1. M.F.S. CHAPTER – 8 M. Y. KHAN
HOUSING FINANCE

2. Chapter Objectives: Housing in India: Some Highlights
National Housing Bank
– An Overview, Focus Areas and Strategies
NHB: Prudential Norms

3. Housing in India

4. Hosing Finance Timeline
Pre 1970
Centralised directed credit
1971
HUDCO: Public Sector, Wholesale Lending
1977
HDFC: 1st private sector retail housing finance institution
1988
National Housing Bank- REGULATORY & SUPERVISORY BODY /Refinancing Agency
Late 80’s
Early 90’s
Public sector banks
Housing Finance Companies, Private Sector Co’s also entered
Late
1990’s
Commercial banks get active in direct lending for housing finance
2000
onwards
Variety of Financial Institutions Entered

5. Housing in India Central Government formulates broad policy framework
Eleventh Five Year Plan ( ):
Investment Requirements for housing estimated at INR 5.1 trillion (US$ 108 bn)
Acute housing shortage estimated at over 24.7 million units
– Rural: 14.1 million units
– Urban: 10.6 million units

6. Housing Finance in INDIA: Some Highlights
Second fastest growing economy in the world after China
Rapid Urbanization and Rising middle class
Contribution of Housing in GDP is about 6%
Services sector accounts for 60% of GDP
Political stability

7. Importance of Housing:
Engine of economic growth
Second largest employment generator after agriculture
Strong backward and forward linkages with over 250 ancillary industries
Estimated investment for meeting housing needs up to 2012: US $ 108 Billions.

8. Housing Finance: Drivers of Growth
High demand growth is driven by:
– Improved Affordability:
Rising disposable income
Lower interest rates
Tax incentives (interest and principal repayments deductible u/s 80 - D)
– Increasing Urbanisation:
Currently only 28% of the Indian population is urban
– Favorable Demographics:
60% of India’s population is below 30 years of age
Rapid rise in new households
Increasing number of nuclear families

9. Key Players in Mortgage Market:
Banks
Key Players
Housing Finance Companies
Reserve Bank of India (RBI)
Regulator
National Housing Bank
(100% subsidiary of RBI)
Access to low cost funds via current / saving accounts
Advantages
Dedicated players,
better customer service
Extensive branch network
Lower operating costs
High operating costs
Disadvantages
Higher funding costs
Mandated direct lending,
High liquidity ratio
Higher capital adequacy ratio

10. Marketing and Distribution
Earlier marketing scenario:
Walk-in customers
Passive marketing, belief that word of mouth from a satisfied customer was the best form of advertising
Current marketing scenario:
With increased competition, buyers’ became more demanding
Customers want door-step service
Use of direct selling agents (third party distribution channels)
Property fairs and exhibitions
Cross selling products and services

11. Regulatory Framework For HFCs
Guidelines for HFCs with regard to minimum capital, asset composition, composition of Board of Directors and appointment of auditors.
Public Deposit Acceptance Directions
– Tenor of 1 to 7 years
– Cannot exceed 5 times net owned funds
– Credit rating
– Statutory liquidity ratio
– KYC norms
• Prudential Norms
– Asset classification
– Provisioning requirements (Provisioning on Non-performing Loans and Standard Non-housing Assets)
– Capital adequacy - Atleast12% CAR

12. Why Housing Finance for India?
Meets housing demand (Urbanisation, Demographics)
Prevents Slum proliferation/explosion
An engine of equitable economic growth – Investments, Savings, Wealth
Contributes to poverty reduction (asset building, retirement, empowerment, community strengthening, better quality of life)
Promotes financial stability and economic growth

13. HOUSING FINANCE MARKET
Households, Corporations, Trusts, Provident Funds
Government
of India
Reserve Bank
of India
External
Sources
Scheduled
Banks
State
Governments
LIC/
GIC
N H B
State Apex CHFS
Housing &
Urban Devpt.
Corporation
Housing Finance Companies
Public, Pvt. Agencies/
SHGs/MFIs
Primary CHFS
Households & Corporations
LIC : Life Insurance Corporation of India GIC : General Insurance Corporation of India CHFS : Co-operative Housing Finance Societies

