The common link between retail credit, urbanisation and fiscal incentives today is housing. The mortgage finance (housing loan) market in India has recorded a phenomenal compounded annual growth of 38% in the last 6 years (source: RBI Third Quarter Review). Factors like Acute housing shortage, benign interest rates, higher loan to value ratio and rising income levels have been the key drivers of this growth.
However, despite the stupendous growth in mortgage finance, its penetration (as a percentage of disposable income) is still low at 10% as against around 30% in other emerging markets. Having said that, housing loans as a percentage of GDP have risen to 8.5% in 9mFY07 from 6% in FY05. The ratio, nevertheless, is undisputedly lower than developed countries (51% in the US and 54% in the UK) and average of Asian countries (of about 15%).
However, the lending pie has undergone a significant structural transformation in the past five to six years, with banks growing their housing loan portfolio at a brisk pace and dominating the hosing finance market with a 52% share in FY06. We underscore some of the key catalysts of the same.
Owned versus rented: Increasing number of urban households moved towards owned accommodation in the last two fiscals due to tax sops and relatively lower interest rates. The proportion of owned houses rose from 44% in 1981 to 63% in 2005 (Source: RBI). With greater financing options, increased affordability and continuance of tax incentive, the trend is likely to sustain in the medium term.
Higher LTV ratio: Higher loan-to-value (percentage of house purchase price financed by banks) acts not only as an incentive for incremental housing demand, but also increases the ticket size of the loan. The ratio has improved from 72% in FY01 to 80% in FY05 (one of the highest in the world), as borrowers sought majority financing from lenders and shelled out a relatively lower proportion from their own pockets. However, very high LTV ratios can take away lender's cushion against property price correction and may result in higher losses in case of default.
Higher ticket sizes: Average ticket size (loan per housing unit) of home loans has gone up remarkably (particularly in metros) due to shift towards better quality housing, increasing documented value and rising realty prices. It may be noted that although the rising property prices act as a deterrent to incremental housing demand, they also lead to higher ticket sizes.
Also, as per the National Housing Bank (NHB) estimates, the average age of an Indian house buyer has fallen from 42 years in FY02 to 31 years in FY07. Given that around 40% of India's 1.1 bn population is under 25 years, the country's per capita income generation capability is likely to remain robust. Moreover, India's median age is 24 years (2005) compared to 33 in China and 43 in Japan. The longer loan servicing ability due to the age advantage is likely to retain higher ticket sizes.
Deeper penetration: In the mortgage finance industry, banks are better positioned than housing finance companies (HFCs) because of their strong regional penetration through extensive branch networks unlike the HFCs' limited and regionally concentrated networks. Moreover, banks have access to low cost retail deposits, which helps them to lend aggressively at competitive rates, giving tough competition to the HFCs.
Not without the risks...
The home loan disbursement process is largely through direct sales agents (DSAs). Most of the financiers (except SBI) have outsourced origination, legal verification, valuation and post disbursal servicing activities, which help them keep their fixed operating expenses low. With rising interest rates, any callousness in the process of credit appraisal, which gives protection against decline in the value of underlying asset, can prove hazardous to the sector. Gross non-performing assets (NPAs) on mortgage finance for last five years have been in the range of 1.5% to 2.0%. Investors may also be well aware of the fact that global markets have recently reacted very strongly to the negative repercussions of sub-prime mortgage lending in the US.
In India, with rising interest rates, categorization of mortgage loans as sub-PLR lending may also become a subjective and market determined affair. While banks expect housing loan demand to decelerate marginally due to rising interest rates (without witnessing any significant slowdown) the net interest margins on the same are certainly due for downward revision. In India, the cost of mortgage loans is higher mainly due to lack of secondary market for mortgage-backed securities (MBS) and relatively higher credit risk. Also, credit risk on mortgages in India is higher than developed countries due to lack of real estate regulation, absence of strict legislations and difficulties in repossession and recoveries.
Reverse mortgage - A viable option? In yet another attempt to add depth to the domestic mortgage financing market, the reverse mortgage scheme has been conceptualised by the NHB, wherein a senior citizen of age 62 years or more, who owns a house, can avail loan up to a fixed amount worked out on the basis of the market value of the house owned. In case of equated monthly installments (EMIs), the lent amount will be spread over 15 years and in case the borrower outlives this tenure, the payments made to the borrower will stop after 15 years. Surplus after paying off loan on sale of property would be refunded to the heirs. Alternatively, the heirs can retain property by repaying loan amount (including interest) to lender bank. The successful launch of the scheme is expected to be another leg of the evolvement of the mortgage financing market, offering security and liquidity to both the borrower and lender.
Thus, despite concerns about slow down in the incremental lending growth for housing loans, we believe that the sector has evolved from being one fraught with risks to a bright business proposition for most financing entities. Better risk management, transparency in proceedings and austere legislations can only entail better participation from investors.