CHAPTER - 3

HOUSING FINANCE

IN INDIA
 CHAPTER - 3
HOUSING FINANCE IN INDIA
3.1 HISTORY OF HOUSING FINANCE IN WORLD

Housing finance is derived from mortgage lending. Mortgage lending is

very old form of financing. “A loan secured by real property such as a
building or land is called a mortgage.

3.2 HISTORICAL BACKGROUND

Historically mortgage borrowing has played a variety of roles in rural

economics because land was the most important asset there.

1) Landowners borrowed against future rents to finance. Current

consumption or the development of their estates.
2) Farmers borrowed to finance expansion improvement and investment
in new equipment.
3) With urbanisation and industrialization, urban developers used
mortgage borrowing to finance construction.
4) Industrial firms used it to finance the purchase of a home.
3.3 FORM OF LENDING

“The traditional form of mortgage lending was a direct loan from one
individual to another. The mortgage contract was written by a lawyer, who,
usually acted as a broker, matching borrowers with lenders.”
[Kohn Meir (1996)]

Mortgage lending was developed differently in different parts of the world as

follows:

United States

“In U.S. Westward expansion created a continuing demand for long

term agricultural credit. Banks were reluctant to satisfy the growing demand
because, of bad experiences of colonial times, and enforcement of
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certain laws by Government. To fill the growing need for mortgage credit,
mortgage brokers expanded their activities. The growing savings banks and
insurance companies provided a ready market. Under the pressure of
competition, mortgage brokers began to guarantee the mortgages they sold
and in the 1880s some of them became intermediaries which were called
‘Mortgage Banks’. These banks issued bonds and used the proceeds to fund
portfolios of mortgages. Uptii I920s all types of mortgage lending expanded
rapidly.

In 1930s, because of the great depression savings and loans

institutions were hit hard. The depression affected the market very badly. It
was almost collapsed. After 193 Os the Federal Government intervened, to
restructure the mortgage market and the savings and loan industry. One of its
actions was to buy. up defaulted mortgages and allow borrowers to pay them
off in instalments. This gave birth to a new lending instrument, it was long-
term, fixed rate amortized mortgage and it became very popular in U.S.

Britain

“In Britain, the development of mortgage market followed the track of

U.S. As in US, it began with lawyers who were called “solicitors” in Britain.
They acted as mortgage brokers. However, commercial banks were allowed
to make mortgage loans. In Britain instead of special institutions like mortgage
loans, building societies developed on the same line as
savings and loans institutions in U.S.” [Kohn Meir (1996)]

“These building societies were mutual organizations whose activities

were controlled by the Building Societies Commission. They were
essentially established to attract deposits from individuals on interest bearing
accounts and to provide finance purely for house purchase or
home improvements”. [Clark W. (1999)]

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 Continental Europe

“Responding to the chronic shortage of rural credit, the French

Government sponsored a mortgage bank the “Credit Fancier” in 1852. The

Credit Fancier was allowed to issue long-term bearer bonds for up to 20 times

its joint stock capital. The funds it raised were supposed to be used to finance

fan mortgage credit. But instead most of the funds went to finance urban

development,”

Germany

“The German version of the mortgage bank was private rather than

public. German mortgage banks were allowed to accept deposits as well as to

issue bonds. Most of their assets were urban rather than rural mortgages.”

Japan

“The Japanese mortgage market was a mixture of public and private

sector. About one-third of residential mortgages were provided by various
types of thrift institutions; one-third by banks (often through special mortgage
lending subsidiaries called housing finance cos.), and one-third by a
Government agency - The Housing Loan Corporation. The later was largely
funded by borrowing from the post office savings bank and its mortgages
were originated by bank and housing finance cos.”

[Kohrt Meir (1996)]

Investigations

Housing finance has been in area of concern not only in developing

countries but also in developed countries. Some of the investigations done in

the field of housing finance are summarized below:

a) Ruonavarra, Hannu (1999) investigated ‘The State and Self- Help Housing

policies in Urban Finland for the period of 1920 to 1950. In

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 Finland self-help housing consisted primarily of self- building of one and
two family houses. Most urban housing production was private speculative
production i.e. based on market trends. Self-building became relatively
important only when other production was depressed. There was no policy
for quality and design of housing. The loan policies made an attempt to
control these two aspects but because of their limited scope were unable
to make a proper impact. The State supported self-building by providing
subsidised housing finance. Thus it was found that in Finland the altitude
of Government in this respect was characterised as guarded support.

b) Liebrath — Ann and Meeks Carol B. (1998) in their research concerning

public policy issues and financing for rural housing produced an overview
of rural perspective on housing finance and Federal Housing policy
concerns. In their research they found that the federal government had
always been concerned about providing housing and finance for
residential mortgage on equal bases which was reflected in federal policy
and National Housing Act, 1934. Even today providing affordable housing
and assuring the availability of finance for home mortgages are the main
areas of concern for federal government. However it has found that rural
areas have persistently remained disadvantaged in housing situations.

From this it can be said that the role of federal government in

development of housing is active and encouraging.

c) Kim-Kyung-Hwan (1997) found that the need of finance for housing was
still a major problem. To overcome the problem, he provided the steps for
use of enormous wealth generated through urbanisation for improvement
of housing facilities of all income groups. He emphasized not only on
innovation of financial instruments but also recommended good
governance and political commitment for its development.
d) Gabriel d. Stuart A. (1996) - A study of urban housing policy in USA in
the 1990s was made In their investigation they found that the limited
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 availability of affordable rental units, mortgage finance related constraints
on home ownership, reduced housing and income assistance to very low
income populations and problems of equal opportunities to housing and
housing finance etc. had raised urban housing as a major issue. To
overcome this problem, the federal government took many steps like
reformation of the Federal Housing Administration, Consolidation of U.S.
Department of Housing and Urban Development Programme and
transformation of the public housing system, enhanced Underwriting
facility by Government sponsored enterprises, and their introduction of
new mortgage instruments etc. On the other hand they found that a
sizeable cut in federal rental housing and income support, and low and
diminishing production of low-income rental housing raised the possibility
of economic distress among the lowest income renter populations.

e) Buckley (1996) analyzed the financing and delivery of housing in

developing countries. Discussing the financial aspects of housing finance
policy he highlighted the important role that credible financial contracts can
play in the development of housing finance. Considering me fiscal
dimension of housing policies he emphasised on implicit taxes and
subsidies as major policy instruments rather than government spending.
His study focuses on the privatisation of publicly owned housing in the
reforming socialist economies. He developed a simple model for
examining the interaction of financial, fiscal and real sector policies
besides reviewing the problems that have been experienced in designing
mortgage instruments in an inflationary environment. Taking the cases of
Colombia Sand Argentina he examined indexed mortgage and housing
subsidy with regard to their roles in creating financial stress and
destabilizing the economy. He also examined the possible constraints on a
policy of encouraging private sector through example of Nigeria. Lastly
with the review of World Bank’s experience with housing finance he
developed some principals of effective housing finance.

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f) Lomax Gregory ( 1995) studied the issues relating to financing social
housing in the United Kingdom. He discussed the political context limiting
public funding of social housing, the current financial regime and its effects
like more participation of private sector in social housing and increase in
rents which in turn helped low-income tenants, the extent of involvement of
financial market in housing association market etc. He concluded with
citing the key social housing finance issues. Faced by policy makers in
England like widening of private sector involvement, and creating balanced,
thriving communities that maximise political support for social housing
project.
g) GuisO-Luigi, et at Daniele (1994) researched housing finance arrangements
in Italy In this research they investigated the Italian age-tenure profile and
the characteristics of housing finance arrangements in Italy. They found
that the underdevelopment of Italian mortgage market was basically
because of the government regulations and other institutional factors. They
also presented micro-economic evidence supporting their research. Lastly
they considered international transfer as one of the reasons for
underdeveloped housing.
h) Lomax John (1994) compared housing finance systems in seven countries.
Focusing especially on institutional structures and variations of market
structure in the context of an industrial economic approach to competition
in financial markets. He suggested initiating the deregulation of housing
market on the lines of United Kingdom for the development of housing
markets.
i) Renaud B. (1991) in his research investigated the transition from socialists
systems to market based housing system. He evaluated the legacy of
Soviet type central planning and previous reform experiments and
described critical difference between socialist housing system and market
based housing. He examined the characteristics, of housing as an
economic good, their implications for market oriented reform and redesign
of social housing policies. He provided a concise reference

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 point for the development of national reforms according to specific country
conditions. He identified priority issues and directions of change in four
areas: clarification and adjustment of priority rights the scope for
privatization of publicly owned housing and elimination of distortions in
rent, prices, and subsidies, the development of market-oriented finance
mechanisms, and the reorganization of housing production.
j) Tolley George (1991) analysed major elements of the urban reforms in
China. He discussed the general status and context of housing reforms in
China. He analyzed pricing and allocation reforms in the existing stock and
presented a framework for evaluating the feasibility of new reforms. He
provided an analysis of the tenure choice based on the user-cost of capital
concept to show the functional relationship between rent reforms and the
potential development of house ownership in Chinese cities. He evaluated
the efficiency benefits that could be derived from allowing the exchange
and allocation of existing housing units. He also provided suggestions to
improve the present approach to housing reforms in China regarding sales
prices, the setting of rents, the credit conditions offered to finance housing
sales and the importance of property rights.

k) Telgarsky P. and Struyk 3. (1991) studied the transformation of the housing

sectors in Eastern European countries to a market orientation reviewing the

situation as of mid-1990 in Bulgaria, Czechoslovakia,. Hungary, Poland,
Romania and Yugoslavia. He discussed a number of reasons why housing
reform was so important for Eastern European countries and sketched the
broad structure of the macro-economic changes underway in the centrally
planned economies. They presented comparative information on the
economies and the housing sectors of the six countries. He also discussed
a set of transition problems that each of the countries would face in some
form, focusing on housing finance, housing development and the state
rental sector.

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The brief review of various studies cited above suggests the following:

1) Housing finance is a felt-need in all types of countries.

2) Two different systems of housing finance evolved one in capitalist
countries and another in socialist countries.
3) In both types of systems the Government played a crucial role in
formulating policies for provision of housing and regulation of tenancy
and rent.
4) In both types of systems, the Government also supported housing
finance directly and indirectly. The direct support came in the form of
construction of units and/or provision of finance. The indirect support
usually came in the form of subsidies.
5) The housing finance system in developed capitalist countries is still not
perfect and suffers from insufficient capital, insufficient supply,
inadequate development etc.
6) Even in socialist countries like China and the former USSR the
problems existed with regard to housing even though the onus of
providing housing fully fell on the government. The main problems
faced in these countries were distortions in rent, unfavourable credit
conditions, adjustments of property rights etc.
7) One common thing running through all these studies is that the
inadequacies in supply of housing mainly relate to inappropriate,
inadequate and insufficient finance.
This indicates that even till now a perfect system for providing

housing finance has not been developed anywhere in the world. This re-

emphasises the need for the further study of housing finance and more

so in ‘the case of a developing country like India.

3.4 MEANING OF HOUSING FINANCE

Housing finance is considered to be one of the basic human needs. The

capital required to acquire or construct a house is large so that only a few

individuals with high income can raise it from their own funds. “There is,
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therefore, great need and scope for the development of arrangements for

supplying 1 (loans) finance for housing”. [Bhole L.M. (1999), p. 253].

In simple terms, finance provided for acquiring a house is called

“Housing Finance”. In technical terms, housing finance means finance

provided for building the house to individuals, corporate borrowers and

builders. “It also includes developers loans provided to institutions for the

construction of large residential projects.

“Finance for housing is generally provided in the form of mortgage loan,

i.e. it is provided against the security of immovable property of land and

building. [Bhole L.M. (1999), p.253]. Thus we can say that housing finance is a

specialised activity which is based on mortgage lending. To understand the

housing finance first we need to understand what a mortgage loan is.

3.4.1 Mortgage Loan

“A loan, secured by real property such as a building or land is called a

mortgage loan”. [Kohan Meir, 1994)].

In past mortgage borrowing was used for different purposes by

different individuals like landowners, farmers, urban developers, industrial
firms, households etc. “The traditional form of mortgage lending was a direct
loan from one individual to another” [Kohan Meir, (1994)] With the
development of world economy the form of lending has also changed. At
present State and Central Government institutions, private financial
institutions, commercial banks, housing finance companies etc. are directly or
indirectly involved in mortgage lending They provide loans for acquiring and
constructing the houses not only to individuals but also to corporate
borrowers, other institutions, etc.

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3.4.2 Characteristics Of Mortgage Loan

A mortgage loan is different from other type of lending. It has distinct

characteristics like:

(i) It is secured against, immovable or fixed property.

(ii) It is a long-term loan in nature.

(iii) It is repaid in small monthly instalments along with interest.

(iv) It creates ‘Lien’ on the property financed.

Thus the risk of default is comparatively less in this business. The income

is fixed in nature. /These characteristics make mortgage lending different from

other type of loans.

Housing finance also is provided in the same manner as mortgage lending.

A housing loan has all the characteristics of a mortgage loan.

3.4.3 Terms Of Housing Finance

The terms of lending for housing are asunder:

(i) It is provided to the individuals with the certain minimum income

level. It can differ from one institution to another.
(ii) The loan is sanctioned from 60% up to 80% of the cost of the house.

(iii) The loan is sanctioned for a long period of time say 20 years.
(iv) The loan creates ‘Lien’ on property financed.
(v) The interest is charged both on the amount of principal and
instalments.
(vi) The loan is to be repaid in equated monthly instalments.
These are general terms of lending. They can differ from country to

country and even from one institution to another.

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3.4.4 Types Of Housing Finance Loans

Now-a-days housing finance is developing at a much faster rate as

housing fulfils one of the basic needs of the human being. Along with the
housing loans, financial institutions provide different specialized services.
They also provide loans for repairs and renovations of existing house.

3.4.5 Contribution Of Housing Finance

Housing finance plays a very important role in social welfare of the

world by satisfying shelter need of the population; It increases the general
standard of living, tries to reduce income inequalities generates employment
opportunities and thus increases the rate of economic growth and
development of world.

3.5 NEED FOR HOUSING FINANCE

The demand for housing finance is increasing day by day The factors
like population growth, economic growth, urbanisation, insufficient capital,
change in the pattern of occupational distribution, increased educational level,
changes in government policy etc. affect the need or demand for housing
finance. We can discuss some of them as under:

3.5.1 Population Growth

The population of world is increasing at an alarming rate. There is a big

gap between the demand and supply of housing because the rate of
population growth is much higher than the supply of housing facilities This has
increased the scarcity of housing which in turn has increased the need for
housing and finance for housing.

3.5.2 Economic Growth and Development

The economy of the world is developing at a faster rate. With the

economic growth and development, industrialization, urbanization,
technological development etc. have taken place. These all have expanded

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the world very rapidly. Economic development has changed the pattern of
occupational distribution. All these factors are resultant of economic growth
and development and they have increased the need for housing finance.

3.5.3 Urbanisation

The development of economy is uneven in the world. Most of the

industries are developed near the cities. The trade and commerce developed
in big cities, which have increased employment opportunities in cities, and
nearby areas. Moreover the villages have failed to provide employment to
growing population, as the agriculture sector growth is slower. This has led to
the process of ‘urbanization’. People shift from villages to cities for the
employment purpose. This has increased the demand for housing in urban
areas. Thus urbanisation is also one of the major factors influencing the
growing need for housing finance.

3.5.4 Break-Up of Joint Family System

In past joint family system was prevailing in most parts of world. Now
this system is disappearing slowly and gradually because of the factors like
urbanisation industrialization, change in occupational distribution etc. With the
breakup of join family system the number of nuclear families has increased
which has increased the need for housing finance.

3.5.5 Insufficient Capital

To acquire or construct a house is very expensive. It is not possible for

every individual to own a house from his savings. The housing loan provides
him financial assistance to acquire a house. Thus insufficient capital is one of
the main reasons affecting the need for housing finance.

3.5.6 Risk Bearing Capacity of Lender

The finance required for housing is larger in quantum. It involves higher

volume of risk. An individual in his own capacity cannot bear that

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much risk because of the limited resources he has. The institutions providing
housing finance have a number of resources from where they can raise the
finance. Likewise, they provide finance to number of individuals, corporate
etc. which reduces the risk of default to them. This factor has developed
housing finance institutions with a rapid rate.

3.5.7 Accessibility to Funds of Lender

An individual in his owns capacity is not able to raise required funds for
owning a house. While a financial institution has number of National as well
as International resources from which it can raise large funds and can use it
for housing finance. Thus accessibility to funds of lender plays an important
role from the above discussion; we can conclude that there is a wide scope
for the growth and development of housing finance industry.

3.6 ADVANTAGES OF HOUSING FINANCE

3.6.1 To Borrowers:

1) The borrower can acquire a house without investing much from own
savings.
2) The loan is long-term in nature, which reduces the burden of
repayment.
3) The loan is repayable in small monthly instalment, which makes
repayment easier.
4) The borrower can use the house even if the loan is not fully repaid.
5) The borrower receives different services from the lender along the
loan.
6) Housing loan leads to asset creation for borrower in long run.
7) The borrower acquires a social status with the help of the house.
8) “Better house for living help the occupants to perform better in their
work, which increases their productivity” [Das Samantak, (1996)]

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9) The borrower gets tax rebate on repayment towards principal loan and
interest on loan up to a certain extent.
10) The municipal corporation tax is much lower in case of self-

occupied house.
11) Borrower can have alterations and expansion in his house without prior
permission of lender, which is difficult in rented house.
12) The amount of instalments remains constant over the period of loan,
while in case of a rented house, the rent increases periodically.
13) The possibility of eviction is negligible in case of a house acquired
through housing loan, while it is much higher in rented house.
14) Second charge may be created on that house for acquiring another

loan.
3.6.2 To Lender

1) The lender earns income as interest on loans.