14. Housing Finance : Exponential Growth
Direct Housing Finance Disbursals
(Rs. in crores)
Primary Lending Institutions (PLIs)
1. Commercial Banks
8566
23553
32816
45700
2. Housing Finance Companies (HFCs)
14614
17832
20862
26000
3. Co-operative Institutions
678
642
623 --
4. TOTAL
23858
42027
54301
71700
5. Annual Growth (in %) 25 76 29 32
Estimated disbursements during Rs. 85,000 cr (Source:NHB)
Outstanding Loan and Advances of Banks
Particulars
Mar-2004
Mar-2005
Total Loans and Advances (TLA)
764383
Housing
51981
134653
Housing as % of TLA 10 12
LOW NPAs % compared to 2.80% of Banks’ Total Retail Credit (Source:RBI)
Outstanding Credit of HFCs
Housing Loans
41844
49238
59144
72500
Other Loans
9666
13358
15847
16300

15. HOUSING FINANCE – Exponential Growth
Rs. in billion
Housing Loans Disbursals
Data pertained to banks and housing finance companies

16. Share of Housing & Consumer Durables in GBC
Source : RBI

17. National Housing Bank - An Overview

18. National Housing Bank Established in 1988 by an Act of Parliament
100% owned by Reserve Bank of India
Headquarters at Delhi
OBJECTIVE:
“To operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith …
… shall act on business principles with due regard to public interest.”
(National Housing Bank Act, 1987)

19. National Housing Bank – FUNCTIONS
Promotion and Development of HFIs
Regulation and Supervision of HFCs
Financing
Refinance for Individual Loans Primary Lending Institutions
Direct Finance for Projects Public Agencies / Private &
Joint Sector Corporate/s,
Builders/NGOs/SHGs / MFIs

20. BUSINESS OBJECTIVES “To provide affordable housing to common man”
Develop Market Related Housing Finance System focusing on Unserved and Underserved segments
Catalyze Increased Investment through Private Sector Participation
Seek to reduce housing shortage say by 30% in next 3 years
Develope 15 lakh houses in 3 Years : To Divert Rs.75,000 crores institutional credit flow into housing sector

21. Focus Areas

22. Extreme Focus : Social and Financial Inclusive Housing
Rural Housing
Urban Renewal
Market Development
Capacity Building and Technical Assistance

23. Public Private Partnership (PPP) Model
Salient Features of Public Private Partnerships Model:
Private Sector:
Innovation, Use of Technology
Professional Management
Quality Assurance
Efficiency and Speed
Maintenance Practices and Sustainability
Public Sector:
Policy Setting
National Planning
Regulation and Governance
Looking after Public Interest
Facilitating Economic Growth and Development

24. NHB: PRUDENTIAL NORMS INCOME RECOGNISION - On Cash Basis.
BASIS OF NPA:
- ASSETS – “THE INTEREST HAS REMAINED PASTDUE FOR 6 MONTHS”
- TERM LOAN do
- DEMAND/CALL LOAN - do
- BILLS do
- LOAN AND ADVANCES – 6 MONTHS - do

25. NHB: PRUDENTIAL NORMS – CONT…
INCOME FROM INVESTMENT:
- IN CASE OF DIVIDEND FROM CO’S AND MF – CASH BASIS.
- IN CASE OF BONDS AND DEBENTURES OF CORPORATES AND GOVT. – ACCURAL BASIS.
ACCOUNTING STANDARDS:
- ACCOUNTING STANDARDS ISSUED BY “ICAI” MUST BE FOLLOWED.

