disbursements are confined to urban areas. Less than 15 per cent of the total housing loan disbursements flow to the rural areas in spite of greater shortage of housing and consequently greater demand for housing finance in rural areas, the housing requirements in rural areas being estimated at 24 million units as compared to 7.1 million units in urban/metro areas based on 2001 census figures. The reduced flow of housing finance to the rural areas is attributed to the following factors:

(i) Non availability of title deeds in respect of residential property in Abadi/Lal Dora/Porumbokku areas, which makes title verification and creation of charge difficult/costlier (in view of higher stamp duty payable for creation of registered mortgage in the absence of title deeds for creation of registered mortgage in the absence of the title deeds for creation of equitable mortgage),
(ii) Fluctuations in the level of income of the borrowers particularly agriculturists due to vagaries of nature, fluctuations in the prices of the produce, etc.,
(iii) Difficulties faced by lending institutions in assessing the income of the rural borrowers engaged in informal/unorganized sector like agriculture and absence of a well laid-down model for this purpose,
(iv) Difficulties encountered in enforcing the securities in rural areas in case of default particularly in view of the lack of prospective buyers for the mortgaged property to be disposed.

It may also be noted that various fiscal measures introduced by the Government of India have served as a great impetus to the accelerated growth witnessed in the home loan market in the last five years as these fiscal measures have effectively reduced the real interest burden on the home loan borrowers through income tax concessions. The fiscal concessions presently being extended to promote home ownership in the country are almost entirely availed of by the urban/metro population and the rural segment is presently left out as most of the home loan borrowers in rural areas are not income tax payers. Under the circumstances, it is appropriate that the impediments witnessed in rural housing are addressed effectively through improvements in the institutional arrangements along with introduction of fiscal concessions to kick start rural housing in a big way.

Besides a robust housing finance system, a sound and sustainable housing policy is equally important for expansion in housing credit. Defective policies with short term objectives in the housing construction segment can impose serious constraints on the credit system. While the two policy areas of the financial sector, viz. monetary and credit policy and fiscal policy are well disposed towards housing, it is the ‘Real’ sector that needs to respond to the emerging challenges and opportunities. Rationalisation of stamp duty across the states and reforms in the registration regime will generate positive sentiments in the lending as well as the construction industry. Reduction in existing stamp duty and registration charges on mortgaged securitized papers across all the states will pave the way for increased flow of fund into the housing finance sector.

The past few years have witnessed fierce competition in the housing finance market and may unfold surprises in the coming years. The housing sector has witnessed varying standards and practices among the lending community, be it in origination and documentation or monitoring and supervision. Variation in standards across the industry imposes systemic risks which can be a potential threat to the sector. Due care has to be exercised in originating loans as well as in monitoring and supervision to ensure the sustained quality of assets, more so, as the housing loans are of long tenor. Thus, there is a need for evolving uniform standards for appraisal and documentation. There is also a need for adoption of a uniform practice by the housing finance industry relating to matters like prepayment of housing loans, conversion of fixed rate loans into floating rate loans and vice-versa and reschedulement of repayment instalments.

Growing competition and reduction in risk weights on housing loans from 100 percent to 50 percent has provided a substantial incentive to the lending institutions resulting in aggressive practices including very high Loan to Value [LTV] loans, softening of collateral requirements, competitive pricing etc. Till date the default rate in the housing finance industry has been low as compared to the default rate in case of corporate loans. However, all over the world, it has been empirically verified that loan default rates bear a positive correlation with LTV ratio and are higher in the case of home loans with higher LTV ratios. Studies have also revealed that the probability of default and loss severity of such loans with higher LTV ratios is also higher particularly in the rising interest rate scenario. Therefore, the need for fixing differential risk weights relative to the LTV ratio has to be looked into.

Availability of reliable information in respect of various parameters related to housing will no doubt help the policy makers, lenders as well as the borrowers. Thus, evolution of a suitable mechanism for creation, maintenance and regular dissemination of this information to the various stake holders needs immediate attention. NHB has taken initiatives in this regard and has initiated the process for development of the real estate price indices. These indices are expected to be of great help to planners, lenders and individual home seekers.

Micro Finance Institutions have been playing a crucial role in community development by inculcating saving and credit habits among their members. The Self Help Groups nurtured by these agencies over a period of time are steadily maturing to handle housing credit for their members. Demand from this segment is bound to increase. There is a need to strengthen these institutions in the informal sector and utilize their network to reach the lower segments of the society. NHB’s recent initiatives to extend housing finance to this segment are expected to accelerate the flow of housing finance to the needy in the unorganized sector.

With the thrust provided by way of policy initiatives of the Government and the measures initiated by NHB and other agencies in respect of issues referred above, the housing finance sector is expected to maintain the growth momentum witnessed during the last few years, although renewed measures are required as above to address and tackle the core issues which can improve the growth of habitat development in our country.