Dec 22, 2004|
Housing Finance: An opportunity knocking?
Macroeconomic stability (or instability) and performance of the housing sector are inextricably linked. However, in contrast, while economies in South Asia have performed strongly in recent times, the consequent effect of this growth has failed to filter down to the housing sector. In India, which is the one of the most advanced economies in South Asia, the mortgage to GDP ratio (ratio of outstanding home loans to GDP) is estimated at 2%. In Pakistan, it is less than 0.5% and in other countries of South Asia, mortgages as a percentage to GDP are almost insignificant. As against this, the ratio for the US stands over 51%. Nevertheless, even if one were to benchmark with more comparable counterparts, the ratio ranges between 15%-20% for South East Asian countries. The penetration level of mortgages is miniscule when compared with the shortage of housing units.
Nevertheless, the housing finance sector in India has undergone unprecedented changes over the past five years. The importance of the housing sector in India can be judged by the estimate that for every rupee invested in the construction of houses, Rs 0.78 is added to the gross domestic product of the country and the real estate sector is subservient to the development of 269 other industries (Source: Report of International Union for Housing Finance). The real estate sector is also the second largest employment generator in the country.
Increasing share of banks
Banks, despite being late entrants in the housing finance segment, have overtaken established HFCs (Housing Finance Corporations) over the past 4 years. This is indicated by the fact that share of banks has augmented from 43% to 69% of the housing loan market over this period.
The rationale for this could be the lower proportion of NPAs contributed by this sector. The statistics for the banking sector's retail portfolio, further reiterate this fact that housing loans are increasingly finding favour among banking entities.
Retail portfolio of banks as at end of March' 04
Source:RBI Trends and Progress in Banking
||Net NPAs as %
||of outstanding loans
|Credit card receivables
|Other personal loans
|Total retail loans
HFCs left behind
The prime withholding factor for the HFCs happens to be 'the cost of funds'. Being institutional borrowers, they are at a disadvantage as compared to banking entities, which have access to low cost deposits. The minimum capital adequacy ratio for banks is 9% as against 12% for HFCs. The Securitisation Act, which brought a welcome relief to banking entities, does not apply to HFCs. Also, over the years, the HFCs have witnessed a decline in their average yields.
Room for all players
Critics had raised the issue that the Indian mortgage market could reach levels of saturation with the rise in the number of players. But this argument has been put to rest in view of the vast demand for housing loans and continuing paucity of funds. The total number of houses that would be required cumulatively during the Tenth Plan period (2002-2007) is estimated at 22.4 m dwelling units. However, this official estimate is based on the 1991 Census and unofficial estimates peg the current housing shortage in India at 40 m units. Further, the Tenth Five Year Plan has estimated an outlay of Rs 7,263 bn to the housing sector, of which the contribution envisaged from public institutional sources is Rs 4,150 bn. Therefore, substantial contribution from private sector players would necessarily be required to tackle the growing housing shortage.
The only concern that continues to haunt banks as well as HFCs is the possibility of asset-liability mismatch. Being a disbursal with relatively long tenure (10-15 years), housing loans expose the lending entities to interest rate and re-pricing risks. Not to mention, the fungibility from fixed to floating rate schemes further trims margins.
All said, the housing finance scenario promises bright prospects in the long run. A benign inflationary environment and a real estate boom is further expected to add fuel to the fire.
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