2) The risk of default reduces as the loan is of long-term in nature.
3) The loan is secured against the house, which helps to recover the
amount of loan in case of default.
4) The lender gets the service charges for providing different specialised
services.
5) The lender can reinvest in instalments of recovered loan, which
generates income.
6) The lender can plan out the future investment as the repayment amount
is steady from the borrower.
7) As the processing of granting the loan is one time operation it reduces
the administration cost.
8) As the mortgage is on immovable property the realisation of unpaid
loan becomes easier when compared with loans provided for other
movable properties.
9) The lender helps the nation in reducing the housing problem and

thereby creating goodwill in the eyes of government.

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10) The lender develops housing finance industry and generates
employment, which helps him to cater the market share with good
name.
11) The lender can provide the loans to all classes of economy, which
increases the spread of investment and reduces his risk.

3.6.3 To Economy

1) The housing finance industry satisfies one of the basic needs of the
society.
2) Along with the housing finance industry other ancillary industries like
bricks, cement, steel etc. also develop.
3) It generates employment opportunities. - Every one million man-years of
direct employment and 7.5 million man-years of indirect employment.
[Narang Kamal (2000)]
4) It increases the general standard of living of the people.
5) It reduces the economic inequalities.
6) It increases the GDP “for every rupee invested in housing sector, 78
paise are added to Gross Domestic Product” [Narang Kamal (2000)].
3.6.4 To Financial Markets

1) The financial markets expand with the development of housing finance

industry.
2) The new institutions providing loans have developed.
3) “It claimless the household savings as well as funds from the capital
market into the housing sector”. [Bliole L.M., (1999)].
4) The process of securitization develops
3.6.5 Other Advantages

1) It helps to expand the boundaries of financial markets.

2) It develops industrial as well as business relations
3) It also develops international business relations.

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3.7 HOUSING FINANCE POLICY, ALLOCATION AND ACHIEVEMENT

OF TARGET

3.7.1 National Housing Policy

As a part of the strategy to overcome the colossal housing shortage,

the Central Government has adopted a comprehensive National Housing
Policy which, among other things, envisages -

1) Development of a viable and accessible institutional system for the

provision of housing finance;
2) Establishing a system where housing boards development authorities
would concentrate acquisition and development of land infrastructure;
and
3) Creation of conditions in which access to institutional finance is made
easier and affordable for individuals for construction/buying of
houses/flats. This may include outright purchase of houses/flats
constructed by or under the aegis of public agencies.
Banks, with their vast branch network throughout the length and
breadth of the country, occupy a very strategic position in the financial system
and have an important role to play in providing credit to the housing sector in
consonance with the National Housing Policy. Therefore, the banks should
gear up to deliver the requisite ‘housing finance’.

3.7.2 Housing Finance Allocation

Keeping in view the objectives of the National Housing Finance

Policy, RBI announces policy relating to housing finance allocation and
other related matters, annually.

Every year, banks will need to achieve the prescribed target of

‘housing finance’ fixed on the basis of their growth of deposits recorded
during the previous year.

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 1) For the financial year April 2001 to March 2002, each bank is
required to compute its share of the housing finance allocation at
3 per cent of its incremental deposits as on the last reporting
Friday of March 2001 over the corresponding figure of the last
reporting Friday of March 2000.
2) This is the minimum housing finance allocation and there is no
objection to the banks exceeding this level, having regard to
their resources position.
3) By the end of April each year, banks should submit to RBI, the
final figures of deposits as on the last reporting Friday of March
of preceding two financial years and the amount of housing
finance allocation computed at the prescribed rate for
the current financial year.
3.7.3 Target Achievement by Banks

Banks may deploy their funds under the housing finance allocation in any
of the three categories, i.e.

1. Direct finance,
2. Indirect finance, or
3. Investment in bonds of NHB/HUDCO, or combination thereof.

3.7.4 Construction Activities

3.7.4.1 Classification

The Working Group appointed by RBI to examine the role of banking

system in providing finance for housing schemes, classified construction
activities in the following three categories:

(i) Categories of construction activities eligible for bank credit as

‘housing finance’ and inclusion in the yearly allocation.

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 (ii) C a te g o rie s o f co nstru ctio n ac tivities elig ib le fo r b a n k c re d it bu t not

to b e in clu d ed in th e ‘h o using fin a n c e ’ a llo ca tio n .

(iii) C a te g o rie s o f co nstru ctio n ac tivities no t elig ib le fo r b a n k cred it.

3„7.4„2 B a n k c re d it e lig ib le fo r inclusion in th e H o u sin g F in a n c e

T a rg e t u n d e r A n n u a l H o u sin g F in a n c e A llo catio n

T h e fo llo w in g ty p e s o f b a n k cred it w ill b e elig ib le fo r b e in g tre a te d a s

‘h o using fin a n c e ’ u n d e r th e A n n u a l H o u sin g F in a n c e A llo catio n :

(i) D ire c t h o using fin a n c e up to Rs. 5 lakh p ro v id e d p e r d w e llin g in

s e m i-u rb a n /ru ra l a re a s an d u p to Rs. 10 laith p ro v id e d in

u rb a n [ m etro p o litan a re a s .

(ii) F in a n c e p ro v id e d fo r co nstru ctio n o f re s id e n tia l h o u s e s to be

co n stru cte d by pu blic h o using a g e n c ie s like HUDCO, H o u sin g

B o ard s, local b o d ie s, in d ivid u als, c o o p e ra tiv e so cie ties ,

e m p lo y e rs , e tc ., e x c e p tin g th e ho u sin g fin a n c e o f th e n a tu re

m e n tio n e d in p a ra g ra p h 2 . 3 b e lo w , priority b e in g a c c o rd e d fo r

fin an cin g co nstru ctio n o f h o u s e s m e a n t fo r e c o n o m ic a lly w e a k e r

sectio n s, lo w in c o m e g ro u p a n d m id d le in c o m e g rou p .

(iii) F in a n c e fo r co nstru ctio n o f e d u c a tio n a l, h e alth , so cial, cu ltu ral o r

o th e r in stitutio ns/ c e n tre s , w h ich a re p a rt o f a h o u sin g p ro ject a n d

w h ich a re n e c e s s a ry fo r th e d e v e lo p m e n t o f s e ttle m e n ts or

to w nships;

(iv) F in a n c e fo r sh o p p in g c o m p le x e s , m a rk e ts a n d su ch o th e r c e n tre s

c a terin g to th e d a y to d a y n e e d s o f th e re s id e n ts o f th e h o using

co lo n ie s a n d fo rm in g p a rt o f a ho u sin g project;

(v ) F in a n c e fo r co nstru ctio n m e a n t fo r im proving th e co nd itio n s in

slum a re a s fo r w h ich cred it m a y b e e x te n d e d d irec tly to th e s lu m -

d w e lle rs on th e g u a ra n te e of th e G o v e rn m e n t, o r in d irectly to

th e m th ro u g h th e S ta te G o v e rn m e n t a g e n c ie s ;

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 (vi) Bank credit given for slum improvement schemes to be
implemented by Slum Clearance Boards and other public agencies;

(vii) Finance provided to

a) the bodies constituted for undertaking repairs to houses, and
b) the owners of building/house/flat, whether occupied by
themselves or by tenants, to meet the need-based requirements
for their repairs/additions, after satisfying themselves regarding
the estimated cost (for which requisite certificate should be
obtained from an Engineer/Architect, wherever necessary) and
obtaining such security as deemed
appropriate;
(viii) Housing finance provided by banks for which refinance is availed of
from National Housing Bank (NHB);
(ix) Investment in the guaranteed/non-guaranteed bonds and debentures
of NHB/HUDCO in the -primary market, provided investment in non-
guaranteed bonds is made only if guaranteed
bonds are not available.
3.7.4.3 Bank credit not eligible for inclusion in the Housing Finance

Allocation. The following types of bank credit for construction will

not be reckoned for the purpose of achievement of housing finance

allocation:

(i) Housing finance granted by banks to their own employees.

(ii) Housing finance granted to non-resident Indians (NRIs) direct or
through Housing Finance Institutions.
(iii) Direct housing loans in excess of Rs. 5 lakh and Rs. 10 lakh
provided in semi-urban/rural areas and Urban/Metropolitan centres,
respectively.
(iv) Housing loans taken over by banks from other banks.
(v) Industries manufacturing building material for construction.

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 (vi) Construction of warehouses, including those to be
constructed for Food Corporation of India, godowns and cold
storages.
(vii) Buildings which do not form a part of housing project like hospitals,
clinics, schools, colleges, markets, shopping centers and cinema
houses.
(viii) Construction of hotels and accommodation for tourist and
commercial offices.
(ix) Construction of hostels.

3.7.4.4 Construction Activities Not Eligible For Bank Credit

1. Banks should not grant finance for construction of buildings meant

purely for Government/Semi- Government offices, including Municipal

and Panchayat offices. However, banks may grant loans for activities,

which will be remanded by institutions like NABARD.

2. Projects undertaken by public sector entities which are not corporate

bodies (i.e. public sector undertakings which are not registered under
Companies Act or which are not corporations established under the
relevant statute) may not be financed by banks. Even in respect of
projects undertaken by . corporate bodies, as defined above, banks
should satisfy themselves that the project is run on commercial lines
and that bank finance is not in lieu of or to substitute budgetary
resources envisaged for the project. The loan could, however,
supplement budgetary resources if such supplementing was
contemplated in the project design. Thus, in the case of a housing
project, where the project is run on commercial lines, and the
Government is interested in promoting the project either for the benefit
of the weaker sections of the society or otherwise, and a part of the
project cost is met by the Government through subsidies made available
and/or contributions to the capital
73
 of the institutions taking up the project, the bank finance should be

restricted to an amount arrived at after reducing from the total project

cost the amount of subsidy/capital contribution receivable from the

Government and any other resources proposed to be made available by

the Government.

3. Banks had, in the past, sanctioned term loans to corporations set up by

Government like State Police Housing Corporation, for construction of

residential quarters for allotment to employees where the loans were

envisaged to be repaid out of budgetary allocations. As these projects

cannot be considered to be run on commercial lines, it would not be in

order for banks to grant loans to such projects.

3.7.5 Direct Housing Finance

A. Direct Housing Finance .refers to the finance provided to individuals or

groups of individual including co-operative societies.
B. Banks are free to evolve their own guidelines with the approval of their
Boards on aspects such as security, margin, age of dwelling units,
repayment schedule, etc.
C. Ceiling on Housing Loans Per Dwelling
1) Semi-urban/Rural areas - Rs. 5 lakh

2) Urban/Metropolitan centres - Rs. 10 lakh

D. Other Guidelines
The following types of bank finance may be included under Direct

Housing Finance:

(i) Bank finance extended to a person who is already owning a

house in the town/village where he resides, for buying/

constructing a second house in the same or other town/

village for the purpose of self occupation.

74
 (ii) Bank finance extended for purchase of a house by a borrower
who proposes to let it out on rental basis on account of his
posting outside the headquarters or because he has been
provided accommodation by his employer.
(iii) Bank finance extended to a person who, proposes to buy an
old house where he is presently residing as a tenant.
(iv) Bank finance granted only for purchase of a plot, provided a
declaration is obtained from the borrower that he intends to
construct a house on the said plot, with the help of bank
finance or otherwise, within a period of two years from the
availment of the said finance.
(v) Supplementary finance
A) Banks may consider requests for additional finance within the
overall ceiling for carrying out alterations! Additions / repairs
to the house/flat already financed by them.
B) In the case of individuals who might have raised funds for
construction/ acquisition of accommodation from other
sources and need supplementary finance, banks may extend
such finance after obtaining pan passu or second
mortgage charge over the property mortgaged in favour of
other lenders and/or against such other security, as they may
deem appropriate.

3.7.6 Indirect Housing Finance

Banks should ensure that their indirect housing finance is channelled

by way of term loans to housing finance institutions, housing boards, other
public housing agencies,, etc., primarily for augmenting the supply of serviced
land and constructed units. It should also be ensured that the supply of
plots/houses is time bound and public agencies do not utilise the bank loans
merely for, acquisition of land. Similarly, serviced plots should be sold by
these agencies to co-operative societies, professional developers and
individuals with a stipulation that the houses should be
75
constructed thereon within a reasonable time, not exceeding three years. For
this purpose, the banks may take advantage of various guidelines issued by
NHB for augmenting the supply of serviced land and constructed units.

A) Lending to Housing Intermediary Agencies

A.1) Lending to Housing Finance Institutions

1) Banks may grant term loans to housing finance institutions

taking in to account (long-term) debt- equity ratio, track record,
recovery performance and other relevant factors.
2) In terms of NHB guidelines, housing finance companies1total
borrowings, whether by way of deposits, issue of debentures/
bonds, loans and advances from banks or from financial
institutions but excluding any, loans obtained from NHB, should
not exceed 10 to 15 times of their net owned funds (i.e. paid-up
capital and free reserves less accumulated balance of loss,
deferred revenue expenditure and intangible assets).
3) In respect of housing finance companies, which are eligible to
draw refinance from NHB, the quantum of term loan to be
sanctioned to them will not be linked ‘ to net owned funds as
NHB has already prescribed the above referred ceiling on total
borrowings of housing finance companies. A list of housing
finance companies approved by NHB for the purpose of
refinance may be obtained by the banks directly from NHB.
4) The quantum of term loans to be granted by banks to other
housing finance institutions, together with outstanding balances
in the existing term loans, if any, from the banking system,
should not exceed three times of their net owned funds as per
the last audited balance sheet, within the overall ceiling fixed by
NHB.

76
A.2) Lending to Housing Boards and Other Agencies

Banks may extend term loans to state level housing boards and other
public agencies. However, in order to develop a healthy housing finance
system, while doing so, the banks must not only keep in view the past
performance of these agencies in the matter of recovery from the
beneficiaries but they should also stipulate that the Boards will ensure prompt
and regular recovery of loan instalments from the beneficiaries.

A.3) Financing of Land Acquisition

In view of the need to increase the availability of land and house sites
for increasing the housing stock in the country, banks may extend
finance to public agencies for acquisition and development of land,
provided it is a part of the complete project, including development of
infrastructure such as water systems, drainage, roads, provision of
electricity, etc. Such credit may be extended by way of term loans. The
project should be completed as early as possible and, in any case,
within three years, so as to ensure quick re-cycling of bank funds for
optimum results. If the project covers construction of houses, credit
extended therefor in respect of individual beneficiaries should be on the
same terms and conditions as stipulated for direct finance.

A.4) Terms and Conditions for Lending to Housing Intermediary

Agencies

1) In order to enhance the flow of resources to housing sector, term

loans may be granted by banks to housing intermediary agencies
against the direct loans sanctioned/ proposed to be sanctioned by
the latter, irrespective of the per borrower size of the loan extended
by these agencies and such term loans would be reckoned for the
purpose of achievement of their housing finance allocation.

77
 2) Banks can grant term loans to housing intermediary agencies
against the direct loans sanctioned/proposed to be sanctioned by
them to Non-Resident Indians also.
However, banks should ensure that housing finance intermediary
agencies being financed by them, are authorized by RBI to grant
housing loans to NRls as all housing finance intermediaries are not
authorized by RBI to provide housing finance to NRls. Further, such
finance granted by banks to housing finance intermediary agencies
against the latters’ on-lending to NRls will not be treated as housing
finance for the purpose of scheme of yearly allocation of housing
finance applicable to banks.

3) Banks have freedom to charge interest rates to housing

intermediary, agencies without reference to Prime Lending Rate
(PLR).

B. Term Loans to Private Builders

In view of the important role played by professional builders as

providers of construction services in the housing field, especially where land
is acquired and developed by State Housing Boards and other public
agencies, commercial banks may extend credit to private builders on
commercial terms by way of loans linked to each specific project. The period
of credit for loans extended by banks to private builders may be decided by
banks themselves based on their commercial judgment subject to usual
safeguards and after obtaining such security as banks may deem appropriate.
Such credit may be extended to builders of repute, employing professionally
qualified personnel. It should be ensured, through close monitoring, that no
part of such funds is used for any speculation in land. Care should also be
taken to see that prices charged from the ultimate beneficiaries do not include
any speculative element, that is, prices should be based only on the
documented price of land, the actual cost of construction and a reasonable
profit margin.

78
3.7.7 Housing Loans under Priority Sector

The following housing finance limits will be considered as Priority Sector

Advances:

a) Direct Finance:
1) Loans up to Rs. 5 lakh in rurai/semi-urban areas and up to Rs. 10
lakh in urban! metropolitan centres for construction of houses by
individuals.
2) Loans up to Rs. 50,000/- for repairs to damaged houses by
individuals.
b) Indirect Finance

1) Assistance given to any governmental agency for construction of

houses, or for slum clearance and rehabilitation of slum dwellers,
subject to a ceiling of Rs. 5 lakh of loan amount per housing unit.
2) Assistance given to a non-governmental agency approved by the
National Housing Bank for the purpose of refinance for construction
of houses or for slum clearance and rehabilitation of slum dwellers,
subject to a ceiling of Rs. 5 lakh of loan amount per housing unit.

c) Investments in Bonds
Investment by banks in bonds issued by NHB/HUDCO exclusively for
financing of housing, irrespective of the loan size per dwelling unit will
be reckoned for inclusion under priority sector advances.

