The Development of Housing Finance in the Changing Business Scenario

THE DEVELOPMENT OF HOUSING FINANCE IN THE CHANGING BUSINESS SCENARIO Mr. P. S. Ravindra** ABSTRACT traditionally in India, most people characterd to calculate on their provident fund and gratuity amounts current after retirement while considering buying a kin. How of all time, with the emergence of lodgement pay as a major business in the country, an increasingly bombastic number of people ar going for accommodate loans. The hold field in India is facing an estimated shortage of 4. 1 crore houses and according to the Ninth Plan, the necessity-supply flutter in urban living accommodations is 3. 3 crore houses.The manufacture comprises of near 383 lodging pay companies although disbursements from only the leading 26 brasss be entitled for re-finance from subject Housing bound, which is the regulatory body for these companies. These Housing finance Companies (HFCs) constitute nearly 95 % of the follow disbursement by the industry . The tax claim on the interest nonrecreational on hold loans has in any case been extended up to the stratum 2003. This move allow for benefit the paying(a) employees, especially the middle-class populace. A dream of providing 25 lakh rural houses has been envisaged in the budget.Out of these, 12 lakh houses will be built under(a) the India Awas Yojana and another one-lakh houses would be provided under the Credit-cum-Subsidy scheme for families with an annual income below Rs. 32,000. Moreover, around 1. 5 lakh houses to be constructed under the Golden Jubilee Rural Housing finance Scheme will be eligible for finance from the NHB. The industry is witnessing a boom at indue boosted by the generous budget sops and rock cigarette real estate prices. The demand is a result of genuine individual needs for housing.The prospects of the industry would be further strengthened on the amendments to the commence Control Act and repealing of the controversial Urban Land roof Act. This research paper focuses on the fill for Housing welkin, Market Profile, Market Trends, Price Sensitivity factors and outlook of Development of Housing pay in the changing Business scenario. ____________________________________________________________ ____________ _________________nd Ceiling Act. _________________________________________________________ THE DEVELOPMENT OF HOUSING FINANCE IN THE CHANGING BUSINESS SCENARIO Mr. P. S. Ravindra** entryway Roti, Kapada aur Makaan are the three basic necessities of human beings. Traditionally in India, most people used to depend on their provident fund and gratuity amounts received after retirement while considering buying a home. However, with the emergence of housing finance as a major business in the country, an increasingly large number of people are going for housing loans. Incomes of families are rising and their purchasing capacity as well as loan repaying capacities is going up. Property prices are more or less on a stabilizing trend. A large number of ho me loan options are available.HFCs are comme il faut increasingly liberal. Interest place bear been progressively falling. The Government of India has been good-looking substantial encouragement to the housing sector. The social structure of the Indian families is going through a sea change as the roast family is fast giving way to the nuclear family concept. The pressure to rescue ones own home is high among these families. Highlights Significantly, there has been no dearth of demand for housing and consequently for finances for the same have been abundant. Market dynamics play a pivotal role in determining the outmatchow rates.Considering the same, the housing finance industry has been in a slump in recent times. The entry of banks into the housing finance sector has be a serious threat to already existent players in the field. The housing sector is witnessing a clash between major players. Foremost amongst this is the ICICI and HDFC imbroglio. The later is giving slee pless nights to HDFC. Tax sops provided by the Government of India is a significant step towards upholding the upcoming prospects of this industry. Sector Comments Nearly 25 lakh houses are built all(prenominal) year in India. However, the nations charterment is around 65 lakh houses per annum.The housing sector in India is facing an estimated shortage of 4. 1 crore houses and according to the Ninth Plan, the demand-supply gap in urban housing is 3. 3 crore houses. In case, all these urban housing dwellings were to be built, it would require an enduement of Rs. 150,370 crore. Traditionally, the housing finance business has been yielding a margin of around 2 per cent. The readiness of the players is in converting their advances that have a maturity period of 15-30 years with the deposits that mature within three years. Though, the National Housing Bank (NHB) refinances housing loan up to Rs. lakh disbursed to the lower income convention, this is just a trifling proportion of a dvances to the major players. The primary sources of funds are fixed deposits, debentures, private placement of bonds and borrowings from banks and financial groundings. Thus, efficacious financial management has a key role to play in this industry. Lending