November 30, 2009

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November 30, 2009

COVER STORY HOUSING IN INDIA India, the second most populous country of the world, has evolved as one of the fastest growing economies of recent times. Housing is a major economic, political and social issue in many developing economies including India. Primarily, India lives in villages. Economic growth has led to migration of population to the cities from the rural areas. Table 1.1 below shows the continuously increasing trend of Indian urban population over the last three decades, while at the same time, the growth rate of the houses is not commensurate with the population growth. TABLE 1.1: CENSUS DETAILS OF POPULATION AND HOUSES ((IN MILLIONS) 1981

1991

2001

1991

2001

Population /

growth

growth

House /Year

over 1981

over 1991

20.01

18.02

523.87

628.70

742.00

(Percentage)

(77%)

(74%)

(72%)

Urban Population

159.46

217.60

285.00

(Percentage)

(23%)

(26%)

(28%)

36.46

30.97

Total

683.33

846.30

1027.0

23.85

21.35

113.96

142.98

177.50

(76%)

(73%)

(71%)

25.47

24.14

Rural Population

Rural Houses (Percentage)

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November 30, 2009

Urban

35.48

52.03

71.60

)

(24%)

(27%)

(29%)

46.65

37.61

Total

149.44

195.01

249.10

30.49

27.74

Houses(Percentage

Source: The Handbook of Housing Statistics Part-1 NBO and NHB Data It may be noticed that the percentage of rural houses has continuously declined from 76% in 1981 to 71% in 2001. In terms of 2001 Census data on housing stock, the number of houses, at 249 million, grew by 27.74% in a 10-year period from 1991 to 2001, outstripping population growth of 21.35% in the same period. The housing shortage has been continuously increasing since the last four decades. Table 1.2 depicts that this shortage in rural areas has been always higher than in urban areas. TABLE -1.2 HOUSING SHORTAGES/GAPS

FROM

1961 AND 2001 (IN MILLIONS)

Year

1961

1971

1981

1991

2001

Total

15.2

14.6

23.3

22.9

24.7

Rural

11.6

11.6

16.3

14.7

14.1

Urban

3.6

3

7

8.2

10.6

Source: The Handbook of Housing Statistics Part-1 NBO Housing is a significant contributor to the Indian economy, providing millions of Indians with jobs and generating considerable economic output each year. Housing markets are integrated with the financial markets in a variety of ways and play an important role in the overall direction of the nation’s economy. According to the Confederation of Indian Industries (CII), the housing sector has forward and backward linkages with about 280 industries and a 10% increase in spending in the construction sector can push the gross domestic product growth by 3%. Hence it becomes important to make funds available to housing. INDIAN HOUSING FINANCE

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November 30, 2009

Housing Finance has been given its due importance only after the enactment of National Housing Bank Act in 1987 and subsequent establishment of National Housing Bank (NHB) in 1988. In 1989, NHB issued the “Housing Finance Companies Directions” and HDFC emerged as the leader of more than 400 housing finance companies existing in the country today. Housing finance has grown fairly significantly during the last few years and the two major reasons attributed for this high growth are: •

Fiscal incentives for investment in housing for households

•

Treatment of housing finance as priority sector lending by banks

The steady growth registered in housing finance disbursements indicates continued buoyancy in the industry. The details of the disbursals by the three major players in housing credit have been depicted in Table 1.3. These players are Housing Finance Companies (HFC), Commercial Banks and Co-operative Sector Institutions. The values in the table reveal that the total housing finance disbursements have shown significant increase during the years 2002-03 and 2004-05 as the percentage change over the previous years’ value have been recorded to be 76.15 and 41.55 respectively. The mean of the yearly percentage increase in the disbursement from 2001 to 2006 is 36.94, which shows substantial growth. Table 1.3: Housing Finance Disbursements (in Rs Crore) Institution Category

