REPORT ON TREND AND PROGRESS OF HOUSING IN INDIA - JUNE, 2001

ASSESSMENT & PROSPECTS
The continued thrust given by the Government to the housing sector during the year once again helped the housing finance industry to sustain the high growth rate witnessed during the earlier years. As a result, the housing finance system has reached a matured stage in its growth.

The year 2000-2001 also witnessed yet again a significant increase in the role of the commercial banks in providing financial assistance for housing. Though the total contribution of the commercial banking sector was marginally lower than that of the previous year, it far exceeded the target of 3% of the incremental deposits. The absence of demand for funds from other sectors of the economy and the continued accretion of resources to the banking sector saw the commercial banks having an excess liquidity. In order to deploy the surplus resources in a profitable way, the banks looked for alternate sectors for lending and they found lending to the housing sector in the retail market to the individuals as a viable one. Due to social and psychological factors, the recovery of loans in the housing finance sector has been excellent as compared to the lending to any other sector and at the same time the profitability of the banking sector is also maintained as they were lending to this sector at market rates. The commercial banks are having a vast network of branches in the rural areas, and this is expected to benefit the rural masses with easy accessibility and availability of institutional finance. This would also result in significant improvement in the housing conditions in the rural areas and could, to some extent, arrest the rural-urban migration. Availability of institutional finance in rural areas together with improvement in employment opportunities could alter the face of the rural economy and help the banks in achieving a better credit-deposit ratio in the rural areas.

In many rural areas of the country, the absence of land records makes it impossible for the financial institutions to verify the title to the property to be financed and in the absence of such ownership records the rural populace is also unable to provide the property to be financed as security. Even though the banks have been advised not to insist on mortgage of property as security and to accept any other form of security, in the rural areas availability of any other alternate security is also a constraint. As a result of these factors, many potential households have been left out of the fold of the formal financial system.

In this regard, the State Governments have a much larger role to play by creation of such land records. Another area in which State Governments can take a major initiative is in the area of stamp duty and registration charges. As has been pointed out in the earlier reports also, in some parts of the country, the stamp duty and registration charges are high. As a result, there is a tendency to under value the property. The State Governments are reluctant to reduce the stamp duty stating that it would lead to reduction in their revenue. On the contrary, it is felt that reduction in stamp duty would lead to better compliance with the statutory requirements and the tendency to under value the property would also diminish leading to improved revenue collection. This measure coupled with creation of land records would lead to increased registration of properties which in turn would also lead to improvement in collection of revenue. It is hoped that the State Governments would reduce the stamp duty for the purpose of registration of mortgages and would facilitate increased flow of institutional finance in the rural areas.

While the competition among financial institutions is good for the borrowers, the factor that is worrying today is the dilution in credit norms by the institutions to increase their business. So far, the housing finance sector has been maintaining a very high recovery rate and it is feared that the dilution in appraisal standards would lead to a fall in the recovery rate leading to higher non performing assets which would contaminate the system. This in the absence of a speedier foreclosure mechanism would spell disaster to the housing finance system. Various financial institutions are well advised not to dilute their credit standards in the name of competition as otherwise this would erode their financial strength as well as the confidence of the people in the system.

In order to help the HFIs in recovering the loans faster, the Government of India had taken a bold step in June 2000 in amending the National Housing Bank Act, 1987 by making a provision for appointment of recovery officers with quasi-judicial powers. However, this provision of the Act has still not come into force as the recovery officers are yet to be notified. This amendment is mainly intended to be used against wilful defaulters. Early notification of the recovery officers will go a long way in containing the wilful defaulters.

Availability of long-term resources for the housing sector has been one of the major problems facing the sector. In order to meet this long term resource requirement as well as to integrate the housing finance market with the capital market, securitisation of mortgages is an effective tool. After long years of research in introducing mortgage backed securities (MBS) in India, NHB came out for the first time with four issues of MBS during the year. It is hoped that the experiences learnt from the four issues will be of great help in standardising this instrument. It is believed that MBS will be the future instrument for raising the resources required by the sector. There are still a few issues relating to MBS that need to be sorted out. The State Governments need to prescribe a lower stamp duty on the MBS in order to keep the interest rates low.

With all these developments it is likely that the housing finance sector will continue to witness the growth rate of the previous year, if not exceed it.