3.7.8 Opening Of Specialised Housing Finance Branches

A. In view of the priority accorded to the development of housing as also

to achieve greater professionalism, there is a need for establishment of
specialised branches at certain centres exclusively to cater to housing
finance. It is the intention that a housing finance branch should be
established in each district. But this can be

79
 brought about gradually based on the policies and perceptions for
greater involvement of commercial banks in the housing sector.
B. Since the housing finance is a new concept to banks, initially the

opening of such specialised branches may be restricted to semi-

urban/urban areas and the number of such branches to be allowed will

depend on the size and spread of the bank. Requests for this kind of

branch in rural area will also be considered where there is a clear need

and assured viability. While formulating their proposals, banks may,

therefore, keep in view the following aspects for consideration:

B. 1 The housing finance branch of a bank should be in any of the

districts for which the bank has lead responsibility or, in the case

of banks having very nominal lead responsibility, in districts where

they have a large presence.

B.2 Banks should avoid opening of such housing finance branches at

metropolitan centres which are served by quite a few specialized

housing finance companies like HDFC or housing finance

subsidiaries of the commercial banks.

B.3 The housing finance branches may be set up in areas where there is

a concentration of branches of the same bank designated to

handle housing finance business so that the expertise available in

the specialised branch could be used for servicing the other

designated branches.

B.4 While formulating their proposals, banks should, as far as

possible, give preference to smaller urban and semi-urban centres

where there is enough potential for opening of such branches.

B.5 The proposals should cover all the states to ensurea wider

geographical dispersion of housing finance branches.

80
 B.6 The applicant bank should also explore the feasibility of converting
any of its loss-making branches at the centre into a proposed
housing finance branch. Apart from this, banks could designate
one of their branches in each district for the purpose of housing
finance in addition to their normal banking functions.

B.7 The availability of housing finance services at specialized

branches should also be widely publicised.

B.8 In the interest of effecting economy in expenditure, the proposed

housing finance branches, as far as possible, may be
accommodated in any of the existing premises of the bank at the
centre.

B.9 Banks may also indicate the existing construction activities, likely
development in the business, their involvement in financing such
projects / construction work (whether in consortium or individual
basis) at the centre.

B.IONational Housing Bank will be prepared to take up the task of

training the staff to be posted in the specialised housing finance
branches so that they are equipped with the necessary skills for
the work.

3.7.9 Home Loan Account Scheme (HLAS) For NHB

A. Foreclosure of Loans Obtained from Other Sources

A.1 Under the HLAS, a member of HLAS is eligible for a loan after
subscription to the scheme for a minimum period of 5 years.

The member has to declare while joining the scheme/availing loan that
he! she does not own a house/fiat. However, a member may acquire a
house or a flat from a public agency/co-operative/ private builder by
obtaining a loan from a bank at the normal rate of interest

81
 or from friends and relatives or through a hire-purchase scheme of

Housing BoardI Development Authority. Thereafter, when the member

becomes eligible for a loan under HLAS, he/she may approach the bank

for such a loan to repay the loan(s) raised earlier from other sources.

A. 2 There is no objection to bank loans under HLAS being utilized for

foreclosing loans secured earlier from other sources, as a special case.

B. Classification of Deposits/Loans under HLAS

Under HLAS, the participating bank is required to accept deposits on

behalf of NHB and make use of these deposits by way of refinance
under any scheme approved by NHB from time to time. The surplus
funds, if any, not so utilised (i.e. excess of deposits over refinance) can
either be remitted by the participating bank to NHB or retained by it,
subject to compliance with the statutory reserve requirements as
under:

1. The deposits under the HLA Scheme are on a recurring basis; and they
should be treated as ‘time’ liabilities, subject to reserve requirements
under Section 42(1) of the Reserve Bank of India Act, 1934 as also
under Section 24 of the Banking Regulation Act, 1949 and included
under item 11 (a) (ii) of Form ‘A’.
2. In terms, of sub-clause (ii) of clause (c) of the Explanation to Sub-
Section (1) of Section 42 of the RBI Act, as amended by clause 3 of the
Second Schedule to the National Housing Bank Act, 1987, ‘liabilities’
will not include any loan taken from NHB.
Hence, the deposits utilised as refinance from NHB should be deducted from

the total deposits received under the HLA Scheme while including the amount

under item 11(a) (ii) of Form ‘A’.

82
3.8 HOUSING FINANCE IN INDIA

The need of housing finance in India was increasing with the rapid

population growth. Though, housing was considered to be a basic need. The

graph no.1 shows the estimation of housing finance shortage in India.

3.8.1 Industry Before and After Independent

Taking up records of the bygone century, it is notable that the deficit of

housing in India was so aggravated till the first half of the century. Census
records reveal that in 1901, there were 55.8 million houses for 54 million
households, inferring that there were 1.8 million surplus houses. This surplus
situation continued till 1941. After that a phase came were this surplus turned
into a deficit and that too of 1.7 million, in correspondence to 64.3 million
houses for 660 households.

The maximum surplus period between 1911 to 1931 was because, many

urban centres during the period were affected by plague and famine which

caused death on a large scale, resulting in households to grow slowly, leaving

enough room for house construction to cope with the household growth.

The Second World War (from 1939 — 1945) totally changed the

situation. Labourers migrated to the towns to work in factories for producing

ammunitions and other war supplies. During this period, there was a scarcity

of labor and materials for housing construction. After the war, many labourers

continued to stay in urban centres and adding pressure on the housing

situation.

The situation aggravated in 1947. About 7.5 million of displaced

persons migrated to India, in the wake of the partition of the country, into India

and Pakistan. With India achieving independence and taking a giant lead in

terms of progression and industrialization, improvement of health facilities

and the death rate coming down and the considerable growth in

83
population and the influx of job seekers into urban India, mounted up

pressure on the housing problem.

By 1971, total number of households was 100.4 million and the

number of houses was 90.7 million, taking up the deficit to 9.7 million.

3.8.2 Housing Shortage

In India, Indian population is increases day by day, so lack of proper

investment and most of people leave in the below poverty line as well as
searing bases also low, so the housing shortages is increases.

The national housing policy of the central ministry of urban affairs

estimates the housing shortage in India based on the 91 census to so around
10.4 million units. Nearly 2.5 million houses are built every year in India.
However, every the national’s requirement is around 6.5 million houses per
annum. The housing sector in India is facing an estimated shortage of 42
million houses and according to Ninth plan, the demand - supply gap in urban
housing is 32 million houses.

TABLE NO 3.1

ESTIMATION OF HOUSING SHORTAGE IN INDIA

(UNITS IN MILLION)

YEAR URBAN RURAL TOTAL

1951 2.5 6.5 9
1961 3.6 11.6 15.2
1971 2.9 11.6 14.5
1981 7 16.3 23.3
1991 10.4 20.6 31
2001 15.5 25.5 41
(Source: FACTS FOR YOU, NOV. 2001, p-30]

Home loans have been registering exponential growth in India during

the past six years. Easy liquidity conditions, low interest rates, availability

84
of tax shelters on repayment of principal and interest, surging demand from

middle income group borrowers, lower regulatory capital, the comfort of

tangible security have all collectively contributed to the spurt in home loans.

Repayment performance so far is satisfactory, with relatively low non

performing assets.

HDFC, ICICI Bank, and SBI are the major players in disbursement of
home loans in a highly competitive environment. These banks sanction up to
85% of the cost of the property as home loan for a maximum period of 20 to 30
years. They offer adjustable rate of interest linked to the retail prime lending
rate, besides fixed rate loans, with accelerated repayment option and
prepayment facility without any penalty. They also offer step up repayment
facility for bigger loans. ICICI Bank also offers home equity loans for maximum
loan tenure of 15 years. All commercial banks have been trying to enhance
their market share in the home loans through vigorous marketing strategies.
While private banks utilize the services of direct sales agents, PSBs depend on
their own staff for selling home loans. Add-ons like free personal accident and
insurance cover are also offered by many banks. Housing finance corporations
exclusively concentrate on home loans, often with refinance assistance from
National Housing Bank (NHB).

While Reserve Bank of India welcomes home loan disbursement in a

competitive environment, it has recently cautioned banks to be diligent with

regard to loan to asset ratio, credit appraisal and supervision. In fact, it has

recently tightened provisioning and regulatory capital requirements for home

loan.

3.8.3 Housing Problem in India

Population explosion, rapid phase of urbanization and evolution of

industrial culture have all created an intense housing problem in the country. It

has become the duty of the state to cater to the basic need of

85
housing. The Conference of the state ministers in 1975 recommended that
national urbanization policy be framed to achieve a balanced urban and
regional growth. A National Housing Commission has to be set up adopting a
National Housing Policy. Also a Rural Housing corporation has to be set up to
implement rural housing programme along with rural development. The state
governments would appropriate funds out of their annual plan allocation for
housing especially for SC/STs and other weaker sections. The Central
Government had to enact legislation to appropriate vacant urban property for
improving housing conditions of the urban poor. Building technology had to
be enforced to reduce housing cost and with the use of local materials
appropriate proportion of institutional finance should be allocated for house
building.

The government established National Building Organization for

conducting research in new building techniques and house construction. The

Hindustan Housing Factory was established for production of housing

materials. In 1970,

Housing Finance and Development in India Housing and Urban

Development Corporation was created to provide loan finance for housing and
urban development programme. Special emphasis was to be given to the
proportion of housing in low income groups and economically weaker
sections. The National Building Construction Corporation was started in 1960
with the objective of developing quality consciousness and reducing the cost
of construction. The National Housing Bank was established in 1987 for
providing loans for house construction and the National Housing Policy was
adopted in 1993.

The United Nations estimated that in countries like India the annual

construction rates of eight to ten dwellings per thousand populations in the

coming decades should be achieved in order to prevent deterioration of

housing situation. It has been estimated that as against five dwelling units per

thousand population per year the additional was only two to three up to

86
1971. In 1971 and 1981 the rate increased into four units per thousand

populations. The National Building Organisation has assessed the housing

inadequacy during 1985 in the order of 245 lakh dwelling units (188 lakhs in

rural areas and 57 lakhs in urban areas). But with rising population the

housing shortage is likely to intensify in the coming decades.

According to the VIth Plan, the provision of shelter was considered as a

basic need and the objectives of the plan were provision of house sites and
financial assistance for house construction for rural landless labourers,
designing of the public sector social scheme to benefit the maximum number
of people and making specific efforts; to reduce housing cost in public
housing schemes. This could be achieved by the cheap and alternative
building materials.

The role of Central Government in social housing scheme is confined to

the laying of broad based guidelines, providing necessary advice and
rendering financial assistance in the form of loans and subsidies to the State
governments and watching the progress of the schemes. The State
governments have classified the schemes into four categories based on
income criteria-housing scheme for economically weaker sections, low income
group housing scheme, middle income group housing scheme and rental
housing scheme for government employees.

The house size and consumption assessing scheme for rural landless
workers has been in operation from the Sixth Five Year Plan. The 1976 Urban
Land Ceiling and Regulation Act provides for imposition of ceiling on both
ownership and possession of vacant land in urban areas, acquisition of excess
vacant land, granting extension in certain category of vacant land and
restricting the length area of construction of future buildings. On the slums,
provisions of basic amenities have been an important agenda since long.

87
3.8.4 Housing Statistics

Table 3.2 presents the total population, total number of households and
housing stock in both rural and urban areas. When compared to 1951, the
population in 1991 increased by 235 per cent. The increase in the number of
households has been 206 per cent and that of occupied residences 229 per
cent. The increase in the number of houses has not been in commensurate
with the increase in population.

Between 1981 and 1991, the proportion of houseless households in

rural areas has declined from 0.47 per cent to 0.28 per cent as shown in
Table 3.3. In 1981, Andhra Pradesh, Gujarat, Haryana, Himachal Pradesh,
Maharashtra, Madhya Pradesh and Rajasthan had a higher proportion of
houseless households (over 0.5 per cent). In 1991, Gujarat and Maharashtra
had a houseless proportion of more than one percent. For the country as a
whole, the proportion in the urban areas declined from 0.73 per cent to 0.55
per cent during the period, Andhra Pradesh, Gujarat, Himachal Pradesh,
Karnataka,

Maharashtra and Orissa having a high proportion. As contrast to rural

areas there was an increase in the absolute number of the houseless
households in the urban areas.

Table 3.4 presents the proportion of households, having access to safe

drinking water and also in rural areas. In 1981 the proportion was lower in
Andhra Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Orissa,
Rajasthan and Uttar Pradesh and very high in Kerala, Punjab and West
Bengal and above average in other States. In 1991, Gujarat, Haryana,
Himachal Pradesh, Karnataka, Punjab, Tamil Nadu, West Bengal and also
Kerala reported a satisfactory level. This clearly shows that during 1981-91
there has been vigorous action programme to provide safe drinking water and
all the states have achieved a high level though still much has to be done.
However, when the water quality problem is considered the problem

88
becomes intensive. If 63 per cent of rural households have access to safe
drinking water in the country, the proportion is 90 percent in urban areas. The
table also highlights the proportion of households having toilet facilities which
is a mere 9 per cent in rural areas (and 64 per cent in urban areas). State-wise
Assam, Gujarat, Kerala, Punjab and West Bengal have shown a higher
proportion of households having toilet facilities. The proportion of households
having electricity in rural areas was only 14.3 per cent in 1981 increasing to 31
percent in 1991. Gujarat, Haryana, Maharshtra and Punjab have a higher rate of
electricity households. In urban areas, the proportion is 76 per cent in 1991.
Sundaram and Tendulkar 1996 have constructed an index of amenities
deprivation and according to them about 28 per cent of the rural households
did not have even one of the these basic amenities in 1991; while less than six
percent of the households lacking access to only one of the three amenities,
one per cent of the households were deprived of water, while two per cent were
deprived of electricity, in contrast to about 17 per cent lacking toilet facilities.
Amongst the states, Orissa has the highest proportion (about 46 per cent) in
the category of having none of the three amenities, while the proportion in
Punjab is only three per cent. Kerala has the highest proportion of households
having all the three amenities (31 per cent), followed by Punjab (14.3 per cent)
and Gujarat (9.9 per cent). In Karnataka the proportion was 5.16 per cent. In
this State, none of the three amenities is reported in 17.2 per cent of
households, neither electricity in 17.4 per cent and neither electricity nor toilet
in 57.4 per cent. The percentage of households not having any two amenities is
46.8 per cent for the country, 49 per cent in Karnataka and lower in Haryana,
Himachal Pradesh, Kerala and Punjab. The percentage of not having water is
less than that of electricity, higher in Assam and Haryana and then for toilet the
deprivation was very high in many states. In urban areas, the deprivation has
been 8.14 per cent for all the three, 2.13 per cent in water, 3.97 per cent in
electricity and 14.3 per cent in toilet facilities. About 57.2 per cent of
households had all the three

89
amenities, the proportion being higher in Assam, Gujarat, Haryana, Kerala,

Maharastra, Punjab and West Bengal.

The extent of deprivation with respect to quality of structure is lower in

urban areas, (10.3 per cent) than in rural areas where it has been 15.3 per
cent, The proportion was higher in Assam, Bihar, Haryana and West Bengal.
The proportion of households having non-serviceable kutcha houses is
greater in rural areas, Assam, Bihar and West Bengal has a higher
proportion.

The proportion of non-serviceable kutcha houses is 9.24 per cent, bad

condition houses 6.03 per cent and slums 6.25 per cent in rural and 14.7 per
cent is urban areas. The proportion of non-serviceable kutcha houses is very
high in Assam, Bihar and West Bengal, that of bad condition houses in
Gujarat, Haryana, Maharashtra and that of slum houses in Assam and
Maharashtra. In Karnataka 5.6 per cent of houses are non-serviceable kutcha
houses, 7.6 per cent pucca and semi-pucca in bad condition and 7.38 per cent
slums. In urban areas the proportion of slum households is 14.7 per cent,
higher in Maharashtra, Orissa, West Bengal and Andhra Pradesh; non-
serviceable kuchha houses 2.88 per cent (higher in Assam, Andhra Pradesh,
Kerala and Madhya Pradesh) and 7.41 per cent pucca and semi pucca
houses in bad condition (higher in West Bengal, Bihar and Haryana).

Table 3.5 presents the percentage and types of rural households in

India during 1991. The proportion of pucca or permanent houses has been
30.6 per cent, higher in Goa, Gujarat, Haryana, Himachal Pradesh, Kerala,
Punjab, Rajasthan, Delhi and West Bengal. The proportion of semi-pucca
houses has been 24.02 percent, higher in Bihar, Goa, Gujarat, Haryana,
Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Sikkim and
other States. The proportion of temporary thatched houses is higher at 33.76
per cent, Andhra Pradesh, Arunachal Pradesh, Assam, Manipur,

90
Meghalaya, Mijoram, Nagaland, Orissa, Tripura and West Bengal having a very

high proportion.

Regarding overcrowding rural population there has been a decline in

1991 except in Bihar and Uttar Pradesh. The percentage of over-crowding has

been 52.23 per cent in 1981, slightly declining to 47.24 per cent in 1981 and

Andhra Pradesh, Assam, Bihar, Gujarat, Karnataka, Maharashtra, and West

Bengal in 1991 have a high proportion of over-crowding.

According to Sundaram and Tendulkar the shelter deprivation index in

rural area in 1991 is 13.41 per cent which includes houseless amenities
deprivation, poor quality structure and over-crowding (both locality level and
big house). The index is higher in Assam and Bihar, Maharashtra, Orissa,
Rajasthan, West Bengal and lower in others. In Karnataka, the percentage of
rural households affected with houselessness has been 0.29, that of amenities
deprivation 22.68 per cont, poor quality structure 13.11 per cent locality level
over-crowding 7.38 per cent, over-crowding within a house 50.6 per cent and
index of shelter deprivation 12.56 per cent. For the country as a whole, the
proportion has been 0.28 per cent houselessness, 26.83 per cent amenities
deprivation, 15.27 per cent poor quality structure, 6.23 per cent locality level
over-crowding and 13.41 deprived in shelter.