rates are predominantly commercialize-driven and in view of the same, the housing finance industry has been in a slump in recent times with there being low demand from builders and investors alike. Furthermore, the entry of banks into the housing finance sector has also not augured well for the industry.Most housing finance companies cater mainly to the higher income group having reasonably assured creditworthiness. In a scenario marked with the absence of speedy foreclosure regulations, most companies prefer to lodge away from rural and the Low-Income group (LIG). However, it must be noted that demand for housing in the Middle-Income Group and High Income Group segments has also recorded a steady rise lately. Market profile The Indian housing finance sector is crowded with players of all sizes and nature government organisations, insurance companies, banks, housing finance companies and co-operative organisations like HUDCO and NHB.Major players in the Industry are HDFC, LIC Housing Finance, Dewan Housing, Can Fin Homes, SBI Home Finance and Gujarat Rural Housing. The youngest entrant into the Industry, which is penetrating rapidly, is ICICI. Interestingly, both Can Fin Homes Limited and its parent Canara Bank are into housing finance. It is the same with quite a few banks, for example, SBI and SBI Home Finance Limited, Bank of Baroda and BOB Finance, Vysa Bank and Vysyabank Housing. Though HDFC and ICICI also have their banking outgrowths, they compete with each other in personal loans, but not housing loans.The industry comprises of nearly 383 housing finance companies although disbursements from only the leading 26 institutions are eligible for re-finance from National Housing Bank, which is the r egulatory body for these companies. These Housing Finance Companies (HFCs) constitute nearly 95 % of the total disbursement by the industry. However, owing to the slump in real estate market place over the uttermost few years, the industry posted a fairly low disbursement growth. Market trends The housing sector is witnessing a clash between major players. HDFC had ruled this sector with a lions stranglehold.It was peaceful sailing for HDFC all these years and it seemed that its monopoly was there to stay forever. However, out of the blue emerged ICICI Home Loans, when this financial institution decided to clash arms with HDFC on its home front. Within a year of its launch, ICICI Home Loans is giving the industry leader, HDFC, sleepless nights. Undercutting in the interest rates is all in the game and so is every other trick in the book. HDFC is gathering its wits to beat its competitor at its own game. It launched an hard-hitting hoarding campaign designed in the style of follo w the leader.HDFC has launched its website propertymartindia. com as a spliff venture with the Mahindras. Following suit, ICICI too, launched its home portal indiahomeseek. com. So the war rages on both at the retail level and also in the form of a cyber war. ICICI has lowered its prime lending rates on short and medium term loans from 13 per cent to 12. 5 per cent. Thus, bringing the interest on housing loans at par with the foreign exchange loans. HDFC also reduced the interest rates on its housing loans from 13. 25 per cent to 13 per cent. It went an extra mile to woo the borrowers of loans up to Rs. crore by allowing them the facility to both opt for a fixed interest rate of 13 per cent or a afloat(p) interest rate of 12. 5 per cent. As the name indicates, a borrower opting for the first choice will have to repay the loan at an interest rate of 13 per cent irrespective of any future hike or cut in the rates. Those choosing the second option would be subject to the vagaries of the interest market and may gain or lose in the bargain. The company has also reduced the interest on loans borrowed by non-resident Indians. These loans repayable within five years will attract an interest rate of 11. 5 per cent per annum while loans ith a term of 6-10 years will be charged interest at 12. 5 per cent. The to a higher place rates are under the fixed interest rate option. Similar natation rate loans would be charged at 5 per cent less interest. Originally, only the commercial banks makeered housing loans on go interest rates, at one time that HDFC is offering loans at a 12 per cent floating rate, ICICI also has a floating rate home loan in the pipeline. Price sensitivity factors noteworthy fact here is that NHB refinance to the HFCs comprises a mere 7% of the loans disbursed. In other words, most HFCs have to arrange for a major part of the disbursals from their own resources.Thus, low spreads, mismatched asset and liability, competition posed by banks with re cent regulations requiring commercial banks to invest 40 per cent of their advances towards the priority sector, etc. pose problems for the lending division. The first housing finance company to cut down its interest rate after rbi slashed the PPF interest rate by 1 per cent on January 14, 2000 was HUDCO. When the National Housing Bank, the refinancing place of all housing finance companies, slashed its rates by up to 50 basis points, it triggered off a virtual interest war in the industry.HDFC, ICICI, LIC Housing Finance, PNB Housing