Future Outlook
The retail loans portfolio of the banks has been on the upswing. Housing loans form a sizable portion of this portfolio and have been expanding likewise. Continued fiscal support and soft interest rates have helped in sustaining high level of demand for housing loans. As a result, the industry continued to witness demand-led expansion. With fiscal incentives and competitive pricing, the sector is expected to sustain the growth.
The National Housing Bank (NHB) continued with its liberalized refinance scheme and clocked an all time high refinance of Rs. 7500 crore during the year, accounting for nearly 10% of the system's housing loan disbursements. In its refinancing capacity, the NHB endeavoured to supplement the efforts and resources of the Primary lending Institutions (PLIs) for improving the opportunities of housing finance in the country by offering them market-friendly products. Responding to the market demand and the trend, NHB has been delivering need based products to the housing finance institutions with market friendly features such as differential risk-based pricing, fixed and floating rates with easy convertibility, periodic and bullet repayments of principal as well as interest, availability of different maturities to suit the client’s ALM requirements, competitive rates, simplified procedures and easy exit route. The commercial banks also found the refinance products and the lending rates of NHB attractive. Refinance to commercial banks accounted for nearly 72% of the total refinance disbursed during the year by NHB.
For its lending operations at competitive rates, NHB relies primarily on the funds mobilized through the capital gain bonds. Supporting the efforts of the Government to promote housing finance in rural areas, the NHB has also been giving an additional 25 basis points reduction in the rates for refinance against rural loans under Golden Jubilee Rural Housing Refinance Scheme (GJRHRS). NHB’s refinance under GJRHRS accounts for nearly 47% of the Bank’s total lending during the year. However, there is still a huge section of the rural population which awaits s servicing from formal delivery channels at affordable rates.
The tenth Five Year Plan document on urban development has estimated an additional requirement of about 4.5 million houses each year during the Plan period (2002-07). Increasing number of household, rural urban migration and rising income levels have made the housing finance market in the urban and semi urban areas attractive as well as challenging. Housing in rural areas however continues to be under served requiring adequate infrastructural support and institutional depth. Partnership with the local bodies in the private and public sector is potentially good opportunity for the financing agencies. Though the capacity of the micro-financing institutions in the area of housing is still limited, NHB extended direct financial support to some of their endeavours, encouraging the local informal sector entities to undertake more and more housing micro-finance activities for their members. This segment is considered to hold enormous potential and scope for providing housing at the local and decentralized level. An efficient and sustainable partnership structure will enhance the scope of funding the housing needs of this segment of the population.
The Union Budget for 2005-06 has reinforced the commitment of the Government to support housing through continued fiscal incentives through the new Section 80 CCE of the Income Tax Act. The Budget announcement has also proposed to make securitization instruments as eligible securities under the Securities Contracts (Regulation) Act, 1956. This will facilitate integration of the housing finance industry with the capital market as these instruments will become tradable in the stock exchanges providing liquidity and depth to the secondary mortgage market. The industry recognizes this move as an important measure to significantly improve the flow of funds into housing as also facilitate efficient pricing. The envisaged legislative changes will facilitate financial innovation and credit enhancement measures, critical for the development of the mortgage securitization market. They are likely to offer scope to the lenders to devise innovative ways of raising funds at competitive costs to maintain the profitability and growth in housing finance business.
Though banks, with their access to low cost deposits and large regional penetration in terms of branch network, continued to dominate the housing finance market, the Housing Finance Companies sustained the growth witnessed in earlier years. However, they are increasingly challenged by the banks, who continue with their aggressive lending. Security of mortgage and low defaults in this segment, coupled with the growth in demand continued to engage the interest of the lending institutions. Although the overall sentiments in the market have remained positive, the competition in pricing and upward bias on the cost of funds continued to exert pressure on the spread of the lending agencies. Sensing overheating of the market resulting from aggressive lending, the Reserve Bank of India raised the risk-weight on housing loans of the commercial banks from 50% to 75% in its mid-term review of the Credit Policy in October 2004, signaling, inter alia, increased risk at the systemic level. This, in turn calls for lenders to exercise greater more care in lending for housing to ensure that there is no slippage in asset quality.
The housing sector in coming years is poised for sustained growth and expansion. The quality of assets and the standards of origination will count for its growth and stability. In tandem with growing competition and innovation in the financial sector, the multi-dimensional housing sector may see the emergence of specialized agencies for origination, funding, loan servicing, credit enhancement in primary market and secondary market and securitization related special purpose institutions.