REPORT ON TREND AND PROGRESS OF HOUSING IN INDIA - JUNE, 2001-02

ASSESSMENT & PROSPECTS

The housing finance disbursement continued to grow at a steady pace during the year 2001-02. However, the presence of formal financial mechanism continued to be felt mainly in the urban and metropolitan areas. The rural areas still remained relatively underserved by the specialised housing finance institutions. While the keen interest evinced by the banking fraternity for housing finance might go a long way in addressing the problem of rural housing shortage by virtue of considerable presence of commercial banks, specially those in the public sector in rural India, the problem for the formal sector institutions to lend in the rural areas still persists due to lack of suitable security. Usually, the formal sector financing institutions insist on mortgage of the property as security for the loan. But in most cases, due to non availability of land records, it is not possible to verify the title to the land on which the house has been constructed. There is thus an urgent need to have these records created, preferably a computerised one for easy retrieval. The Government of India had introduced a scheme for the purpose. While some of the states have done well in computerising the land records in the rural areas, some other states are yet to do so. Early implementation of this scheme in all the states would lead to a better flow of institutional credit for housing in the rural areas where the shortage of housing is more.

With a view to addressing the twin problems of ‘affordability” and “accessibility” that thwart the progress of housing in the country, NHB is contemplating to introduce mortgage insurance in India. Significant advancement towards this objective has been made during the current year. Besides the Canada Mortgage and Housing Corporation, the Asian Development Bank, the International Finance Corporation and the United Guarantee Mortgage Indemnity Company, a member of the American International Group Incorporated have expressed their interest to participate in this venture. With the introduction of mortgage credit guarantee, it is expected that the housing finance market will expand and the section of the population which hitherto could not access credit from an institution in the formal sector will be in a position to do so through the scheme, making the dream of “housing for all” a reality.

With the commercial banks entering the housing finance market with renewed vigour which is partly attributable to factors like low level of NPAs in this sector and partly the lack of demand for funds from the other sectors of the economy, the ultimate borrower is benefited because of wider choice. Further, the cost of funds for the commercial banks being lower than that of the HFCs, the borrowers are also given the benefit of lower rate of interest. In addition, banks have also waived some other charges like the processing fee and done away with certain other requirements like the guarantor etc. This has triggered a price war among the institutions extending housing loans and quite a good number of loans have been refinanced. In a highly fragmented and segmented market, the profit margins could be driven down to survival levels when volume drops precipitously. Fortunately, the volume of new loans disbursed especially to the individual segment has maintained a steady growth during the year. The number of refinanced loans is expected to come down in the coming year as the rate differential among the institutions would be narrowed down owing to intense competition and more efficient functioning of the market in terms of information symmetry etc. and there would be more number of loans being originated at the new low level with less chance of being refinanced.

Any economic activity undertaken is beset with risk and the business of extending housing loans is no exception. It is in this context, the National Housing Bank has introduced the Asset Liability Management guidelines for the housing finance companies which are more or less on the similar lines issued by the Reserve Bank of India to the commercial banks and the non-banking financial companies. Asset Liability Management is an effective tool for the overall risk management and the HFCs are expected to implement this during the year 2002-2003.

The next year could also see a series of mortgage backed securities issue in view of the significant concessions extended to the banking system by the Reserve Bank of India regarding their investment in such securities. Further the notification of the rules and procedures for recovery of housing loans as envisaged under the National Housing Bank (Amendment) Act, 2002 should also strengthen the confidence of the investors.

Thus, with the introduction of a mortgage credit guarantee scheme and the scheme for recovering the loans from wilful defaulters being made easy, the housing finance sector is expected to witness further growth during the coming years. With the mortgage backed securitisation picking up, the much needed long term resources should also be available for the sector.