By Dr Sanjay Chaturvedi, LLB, PhD
Housing finance sector has established its existence in the country with set up of Housing Development Finance Corporation (HDFC) in 1977. There are several new entrants in the Housing Finance sector, viz.. Industrial Credit and Investment Corporation of India (ICICI) , Tata Home Finance, Birla Home Finance, Sundaram Home Finance, LIC Housing Finance limited. Reportedly, Industrial Development Bank of India (IDBI), Reliance and General Electric (GE) Capital are in the fray. Mergers and acquisition sprees have also become a part of the housing finance sector.
Industrial Credit and Investment Corporation of India (ICICI) has acquired Anagram Housing, Housing Development Finance Corporation (HDFC) has acquired Gujarat Rural and Urban Housing (GRUH) and Home trust, Birla Home has acquired Indian Tobacco Company ( ITC) Classic Housing. In all, there are 58 housing finance companies and 29 out of which are registered with National Housing Bank for refinance purposes.
The first major turning point in the Indian housing sector came in 1997, when the market conditions began to favor the purchaser. Housing became a buyers’ market, augmented by housing finance. Despite the recessional conditions faced by the rest of the economy between 1997 and the year 2000, both the housing as well as housing finance Sector grew by 30% per annum. Builders, realizing that the markets had turned into a buyer’s market, changed their strategy by going for volumes rather than margins. The resultant fall in prices further fueled demand and the need for Housing Finance enhanced. On the new construction side no significant relationship between price and quantity, consistent with perfectly elastic supply. Joint families gave way to the nuclear family system, fueling housing demand. Technology also played its part; with the advent of the internet and telecommunications, the city center became less attractive and suburbs & satellite towns became a good place to reside. This prompted new projects, better design and construction features, amenities, ambience and side attractions such as clubs, shopping centers, creches, recreational and educational institutions. With the fall of monopolies, both in housing and housing finance, loan interest rates started falling, first in 1999 continuously till the year 2004. Increased competitions in the Indian Banking industry have driven the interest yields and consequently, the Net Interest Margin (NIM), southward. From 2004 onwards, there has been talk of rates inching upwards, particularly in view of uncertainty at the political level, increasing price of petroleum and increased credit usage by the corporate sector, in comparison to the 1997-2000 period.
Several other papers, which are not usually thought of as “supply elasticity papers,” including Kearl (1979), Huang (1973), Topel and Rosen (1988), and Poterba (1991), contain explicit or implicit estimates of such a parameter. Most of these have found or implied low elasticities. Kearl reported an elasticity of 1.6 for new construction, and Huang, 2.0 for starts. Topel and Rosen’s research on starts found a long run elasticity of 3.0 using quarterly data from 1963-1983. Poterba also presented data that seemed to indicate a rising supply price.
Green, Malpezzi and Mayo (2000) present evidence that the responsiveness of the market also varies from place to place, depending among other things on the regulatory environment and geographic constraints.
Over time, housing finance companies have become aggressive, less rigid in their pricing, more customers friendly in documentation. Competition is increasing between housing finance companies. Whereas housing finance companies (such as Housing Development Finance Corporation, HDFC) have the technical expertise and sector knowledge and need not indulge in rate cutting to increase business, the seriousness of banks in the long run is not certain. Housing Development Finance Corporation has, since liberalization commenced in 1991, grown substantially. In the past five years (when many of the impacts of the earlier phase of liberalization were truly felt) Housing Development Finance Corporation has grown at an average of 30% per annum in terms of housing loans disbursed. Most banks entered into the retail lending sector because of the fear or Non Performing Assets (NPA) calculations. Predicting Corporate Non Performing Assets are of a large magnitude and could destabilize the finances of a bank. Hence the retail thrust came in fashion.
The housing finance is undoubtedly a technical area and needs specific expertise. Moreover, few banks have long term finances to stabilize their housing finance operations.
The lack of technical expertise of banks has been fully exploited by scamsters who availed of multiple loans against the same property through forged papers. Banks like Citi Bank, Standard Chartered and ABN Amro target the creamy layer of society, but the Direct Sale Agent (DSA) model also has provided illustrations of large-scale unhealthy practices. Thus, Housing Development Finance Corporation, HDFC, continues to be the market leader, with the other prominent specialist being Life Insurance Corporation Housing Finance Limited (LICHFL).
Certain organizations like GRUH Finance Limited lend to the lower strata of society. These loans are viewed as in viable by the larger banks and housing finance companies. GRUH Finance Limited competes in the same market as credit societies and other informal sources of lending. Thus, unless there is a harsh recovery mechanism or the ‘group lending model’ adopted by micro finance organizations, the risks in this market segment are real and could translate into bad loans. Parshwanath Housing and many others who offered small loans, with all noble intentions, had to close operations because of the inherent risks in this market segment. Risk is inherent in any commercial activity and banking is no exception to this rule. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today’s financial system. The importance of the housing sector in India can be judged by the estimate that for every rupee invested in the construction of houses, 78 paisa is added to the gross domestic product of the country and the real estate sector is subservient to the development of a number of other industries. The real estate sector is also the second largest employment generator in the country.