A41

Northern India Regional Council of ICAI

Presentation by R. V. Verma Executive Director National Housing Bank

Overview of Housing Sector

NHB

Seminar on Professional Opportunities in Infrastructure Sector at New Delhi on Saturday, the 15th October, 2005 Slide 1

Northern India Regional Council of ICAI

Overview of Housing Sector

NHB

Presentation Outline • • • • • • • • • • • • • • • • • • • •

Real Estate and Housing National Housing Bank Housing Finance System in India Housing – Shortage Industry Performance Housing Finance – Trends Credit Growth to Housing & Real Estate Housing Finance Interest Rate in India Policy Profile Supportive Policy Regime Fiscal Regime for Housing Supportive Credit & Regulatory Policy of RBI About National Housing Bank Financing Agencies National Housing and Habitat Policy Need for Mortgage Backed Securities (MBS) MBS : Benefits to Banks / FIs MBS : Institutional Framework Issues in Indian Context Opportunities Slide 2

Northern India Regional Council of ICAI

Real Estate and Housing … • Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings/houses.

Overview of Housing Sector

• Reserve Bank of India clarifies exposure to, – Residential Mortgages, as lendings fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented; – Commercial Real Estate, as lendings secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multifamily residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.)

NHB Slide 3

Northern India Regional Council of ICAI

Overview of Housing Sector

NHB

… Real Estate and Housing • In India, about three fourth (3/4) of real estate development is for residential use and balance one fourth (1/4) is predominantly for commercial use. • Indian Real Estate and Housing Industry – is growing annually at around 30 per cent. – has significant backward and forward linkages with over 250 ancillary industries. – is the second largest employment generator, next to agriculture. – can create a significant impact on our economic growth, over the medium term. – can play a prominent role in the healthy development of our Nation. • From every Rupee spent on construction, an estimated 75 – 80 paise is added to GDP. Slide 4

Northern India Regional Council of ICAI

National Housing Bank (NHB) • Multi-Functional, Development Finance Institution in Housing Sector, wholly owned by the Reserve Bank of India

Overview of Housing Sector

NHB

– Promotion & Development – Regulation & Supervision – Financing

• NHB’s Approach – Integrated: Aimed at confidence-building among Savers, Borrowers, Lenders and Investors. – Multi-pronged: Simultaneous intervention on both the demand (financial) and supply (real) side of the housing sector – Multi-Agency: Wide coverage of schemes to include various actors in the field of housing credit delivery, spread over a vast geographical area in order to achieve “extensive” outreach Slide 5

Northern India Regional Council of ICAI

Housing Finance System in India Households, Corporations, Trusts, Provident Funds Government of India

Overview of Housing Sector

State Governments

Reserve Bank of India

External Sources

Schedul ed Banks

LIC/ GIC/ UTI National Housing Bank State Apex CHFS

HUDCO Primary CHFS

NHB

Public Agencies/ SHGs/MFIs

Housing Finance Cos.

Households & Corporations LIC : Life Insurance Corporation of India GIC : General Insurance Corporation of India

UTI : Unit Trust of India CHFS : Co-operative Housing Finance Societies HUDCO : Housing & Urban Development Corporation

Slide 6

Northern India Regional Council of ICAI

Housing Shortage ( in million )

35

31.1

30 Rural

Overview of Housing Sector

Urban

Total

23.3

25 20 15

14.6

24.0

14.7

11.6

10 5

16.3

22.9

7.0

8.2

7.1

3.0

0

NHB

1971

1981

1991

2001 Slide 7

Northern India Regional Council of ICAI

Industry Performance 600

500

Overview of Housing Sector

400 T otal

HFC s

B anks

C ooper ati ves

300

200

100

NHB

0 year

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

Slide 8

Northern India Regional Council of ICAI

Housing Finance – Trends … • Housing

Overview of Housing Sector

NHB

– – – –

is a basic necessity, for an individual supports economic activities, for a family / community is a catalyst, for creating multiplier effect in other sectors is a labour intensive activity, for increasing the per capita income – is an engine of growth, for the national economy

• Housing Finance – Strengthens the Financial System – Leads to Investment Demand – Increases the Assets Formation – Leads to Formation of Household Physical Assets – Serves the Social Cause – Key to Development of Human Settlement Slide 9

Northern India Regional Council of ICAI

… Housing Finance - Trends • Liquidity in the System • Lower Inflation Rate • Softer Interest Rate Regime

Overview of Housing Sector

• Housing Loan has the Lowest Non Performing Assets (NPAs) (as at the end of March, 2004)

Retail Portfolio of Banks Net NPAs as % of outstanding loans

(RBI)

Housing Loan

Consumer Durables

Credit Card Receivables

Other Personal Loans

TOTAL Retail Loans

TOTAL Loans & Advances

1.4

4.0

2.4

1.6

1.6

2.8

• Fiscal Concessions (Tax Concessions, etc.) NHB

• Legal Reforms (Repeal of ULCR Act, SARFEASI Act, etc.) Slide 10

Northern India Regional Council of ICAI

Credit Growth to Housing & Real Estate • Outstanding Gross Bank Credit Particulars Gross Bank Credit (GBC) Housing