3.8.5 Finance Agencies

There are many agencies catering to the needs of housing finance. The
notable among them are Housing and Urban Development Corporation,
National Housing Bank, Housing Development Finance Corporation, State
Housing Boards, Life insurance Corporation and many private agencies.
HUDCO was established in 1970 as the main source of finance with equity
contribution by the government, borrowings from State and floating of
debentures. The HUDCO has been financing several rural schemes by
remaking 15 per cent of the resource allocation to such

91
schemes. In 1986, total cumulative loan sanctioned and amount disbursed
was Rs. 2306 and Rs. 1423 crores respectively. About eight per cent of
development of flats relates to weaker sections.

The National Housing Bank was set up as a subsidiary to Reserve

Bank of India in 1988 to augment the flow of institutional finance to housing
sector and to promote and regulator of housing finance institutions. The
various schemes operated by NHB are home loan account scheme (a
contractual saving scheme) (ended to guaranteed loan, refinance scheme for
housing by the Commercial Banks and Housing Finance Institutions and land
development. Shelter projects of public private agencies operate through
HUDCO and Commercial/Banks to increase the supply of service land and
houses. Allocation of LIC/GIC loan to State governments for housing scheme
has been increased in recent years. During 1993-94, LIC allocated loans to
the extent of Rs. 201.8 crore and GIC allocated to the extent of Rs. 107.6
crore for social housing scheme in different states.

The Housing Development Financial Corporation began its operation in

1978 with Rs. 10 crores in capital and a loan on one million dollars from the
International Finance Corporation. Its balance sheet shows a worth of Rs.
5311 crore with a share capital of Rs. 100 crores in recent times. During its
first decade of existence, HDFC borrowed wholesale and rented retail. More
recently because of the regulation in the financial sector, credit is no longer
allocated. Therefore HFIs now have to compete with the other financial
institutions, although they cannot lend money at high rates of interest
according to NHB regulation. In 1991 HDFC entered the retail deposit market
in order to raise funds.

Interest rates offered on deposits are regulated by the NHB. HDFC

also regulates to take deposits of between one and seven years duration and
there are controls on the deposits. Unlike banks and mutual funds, HFIs must
deduct income tax at source interest profit of over Rs. 3500 while the deposits
HDFC has invested in staff training also.
92
 Because of retail deposits which account for over a third of incremental

fund, a number of deposits has increased from 56.000 in 1991 to over 2.7 lakh.

Today about 20 per cent of HDFC funds are from institutional sources. It is the

first Indian Housing Institution to raise funds under the USAID assistance. In

1983, HDFC exhibited the first coverage and interest rate swap to lock its

funding at fixed interest rate. One of the international loans has been supplied

so that the interest rate and exchange rates are similar to that borne by HDFC.

It has also received term loans from World Bank, the Commonwealth

Development Corporation and from Germany.

Initially HFIs are allowed to be 100 per cent dependent on NHB finance

for their funding. This will be reduced to 60 per cent and eventually the NHB

will be a lender of last resort only.

The HDFC received 12 per cent of its initial funding from NHB. For some

of the small HFIs, NHB grants form a major part of their funding. NHB does not

play an important role in the case of large HFIs. NHB refinances is directly tied

to individual housing loans at fixed rates of interest below the rates the

Housing Finance institutions charge the borrowers. While the NHB provides

the source of this fund, the risk of default is still formed by HFIs.

One of the greatest potential source of fund for the HFIs is securitization

of mortgages. A Housing Finance Institution would organise portfolios of loans

to be securitised. These loans will be sold in the market later, but the HFI will

still be responsible for collecting and subscribing. This will not reflect on the

balance sheet. The market maker then issues mortgages and backs securities

against this newly purchased loan portfolio. NHB has to play an important role

in this stratification as market maker and as a partial guarantor.

93
 At the moment there is no market for securitised asset, one of the
reasons behind this being the very high rate of interest on transfer of
mortgages. The Maharashtra Government for example reduced the rate from
three per cent to 0.1 per cent in 1994 for better securitised asset market.

Further, government laws provide very little protection to lenders which

will be ultimating the holders of securitised paper. At present housing loan
offers fixed rate of interest which is regulated by NHB. The interest paid on
mortgages of securities will be directly determined by the rate charged by the
HFI to the borrowers. Until reducing rates on housing loans and competition
with commercial lending rate, the mortgage securities will have to be
attractive to investors. This has been exempted from the Urban Land Ceiling
Act.

Demand for housing finance has increased very much while the HFls
find a resource crunch.

The total aggregate investment in housing during Eighth Five Year

Plan has been Rs. 77,467 crores. However, during 1993-94, the aggregate
HFI sanction was Rs. 2000 crores. Reserve Bank of India controls the
Housing Finance institutions a other non-banking financial institutions. But
HFls unlike NBFCs operate on low spread high volume business
environment. They do not have high preferred lending for loans above Rs.
One lakh, despite the NHB increasing the refinance rate. The net earning
spreads between 1.25 to 1.5 per cent. Therefore they are concentrating on
that segment that offers satisfactory returns. This includes lending to builders
and developers, corporate and State Housing Boards. This segment offers
greater surety of repayment and the bulk of business with high value
transaction. Transaction spreads are highest in the case of consumption
finance to developers and builders. So also the risk considering mushrooming
of a large number of construction companies.

94
SBI house finance has minimised the risk by restricting itself only to public

limited companies.

Public deposit ranging from one to seven years average is a major

source of finance for Housing Finance Institutions. The HD and SBI home
finance depend more and more on public posits and expansion of finance.
Because of its vast deposits the HDFC has emerged successfully like the LIC
housing finance because of its excess capturing market policy holders. The
corporation's retail has aggregated lending Rs. 2000 crores in recent times.

Housing Finance Institutions have to compete for funds with other

finance institutions. But deposit mobilisation becomes obviously difficult.
Recently, the Housing Finance Institutions rely on a large number of public
issues as an attractive source of funds.

The international bid market is another source of funds for the HDFC.
This constitutes about 26 per cent of its total funds. Euro issue provides
access to a large volume of low cost funds to builders say in Singapore where
housing loans are available at lower rates of four per cent. If Housing Finance
Institutions are able to borrow from abroad at six per cent, they could lend 8 to
10 per cent and provide housing credit cheaper. The NHB self can borrow
from abroad and provide refinance at rates lower than that of the Housing
Finance Institutions.

In 1988, the BBI allowed the banks to enter into housing finance sector
by encouraging them to give individual housing loan, project loans and also
subscribed to the bonds of HUDCO and NHB. However, bank lending to
Housing Finance Institutions is negligible as they are now competing directly
with non-banking institutions. Some banks like Bank of India have set a
specialized housing finance bank to focus on this activity. Many banks floated
housing finance subsidiaries. The Housing Finance

95
institutions need to help for variable rate market agencies that too against the
present fixed rate where they experience increased interest rates.

Increasing management is another area which will have a far reaching

impact on the profits of HFIs. Since a Housing Finance Institution has to
invest 75 per cent of its funds in housing, investment and management
become equated to proportion of other income to total income which has to be
very high. The Housing Finance institutions are going beyond the traditional
theory of lending role. This offers a basket of services including property
guidance and investment counselling. A high recovery rate is also crucial for
satisfactory performance. The Housing Finance Institutions also convert the
asset into debt instruments which enables the companies to raise more funds.
Here Housing Finance Institutions loans would be security mortgages on
residential properties.

This loan are then purchased and sold to an intermediary called

special purpose agent in the intermediary market. Pension funds and
consumer societies could invest in mortgaged loans. Even when the loans
are repaid by borrowers, the amount is passed onto investor. The mortgage is
vetted by credit agencies. Besides an insurance company will provide
mortgage insurance or bank guarantee. However, securitization mechanism
is inadequately developed and lack of liquidity securitisation becomes a major
constraint. The prevalence of high stamp duties is another hindrance.

The Housing Finance Institutions have to comply with norms of capital

adequacies, income recognition and asset classification issued by the NHB.
They have to be rated by credit rating agencies. The Housing Finance
Institutions have to retain a capital adequacy ratio of six per cent by
September 1995 and eight per cent in March 1996. This is as per the A.C.
Shah Committee recommendation of Non-Banking Financial Companies
which is applicable to HFIs also. There are over 150 Housing Finance
institutions and still more have been floated. The National Housing
96
Policy specified the inclusion to permit NHB and HUDCO to set up individual
funds to invest in housing scripts and also to introduce a secondary mortgage
system. In this, easing out of legal impediments and of the rent control act to
make investment more jyttractive becomes necessary. The refinance rate by
NHB at present is 14 per cent of HFI loan between of Rs. 25,000 and Rs.
1,00,000 and 14.5 per cent for those above Rs. 1 lakh. The NHB has
described lending rate of 15.2 per cent for less than Rs. one lakh. There are
19 companies that are recognised by NHB and avail its refinance facilities.
After the 1992 security scam, the NHB has been subject to many limitations.
The NHB of late has been playing a subdued role.

The HDFC has been thriving and enjoys more than 50 percent of the
market share. It has 27 branches and a deposit base of over Rs. 2000 crores
which ensures a low fund cost. During 1994-95, it sanctioned Rs. 1500 crores
and disbursed Rs. 1200 crores. The total outstanding has been increased by
25 per cent when compared to present year and only 0.7 per cent of this was
non-performing. The total income for 1994-95 amounts to Rs. 780 crores, the
profit rate being 38 per cent. The LIC housing finance was promoted by ICICI,
IFCI and UTI in 1981. The company has the widest net unit of 65 branches.
Life Insurance Policy is a necessary requirement for financing. The LIC agent
acts as an influencer, further widening the net.

The cumulative amount of sanction and disbursement as on March

1994 in the case of HIDFC was Rs. 6,993 crores and Hs. 5695 crores
respectively. LIC housing sanctioned Rs. 2483 crores and disbursed Rs.
1885 crores. The cumulative amount sanctioned and disbursed by Canfin
Homes was Rs. 680 crores and Rs. 372 crores. In the case of Dewan
Housing Finance and Rs. 183 crores and Rs. 142 crores in the case of SBI
finance. The Eighth Five Year Plan accorded an important place for rural
housing. The National Housing Policy with the long term objectives aimed

97
at provision of basic infrastructure, increasing serviced land, enhancing
resource mobilisation, promotion of self-help housing, establishment of
management information system for housing and infrastructure and provision
of financial and institutional support. The Planning Commission had set up a
working group on housing finance so as to consider ways and means to step-
up the flow of institutional finance to the housing sector. Physical incentives,
procedural simplification and setting up of a wider network of HFIs especially
in remote areas have been the important initiatives taken during the plan.

Table 3.2

Population, Households and Housing Stock in India (in Lakhs)

Occupied
Censu Population Tota Household Residences
s yr. Rura Urba I Rura Urba Tota Rura Urba Tota
I n I n I I n I
1951 2985 624 3609 606 128 734 541 103 644
1961 3601 791 4392 686 149 835 651 141 791
1971 4383 1089 5472 780 192 971 727 181 908
1981 5255 1597 6852 935 291 1226 872 272 1144
1991 6291 2172 8463 1116 395 1511 1085 387 1472
Source: Census of India, Various years

98
 Table 3.3

Proportion of Houseless Households in India

% of houseless H/H % of houseless H/H
State (Rura Areas) (Urban Areas)
1981 1991 1981 1991
Andhra Pradesh 0.52 0.26 1.03 0.80
Assam N.A. 0.02 N.A. 0.15
Bihar 0.07 0.06 0.49 0.39
Gujarat 1.41 1.03 0.60 0.63
Haryana 0.51 0.21 0.43 0.27
H.P. 0.60 0.23 0.52 0.90
J&K 0.27 N.A. 0.10 N.A.
Karnataka 0.46 0.29 0.84 0.60
Kerala 0.17 0.12 0.51 0.29
M.P. 0.98 0.39 0.91 0.58
Maharashtra 1.47 1.08 1.03 0.66
Orissa 0.28 0.15 0.77 0.85
Punjab 0.36 0.25 0.62 0.39
Rajasthan 0.68 0.30 0.66 0.46
Tamil Nadu 0.13 0.07 0.25 0.20
Uttar Pradesh 0.08 0.07 0.47 0.51
West Bengal 0.20 0.07 0.93 0.58
All India 0.47 0.28 0.73 0.55
Source: K.Sunuaram and S.D. Tendulkar on Measurign Shelter Deprivation
in India, Indian Economic ReveiwVol XXX, No.2, 1995, p.134-5

99
 Table 3.4

Population Growth rate and provision of drinking water and toilet

facilities (1991)
% age of H/H % of national
State having safe Toilets growth rate
Drinking water (rural)
Andhra Pradesh 48.98 6.62 1.51
Assam 43.28 30.53 2.25
Bihar 56.55 4.96 2.27
Gujarat 60.04 11.16 1.89
Haryana 67.14 6.53 2.40
Himachal Pradesh 75.51 6.42 1.80
Karnataka 67.31 6.64 1.67
Kerala* 21.00 44.07 1.40
Madhya Pradesh 45.56 3.64 2.24
Maharashtra 54.02 6.64 1.76
Orissa 35.32 3.58 1.71
Punjab 92.09 15.79 1.80
Rajasthan 50.62 6.65 2.59
Tamil Nadu 64.28 7.17 1.06
Uttar Pradesh 56.62 6.44 2.50
West Bengal 80.28 12.31 1.93
All India 55.54 9.48 -

*ln Kerala, inside wells proportion is very high.

Source: D. Lahiri, ‘Rural Housing: Policies and Problems in Rural India,
Kurukshetra, May-June 1966, p. 85
The need for setting up of an appropriate management information
system at various levels for housing and urban services is to be achieved in
order to support policy formulation and implementation of various schemes. A
sub group on housing statistics set up by the Planning Commission had
identified various gaps in the data collected and had suggested improvement
of the existing system of data collection. The sub group proposed a housing
census and periodical service on important indicators of housing condition,
access to service, expenditure and savings pattern and residential patterns.

During the VIIIth Plan, a new housing scheme with a target of 81.5 lakh
rural units and 78 lakh urban units has been prop ed. The shelter up

100
gradation has to be in the case 40.7 lakh units in rural and 17.5 lakh in urban
areas. The allotment of village housing scheme under Minimum Needs
Programme is 40 lakh units. The new housing stock will be 35 lakh rural units
and 80 lakh urban units indicating a major role for the informal sector. The
share of the rural sector in terms of units is estimated to be 51 per cent higher
than the Vllth Plan. A new scheme of rural housing aimed at supplementing
government efforts and up gradation of housing units is also in the offing.

Recently, there has been a marked growth in the flow of credit from
financial institutions. The contribution of LIC has increased from Rs. 185 crore
in 1984-85 to Rs. 825 crores in 1990-91. A large flow of institutional finance
has been made by HUDCO when its growth is considered. During the Vllth
Plan HUDCO sanctioned Rs. 2,834 crores and released a loan amount of Rs.
1,797 crores facilitating about 20 lakh units. Loan operation of HUDCO has
registered a growth of 133.5 per cent when compared to the previous plan.

The LIC contributes by way of direct lending, bulk loans and assistance
to State governments, apex bodies and loans to its own housing finance
subsidiaries. During the VIIth plan all these totalled Rs. 1,570 crores.

Under the National Housing Policy, the Karnataka Government has the
objectives of distribution of house sites in rural and urban areas and provision
of assistance for construction of houses for economically weaker sections of
the society at an affordable cost. The total state plan outlay has been Rs.
19.93 crore in 1979-80 which works out to 6.08 per cent of total state plan
outlay. The proportion declined to 3.65 per cent during 1980-82, slightly
increasing to 4 per cent of plan outlay in the subsequent year. However, the
proportion declined to 3.48 per cent during 1987-89 and less than 2.5 per
cent during 1989-91. During 1995-96, outlay on housing has

101
been Bs. 150 crore which is around 4 per cent of the state outlay indicating an

insignificant role of housing finance by the state sector.

Up to the end of November 1995, about 18.8 lakh house sites were
distributed in the state. The Karnataka government has launched the Ashraya
Scheme during 1990-91 with the objective of providing shelter to the
economically weaker sections as quickly as possible, elimination of
houselessness by the turn of the century by adopting a new housing strategy
for the target groups, rehabilitation of the slum dwellers in Bangalore city in a
phased manner and promotion of the usage of local manufactured building
materials with prefabricated technology in the long run. The main target
groups eligible under the Ashraya Scheme are people whose annual income
falls below Bs. 11,800 in rural and urban areas excluding in Bangalore city. The
unit cost of a house under the Ashraya Scheme is Rs. 20,000 in rural areas
with 50 per cent loan and 50 per cent subsidy comonent. The unit cost is Bs.
24,500 in urban areas with a loan component of 80 per cent and a subsidy
component of 20 per cent. During 1995-96; about 89,000 houses were
constructed and 7.6 lakh sites distributed under Ashraya.

The number of house sites distributed up to 1995-96 amount to 3.2

lakhs. Betweenl 976-1982, the house sites distributed average about 40.000 a

year. During 1991-92, (the year of launching of Ashraya) about four lakh sites

were distributed and during 1992-95, another 3.5 lakh sites were distributed.

In urban areas under Baghyamandal from 1979-80 for economically

weaker sections house were constructed. The average was more than 10.000

units in the year 1981-82 and 1984-85 but average has been around 5,000

increasing to recent years.

