Roti, kapda aur makaan are the three basic necessities of life. So, why is the level of mortgage penetration in India abysmally low? Housing loans as a percentage of GDP have remained at around 7% in India. This is significantly lower than the levels achieved in most developed countries and even other Asian markets. It indicates an opportunity for further penetration of mortgage loans. With improving demographics, considering 60% of India's population is below 30 years of age and economies of scale, the mortgage to GDP ratio is likely to increase going forward. Increased urbanization is also expected to be a strong driver of growth. 70% of India's GDP and 7 out of 10 jobs are expected to be created in urban cities over the next 20 years. This will help drive housing demand within cities, as well as the creation of more cities to house the growing population.
But, are regulations in favour of this? Well, a Reserve Bank of India (RBI) committee recently announced a number of borrower friendly measures to increase the same. It has favoured introduction of fixed rate loans for a period of up to 30 years and asked banks to look at charging a 'reasonable' pre-payment penalty on the outstanding amount only. Fixed rate loans with duration of 7-10 years may also be introduced in addition to vanilla fixed-rate loan products. These longer-term loans will help reduce the EMIs of borrowers and may make certain properties more affordable. Plus, these will also help borrowers against interest rate fluctuations. The pre-payment penalty on fixed rate loans should be reasonable, so it doesn't act as a disincentive for fixed rate borrowers. On the other hand, pre-payment penalties for floating rate loans have been abolished.
In order that banks do not face an asset-liability mismatch (funding long term assets with short-term liabilities) the RBI has recommended that banks popularize their 5+ year tenure fixed deposit schemes, which are exempt from taxes. These will help banks meet their long-term funding needs. Plus, large institutional investors like pension funds, provident funds, and insurance companies should be encouraged to invest in bonds issued by banks. Banks can also opt for the take-out financing route. All in all, we believe that these recommendations are beneficial to borrowers. These may increase investment in housing and real estate which has been facing a slump of late on account of prohibitive prices.