22-Mar-02

21-Mar-03

19-Mar-04

18-Mar-05

4,69,153

5,36,727

6,69,534

7,64,383

9,72,587

16,143

22,346

36,587

51,981

75,173

3.44

4.16

5.46

6.80

7.73

1,766

2,596

5,894

5,577

10,612

0.38

0.48

0.88

0.73

1.09

Real Estate Loans (RELs) RELs as % GBC

• Outstanding Credit by HFCs Particulars Housing Loans

(Rs. crore) 2001-02

2002-03

2003-04

2004-05

33,250

41,844

49,238

59,144

* 72,500

8,163

9,666

13,358

15,847

* 16,300

• Direct Housing Finance Disbursals Primary Lending Institutions (PLIs)

2. Housing Finance Companies 3. Co-operative Institutions

NHB

4. TOTAL 5. Annual Growth (in %)

(Source: NHB)

2000-01

Other Loans

1. Commercial Banks

(Source: RBI)

23-Mar-01

Hsg. as % of GBC

Overview of Housing Sector

(Rs. crore)

(Rs. crore)

(Source: NHB)

2000-01

2001-02

2002-03

2003-04

2004-05

5,553

8,566

23,553

32,816

* 45,700

12,638

14,614

17,832

20,862

26000

868

678

642

623

---

19,059

23,858

42,027

54,301

71,700

35.07

25.18

76.15

29.21

32.04 * - Estimated

Slide 11

Northern India Regional Council of ICAI

Housing Finance Interest Rate in India

12.50

12.00%

10.00

11.25

14.00%

8.50

10.00% 8.00%

l-0 4 Ju

n04

l-0 3

Ja

Ju

n03

Ja

2

l-0 2 Ju

n0

Ja

1

l-0 1 Ju

n0

l-0 0

Ja

Ju

Ju l-9 9 Ja n00

Ju l-9 8 Ja n99

n98

Ja

l-9 7 Ju

n97

Ja

6

l-9 6 Ju

n9

l-9 5

Ja

Ju

Ja

n95

6.00%

Months

NHB Slide 12

8.75

13.00

16.00%

15.00

Overview of Housing Sector

15.50

18.00%

16.00

17.00

20.00%

15.50

19.00

Source: HDFC, 2004

Northern India Regional Council of ICAI

Policy Development • Changing Profile of Housing Sector • From “Social Sector” to “Economic Sector”

Overview of Housing Sector

• Government’s growing thrust on Housing • Institutional building and financial deepening of the housing sector • Growing dependence on the market – Major shift in policies since early 1990s

NHB

• Deregulated environment – but “Accessibility” and “Affordability” continue to be major challenges Slide 13

Northern India Regional Council of ICAI

Overview of Housing Sector

NHB

Supportive Policy Regime • Housing as a “Lead Sector” for all-round economic development • Role of all agencies – Private, Public, Cooperative Sector, Central and State Governments – duly recognized in the policy framework • Continued fiscal provisions/tax benefits for borrowers, lenders, corporates engaged in housing finance • Repayment of principal and interest on housing loans are eligible deductions • Lenders can transfer 40% of their profit to special reserve, exempted from tax • Supportive fiscal regime has led to sustained increase in demand for housing loans • Borrowers’ changing preferences – from debt averse to market savvy – Preference for loans • Lower interest rates and higher incomes have reinforced demands for housing loans Slide 14

Northern India Regional Council of ICAI

Fiscal Regime for Housing • Individuals:

Overview of Housing Sector

– Interest on capital borrowed for purchase/ construction of a house property allowable as deduction upto Rs. 1.50 lakh subject to certain conditions [Section 24(b) of IT Act] – Deduction u/s 80 C of IT Act for repayment of Principal amount of housing loans available from AY 2006-07 onwards upto Rs. 1 lakh – Tax Rebate u/s 88 of IT Act available upto 2005-06 in respect of repayment of housing loan upto Rs. 20,000/- discontinued

• Corporates: – Deduction available not exceeding 40% of the profits derived from the business of providing LT finance carried to special reserve account [Section 36(1)(viii) of IT Act]

• Investors:

NHB

– U/s 54EC of IT Act, Capital gain on transfer of a LT capital asset by an assessee will not be charged if the same is invested in bonds issued by NHB, NABARD, NHAI, REC or SIDBI Slide 15

Northern India Regional Council of ICAI

Supportive Credit & Regulatory Policy of RBI

Overview of Housing Sector

• Risk weight on housing loans reduced from 100% to 50% (raised to 75% in September 2004 by RBI in the mid-term review of credit policy) • Priority Sector lending includes individual housing loans upto Rs.15 lakh (raised from Rs.10 lakh ) • Banks’ indirect lending to HFCs can also be covered under priority sector • At least 3% of incremental deposits of the Banks to be lent for housing – directed credit • Low NPA levels in housing sector has encouraged the lending agencies • Supportive regulatory policy has led to sustained increase in lending for housing finance

NHB Slide 16

Northern India Regional Council of ICAI

About National Housing Bank (NHB) • Established in 1988 by an Act of the Parliament • Preamble of the National Housing Bank Act, 1987 “An Act to establish a bank to be known as the National Housing Bank to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions and for matters connected therewith or incidental thereto.”