102
 Table 3.5

Percentage and types of rural households in India (1991)

Types of House
No. of No. of
occupied (%)
State / U.T. H/H Rural H/H %88.2
Semi
(mil) (mil) Pucca Kutcha
Pucca
Andhra
Pradesh 13.71 10.34 75.4 29.77 25.24 44.99
Arunachal
Pradesh 0.17 0.15 88.2 9.76 10.53 79.71
Assam 3.80 3.33 87.6 10.53 13.37 76.09
Bihar 14.11 12.25 86.8 24.07 38.33 37.56
Goa 0.22 0.13 59.0 41.58 52.36 6.06
Gujarat 7.47 4.79 64.1 43.42 51.61 4.97
Haryana 2.65 1.92 72.5 41.46 41.32 17.32
Himachal
Pradesh 0.99 0.88 88.9 49.75 43.86 6.39
Karnataka 8.02 5.53 69.0 30.45 49.34 20.21
Kerala 5.39 4.03 74.8 51.56 20.55 27.89
Madhya
Pradesh 11.77 9.05 76.8 20.93 73.79 5.28
Maharashtra 14.90 8.99 60.3 35.37 47.36 17.27
Manipur 0.30 0.22 73.3 2.46 35.90 61.46
Meghalaya 0.33 0.26 78.8 9.33 28.17 62.50
Mijoram 0.12 0.06 50.0 2.86 35.68 61.45
Nagaland 0.08 0.05 62.5 12.35 31.00 56.65
Orissa 5.98 5.17 86.3 13.00 22.63 64.37
Punjab 3.38 2.36 69.8 72.14 12.26 15.60
Rajasthan 7.37 5.66 76.8 47.04 27.46 25.50
Sikkim 0.08 0.07 87.5 22.13 40.43 37.43
Tamil Nadu 12.34 8.43 68.3 34.60 19.63 45.77
Tripura 0.52 0.40 76.9 1.91 17.35 80.74
Uttar Pradesh 22.41 18.09 80.7 32.70 33.60 33.70
West Bengal 12.50 8.89 71.1 15.74 34.17 50.10
Delhi 1.86 0.16 8.6 86.63 5.87 7.50
Union
Territories 0.40 0.15 37.5 43.98 24.02 32.00
All India 151.03 111.53 73.8 30.59 35.65 33.76
Source: Census of India, Housing and Amenities-A Data Based on Housing
in Districts, Cities and Town, Occasional paper No. 5,1994.

In addition to provision of sites and construction of houses under

Ashraya scheme, a new scheme called Neralina Baghya Awas introduced
103
during 1993-94 with the objective of replacing hatched roof with tiled roof at a
unit cost of Rs. 3,000 per house. During 1994-95 about 12,000 thatched roof
houses have been converted into tiled roof houses. The target for 1995-98
has been 10,000 tiled roof houses.

3.8.6 Housing investment

The government has invested Rs. 25,000 crores up to the VIth Five
Year Plan in the housing sector. The outlay in Seventh Plan has been Pis.
4260 crores. The investment in housing has been failing down in terms of the
percentage of the total investment in the economy. Lack of coordination
among government departments, inefficient urbanization, population growth,
overlapping of work, faulty administration etc., have resulted in shortening
housing investment. The National Building Construction Corporation which
has undertaken the construction of specialized and complicated works on a
transitory basis onto the planning of designing. The Housing and Urban
Development Corporation being an apex organisation provides loan finance
for housing and urban development with the emphasis on the promotion of
housing for persons belonging to low income groups and economically
weaker sections.

Main sources of finance for hedonic or of equity construction are by

government borrowing from LIC and floating of debentures.

3.8.7 Rural Housing

Over the years housing problem has assumed great dimension with a
huge backlog and a rapidly growing population. The housing shortage may
rise to over tour crores units whereas shortage in rural areas could be over
2.5 crores units. Besides, over 1.2 crores units require substantial upgrading.
As early as 1972-73, the Estimates Committee of the Lok Sabha observed
that about 83 per cent of the country's population resided in Kutcha houses.
The problem of rural housing has not received a close attention.

104
 The 1991 population census has reported that about three per cent of
the rural households are homeless and this proportion was 0.5 per cent in
1981. Safe drinking water, sanitation and electricity are basic amenities to be
provided to the households. According to 1981 census, only about 55 per cent
of the rural houses (excluding Jammu and Kashmir) have accessibility to safe
drinking water. According to the National Drinking Water Mission availability of
a tap, hand pump or tube well within or outside the premises constitutes safe
drinking water. If water drawn from open well in the premises is also imputed,
the proportion of accessibility will increase to 64 per cent. The proportion of
rural households having sanitation facilities (toilets for example) is very low.
The proportion is just 12 per cent for the nation and some states like Kerala
and Assam have a high proportion (over 40 per cent) followed by Punjab and
West Bengal.

The percentage of rural households having electricity has increased

from 14 in 1981 to 39 in 1991. In states like Punjab (from 50 to 77 per cent),

Haryana (from 41 to 63 per cent), Maharashtra (from 24 to 58 per cent), Gujarat

(from 21 to 56 percent), Tamil Nadu (from 26 to 45 per cent) and Andhra

Pradesh (from 13 to 38 per cent), the proportion is high. It is low in Uttar

Pradesh (11 per cent) and also in Bihar (less than 6 per cent).

The percentage of households having all the three basic amenities is

less than six per cent in the country. The percentage is higher in Kerala (31 per

cent) and is very low in Orissa (2.5 per cent).

Regarding quality of rural housing, nearly three fourths of the houses

are semi-pucca or Kutcha without wall or even fence. About 10 per cent of
households have only non-serviceable Kutcha houses and six per cent of the
houses are in bad condition. Only the higher income groups have more than
one room on an average. Nearly 14 per cent of the households have houses of
wall built just from grass, straw and leaves and 33 per cent of these houses
have roof of similar material only.

105
 The facility of exclusive use of drinking water is confined to less than 80

per cent of the households while quality of rural houses and amenities

provided are far from satisfactory. Even where financial allocations have been

larger, they have been inefficiently utilized. Very little action has been taken iii

reducing cost of construction and use of local resources for construction.

Houses in rural areas consist of semi-pucca and serviceable kutcha

houses. The proportion of kutcha or semi-permanent houses has declined
from 43.6 per cent in 1971 to 40.6 percent in 1981 and further to 33.8 percent in
1991. There is not much change in semi pucca or permanent houses. The
proportion in this case declined from 37.5 per cent in 1971 to 36.7 per cent in
1981 and to 35.7 per cent in 1991. The proportion of pucca or permanent
houses has shown an increase from 18.1 per cent in 1971 to 22.5 per cent in
1981 and 30.6 per cent in 1991.

The expenditure on housing has increased from Rs. 4 crore in the First
Five Year Plan to Rs. 24.5 crore in the Seventh Five Year Plan. However, the
percentage of plan expenditure spent on housing declined from 1.96 in the 1st
Plan to 1.09 percent during the annual plans 1966-69, slowly increasing to 1.36
per cent during the VIIth Plan. The proportion of rural housing to total housing
expenditure which was around 11 per cent in the first three plans was less than
live per cent in the IVth Plan, increasing to 11 per cent in the Vth, 27 per cent in
the VIIth and 22 per cent the VIIth Plan. Rural housing being an important
component of Minimum Needs Programme had a provision of distribution of
the house sites to the extent of 30 lakhs during the Seventh Five Year Plan, the
achievement being higher. In the case of construction assistance, the target
has been around 20 lakhs and the achievement higher. During the VIIIth Plan, a
similar target has been proposed.

106
3.8.8 Housing Needs
Home should be a place where each family member finds peace,
comfort, safety and relaxation. Today housing is not availability bat
affordability. Housing is indeed a global problem. Half of the urban
populations live in slums and squatter settlements of developing countries.
Slums are the part of urban life. Housing is immobile, durable and expensive
property. Housing is the most costly commodity and hence it needs heavy
capital investment. Every dwelling unit differs in size, location, floor plan,
interior decoration and utilities. Housing consumers choose the dwelling units,
which provide the best price, size, location and other facilities. If the income of
family changes, the need for housing also changes. Millions of people have
no proper housing. A certain minimum standard of housing is essential. The
standard of living of mankind can be judged by the adequacy of housing. Due
to our faulty planning, a trend of urbanization has added fuel into the housing
finance. In search of employment and better wages, frequent droughts, desire
to live in urban area have forced skilled and semi-skilled laborers to migrate
towards city area. Government enacted Urban Land Ceiling Act to provide
help to poor people. But there are many loop-holes.

In the old days, the primitive man lived in a cave. Then he started to
live on trees and build house with the help of wood and grass on the trees. To
protect himself from wild animals and natural calamities like rain, heat, cold
etc. made essential to have shelter. People had started to live together in-
groups and villages. It becomes necessary to have a house for living with
proper facilities to improve the quality of life. Today our country is facing the
problems to rapid increases in population, fast development of urbanization
and proverty of masses. Urban and rural housing are lacking in essential
housing services such as potable water supply, sanitation and electricity.
Most of the rural housing areas are still used to lighting kerosene lamps.
Some of the rural areas have still no electricity facility. The need of housing is
also changed with the development of human

107
culture. Housing means shelter, safety and privacy and rest place. In the fast
changing world, it becomes luxurious also. Man had started to live in villages
instead of living in jungle. They had started farming and livestock business.
After industrial revolution people had started to migrate from village to urban
area in search of livelihood. So the need for houses increased rapidly.

The urban homeless population such how poor migrates to cities, the
economically deprived and the employed, the handicapped, the old and sick
people are living on pavements and open places. As per the 1991 census,
the estimates figure of housing shortage in the country is 22-90 million units
as on 31-3-1991. More than 90% of this shortage is for the poor and the low
income group people. In the ninth plan, provision for housing would require
an investment of Rs. 151000 crores. It has estimated that not more than 20 %
of this will flow from banks, financial institutions, central and state
government. The national agenda has emphasized that housing activity
would provide employment and also developed other depending industries
like cement, sands, plumbing, bricks, marbles, tiles, stones, wooden, paints
etc.

The government is very serious about reviving the housing industry

and also planning the series of measures to stimulate his sector. The
government thinks to repeal the Urban Land Ceiling Regulation Act, initiating
new housing projects in rural and urban areas and reforms in housing boards
along with urban local bodies. The government is in the process of preparing
guidelines for allowing direct investment in the housing sector. The above
measures will push the need of housing.
At present common persons are facing problems about where to invest
their money. Government has reduced the interest rates on Provident Fund,
National Saving Certificates, Public Provident Fund and other government
securities. The bank fixed deposit rates are also gone down and not likely to
go up in the near future. The stock market is also in a bad shape and very
risky to invest. So it is advisable to invest fund in real

108
estate for the long term. It was found that return on real estate is comparatively
higher than any other instruments i.e. stock market or bank fixed deposits.
There is a tax benefit on housing loan. It gives tax benefit on housing loan
interest to a maximum of Rs. 1,50,000 per annum. Investment in housing
property offers good return in comparison with the income from banks and
other government securities. President Franklin D. Roosevelt said “Real estate
cannot be lost or stolen nor can it be carried away. Managed with reasonable
care, it is about the safest investment in the world.” The return on three to five
years deposits will come down from 9.5% to 9% and as these returns are
taxable. The equity market is not safe for the investors. So they will have to
look for some other sources. Although the interest rates on small saving like
Public Provident Fund, National Saving Certificate are also decreased up to
9.5% and long lock in period between 6 to 15 years. RBI gives a tax free return
of 8.5 % but with a look in period of five years. Buying property is not only
providing shelter but it is a sound investment in the changing economic
scenario. Investment in property is very safe and high yielding. So it is very
fruitful to invest in creating assets and employment.

The growth of population in our country gave rise to the demand for the

housing requirements. Following table shows the population growth of our

country.

India’s population as on 1st March 2001 reached at 1027 million i.e.

531.3 million males and 495.7 million females. It shows 16.7 of the world

population. Rural population is decreased from 1921 onwards and migrated

towards urban areas. Housing in rural and urban areas are described as

under.

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 Table 3.6
The Population Growth of India
Population (In Million)
Census Total Rural UrbanPercentacje of total
Year Population Popu ation
Rural Urban
1901 239 213 26 89.2 10.8
1911 252 226 26 89.2 10.3
1921 251 223 28 88.8 11.2
1931 279 246 33 88.0 12.0
1941 319 275 44 86.1 13.9
1951 361 299 62 82.7 17.3
1961 439 360 79 82.0 18.0
1971 548 439 109 80.1 19.9
1981 683 524 159 76.7 23.3
1991 847 629 218 74.3 25.7
2001 1027 742 285 72.2 27.8
Source: India 2002 & 2004 Page No. 16 and 15 respectively.

3.8.9 Rural Areas

Shelter is one of the basic needs from human life. According to census
2001, round about 72.2 percentage of the total population are living in rural
areas. The village people are depending upon agriculture and agro based
industries. Housing in rural area is still traditional. It has very small windows,
no proper ventilation and lack of sanitary facilities. They are prepared from
mitti, chunna, mud, grass, woods and bambooes. Most of the houses are
Kachha. They have a roof of nalia or grass and very uncomfortable at the
time of monsoon. The houses are very small with one room and small
varanda and very uncomfortable for female. It is absolutely necessary in the
rural areas to provide essential housing services such as potable water
supply, sanitary latrine, disposal of waste, paved streets, and electricity.
People belonging to different castes, religion etc. is living together in the rural
areas. The upper caste people still hold large lands while people of the lower
castes own either marginal lands or work as landless laborers. The standard
of living of rural farmers is very low and

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has exploited by landlords, intermediaries and money lenders. The rural
people have to face many social problems. The money lenders charge heavy
interest rates on the borrowing. It is the need of hour to provide schools,
health centers, community centers, playgrounds, market for economic and
social up lift of villages. It requires to built grain-go downs, folder stores, cold
storage, cattle sheds, dairies, poultry farms and animal houses etc. The cost
of building materials are available from nearby forest and fields. Other
materials like bricks, tiles, lime, bamboo and timber are also to be produced
from local or nearly markets. The census 1961 states that out of total 78.9
million houses, 51 millions kachha houses without any appropriate facilities.

Table 3.7
Indian houses according to class (In Percentage)
Census Kachha Semi-Pacca Pacca
Year (Non-Permanent) (Semi-Permanent) (Permanent)
1971 42.57 37.50 18.12
1981 40.55 36.93 22.52
1991 33.76 35.85 30.59
Sources: Census of India 1971,1Q81, 1991

According to the 1991 census around 9.1 million household are without
shelter and 10.31 million household reside in unserviceable kuchha houses.
Nation Housing Habitat Policy was announced in the year 1998 to provide
housing for all and construction of 20 lakhs additional housing units annually
for the poor and deprived class. Out of which 13 lakhs will be constructed in
the rural areas.

m
 Table 3.8

Ownership house and Kachha houses in rural Gujarat.

(In Percentage)
Household income Ownership House Kachha House
Up to Rs. 20,000 93.7 50.6
Rs. 20001 to 40000 94.0 22.8
Rs. 40001 to 60000 92.7 14.9
Rs. 60001 to 86000 91.1 21.4
Above Rs. 86000 98.8 18.1
Source: West and Central India Human Development Report 2001 - Page
No. 60 to 61.

3.8.10 Urban area

Slum Inhabitants live in old and dilapidated building in congested
localities mostly in the inner city areas. In the urban area cost of land is very
high. The small tenement with two rooms or three rooms and kitchen, flats,
duplex, raw houses are developed to do economy in the land. Building
material cost is up to 2/3 of the total cost of house constructed. The safety,
durability and performance of houses depend on the type of building material
used and the technology of constructions. Total cost of construction includes
73 % as cost of materials and 27% as labour charges. Costs of materials
included cement, iron and steel, bricks, timber, concrete, sand etc. and labour
charge includes wages of masons, carpenters and unskilled labour. Most of
the people in urban areas living in huts, footpaths and dirty places, Houseless
ness, overcrowding, and slums are serious problems in urban areas. The
houses of the poor are not only overcrowded but lack of privacy and does not
provide proper sleeping arrangements. Slums, unemployment, crimes,
begging, corruption, drug abuse, air pollution etc. are the main problems of
urban areas due to uncomfortable living conditions. They have no adequate
water and latrine facilities. It is very hazardous to health. It is very troublesome
and painful at the time of monsoon and cold seasons. It is also very
uncomfortable to female and old persons.

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 The 2001 census shows that level of urbanization in India increased
from 25.7% in 1991 to 27.8% in 2001. According to the last economic survey,
some states such as Tamilnadu and Maharashtra have more than 40% urban
areas. Today 35 cities have more than 1 million populations as against 23 in
1991. Due to the growth of urban population, the need of infrastructure
facilities is also increased such as roads, water supply, sewerage,
transportation, health etc. Census 2001 has estimated slum dwellers in 743
towns in the country at 40.6 million. According to the report of Asian
Development Bank, India’s urban population are more than double from 109
million in 1971 to 271 million in 1991. It is estimated to grow to 660 million in
2025 million with urban poor as against 90 million at present.

3.9 REASONS FOR DEVELOPMENT OF HOUSING FINANCE IN

INDIA
The housing finance in India has shown tremendous growth during the
last several years. Most of all countries of the world have given top priority for
developing housing activities. There are several reasons for development of
housing finance in India.

3.9.1 Less risk and more safety:

Housing loan is the safest investment in our country. There is very less
probability of bad debts or recovery problems. HDFC had 72 percentage parts
in individual loan of housing finance in the financial year 2000. There is less
probability of insolvency in individual advance. The housing finance
institutions provide 65 percentages to 85 percentage loans of total estimated
costs. The borrower should not want to create any risk on own estate. The
borrower also finds it less risky in getting housing loan.

3.9.2 Increase In the borrower income:

Demand of housing increases due to the growth of borrowers income.
The implementation of the fifty pay commission, the income of

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salaried people’s or middleclass has gone up to some extent. So they can
afford reasonable burden of interest on housing loan. Although there is a
recession in the economy, the housing sector is also growing well.

