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