Finance Limited and a host of others followed suit. In a game of one-upmanship, the companies have been vying with one another to offer the best pot in a rapidly growing market. CRISIL has forecast an gain in the interest rates in the second half of this year. This will be due to the demand of funds by the Centre and also the corporates exceeding the supply. The Central Government has projected a Rs. 31,000 crore higher borrowing this year than l ast years figure of Rs. 86,000 crore. The State Government borrowings would add up to a further Rs. 7,500 crore and the corporate demand would be higher by Rs. 11,000 crore. As compared with the supply, CRISIL expects the short fall to be around Rs. 15,800 crore. To make up this short fall, even if there is a 1 per cent cut in CRR, interest rates are still bound to increase. The Union Budget 2000-01 has given a shot in the arm to the industry by raising the exemption applicable to individual borrowers on the interest paid on housing loans to Rs. 1 lakh. The existing tax rebate of 20 per cent under section 88 of the Income tax Act of 1961, covered repayment of housing loans, subject to a maximum of Rs. 0,000. The same has now been doubled to Rs. 20,000. This, coupled with the lowering of the interest rate would enable a borrower to enjoy tax exemption upto a loan of Rs. 7. 5 lakh for a 15-year term. He can now have opening to better tax planning options on account of the exemption and a lower Equated Monthly initiation (EMI) due to longer term of repayment. Furthermore, individuals who already own a house can now invest in a new house and yet claim exemption from capital gains on the trade of the asset. The tax exemption on the interest paid on housing loans has also been extended up to the year 2003.This move will benefit the salaried employees, especially the middle-class populace. A dream of providing 25 lakh rural houses has been envisaged in the budget. Out of these, 12 lakh houses will be built under the India Awas Yojana and another one-lakh houses would be provided under the Credit-cum-Subsidy scheme for families with an annual income below Rs. 32,000. Moreover, around 1. 5 lakh houses to be constructed under the Golden Jubilee Rural Housing Finance Scheme will be eligible for refinance from the NHB. The industry has found new avenues such as securitisation, which are expected to be launched in the market very soon. This mechanism would require a po ol of assets (mortgages), which would be sold by the HFCs to NHB. These assets in acidify would act as a Special Purpose Vehicle (SPV) and would be sold as liberty chit through certificates to investors, which initially would be from groups seduceing pension funds, mutual funds, financial institutions, commercial banks and other trusts or institution which require monthly fixed income. The mortgages would be for loans up to a period of 10 years, on which HFCs would earn 16 % from borrowers. The spread is to be passed back to the concerned HFCs in the form of premium at secure of mortgages or service charge over a period of time. It is expected that with the success of securitisation the circulation of funds would increase coupled with cash flows generated by these funds. Furthermore, a secondary market for mortgages would become feasible for HFCs. Outlook The industry is witnessing a boom at present boosted by the generous budget sops and rock bottom real estate prices.The deman d is a result of genuine individual needs for housing. The prospects of the industry would be further strengthened on the amendments to the Rent Control Act and repealing of the controversial Urban Land Ceiling Act. Thus, the housing finance industry is on solid ground and has interesting prospects ahead. As for the small players, they will have to take the harsh decision to either exit the industry or merge with bigger entities. It is also amply clear that in the future, industry leader HDFC will have to share the spoils with the fast-growing(a) young turk ICICI.Notwithstanding the competition, the customer has nothing to lose as he can choose the best loan scheme from the ICICI and HDFC fold, with minimum interest and a nil processing fee. Conclusion Despite the abovementioned factors, several(prenominal) bottlenecks still exist in the industry, which have to be taken care of before any of the above can bring about an improvement in the prospects of the industry. From an overall viewpoint demand for housing is ever rising and the same would be reflected on the demand for funds. Hence, the profitability of the industry should commence on the overbearing track in the future.Now housing finance products are at par with other consumer goods, where use of all marketing mix has become necessary for the banks to attract and retain customers. References 1. Basu D. N and Mehta V. K. , 1993. Housing Finance System India, Urban India, XIII, (1) January-June 36-50. 2. Manoj P. K. 2004. Dynamics of housing finance in India, 3. Vora P. P 2002. The Indian housing finance system, Housing Finance Investment. 15(Jan) 18-25. 4. Nambirajan, R, 2001. Home Loans and Tax benefits, Indian Infrastructure, May, pp. 42-43. http//www. indianloans. com http//www. indiainvest. com http//www. lichousing. com * * * * *