2001-02

2002-03

2003-04

2004-05

12673.85

14614.44

17832.01

20862.23

26042.5

27411.4

Commercial Banks

5553.11

8566.41

23555.37

32816.39

50398

58623

Cooperative Sector

867.72

677.58

641.48

623.08

421.15

520

19058.68

23858.43

42026.86

54301.7

76861.6

86554.4

Housing

Finance

2000-01

2005-06

Companies

Total

5 Yearly % Increase

-

25.18

76.15

29.21

41.55

12.61

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November 30, 2009

The distribution of disbursements by the three major credit providers of housing finance market is pictorially shown in the following figure (Fig 1.1). It is evident that the commercial banks have surged ahead of housing finance companies (HFC) in loan disbursements from the 2002-03 onwards and this change has rapid. It may be noticed that in five years time the ratio of disbursals of commercial banks to HFC has increased from 0.44 in 2000-01 to 2.14 in 2005-06, which clearly shows the dominance of commercial banks in the housing finance domain. The contribution of the cooperative sector is miniscule.

Fig 1.1 Distribution of Housing Finance Disbursements Funds for housing are in short supply and the demand for housing has been rising. The result has been an acute housing shortage. The creation of specialized HFCs has helped ease the problem to some extent, but the HFCs need continuous funding to match the demand for housing loans. In India there is a huge deficit of capital in this sector. It is very difficult to mobilize the required funds from existing sources as the market becomes increasingly crowded and competitive.

Working group on urban housing pertaining to the 11th Five-year Plan

estimates that an investment of Rs.3, 61,318 crore is required for meeting the housing requirement up to 2012 (Kundu, 2006). This raises the logical question: where will these resources for housing come from? The HFCs must therefore evolve innovative mechanisms for fund generation. These funds could be generated in two ways. The first is by increasing the liabilities and the second is by adjusting the assets. The first is the traditional ways of raising funds. The second option has seen some innovations in recent years. Securitization is one such innovation through which illiquid assets like mortgages can be converted in to liquid assets like cash by pooling the mortgages and selling them to the investors in the capital market (Fabozzi, 2003). This way capital market funds could be channelized to housing finance. This is in addition to the current sources of funds from the banking sector. Hence securitization of housing loans is considered to be a viable solution (Patil, 2005)

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November 30, 2009

Housing loan securitization is a long-term solution to the problem of raising resources for Housing Finance Institutions (HFIs), the main providers of housing loans in the country (NHB’s Report 2004). Through securitization, HFIs can recycle the amounts they have advanced by raising cash from their loan assets as soon as these are created. MortgageBacked Securities (MBSs) can help increase the depth of the fixed-income debt market while at the same time channeling resources from the capital market to the housing sector. Securitization will also improve the HFIs’ capital ratios and give them a healthier balance sheet. Further, HFIs can alter their risk asset profile through securitization by disposing of the riskier assets in their portfolio.

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November 30, 2009

FIN-NICHE

November 30, 2009

Whether it is a financial downturn or a resurging market, the response of the markets is intricately and inseparably linked to the reactions of banks. Through BANCON-’09 the banking conclave of IMT-G, we provide an opportunity to delve deeper to understand what drives the banking sector and how the financial gurus steer this industry. There would be a series of sessions, each critically analyzing the various aspects of the industry. With the who’s who of the banking world to grace the occasion by their presence, we welcome you all to BANCON –‘09. Major events : •

Key note Speech- An eminent personality from the banking sector to address the audience, provide his valuable insights and share his experiences.

•

Technical sessions – In an attempt to understand the intricacies of the banking world there would be a series of sessions, each critically analyzing the various aspects of the industry.

•

Panel discussion – Touted as the star event of the conclave, a panel of 4-5 eminent personalities from the financial world will be part of this moderated discussion. Areas of discussion will include contemporary issues and new business opportunities in the financial worlds. Location of the event – yes you guessed it right, the Amphi.

•

Paper presentation- the conclave provides a platform for young minds from various B schools to showcase their talent by presenting their papers to distinguished judges and guests at the conclave.

•

Case study competition - An inter B school competition will be held during the conclave to solve a live case study.