3.9.3 Reduction in interest rate:

The government has reduced the interest rate on P.P.F., P.F., N.S.C.
and other small savings investments. This means return on three to five years
deposits come down 9.5% to 9%. The banks interest rates are also gone
down. As these returns are taxable and the stock market is not safe for the
investors. Therefore, they will have to look for some other resources. The
interest rates on small savings i.e. P.P.F., N.S.C. are also decreased up to
9.5% and long lock in period between 6 to 15 years. RBI bonds which give a
tax-free return of 8.5% but have lock in period of five years. So it is advisable
to invest in creating an asset. Common investors are presently facing a
dilemma regarding where to put money. Banks fixed deposit rates have gone
down and the stock markets are also in depression. An investment in mutual
fund is risky and not in a position to get proper returns on it. The return on real
estate is high in comparison with stock markets, bank fixed deposits and other
securities. Recently, the government has cut down the interest rates on banks
and other government securities. So the housing finance companies have
reduced their existing interest rates to attract the customers. If you have opted
for a loan on fixed interest rate, you can close the existing loan account and
transfer your loan to another lender. You can convert your housing loan from
a high interest rate to a low interest rate one by paying 1 % more interest on
the outstanding balance. The customer has to apply to the housing finance to
convert it from the earlier higher rate to the new rate.

3.9.4 Existence of National Housing & Habitat Policy 1998:

The National Housing Policy stipulates the creation of a shelter fund
and risk fund to facilitate credit for the poor. Subsidy based housing

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schemes are introduced by the government in the rural areas with low interest

schemes. The housing policy has emphasised on the role of energy saving

building materials, waste recycling and use of locally available materials.

Basic infrastructure services such as water supply and sewerage; sanitation,

power supply and urban transport have been made an integral part of housing

development.

3.9.5 Population growth:

Growth in the population is the main problem in India. Demand of
housing in our country is mainly due to growth of population. Today, India
possesses 2.4% of world surface area of 135.79 million square kms and 16.7%
of the world population. According to census 2001, the population of India as
on 31st March was 1027.02 million. As per the census 1991, the estimated
figure of housing shortage in the country was 22.9 millions units as on 31st
March, 1991. More then 90% of this shortage is for the poor and the low
income category. The other factors such as an increase in the number of
family members, separation of joint family, migration towards urban areas,
change in social customs and traditions etc. have affected the demand of
housing.

3.9.6 Enchantment in the cost:

Cost is another factor affecting in the demand of housing units. Cost

includes the cost of land and document charges, the cost of construction,

building materials, designing and technologies. It is very difficult for salaried

or middle class people to built or buy a house without support of housing

finance. They have very limited sources of income and have also to meet their

social responsibilities. It is impossible to buy or build a house after savings.

So it is absolutely necessary to take housing loan to purchase a house or flat.

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3.9.7 Enforcement of Urban Land Ceiling Regulation Act
(ULCRA):
ULCRA introduced in 1976, to control and prevent the concentration of
urban land in few hands. It is applicable to all cities with population over
250000 permitting official appropriation of surplus land owned by individuals,
families and corporate. The land ceilings were fixed at 500-2000 m2 in four
different categories of urban agglomeration and the compensation was Rs. 5
to Rs. 10 according to category up to ceiling to Rs. 2 lakh regardless of the
area acquired. But out of the total 550000 acres of vacant land in 64 Indian
cities, only a little over 47000 acres were taken over by the government. The
act failed in its objectives and enhanced land prices to unreleased heights,
reducing land supply substantially.

Several loopholes in ULCRA have benefited state government,

builders and property owners.

3.9.8 Tax rebate on housing loan:

The government of India had announced numerous tax incentives to an
individual for residential house property loans from 1997 onwards. The
constant increases on exemption of housing loan interest from Rs. 15000 to
30000 in the budget of 1998-99. The budget of 1999-2000 has extended tax
exemption on housing loan interest to Rs. 75000 and enhanced depreciation
rates for dwellings up to 40% on new building purchased by corporate for their
employees. It has encouraged more people to go for housing finance. In the
year 2000-11, the government has increased tax exemption limit from Rs.
75000 to Rs. 150000 on housing loan interest. Under section 88 of income tax
act, housing loan principal amount up to Rs. 20000 is allowed for tax
exemption. Any housing project having aid from the World Bank should get
50% tax deduction rebate. Thus home loan has become a popular tax saving
instrument.

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3.9.9 Growth of other industries:
The housing sector is closely linked with other industries namely steel,
cement, bricks, tiles, quota stones, marbles, paints, wooden and others.
There is growth in small scale industries. It also generates employment to
skilled and unskilled persons. This sector contributes about 4% GDP and 10
to 12% in capital formation of the country. The construction sector provided
15 % employment. It had provided employment to around 15.5 lakh people in
1997. Out of about 50% were unskilled. This sector has kept an average
growth rate of 20% per annum in the last five years after 1990.

In short, scarcity of developed land, hike in the construction cost, non-

availability of construction materials and skilled manpower has affected the
housing sector. The decline in the rate of interest, calculation of monthly
reducing balance method, easy credit facility, availability of housing finance
from different housing finance companies and banks with competitive rates
have pushed this sector. The scheduled commercial banks have also
permitted for housing finance to 3 % of their incremental deposits and raised
the eligibility ceiling on the built up areas for benefit under section 80(1) A of
the income tax act 1961 from 1000 to 1500 sq. feet except Delhi and Mumbai.

3.10 IMPORTANT STEPS IN SELECTING HOUSING FINANCE

The important steps should be taken into consideration by borrower in
selecting and evaluating housing finance. It includes certain important factors
such as rate of interest, bridge loan interest, processing fees, administrative
fees, prepayment charges, hidden charges, loan transfer fees, marginal
money to be paid, types of facilities, services provided etc.

3.10.1 Estimation of loan:

The loan amount mainly depends upon the borrower’s monthly
repayment capacity. The loan amount is sanctioned in the range of two or

117
three times of borrower’s household income. The repayment is done through
EMIS. The maximum permissible EMI is fixed in the range of 30% to 40% a
borrower’s gross monthly income or 50% of net monthly income. The actual
value of the loan increases within the duration of the loan. The spouse salary
and other earnings are also included to increase the earning of the borrower.
The maximum loan amount can be sanctioned up to 20 lakhs. Other institutes
like HDFC and foreign banks have sanctioned housing loan up to Rs. 50 lakhs
or even more as the case may be.

3.10.2 Terms of Loan:

Most of the housing finance companies have duration of 15 years. Now

HDFC has started to approve housing loan up to 20 years with slightly higher

rate of interest. ICICI, HDFC, scheduled commercial banks and other financial

institutions have increased the term of loan to a maximum of 20 years. Due to

as longer as duration of loan, the borrower has to pay more interest.

3.10.3 Repayment capacity of borrower:

The loan amount sanctioned to borrower should depend upon the
repayment capacity of the borrower. This is one of the important factors for
sanctioning housing finance. The loan is repayable in the form of equated
monthly installments (EMIS). The repayment capacity depends upon the family
income of the borrower. The EMI should not exceed 50% of borrower’s
monthly household income. The repayment capacity is determined after taken
into consideration the borrower age, income, number of dependents, assets,
liabilities, any other loan taken, stability and continuity of employment or
business, co-applicant’s income etc. The repayment capacity is decided up to
1/3 of the gross monthly income or 50% of the net income of the borrower. The
gross income of 30% is fixed as the repayment capacity by the scheduled
commercial banks.

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 Another important factor is the age of the borrower. If the borrower has
younger age, it should be more fruitful to avail housing finance. It provides
long repayment period. Each housing finance company has its own age limit.
Most of all housing finance companies have repayment latest by retirement.
Banks have decided minimum age 21 years and maximum upper age limit up
to 65 years. The other factors such as nature of service or business,
company position and its status, educational qualification, designation, future
advancement etc. are also considered for repayment capacity.

3.10.4 Processing and administration fees:

HFCS charge certain processing and administration fees for
sanctioning the loan and getting the legal appraisal. Most of the HFCS charge
processing fees up to 0.5% of the loan amount applied for. The administration
fees are charged at 1% loan amount sanctioned. Bank housing finance
charges 0.5% of loan amount only once a time.

3.10.5 Pre-Payment charges:

The pre-payment charges are levied because it disturbs the financial
planning of the financial institutions. The borrowers who want to pre-pay
housing loan to reduced interest burden and get their houses free. Most of
the nationalized banks do not charge pre-payment charges. Prepayment
charges would be fixed on the percentage of what borrowers should repay.
ICICI does not charge for part pre-payment but in full pre-payment a fees of
2% will be applicable on amount being prepaid and any such amounts
prepaid in the last one year. LIC does not charge prepayment charges after 5
years.

3.10.6 Rate of Interest

The rate of interest is the most important factor for selecting an
alternative source of housing finance. The rate of interest are two
types.

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 A. Fixed rate interest
In this method rate of interest remains the same throughout the tenure
of the housing loan. If there will fluctuation in the interest rates it will not
change during the duration of loan.
B. Flexible rate interest
The interest rate is connected with the bank’s Retail Prime Leading
Rate (RPLR) and varies with fluctuations in the RPLR. Flexible rate
plans quote lower interest rates as compared with fixed rate plans. If a
bank lends Rs. 100000 to Mr. A and B at 12.00% for 5 years monthly
installment on monthly reducing balance method and on annual
reducing balance method respectively. Mr. A has to pay Rs. 2224.44
and on Annual Reducing Balance Mr. B has to pay Rs. 2311.75. So,
Mr. B should pay 87,31 more per month. After 5 years B will pay Rs.
5238.60 more. Following table shows monthly installment in different
reducing balance for 5 years.
Table 3.9
Monthly installment of housing loan of Rs. 100000 for 5 years
Reducing 10.50% 11.00% 11.50% 12.00 % 12.50 % 13.00 % 13.50 % 14.00 %
Price
2142.51 2167.05 2191.76 2216.64 2241.68 2266.90 2292.27 2317.82
2149.39 2174.24 2199.26 2224.44 2249.79 2275.31 2300.98 2326.83
2163.57 2189.06 2214.71 2240.52 2266.50 2292.63 2318.92 2345.37
2184.69 2211.13 2237.72 2264.47 2291.36 2318.41 2345.61 2372.96
226.46 2254.75 2283.18 2311.75 2340.45 2369.29 2398.29 2427.36

Source: Sandesh property plus 16-6-02

The flat rate of interest is more expensive. Rate of interest depends

upon the tenure of the housing loan. Fixed rate remains unchanged during
the entire tenor. Nationalized banks offer housing finance at floating rate.
Today, HFCS have also started housing finance at floating rate.

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3.10.7 Comparison of different financial companies:
The borrower should study the different financial institutions and
compare with each other in terms of interest rates, processing and
administration fees, duration of loan, maximum loan amount, margin to be
paid, eligibility, prepayment charges etc. The borrower should also know the
hidden charges of the certain institutions.

3.10.8 Services to borrower:

The service factor has become important today. The borrower desires
free counseling regarding to choose the right property at the right price.
Housing finance institutions provide advisory services to customers for buying
and selling properties for identifying reliable builders and contractors and
assist for processing of loan etc. HDFC has started home conversion loan. It
does not charge repayment charges for earlier loan payment.

Some housing finance companies provide personal accident and fire

insurance for house of flat. HUDCO gives free insurance for personal
accident, fire and natural calamities. Some housing finance companies render
free counseling for building materials, technology and guidance to facilitate
completion of longer formalities leading to quick disbursal of the loan. There
is cut throat competition in the field of housing finance sector. So, they offer
certain incentives to the borrower such as free credit card, insurance cover,
attractive balance transfer etc.
Today, property market is user oriented and not investor-oriented. It is
a buyer’s market and not a seller’s market. Buyers not only set the prices, but
also have started demanding amenities and basic infrastructure
- marble or granite or sandwich kitchen platform, marble flooring, video,
security, intercom, air condition facility etc. has become the norms now.
Customer demands quality in design, construction and awareness about legal
market documentation.

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3.11 HOUSING POLICY AND MARKET CONDITIONS

The housing sector has always been given priority status in India.
During the early post-Independence years, the housing policy tended to be
socialistic in nature with the Government taking up the role of a provider by
being responsible for house construction. The Government’s support was
primarily centralized and directed through the State Housing Boards and
Development Authorities. Private sector investments were minimal as the
sector was perceived to be a non-profitable. The only notable private player
was the Housing Development Finance, Corporation (HDFC) that was set up
in 1977. Commercial banks, the largest mobilizes of savings in the country
too were reluctant to lend funds for housing.

By the 1980s, the Government realized that with its limited resources, it
was difficult to march the housing requirements of the nation. Thus, it slowly
began shifting focus from being a provider to a "facilitator”-promoting the
development of housing activities by encouraging participation from the
private sector. While the 'Seventh Five-Year Plan (1985-90) itself had laid the
foundation for such a policy shift, the implementation took off only in 1991
when the public-private partnership mechanisms of housing provision were
initiated.

The play of market forces came into full swing with the industrial
slowdown of the 1990s. Commercial banks, Faced with sluggish credit o f -
take and high liquidity, were forced to look for alternative investment
opportunities in order to maintain their profitability The prevalent low interest
regime coupled with stable property prices and fiscal incentives made the
housing sector an attractive choice. Soon, many Housing Finance Companies
(HFCs) also joined the fray, leading to a highly competitive market.

The changing scenario is reflected in the Governments reducing

financial allocation for housing as a percentage of the total investment in

122
the economy over the years from a high allocation of 34 percent in the First

Five-Year Plan (1951-56) it has come down to a mere 2.4 percent in the Tenth

Five-Year Plan (2002-2007)2

3.11.1 Present Scenario

The last few years have seen the home loans market grow at a CAGR of
over 30 percent. This growth can be attributed to factors such as increase in
middle class population, increase in disposable income levels of people,
increasing affordability of housing property purchase, stable property prices,
changing demographic trends, tax benefits and other fiscal incentives
announced in consecutive Union Budgets, to name a few. The most important
factor, though, is the low interest rate regime-the rates of interest of 15-16
percent during the previous decade, the interests have come down to 7-10
percent.

House prices across the country have risen by 10 - 90 percent over the
years; the rise is even steeper in select small cities like Pune and Kochi which
are experiencing-high economic activity. This is a result of the increasing
demand for residential property, which in turn is fuelled by growth in
population and income. The spurt can also be attributed to the decrease in the
average house cost to annual income ratio from 11 - 1 4 in the previous decade
to around 4 - 5 now. Introduction of Equated Monthly Installment (EMI) that
spread repayments over long periods ranging from 15 to 20 years on housing
loans have gone a long way in increasing the affordability of housing
investments among common people too. With EMIs becoming equal to or
cheaper than rentals a trend of investing (owning) in residential property has
set in. Tax savings were an added advantage.

Interestingly however, the Indian housing industry continues to be a

highly disorganized and fragmented. Only about 30% of the demand for

housing units is met by the organized sector comprising large builders and

Government or Government-affiliated entities. The remaining 70% of

123
demand is catered to by unorganized small builders and contractors, setting

the stage for unethical practices.

3.11.2 Competition between HFCs and Banks

While the late '90s to 2002 saw the HFCs hold a major stake of the
market share, from 2003 onwards, the balance began tilting in favour of banks.
Banks have been pursuing the home loan sector aggressively, due to the
many advantages it presents. Needless to say, the low non performing assets
(NPAs) in the sector and the lower risk weight of 50 percent For housing loans,
as compared to 100 percent for consumer credit made the sector a lucrative
choice. However, this advantage seems to be slipping by with the Reserve
Bank of India’s decision in January 2005 to increase the risk weight for capital
adequacy to 100 percent with immediate effect. How this affects the home loan
market is yet to be seen. The victims of this aggressive attitude of banks have
been small and medium sized HFCs that do not have the wide distribution
reach or resources that banks command. Increased competition led to the
need for product differentiation, as other modes of attracting consumers like
lowering of interest rates had been overused. Thus, loan offerings with
innovative features such as adjustable rate plans, lower processing fees, low
EMI, inclusion of cost of registration, stamp duty, as associated costs, etc.,

have come to be the norm of the day Spot approvals for loans in loan melas’
have also become a common phenomenon.

A fall-out of this intensifying competition is the growth of unethical

practices in marketing of home loans. As possibilities of profits due to
margins reduced, market share and volume of business assumed greater
importance. Thus, HFC/banks put pressure on their sales teams. The harried
sales force (generally graduates with knowledge of their products) lure
customers to go in for loans citing only the advantages of their respective
schemes, especially floating home loan rates. Most of the customers are kept
in dark regarding the risk associated with interest rate

124
fluctuations. They do not know, that interest rates change with the changes in

the Prime Lending Rate, which in turn is affected by factors like inflation,

growth of economy and global interest rates. Thus, the market is actually

thriving on the back of un-hedged liabilities.

3.11.3 Increase in Developers

Developers are enjoying the benefits of the real estate boom-they are

working on residential and commercial projects at the same time. There has

been a growth in the number of developers in recent years. Large developers

are moving from their traditional regions to Fast developing areas with high

demand For housing.

With the opening of the real estate sector to FDI, Foreign developers

also, entered the market. Interest of Foreign developers in the Indian real

estate market arises out of the higher returns here as compared to most other

developed countries.

The residential market is hotter compared to commercial construction

for two reasons-duration of residential construction ranges from 2 to 3 years

making it easier to build and exit the market; and the existing high demand For

residential properties reduces risks.

3.12.4 Changing Profile of Consumers

The average age of the present consumers of housing loans has come

down and is presently in the range of 28 - 35 years, as against 35 - 45 during

previous decades. The attitude of investors also seems to have undergone

considerable changes. The earlier risks averse consumers seem to have given

way to aggressive investors, willing to take risks. Perhaps this has more to do

with age than attitude. This explanation can be arrived at from the increase in

number of home loan borrowers in the age group of 35 and above seeking risk

cover on the outstanding loan amounts.

