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 Tradition anyy in India, close to people used to depend on their provident fund and top amounts received after retirement while considering buying a berth. However, with the exit of hold finance as a major business in the country, an increasingly large number of people argon going for lodging loans. The trapping sector in India is facing an estimated shortage of 4. 1 crore houses and concord to the Ninth Plan, the posit-supply gap in urban lodging is 3. 3 crore houses.The exertion comp stand ups of closely 383 lodgment finance companies although disbursements from only the leading 26 institutions are eligible for re-finance from National Housing Bank, which is the regulatory body for these companies. These Housing finance Companies (HFCs) conciliate nearly 95 % of the total disbursement by the diligence . The tax exemption on the affaire paid on admit loans has alike be en extended up to the division 2003. This move forget acquire the salaried employees, especi ally the conservative populace. A dream of providing 25 hundred thousand rural houses has been envisaged in the budget. go forth of these, 12 lakh houses leave behind be built under the India Awas Yojana and an se equatingate one-lakh houses would be provided under the Credit-cum-Subsidy scheme for families with an one-year income be humbled Rs. 32,000. Moreover, close to 1. 5 lakh houses to be constructed under the well-off Jubilee Rural Housing basketball teamance Scheme will be eligible for refinance from the NHB. The constancy is witnessing a boom at present boosted by the open-handed budget standard operating procedure and rock bottom real nation prices. The demand is a result of genuine soul needs for caparison.The prospects of the application would be further strengthened on the amendments to the Rent Control bite and repealing of the debatable urban Land jacket cr own Act. This re search paper focuses on the Demand for Housing sector, market place Profile, Market Trends, Price Sensitivity factors and observation post of Development of Housing finance in the changing Business scenario. ____________________________________________________________ ____________ _________________nd Ceiling Act. _________________________________________________________ THE DEVELOPMENT OF HOUSING FINANCE IN THE CHANGING BUSINESS SCENARIO Mr. P. S. Ravindra** door Roti, Kapada aur Makaan are the three basic necessities of human beings. Traditionally in India, al most(prenominal) people used to depend on their provident fund and confidential information amounts received after retirement while considering buying a radix. However, with the exit 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 pay offing capacities is going up. Property prices are more or less(prenominal) on a stabilizing trend. A large number of home loan options are available.HFCs are becoming increasingly liberal. Interest place nurse been progressively falling. The brass of India has been giving substantial encouragement to the housing sector. The social structure of the Indian families is going through a sea change as the joint family is fast giving way to the nuclear family concept. The pressure to have ones own home is postgraduate among these families. Highlights Significantly, t here has been no dearth of demand for housing and consequently for finance for the resembling have been abundant. Market dynamics play a important role in determining the bring rates.Considering the same, the housing finance industriousness has been in a way up in re centime times. The entry of banks into the housing finance sector has posed a serious threat to already existent players in the field. The housing sector is witnessi ng a clash surrounded by major players. Foremost amongst this is the ICICI and HDFC imbroglio. The later is giving sleepless nights to HDFC. Tax sops provided by the Government of India is a significant step towards upholding the future prospects of this industry. vault of heaven Comments Nearly 25 lakh houses are built any year in India. However, the nations requirement is around 65 lakh houses per annum.The housing sector in India is facing an estimated shortage of 4. 1 crore houses and jibe 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 investment of Rs. 150,370 crore. Traditionally, the housing finance business has been yielding a margin of around 2 per cent. The skill of the players is in converting their advances that have a maturity period of 15-30 eld with the deposits that mature within three years. Though, the National Housing Bank (NHB) refinances housin g loan up to Rs. lakh disbursed to the lower income group, this is just a minimum proportion of advances to the major players. The primary sources of funds are fixed deposits, debentures, undercover placement of bonds and adoptions from banks and monetary institutions. Thus, efficient financial management has a delineate role to play in this industry. Lending rates are preponderantly market-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 a identical. 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 high income group having reasonably assured creditworthiness. In a scenario marked with the absence of speedy foreclosure regulations, most companies prefer to stay away from rural and the Low-Income root (LIG). However, it must be noted that demand for housing in the M iddle-Income assort and High Income Group segments has also recorded a steady rise lately. Market profile The Indian housing finance sector is herd 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, heap Fin Homes, SBI Home Finance and Gujarat Rural Housing. The youngest entrant into the Industry, which is penetrating rapidly, is ICICI. Interestingly, twain Can Fin Homes Limited and its parent Canara Bank are into housing finance. It is the same with quite a some banks, for example, SBI and SBI Home Finance Limited, Bank of Baroda and pier Finance, Vysa Bank and Vysyabank Housing. Though HDFC and ICICI also have their banking arms, 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 regulatory 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 over the last few years, the industry posted a fairly low disbursement growth. Market trends The housing sector is witnessing a clash between major players. HDFC had rule this sector with a lions stranglehold.It was smooth 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. indoors a year of its launch, ICICI Home Loans is giving the industry leader, HDFC, sleepless nights. Undercutting in the touch on rates is all in the game and so is every other trick in the book. HDFC is gathering its wits to beat its rival at its o wn game. It launched an aggressive hoarding campaign designed in the style of follow the leader.HDFC has launched its website propertymartindia. com as a joint move 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 mean(a) term loans from 13 per cent to 12. 5 per cent. Thus, bringing the engagement on housing loans at par with the foreign exchange loans. HDFC also rock-bottom the touch 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 either opt for a fixed interest rate of 13 per cent or a floating 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 disregarding of any future hike o r cut in the rates. Those choosing the plump for option would be subject to the vagaries of the interest market and may elucidate 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 floating rate loans would be charged at 5 per cent less interest. Originally, only the commercial-gradeized banks offered housing loans on floating interest rates, in a flash 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 recent 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 agency 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(prenominal) to offer the trounce deal in a rapidly growing market. CRISIL has forecast an append in the interest rates in the second half of this year. This will be due to the demand of funds by the Centre and als o the corporates exceeding the supply. The Central Government has projected a Rs. 31,000 crore higher borrowing this year than last 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 stable 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 real 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 nowadays 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 access to better tax planning options on accounting system of the exemption and a lower Equated Monthly Installment (EMI) due to hourlong term of repayment. Furthermore, individuals who already own a house can now invest in a new house and yet take away exemption from capital gains on the sale 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 establish new avenues such as securitisation, which are expected to be launched in the market very soon. This mechanism would require a pool of assets (mortgages), which would be sold by the HFCs to NHB. These assets in turn would act as a Special Purpose Vehicle (SPV) and would be sold as pass through certificates to investors, which initially would be from groups earning 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 superior at purchase 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 currency flows generated by these funds. Furthermore, a secondary market for mortgages would become feasibl e for HFCs. watch The industry is witnessing a boom at present boosted by the generous budget sops and rock bottom 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 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 aggressive young turk ICICI. withal the competition, the customer has nothing to lose as he can use up the best loan scheme from the ICICI and HDFC fold, with minimum interest and a nought processing fee. Conclusion Despite the abovementioned factors, several bottlenecks still exist in the industry, which have t o be taken care of before any of the above can bring about an improvement in the prospects of the industry. From an overall stall 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 positive surmount in the future.Now housing finance products are at par with other consumer goods, where use of all marketing mix has become requirement 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 * * * * *