CAN YOU SOLVE

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November 30, 2009

Unscramble the letters below to make meaningful words. 1.lzsuno geyern 2.onognghk naghahsi nigankb procoranoit 3.diap ni paliact 4.zenzbemmeelt 5.rercnut ncaouct Send in the solutions to [email protected].

First five correct entries will be declared winners on Thursday(3rdDecember) So hurry up!! Do write in to us(@ [email protected]) if you have any suggestions/ideas for us.

NEWS THIS WEEK Cheques trickle down

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November 30, 2009

Not only are their CEOs paid astronomical salaries, but the generosity of some of the top companies in India Inc seems to be extending to the rank and file in their organization as well.

Volumes decline by a quarter since June RETAIL investors, it seems, are still not confident about the direction of the Indian stock market. Cash segment volumes, at least, suggest so. The cash segment — where retail investors primarily put money in the equity market — has seen volumes decline by a quarter since June, indicating retail participants’ nervousness about the short term prospects of the Indian capital market.

Maruti, Hyundai Motors India and Tata sifting gold from rust The once-iconic automobile hub, now going through a journey of bankruptcy, is turning out to be the ideal hunting ground for the carmakers who are eyeing talent laid off by General Motors, Chrysler and Ford. The Indian auto sector is scouring Detroit and other such fallen auto hubs across the US and Southeast Asia, placing advertisements in leading auto magazines seeking engineering talent.

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November 30, 2009

They couldn’t do without us AS AMERICA’S top banks emerge from the Troubled Asset Relief Program (TARP) and the economy shows signs of recovery, Indian outsourcing vendors Tata Consultancy Services, Infosys and Wipro are set to gain new off shoring projects worth around $1 billion over the next 1-2 years.

Attempts to improve India-US relations PRIME Minister Manmohan Singh and US President Barack Obama attempted to give new impetus to the strategic relationship between the two countries and push forward ties in several key areas from climate change to counter-terrorism.

Unitech hopes to raise $700m via FCCBs UNITECH, India’s second-largest real estate company, has sought approvals from the government and central bank to raise $700 million (Rs 3,200 crore) through foreign currency convertible bonds (FCCBs).

Kimaya in talks with PEs to sell 15% OWNERS of Kimaya Studios, a Mumbai-based fashion house, are in talks with private equity firms to offload more than 15% stake

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November 30, 2009

in the designer retail chain that hawks labels of more than 100 designers.

ITC’s Warning ITC fired a warning shot at Max India’s Analjit Singh and the Oberoi family, indicating that it is not disinclined to the idea of a fight for EIH, the company that runs the Oberoi and Trident hotel chains.

Dubai slides into debt trap MARKETS around the world including India found themselves lashed by fears of fresh financial trouble, this time with its epicenter near home in Dubai, threatening to derail an incipient global recovery and holding huge consequences for India.

IS Dubai daunted? WORLD markets were on their way to regaining their recently acquired composure as fears that the knock-on effect of the financial crisis in Dubai would lead to a double-dip global

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November 30, 2009

recession abated.

S’pore set to reign as financial hub THE jury is out on what the future holds for Dubai. Fund managers and high-street bankers see the fall of Dubai as a prelude to the emergence of Singapore as the undisputed financial centre of Asia.

The Cat Fails CAT failed its maiden test as it took to a computer-based format for the first time.

WORDS Vostro Account: The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank. Also known as a loro account. Suspense Account: An account that is used to store short-term funds or securities until a permanent decision is made about their allocation.

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November 30, 2009

Regulation R: Regulation R implements provisions of the Gramm-Leach-Bliley Act of 1999 regarding banks that are also involved in securities activities. Regulation R details exceptions for banks from the definition of "broker" and "dealer." Activities of banks that fall outside of these exceptions are required to be done by a registered broker-dealer. Treasury Bond - T-Bond: A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level Off-The-Run Treasuries: All Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity. These are the opposite of "on-the-run treasuries”.