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3.12.5 Evolution of Housing Finance in India and Leading
Financiers

I. IN the post-bank nationalization era, governmental effort in housing

finance started with the setting up of ‘National Housing Bank’ in 1988.
HDFC was already on the scene from 1977 and had become a significant
player in the housing finance market. Earlier district level co-operative
banks were engaged in this effort. The other alternatives were loans
under “Staff Housing Loan Schemes” of employers and withdrawal from
Provident Fund balances. Both of these options could be meaningfully
exercised only after some years of service. There were obvious
limitations, in terms of money availability for the schemes, the amount
that could be withdrawn from the PF etc. These were therefore options
that counted only as, “better than noting".

II. HDFC’s approach to lending was fundamentally different from that of

the traditional lender. They changed the cumbersome and heavy-
handed approach of other lenders on the scene and introduced
customer-friendly procedures that were easy to understand and comply
with. They set the tone, which has become were standard for other
institutions to follow and of course, improve upon. In fact, along with
them, foreign banks like HSBC, new private secotr banks like ICICI bank,
institutions like LIC Housing Finance have made it easier still, by
making the housing loan product available on-line.

III. NHB functions as a multi-functional Development Finance Institution

(DFI) in the housing sector and its activities include:

IV. To promote a sound, healthy, viable and cost effective housing finance

system to cater to all segments of the population and to integrate the

housing finance system with the overall financial system.

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 V. To promote a network of dedicated housing finance institutions to
adequately serve various regions and different income groups.
VI. To augment resources for the sector and channelize them for housing.

VII. To make housing credit more affordable.

VIII. To regulate the activities of housing finance companies based on
regulatory and supervisory authority derived under the Act.
IX. To encourage augmentation of supply of buildable land and also
building materials for housing and to upgrade the housing stock in the
country.
X. To encourage public agencies to emerge as facilitators and suppliers
of serviced land, for housing.
XI. The prominent among the Housing Financing Companies (HFCs)
include HDFC (the market leader and the pioneer HFC in India), LIC
Housing Finance Ltd. (second largest HFC), ICICI Homes Ltd. Can fin
Homes Ltd. (CFHL) PNB Housing Finance Ltd. (PNBHFL) etc.
Commercial banks, public sector players as well as those of a private
vintage, have recently entered the home loan market in a big way.
Their size, reach and access to resources have made them big
players. Urban Co-operative Banks and Regional Rural Banks have
always been there, doing their bit.

Currently, RBI and NABARD encourage banks to finance group

housing through SHGs (Self Help Groups). However, financing SHGs for
housing purpose is yet to make a major breakthrough in India, probably
because of the long-term nature of housing finance, large amounts of loan
involved, lack of immediate cash generation out of housing development
protects unlike business activities, etc. Other limitations are, the weak
organizational structure of the SHGs and lack of adequate and tangible
security.

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3.12 CAUSES FOR SLOW GROWTH OF HOUSING SECTOR IN
INDIA

I. The enormous growth in population combined with the evolution

system of nuclear family instead of joint family system has resulted in
greater demand for housing. However funds and limited land
availability are two of the constraints in the sector lack of long term
vision and lack of employment opportunities in rural areas causing
migration to cities are other contributors to the increasing housing
problem in housing sector.

II. The inelastic supply of land and the continuous and increasing demand
for new housing, pushes up real estate costs and prices out many
potential house owners. Eventually, demand—supply pressures bring
about equilibrium creating new investment in housing, but at the
individual level many are forced out of the ownership market into rental
homes.

III. The Central Government had taken a bold initiative in repealing the
’Urban Land (Ceiling & Regulation) Act'. However, many State
Governments have not followed the initiative. This dual line of authority,
controlling land availability tor housing development, to say the least,
complicates investment decisions. The Government appears to be
thinking in terms of easing the regulatory norms tor FDI’s investment in
this sector. New investment that will create additional housing stock
would be very welcome.

IV. The prohibitive cost of stamp duty on purchase of the property is a

strong disincentive deterring new purchases and easy transfers. An
unwelcome corollary is that properties are undervalued to reduce the
duty-incidence and create unaccounted wealth. Stamp duty in most
Indian cities ranges between 10-15%. States such as West Bengal,
Kerala and Bihar levy as much as 20%. Some States even have a

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 double incidence of stamp duty, first on land and then on its

development. In comparison, markets like Singapore or Europe levy a

maximum of 1-2%. Even the ’National Housing and Habitat Policy 1998,

recommends a stamp duty of 2-3%. It is, therefore, desirable to reduce

the stamp duty on transfer of property. It is also desirable to have a

uniform stamp duty structure throughout the country.

V. Housing finance companies extend loans taking a mortgage on the

property by way of deposit of title deeds. This procedure does not

attract stamp duty. But in some states, the memorandum of deposit of

title deeds executed by the borrower requires stamping. Once all the

State Governments allow exemption from stamp duty, the cost of

borrowing a housing loan will go down for the individual.

VI. In our country where a large proportion of the population cannot afford
to own a house, the alternative is to provide houses on rent. The 'Rent
Control Act' as it exists today is biased in favour of the tenants. This
deters people from investing in houses to rent. In Maharashtra, the legal
position is such that, many house owners prefer to keep the house
locked up rather than let it out on rent. The Central Government has
already enacted o ’Model Rent Control Act'. Housing being a State
subject, the State Governments need to follow suit.

VII. The housing shortage in the country is more in the rural areas. The
estimates of the National Buildings Organization bear this out. More
home loans would therefore be needed in the rural areas. However the
primary lending institutions are chary of increasing exposure in rural
housing because of a) absence of clear title to the land on which the
house is to be constructed and b) difficulties in accepting agricultural
land as collateral security.

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VIII. The State Governments will have to play a facilitating role so that the
lending institutions can lend with comfort, to the people in these areas.
The availability of HFCs in rural areas is smaller in number as against
urban centres, affecting the process of extending loans. Further,
income-generating capacity of rural population is lower and the pattern
is also different. Therefore, different lending norms have to be adopted
to encourage loans and housing in rural areas. Housing schemes, that
extend margin funding, concessional interest rates to homebuilders in
rural or tribal areas and a host of other models are available in New
Zealand, England and other countries. It is worth emulating these
models.

3.13 SIZE AND GROWTH OF HOUSING FINANCE SECTOR

The incentives provided by the Government to new housing and

housing finance sector in the last few Union Budgets have helped to increase
the sanctions and disbursements of housing finance companies and banks.
During the first three years of the Ninth Five Year Plan [1997-2002], the
housing finance companies approved by the National Housing Bank (NHB) for
its refinance assistance, disbursed an amount of Rs. 22,977.27 crores as
against a total target of Rs. 12,000 crores, with an average annual growth rate
of 28.51%. As per the information available with NFIB, the banking sector also
disbursed a sum of Rs. 15,147.34 crores between the year 1997 and 2000,
exceeding the stipulated housing finance allocation of RBI in each financial
year The state level apex co operative housing federations disbursed an
amount of Rs. 1,886.3 crore as loans to primary housing co-operatives during
the first three years of the 9th Five Year Plan with an annual average growth of
16.71%.

Home loans have become an important part of the advances portfolio of

commercial banks. The incremental credit to home loans sector, as a

percentage of new credit growth, is 20% or more for most of the commercial

banks. According to a study by FICCI, their share of the home

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loan finance market is larger than that of HFCs as on March 2003. Housing
finance has emerged as a high growth sector in the Indian economy and all
major economic indicators are showing a sturdy growth of this segment; as is
evident from an average growth rate of 28% during the last five years. In the
coming years, the growth estimates are placed at about 35 %. As per the
preliminary estimates of NHB, as on the financial year ended 31.3.2003, the
total disbursements from banking sector crossed Rs. 30,000 crores, while it
was Rs. 18,000 crores from HFCs.

Commercial banks would probably be more aggressive in home loans

if they had more long duration liabilities. As it is, they have access to funds up
to five-year maturities and manage the risk through interest rate derivatives.
In the absence of Long-term market, the Government has to play a significant
role in making available long-term resources. South Asian Governments of
Korea, Philippines, Singapore and Thailand etc. make substantial funds tor
housing available at subsidised rates. One way of raising long-term resources
needed tor the housing sector could be securitization of mortgages.
Securitization otters a viable, sustainable and market-oriented sourcing
mechanism tor funds.

3.14 RECENT DEVELOPMENT - BAD DEBTS IN HOUSING

FINANCE

Bad debts in housing finance companies and banks are on the rise.
Gross Non Performing Assets (NPA) levels of 17 HFC s registered with NHB
have doubled to 4.9% of total assets in 2003-2004. On a net basis, NPAs
rose from 1.9% of assets as on March 2003 to 2.4% by March 2004. Bad
loans may rise by 15 - 20% after NHB enforces new norms that require a loan
to be classified as a bad debt within 90 days of default against 180 days as at
present. (A norm already implemented by banks from 31/03/04 under the
Basel accord.)

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 As per rating agency CRISIL, net NPAs for banks stood at 1.4% by

March 2003. NHB classifies HFCs into three groups based on asset size:

Rs. 10 - Rs. 150 Crores,

Rs. 150 - Rs. 500 Crores and

Above - Rs. 500 Crores

The net NPAs for these three groups stood at 9.4%, 5.3% and 1.6%
respectively. The HFCs with assets over Rs. 500 Crores shared an increase in
NPA levels from 1.2% to 1.6% in financial year 2003. For the other groups,
there was a drop over the period. Overall, the net NPA rose from 1.7% in
financial year 2002 to 1.9% in financial year 2003. This number includes HDFC -
the largest Housing Finance company with NPA of less than 1%. Thus, if
HDFCs were excluded from the calculation, NPAs of other Housing Finance
companies would have been far higher at 3.8%. In spite of all this, housing
finance is still considered a relatively safe risk asset exposure compared to
other types of loans.

A homeowner does not walk away from his primary residence, unlike a
bankrupt business owner, who could abandon a failed enterprise. By the very
nature of it, a home is more of a permanent commitment. Bad debts in the
home loan segment, therefore, have to be of a much lower order than in
commercial loans. Ignoring willful defaulters, most other cases of bad debt
arise when a homeowner finds it difficult to service the loan. Some of the
causes could be:

I. Increase in rates of interest subsequent to the loan, making repayment

obligations beyond the cash flow surpluses available with the borrower,

II. Reduction or stoppage of income of the borrower, either through loss of

gainful employment, or disability

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 III. Increase in general price levels, requiring a borrower to spend more of
his disposable income on other essentials, reducing the cash
available to service the loan.
IV. Relocation of the borrower, and not enough rental income from the
property to service the loan while simultaneously meeting the new
rental commitments at the new location.
V. Bad faith declarations. One may declare a lower property value, to
reduce the incidence of stamp duty. Therefore, the borrower loses out
on the loan amount and resorts to undisclosed outside
borrowings. This could lead to debt servicing problems.
VI. Borrowers may declare a higher value for the property. It this is not
noticed by the lender; the borrower may have little or no stake in the
property. It there is a tall in prices at a later date, the borrower may
simply abandon the property to be auctioned by the lender There would
be no value left for the customer in this situation.
VII. Home loans grew by more than 25% each year in the period 2002 to 2004

even while bad debts were on the rise. Falling interest rates, aggressive

marketing and increasing competition were the drivers. It such

aggression is not coupled with rigorous credit verification and appraisal

and approval standards, the lender may be buying into problems.

3.15 FRAUDS IN HOUSING LOANS

Credit expansion, particularly, in housing sector has been on high growth

path during the last few years. Government of India declared its housing and
habitat policy in 1997 and revealed that there is a demand of 13.66 million
houses in India which requires an amount of Rs 151000 crore. Keeping in view
the government priorities, banks started financing housing units. Aggressive
growth in housing finance by the banks may be attributed to the following
reasons.

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 I. Tax incentives on repayment of principal and interest
II. Rising income level of the middle class
III. Comfortable and affordable interest rate
IV. Competition amongst banks and housing finance institutes
V. Low returns on other investments
V I. Low incidence of N PA
VII. Housing as a priority sector lending for banks.
Housing loans as a percentage of GDP is 57% in UK, 54% in USA and it

is only 2.5% in India. It shows vast scope for housing loans in India.

Increased focus of banks in housing finance is also not free from

vulnerability of this sector from fraud. Miscreants will always try to exploit

such a situation by observing the process of sanction of loan by banks and

the lacunas in the system.

It is said that strength of the chain lies in the weakest link, so whichever

is the weakest point of our processing of proposal will be vulnerable to fraud.

Fraud is one of the reasons for turning the Housing Loan account to NPA.

3.15.1 Main reasons for housing loans turning NPA are as

follows

1. Loss of job
2. Closure of the factory/company where the employee was working
3. Illness/demise of the borrower
4. Dispute between builder and borrower
5. Providing over-finance to the borrower who is unable to service the
installments regularly. "We do not give money, we only lend money”
6. In some cases, the notional income from the proposed property to be

financed is also taken into account for the purpose of arriving at the

eligible loan amount. Non-occupancy of the house results in

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 decreased income and installments are not paid properly. "Net profits
do not repay loans; it is cash profit which repays loan”.
7. Fraud has occurred in such cases, where an agent approaches the bank
for sanction of housing loans in bunches Avoid middlemen in the
process of loan sanctions.
8. Sanction of loans on fabricated documents without proper
verification and due diligence by the branch.
The spurt of housing loan frauds cannot be undermined. Fraud is a

deliberate attempt to defraud the bank by certain miscreants for availing

housing loans resulting in non-repayment and financial loss to the bank.

A physician prescribes medicines after studying the symptoms of a

disease. It is thus imperative to know the causes of fraud before arriving at the

solution: Yes, Frauds in Housing Loan are avoidable.

3.15.2 Modus Operand! of Fraud

Various modus operandi adopted by miscreants in the housing loan

finance may be listed below

A) By the Borrower

Impersonation (Benami Account)

• Submission of fake title deeds of the immovable property to create

mortgage for loan availed
• Submission of colored Xerox copy of title deed

• Submission of fake Income/ salary certificate

• Preparation of a multiple set of documents for the same immovable

property and
• obtaining loan from different banks over the same property

• Selling the property subsequent to the availment of loan

• In collusion with private builders/ co-operative societies, defrauding

banks by depositing fake title deeds.

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 • Submission of inflated valuation report and cost estimates

• Incidence of frauds has come to surface where an agent approaches

the bank for sanction of housing loans).
B) By the Seller

• Executing conveyance-deed of a non— existent property

• Selling of same house to more than one buyer and enabling them to get
loan from different banks
• Execution of sale-deed in favor of buyers) of property now owned by
him.
Thus there are many more deficiencies in the system of housing loan

sanctions and disbursements. In this backdrop, there is a felt need to

strengthen the system of due diligence in housing loan finance in banks.

Towards this end, it is attempted to develop a checklist of precautions for

preventing frauds in housing loan Finances.

3.15.3. Precautionary Measures for preventing Frauds in Housing Loan

Finance

The precautionary measures have been summarized at all the three

stages of lending i.e.

1. Pre-sanction Appraisal

2. Documentation and Creation of Charge, and

3. Post— sanction follow-up.

1. Pre-sanction Appraisal

a) Identification of Borrower/ Guarantor: The first and foremost factor at

the entry level is the KYC norms. Strict adherence to "Know Your

Customer" norms for identification of borrower, guarantor and

verification of their addresses are primarily required at the beginning of

the appraisal of the proposal.

