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Housing Scenario in India

We are looking at the Housing Scenario at a stag when the National Economy is on the road to revival, after reeling under depressive conditions for over the last three years. The growth rate of the economy might go up to levels up to 6%, if the revival is kept up. Share markets are not entirely looking up, though they are stabilizing at levels which can be termed as reasonable. Industrial growth rate which was wallowing at a low of 1.5% is now at around 5%. In fact, industrial credit given out by banks which in normal times would be about 4-5 times of bank credit given to housing, had in the last few years reduced to levels below advances to housing loans. But the happy feature is that industrial growth is picking up. Even, the steel sector which was hopelessly down is now having hopes of revival.

It is only housing, amidst all these that seems to have kept up fairly stable front. Yes, the late 90s saw even housing go through a bad phase. But, then with that phase crossed, there has been a steady revival and stabilization of the market at levels which can be termed as reasonable from the point of view of both the customers and those on the supply side. Housing is a basic need and like any basic human need will be constantly in demand. The potential for housing in this country is huge by NHB estimates. And the requirements by NHB estimates are around 20 million houses. There are other estimates which suggest that it is at a much higher level. Even going by the conservative estimate taken by the NHB, the requirements in the area of housing are massive. This really means that a lot of investments cab be there in the coming years and there is room for multiple players.

Going by figures of amounts given out by the organized financial sector, the average of money being advanced for purchase of housing is in the range of 20 to 25 thousand crores every year over the last five years. In the next five years these may be in the region of 70-75 thousand crores. There is also talk of foreign direct investment coming in. this will add to the capabilities of the financial sector in meeting the requirements in the area of housing. The considered view on FDI is that it would not in any way present hardships to the local developer community. They may on the other hand enable the local entrepreneurs to organize the construction industry in a more stable way. The reason why I venture forth to say this is that finance has been one of the areas of uncertainties as far as investments into the construction industry are concerned. FDIs might end up strengthening this area by bringing in finance and steadying the construction industry through the joint venture route.

As far as availability of finance to the retail customers is concerned, there has been a tremendous improvement in the possibility over the last few years. There are over 32 NHB recognized Housing Finance Companies which dot the map of this country with their presence all-over. The nationalized banks have in addition made housing a thrust area and added to the reach for advancing loans to individuals. The LICHFL, which organization I happen to represent, itself has over 200 centres in this country which are covered by their physical presence. Leading Housing Finance organizations like the HDFC, ICIC also have a widespread network all over the Country giving out loans to customers for housing. The banking major, SBI covers over 500 centres through their branches where personal banking division functions. The other banks too are not far behind in their reach out to the house purchasing public.

Banks have come into this sector at a time when credit off take in the industrial sector has been low. With lot of flust funds waiting to be deployed, the housing scene presented an attractive option to the banks to channelise their funds. This was particularly so, because in the housing sector advances are given against mortgage of assests, which continue to carry value, and therefore make the loans considerably safe. Even by the experience of the housing sector in India, NIRs have been some of the lowest as compared to any other sector of advance.

The other significant factor that has kicked up a lot of activity in the recent past, in the housing area, is today’s steadily falling interest rates of loans. The customers today enjoy tremendous choice and can approach those giving out finance at lowest rates. The fall in the rates has been phenomenal over the last 4 to 5 years. From rates that were around 15% and over, they have plummeted to around 9% and even lower. The changes have come so thick and fast that an organization like ours has had to revise interest rates over a dozen times in the last 2 years. Banks which are outside the purview to regulations of the NHB, have enjoyed certain added advantages too in the matter of their ability to compete in terms of interest rates. The monetary policy of RBI which has been constantly giving a signal for a soft interest regime has been lowering its Bank rate and CRR constantly thus, enabling banks to have recourse to greater liquidity at lower cost. For the Housing Finance Institutions however, there has been a difficulty of their being able to match such interest rate reductions, since the cost of funds borrowed earlier, kept the average cost a fairly high levels. But then they have fallen in line with the market to remain in contention. This has had the result of even bringing down the spread for the Housing Finance Companies.

The customer who is purchasing a house today has not only the options of competitively lowest rates of interest, but also choice of different types of loans starting from the house-purchase or house-building loans to house-improvement loans, home equity loans [ loans on mortgage of property], home extension loans, NRI loans etc. It has never been better than this ever before.

While this is such a positive development, as far as the home seekers are concerned, the lot of home builders are still a long way behind the satisfactory levels. Even today, with the organized groups of Developers, being by and large, quite influential, still availability of institutionalized finance, as a regular source, has been almost absent as far as the average Developer is concerned. This has been an area of major concern for the Builders. The more enlightened platforms of developers at National levels like CREDAI and NAREDCO have been trying to grapple with this matter to bring about some stability on this front. In fact the Housing Finance Companies and the representatives of the developers have been sitting together to thrash out some commonly agreed methods whereby finance to developers can be a more dependable arrangement. Surprisingly, it is this attempt by the developer community that has even forged a common platform for the HFCs to meet! Credit is certainly due to the Developers’ organizations for having brought the HFCs closer, in their own quest for a solution to the area of construction finance.

One of the reasons why financiers shy away from developer-finance is that the developers are not systematically organized like the Corporates. Their picture is not transparent; the variations are from a proprietorship builder to partnerships, closely held family concerns, Private Limited Companies, Public Limited Companies etc. Often the company that comes out to borrow is part of a bigger group and the credentials presented for assessment do not carry the total financial picture of the group. There is a difficulty about assessing track record of small or medium builders since they keep changing their names and one can’t push back enough to know the full picture. Even when financials are presented they are not professionally done and there is difficulty in looking at it as one would look at a regular corporate business house. A lot of deals do not get reflected in the financials since two-levels deals, namely cash the cheque, make it difficult for clear assessment of actual position. Individual developers keep having incomes moving up and down over the years which again is a reflection of booking of income only when sale results. Since project work and sale alternate at different levels, incomes too fluctuate making it difficult for assessing a picture of stable or growing incomes. Since there is so much variety thrown in, the financial companies find it very difficult to evolve standardized set of norms for lending to developers. In fact, after the experience of wholesale defaults in the loan account of the Builders in the late 90s, the financial companies have only selectively moved forward with finance to developers.

One of the most important requirements from the side of organizations like NAREDCO and CREDAI is that the Builder community needs to he helped to organize themselves on professional lines. A certain uniform set of accounting practices need to be followed. The developers also need to bring certain uniformity in their practices as far as the house purchasing customers are concerned. In the context I would like to quote Shri Deepak Parekh, The HDFC Supremo, who gave a call in the recently concluded CREDAI National Convention to the developers on a few important things.

Shri Parekh appealed to Developers to go by carpet area, and charge, if required, additionally on sq. ft rates for the super plinths area which provided common services. This would make it very simple for the customer to understand what area he stands to have in the flat he is about to purchase. The other practice relates to payment being made by purchasing customers at time periods specified in the agreement. His point was that these payments should be related to progress of constructions and not merely on time schedule. The third point he mentioned was regarding two-level pricing. A number of these aspects will need to be considered by the developers. They need to make their various centre-level associations bring in some standards in the working of the developers. Together the industry should present a picture of confidence, if financers and customers are to look at them with a sense of reliability. While at the top levels big developers are well organized and institutionalized, a lot of the others in the field are not giving out such signals of confidence to financiers. Therefore, the role of NAREDCO and such organizations would be to bring in uniform standards and practices amongst Builders so that they would be in a much better position to look at institutional help which is today so much conspicuous by its absence.

Shri D. Krishnan General Manager (Mktg) LIC Housing Finance Ltd.

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