Overview of Housing Sector

• Equity fully held by the Reserve Bank of India • An apex institution for housing finance system in India • Functions – Promotion & Development of Housing Finance System • • • • •

NHB

Co-ordination with the Government Participation in the equity of HFCs Training Programmes /Workshops Promotion of RMBS Issues Research in Housing & Habitat related areas

– Regulation & Supervision – Refinance to Primary Lending Institutions – Project Finance to Public Agencies / SHGs / MFIs Slide 17

Northern India Regional Council of ICAI

Overview of Housing Sector

NHB

Financing Agencies … • Large number of institutions in the market – supportive policy framework • Besides the HFCs, Commercial Banks have emerged as major players – Public Sector Banks, Private Sector Banks as well as Foreign Banks • Commercial Banks currently accounting for 50% of the market, which is set to further increase • Housing sector has registered an annual growth rate of nearly 32% over the last decade • Steady growth in number of HFCs – 45 registered HFCs with NHB and 10 HFCs with assets size more than INR 500 crore • Dominated by few major players viz. HDFC, LIC Housing Finance Ltd., CanFin Homes Ltd., Dewan Housing Finance Corporation Ltd., and HUDCO • Top 5 HFCs account for nearly 80% of all deposits held by HFCs and 75% of all lendings done by HFCs • State level cooperative sector institution – Funding from insurance company – LIC Slide 18

Northern India Regional Council of ICAI

… Financing Agencies • With the entry of commercial banks in housing finance sector, competition has intensified

Overview of Housing Sector

• Deposit growth among the HFCs as well as their borrowings from Commercial Banks indicate high level of confidence • Deposits have grown from Rs. 860 crore in 1992-93 to Rs. 13,500 crore in 2003-04 • Banks’ lending to HFCs has grown from Rs. 2,870 crore in 2000-01 to Rs. 9,850 crore in 2003-04

NHB Slide 19

Northern India Regional Council of ICAI

Overview of Housing Sector

NHB

National Housing & Habitat Policy • The Policy has encouraged all stake-holders in the housing sector – a strong advocacy document • Has sought to build a broad consensus on the approach and strategy • Prescribes enabling role for the Governments and Public Agencies • Places reliance on private sector enterprise and potentials • Envisions strong, efficient and sustainable publicprivate-partnership (PPP) in all segments of the housing sector • The Policy has also prescribed a strong collaboration between the formal/informal sector • Recognizes the potential of MBS and Secondary Mortgage Markets as an important source of funds Slide 20

Northern India Regional Council of ICAI

Overview of Housing Sector

Need for Mortgage Backed Securities (MBS) • Capital deficient housing sector: Huge volume of funds required • Growing disintermediation • Capital market : Permanent source of funds for housing in a market oriented environment • Need for integration of housing market with capital market • Need for long term debt market – Housing finance : a long term financing activity – Better asset liability management

• Improved balance sheet management by HFIs /Banks • MBS : a vehicle for carrying forward reforms NHB Slide 21

Northern India Regional Council of ICAI

Overview of Housing Sector

MBS : Benefits to Banks / FIs • Risk Diversification : Precludes concentration of financial risks within the housing finance circuit • Risk Transfer : Transfer of 100% RWAs to third parties substantially enhancing own liquidity • Capital Relief : More loans with no additional capital • Ability to leverage resources • Continued liquidity and matched funding based on maturities of assets and liabilities : Better ALM • Restructuring Debt-Equity Ratio • Facilitates reduction of credit concentration • New sources of fee based income : Servicing

NHB Slide 22

Northern India Regional Council of ICAI

MBS : Institutional Framework EMI Loan

Borrowers Mortgages

Servicing & Paying Agent

Originator Custodian

Monthly pay-outs

H F I

Investors Banks

Overview of Housing Sector

Unrated Mortgages

Custody Agreement

FIs Servicing & Paying Agency Agreement

Rating Agency Declaration of trust

Mutual Funds

Rated Mortgages

SPV

Trustee Registrar & Transfer Agent

NHB

Payment of Consideration by SPV

Insurance Cos.

Pass- through Certificates

N H B

PTCs

Issue Arrangers Slide 23

Northern India Regional Council of ICAI

MBS : Issues in Indian Context • Legal

• Accounting Overview of Housing Sector

• Taxation

• Capital Market

• Diverse Underwriting Standards and Documentation NHB Slide 24

Northern India Regional Council of ICAI

Opportunities • Deregulation has led to competition • Demand-led growth of the sector • Competition has led to rate war

Overview of Housing Sector

• Innovative products in the market – Demand driven products • Increased awareness among borrowers • Greater transparency in the Industry • Low NPA levels

NHB

• MBS, Credit Guarantee and Credit Information are some of the emerging Institutional Innovations. Slide 25

Northern India Regional Council of ICAI

Overview of Housing Sector

Thank You NHB Slide 26