26. NHB: PRUDENTIAL NORMS – CONT…
INVESTMENT GUIDELINES:
- HFCs ARE AUTHORISED TO INVEST IN SHORT TERM ASSETS AND LONG TERM ASSETS LIKEWISE…
- EQUITY SHARE
- PREFERENCE SHARE
- DEBENTURES/BONDS
- GOVERNMENT SECURITIES/ T – BILLS
- UNITS OF MUTUAL FUND
- AND OTHER INSTRUMENTS PRESCRIBED BY RBI

27. NHB: PRUDENTIAL NORMS – CONT…
ASSET CLASSIFICATION:
1. STANDARD ASSETS:
- “THERE IS NO DEFAULT IN TERMS OF INTEREST OR PRINCIPAL REPAYMENT AND DOES NOT CONTAIN MORE THAN NORMAL RISK”
2. SUB-STANDARD ASSETS:
- “IT IS THE ONE WHICH HAS BEEN CLASSIFIED AS NPA FOR A PERIOD NOT EXCEEDING 2 YEARS”
3. DOUBTFUL ASSETS:
- “IT MEANS ANY LOAN/LEASED/HIRE PURCHASE ASSET WHICH HAS BEEN CLASSIFIED AS NPA FOR A PERIOD EXCEEDING 2 YEARS”

28. NHB: PRUDENTIAL NORMS – CONT…
4. LOSS ASSETS
- “IT IS THE ONE WHERE THE LOSS HAS BEEN INDENTIFIED BY NBFC OR THE AUDITORS” AND THERE IS A THREAT OF NON- RECOVRY DUE TO REDUCTION OF THE VALUE OF THE SECURITY OR DEFAULT ON THE PART OF THE BORROWER”

29. NHB: PRUDENTIAL NORMS – CONT…
PROVISIONING REQUIREMENTS:
1. LOSS ASSETS: 100% PROVISIONING
2. DOUBTFUL ASSETS:
3. SUB STANDARD ASSETS: GENERAL PROVISION OF 10% OF TOTAL OUTSTANDING AMOUNT…
PERIOD FOR WHICH THE ASSET HAS BEEN CONSIDERED DOUBTFUL
PERCENTAGE OF PROVISION
UP TO 1 YEAR
20 %
1 TO 3 YEAR
30%
MORE THAN 3 YEARS
50%

30. NHB: PRUDENTIAL NORMS – CONT…
DISCLOSURE IN BALANCE SHEET:
- “EVERY HFC SHALL SEPARATELY DISCLOSE IN THEIR BALANCE SHEET, THE PROVISIONING IN RESPECT OF NPAs WITHOUT NETTING (WRITING OFF) THEM FROM THE INCOME OR VALUE OF THE ASSETS”
- DEPRICIATION PROVISION FOR INVESTMENTS.

31. NHB: PRUDENTIAL NORMS – CONT…
CAPITAL ADEQUACY REQUIRMENTS:
EVERY HFC SHALL MAINTAIN MINIMUM (TIRE -1 + TIRE – II) CPAITAL OF 12 PERCENT OF THEIR DEPOSIT LEVEL.
TIRE – I CAPITAL: IT INCLUDES “NET OWNED FUNDS”
TIRE – II CAPITAL:
- TIRE – II CAPITAL MAINLY INCLUDES PREFERENCE SHARE, REVALUATION RESERVES, GENERAL PROVISIONS AND LOSS RESERVES, HYBRID DEBT ETC.
- AT ANY POINT OF TIME, THE TIRE – II CAPITAL SHOULD NOT EXCEED 100% OF TIRE – I CAPITAL.

32. NHB: PRUDENTIAL NORMS – CONT…
RESTRICTIONS ON INVESTMENT IN LAND, BUILDING AND UNQUOTED/UNLISTED SHARES
- MAX. LIMIT 20% OF NOF.
CONCENTRATION OF CREDIT AND INVESTMENTS:
- MAX. CREDIT TO SINGLE BORROWER – 15% OF “NOF”
- MAX. CREDIT TO GROUP OF BORROWERS – 25% OF “NOF”
SUBMISSION OF HALF YEARLY REPORTS TO NHB

33. Thank You
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