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 For proof of identity of the borrower, recent photo duly signed by the

borrower/guarantor and duly verified by the bank officer, Passport, PAN

card, Voter’s identity card, Driving License, Identity card , letter from a

recognized public authority or public servant verifying the identity and

residence of the customer to the satisfaction of bank. For correct

Permanent Address verification, verify from Telephone Bill, Bank

Account Statement, Electricity Bill, Ration Card, Letter from Employer.

b) Branch should insist upon existence/opening of bank accounts as per

KYC norms (with the photograph/introduction, confirmation of address
through registered letter etc) in the name of owner of
properties/borrower. It may help traceability of the borrower in case of
need.
c) Pre-sanction Verification Report: The information submitted by the
borrower/ guarantor has to be verified through discreet enquiry
, from different sources such as, neighbors, colleagues, market sources,
bankers etc. Document the above inspection. Banks have prescribed
formats of their own for pre-sanction inspection which should be used
sincerely. In one instance, a bank relied on the salary certificate of a
PSU employee and disbursed the loan without due diligence. The
account turned NPA and many correspondences thereafter proved
futile. Later on it was found that the salary certificate was fabricated,
borrowers were impersonated. Thus, such entry level particulars are to
be verified from competent authority by the branch with a professional
approach.
Reserve Bank of India in its mid-term monetary and credit policy
announced in October, 2004 has expressed concern over the rising
frauds being committed in Housing Finance Sector and other mortgage
based loans cautioning Banks against reckless lending without due
verification of identity of the borrower, existence/physical condition of
the immovable property offered to Bank as security and

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 other formalities involved in such lending. If these two basic
requirements are adhered to the risk factors enumerated above could
be mitigated to a great extent.
d) Site Verification: It is absolutely necessary to confirm existence of the
property by undertaking physical verification/inspection. For cross-
check, a second physical inspection/verification (Pre disbursement
Inspection) by another Officer of the bank has to be made before parting
with money.
e) Existence of Property: It must be borne in mind that if the property is
not in existence or it does not come into existence, even if the
agreement is duly registered or there is a registered sale deed, the
document becomes a fake document which is not worth the cost of the
papers used in making that document. It is, therefore, absolutely
necessary to confirm existence of the property by physical
inspection/verification before parting with money. Similarly, mortgage of
a property which is not in existence is void ab-initio.
f) Valuation of property: It is observed by banks that the value of the
property is higher/infiated at the time of availing loan and low at the
time of auction/compromise. What a surprise!
The valuation should be made by empanelled valuer of the bank. The
valuer must indicate in the valuation report the realizable value of the
property in case of forced sale in addition to the value at normal
circumstances. There should be a logical assessment of valuation. The
valuer should mention in his valuation report, which of the documents
to the property have been verified by him which will also serve as cross-
check. It is obligatory on the part of the valuer/Architect to enclose a
photo of the property verified/valued/ estimated duly signed by him and
the borrower. The valuer should also append a locational map
mentioning four boundaries, neighbors of the site to the valuation
report. In spite of what is stated above, it

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 is obligatory on the part of the Banker to make its own assessment of
realizable value of the property by making discreet enquiry.
g) Photo of the immovable Property: In order to guard against finance for

non-existent property, the photo of the house with the presence of the

borrower or his representative duly signed by the borrower and verified

by the banker should be taken minimum at two stages, i.e. before

disbursement of the loan and after completion/possession of the house.

h) Approval of Map and Cost-estimate: In order to avert illegal

construction, threat of demolition of property and cases of non existent
property being financed under housing loan, approval of the plan of the
building should be duly approved by competent authority. The borrower
should also make a sworn affidavit (as per Delhi High Court Order) that
the plan of the building is as per duly approved plan and it should be
counter checked by banker.
i) Scrutiny of the Title: The approved/ empanelled lawyer of the bank has
to furnish the search report and legal opinion about the title of the
property to be financed. For this purpose, the lawyer has to examine the
original title deeds (not duplicate copy/ Xerox copy), prior conveyance
deeds to establish the link and such other documents like up to date tax
receipt, affidavits by the mortgagor swearing that the property in
question is free from all encumbrances, is not subject to any pending
litigation or attachment from court or IT/ST or other Govt.
Departments/Authorities and that there are no other documents other
than the ones deposited in the bank etc. Borrowers who swear false
affidavits may be criminally charged. Sometimes, coloured Xerox of
original title deeds are submitted by the borrowers. Original stamp
papers when put to Ultra-violet Ray lamps will glow, but colored Xerox
paper will not glow. Original stamp papers have water-mark while
colored Xerox papers do not

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have. The advocate, before submitting his legal opinion, should make
searches about ownership /encumbrances from records of:
1. Office of the Registrar/sub-Registrar of Assurances

2. Municipal Office
3. Court having Jurisdiction over the property
4. Revenue Office.
The advocate’s certificate should basically cover the following points.
i. The said property is absolutely clear, free and marketable.
ii. The said property is free from all sorts of encumbrances,
charges, liabilities, liens, lispendens and attachments of
whatsoever nature.
iii. The said property is not subject to any Land Ceiling Act.
iv. A valid mortgage can be created in favor of the Bank by the
owner of the said property.
v. It is further certified that "I have verified from the Sub-Registrar's

Office about the genuineness of the title deed(s) examined by me

and that the same is (are) original and not duplicate or fake".

vi. The receipts for the relevant searches are enclosed hereto. The
lawyer in his report must also indicate the places/records visited!
Searched and enclose the proof of such visits like money
receipts, certificate from court, index-ll etc. Lawyers who have
belied the trust by Furnishing wrong report on title should be
delisted from the bank's panel. Where there are more than one
housing loan applications for purchase of flats from the same
builder the search reports Lawyer’s Opinion should be obtained
from different lawyers by rotation. Branches should make their
own independent enquiries rather than solely rely on the
encumbrance certificate produced by the applicant’s advocate. In
some states certificates relating to

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 property are available by applying online which may be made

use of.

3.15.4 Documentation and Creation of Charge

a) To check impersonation, documents should be executed in presence

of the Bank Officer. Take documents as per pre-prepared and
approved checklist.
b) Valid mortgage should be made as per bank’s guidelines and advice of
the legal counsel.
c) The document and mortgage for loan amount beyond a certain limit
should be vetted by the legal counsel.
d) Advance post-dated cheques should be obtained for future instalments.
In case of dishonor of cheque, protection under Sec 138 of Nl Act may
be taken. Cheque should not be kept blank; the cheques duly crossed
account payee should bear the name of bank as payee to avoid its
mis-use.
e) Do not keep documents) blank.
3.15.5 A live case of NPA in Housing Loan Account

"Various Finance agents approached one Bank with proposals for

sanction of loan for housing purposes by providing fabricated documents,
such as agreement of sale, NOG from builder, payment receipt, registration
receipts etc. In few cases, such agents accompanied by prospective
borrowers also visited the branches to discuss the proposal and complete
documentation. Modus operandi adopted is an agreement for sale with
builder and a flat is booked by making initial payment. The agreement is duly
stamped and registered with Registrar Office. Loan is availed against
mortgage of this flat. Then same flat is mortgaged to another Bank by
. producing fabricated documents. Pay Order of loan amount is encashed by
opening account in the name of the builder with another bank. The fraud

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came to notice when the builder refused to mark ’lien’ on the flat and denied

having received payment from the Bank on behalf of the loanee”.

3.15.6 Creation of Mortgage

A valid mortgage as per bank’s stipulation and advice of bank’s legal

counsel is to be created. One has to pay heavy price if any SHORT-CUT or
any LENIENCY is exhibited in this vital aspect of loan process.

a) Original Title Deed should be obtained for creation of mortgage-

Registered/Equitable.
b) In some states like Maharashtra, Gujarat, Madhya Pradesh and Tamil
Nadu etc., creation of equitable mortgage attracts payment of Stamp
Duty and the Memorandum of Entry/Recital or any writing evidencing
creation of equitable mortgage is to be registered under the
Registration Act before the Sub- Registrar for recording the charge of
the bank.
c) Never part with original title deeds after creation of mortgage.

3.15.7 Disbursement and Post-Sanction Follow-up

a) End-use verification of amount disbursed should be made at each

stage of disbursement of loan.
b) Borrower's margin money should also be spent as per project plan.
c) After construction/purchase of house, completion/possession letter
should be obtained from the borrower.
d) The Pay Order/ Demand Draft should be issued in the name of the
banker to the builder/seller with the bank account number on it. The
Pay Order/Draft should not be handed over to the borrower/agent of
the seller. Bank’s officials can be sent for delivery of the instrument to
the builders/sellers of the property at their registered address.

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3.15.8 Other Measures

1. Salary amount should be compared with Bank statement. Cross

verification with balance sheet. Inclusion of income of co-borrower for
higher eligible amount of loan, income should be from confirmed
sources.
2. Tracking and sharing of all information among Banks & Finance
Companies about names of builders and developers.
3. Document of title should be in DEMAT form in States! Centers where the
same has been implemented.
4. In case of large value loans, Bank can approach sub-Registrar’s Office
to verify the genuineness of the stamp paper/ document/ registration
receipt etc.
5. Banks should develop in— house expertise for valuation of properties.

6. For valuation, say, over Rs 25 lacs, valuation reports should be done by

two independent valuers from Bank’s approved list.
7. Equitable mortgage should be created at Registrar’s Office by deposit of

title deeds.

3.15.9 Suggestions

1. There should be a centralized agency as like Registrar of Companies for

recording mortgage charges by taking nominal fees on account of
banks/financial institutions.
2. Registration of equitable mortgage up to a certain amount of loan
should be made free of any charges.
3. Banks should have their own check-list of forms and documents
required for housing loan sanctions readily available at all branches.
4. Branch people should adequately be trained for appraisal of credit and

creation of valid mortgage.

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Bankers should appreciate that they do not give money, they only lend money.

Hence there should not be any short-cut to the systems and procedures for

lending. What is required while lending is: Due diligence with professional

approach?

3.16 TYPES OF HOME LOANS

a) Home Purchase Loans: This is the basic home loan for the purchase of
a new home.
b) Home Improvement Loans: These loans are given for implementing
repair works and renovations in a home that has already been
purchased.
c) Home Construction Loans: This loan is available for the construction of
a new home.
d) Home Extension Loans: This is given for expanding or extending an
existing home. For example addition of an extra room etc.
e) Home Conversion Loans: This is available for those who have financed
the present home with a home loan and wish to purchase and move to
another home for which some extra funds are required. Through a home
conversion loan, the existing loan is transferred to the new home
including the extra amount required, eliminating the need for pre-
payment of the previous loan.
f) Land Purchase Loans: This loan is available for purchase of land for
both home construction or investment purposes
g) Bridge Loans: Bridge Loans are designed for people who wish to sell
the existing home and purchase another. The bridge loans help finance
the new home, until a buyer is found for the old home.
h) Balance Transfer Loans: Balance transfer loans help to pay off an

existing home loan and avail the option of a loan with a lower rate of

interest.

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 i) Refinance Loans: This loan helps to pay off the debt that has incurred
from private sources such as relatives and friends, for the purchase of
present home.
j) Stamp Dug; Loans: This loan is sanctioned to pay the stamp duty

amount that needs to be paid on the purchase of property.

3.16.1 Problems
A. To Housing Finance Companies

HOUSING FINANCE INSTITUTIONS usually come across above

difficulties in granting (approving) housing loans.

Most of the applicants presents forge documents like,

a) Wrong income proofs.

b) Forge documents regarding mortgaged securities.

c) Mortgage of single security to get different loans.

Housing Finance Institutions have to spend lots of efforts to recollect

the amount of loan. It increases the cost of administration as a result of

collection program. High stamp duty ruins the development of this industry.

In country like India there are so many chances of defaulting of

borrower. Builders don’t co-operate with Housing Finance Institutions, they

don’t show the actual performance of work, which has been completed. Legal

procedure of getting amount of loan from defaulter is very long. Wrong

valuation of mortgaged securities by professionals like CAs and Asset valuer.

B. To Borrowers (Customers)

• Long and confusing procedure of sanctioning.

• High processing charges and fees.

• Level of margin is very high.

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 . Lack of co-operation from HOUSING FINANCE INSTITUTIONS as well
as builders.
• Long list of documents required to get housing loan.
• High default charges in case of late payment of EMI.
• High interest rates in comparison of Row.

3.16.2 Terms of Housing Finance

A. Maximum Amount

Home loans are generally provided for in the range of 75%-85% of the
asset value. The Asset value is determined on the basis of the certification
provided by approved valuer. The amount of loan varies from institution to
institution and it may vary from Rs.1 lakh to Rs.1 crore. The maximum
amount, which one can borrow, is a function of many factors, which includes
primarily the purpose of the loan. In addition, ones residential status whether
resident in India or non-resident will also have a bearing on the maximum
amount of loan that one can borrow. Generally, if one is a resident Indian,
then he can borrow up to 85% of the cost of the property.

B. Collateral Securities

Housing Finance Institutions usually take some additional securities,

which are called collateral securities. These may be in the form of guarantee
from one or two persons, assignment of life insurance policies, deposit of
shares and units or other securities. These additional securities are taken
with the hope that if a loan is not paid back recourse may be taken to such
securities instead of depending upon the mortgage of the property, which is
the last resort. Guarantors, when alerted, become very effective persons in
prevailing upon the borrowers to ful fill their obligations.

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C. Range Of Interest Rates

The interest rates may vary from institutions to institutions and generally

range from about 8.75% (ICICI Land Loans) to around 19% (City Bank

Property Power).

D. Interest Rate Calculation

Most Housing Finance Institutions follow the yearly reducing-balance

method, which accounts for the principal repayments only at the end of their

financial year. Thus, one pays interest on the principal that applicant has

already returned to the Housing Finance Institutions. The effective interest rate

is thus higher, than the quoted interest rate by around 0.7%. Banks and some

Housing Finance. Institutions, in contrast, follow the daily or monthly reducing

— balance method, which results in a lower interest burden.

The interest on home loans in India is usually calculated either on

monthly reducing or yearly reducing balance.

• Monthly reducing: In this system the principle on which one pays

interest reduces every month as he/ she pays his / her EMI.

• Annual Reducing: In this system the principal is reduced at the end of

the year, thus one continues to pay interest on a certain portion of the
principle on which one has actually paid back to the lender. Which
means the EMI for the monthly reducing system is effectively lesser
than the second system of calculating interest.
• Fixed Rate: Some Housing Finance Institutions have fixed rate of
interest, which means that the interest rates remain unchanged for the
entire duration the loan. This basically means that one does not
benefit, even if the rates of interest drop in the market

• Floating Rate: This is the rate of interest that fluctuates according to the

market lending rate.

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E. Extra Costs

1) Interest Tax: is the tax payable on the interest paid on a home loan and
not the principal. This tax is sometimes included in the interest rate of
the loan, or may be charged separately as interest tax.
2) Processing Charge: It’s a fee payable to the lender on applying for a
loan. It is either a fixed amount not linked to the loan or may also be a
percentage of the loan amount. The loan amount received by one can
be less than the processing fee.
3) Prepayment Penalties: when a loan is paid back before the end of the
agreed duration a penalty is charged by some banks/companies, which
is usually between 1% and 2% of the amount being pre paid.
4) Commitment Fees: Some institutions levy a commitment fee in case
the loan is not availed of within a stipulated period of time after it is
processed and sanctioned.
5) Miscellaneous costs: It is quite possible that some lenders may levy a
documentation or consultant charges.
6) Registration of mortgage deed.

F. Security Needs to Provide for a House Loan

Security for the loan is a first mortgage of the property to be financed,

normally by way of deposit of title deeds (a clear and marketable title). Some
lenders may also require collateral security like the assignment of life
insurance policies, pledge of shares, national savings certificates, units of
mutual funds, bank deposits or other investments.

G. Required Documents

1) The common documents that the financiers require at the pre-approval

stage are

I. Proof of Age

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 II. Copy of Bank A / C statements for the last 6 months
III. Copy of latest credit card statement
IV. Passport size photograph M)
V. Signature verification of the banker
VI. If applicant is salaried, he needs to produce:
a. Salary and TDS certificate
b. Latest pay slip
VII. Letter from employer
VIII. If applicant is self-employed he requires:
a. Business track record.
b. Copy of audited financial statements for the last 2 years.

2) At the disbursal stage (for property already located), applicant needs to

submit

I. Allotment letters
II. Photocopies of title deeds III.
Agreement to sell
IV. Encumbrance certificated
3) For self— construction - Approved plans and clearance certificates

along with estimates.

H. Equated Monthly Instalments

EMI or Equated Monthly Instalments refers to the fixed sum of money

that applicant will be paying to the housing finance company every month. The

EMI comprises both interest and principal repayment. The size of the EMI

depends on the quantum of loan, interest rate applicable and the term of the

loan.

I. Property Insurance.

One will have to ensure that the property is duly and properly insured

for fire and other appropriate hazards, as required by the Housing Finance

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Institutions during the period of the loan and will have to produce evidence

each year and / or whenever required by the Housing Finance Institutions. The

Housing Finance Institutions will be the beneficiary of the insurance policy.

This is an added cost that will add to the final cost of purchase of the property.

J. Monthly / Yearly Reducing EMI

Yearly Reducing EMI-ln this system of calculating EMI the principle is

reduced at the end of the year, thus one continues to pay interest on a certain

portion of the principle which one has actually paid back to the lender. Thus

the EMI for the monthly reducing system is effectively lesser than the Yearly

reducing system of calculating the Interest.

K. Loan Period

The maximum duration of period of the loan is a function of one’s

residential status and varies for every housing company, and is also different

for every scheme.

As a resident Indian, applicant could avail of a loan for duration of 5

years to 20 years. As a non-resident, applicant can avail of a loan only for a

maximum period of 7 years.

L. Disbursement of Loan

• One can take disbursement of the loan after the property has been
technically appraised, all legal documentation has been completed and
applicant has invested his own contribution in full. His contribution is
the total cost of the property less the loan amount
• The loan will be disbursed in full or in suitable instalments (normally not

exceeding 3) taking into account the requirement of funds and progress

of construction, as assessed by the housing finance company entities.

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M. Conditions required to be fulfilled in case of repatriation of sale
proceeds.

• Applications for repatriation of sale proceeds are considered provided

the sale takes place after three years from the date of final purchase
deed or from the date of payment of final installment of consideration
amount, whichever is later.
• For NRIs: Applications for necessary permission for remittance of sale
proceeds should be made in form IPI 8 to the Central Office of Reserve
Bank at Mumbai within 90 days of the sale of the property.
N. Criteria for eligibility -

The primary concern of the Housing Finance Institutions in determining

the loan eligibility is that applicants are comfortably able to repay the able to
repay the amount applicant borrows. Your repayment capacity is determined
by taking into consideration factors such as income, age, qualifications,
number of dependants, spouse's income, assets, liabilities, stability and
continuity of occupation and savings history.

O. Tax Benefits

Tax benefits available are as under:

• Exemption under Sec 88 of Income Tax Act (Rebate) for repayment of

principal up to Rs. 20,000/-.
• Deduction under Sec 24 of IT Act for interest payment on housing
loans up to Rs. 1,50,000/-

3.17.3 Steps Involved In Sanctioning A Home Loan

Step 1: Applications- An application for home loan is completed and

submitted to the lender along with relevant documents. The
lending institution will process the application to check the
individual’s eligibility for the loan, based on the personal profile

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 of the applicant and his income. The forms and documents
required at this stage are listed in the next chapter in the
appropriate section.

At this stage, bankers ask for a loan fee of about 0.5 to

1.0% towards processing charges. The current market situation
is such that no one levies this charge.

Step 2: Verifications- Verification of personal details, property and

supporting documents, usually takes 5 to 7 working days.
Documents of title relating to the property offered as security and
other connected papers must be submitted to the lender at this
stage. These documents are listed under the appropriate head in
the next chapter.

The bank's credit officer should visit the property as well

as the current residence of the customer to verify information
submitted in the application form. Any reference indicated in the
application may also be contacted. There could be personal
contact for an interview and clarifications sought.

The process is somewhat along the following lines:

I. The bank's credit officer, or someone from a credit verification agency,

visits the address provided by the applicant to establish the current
residence and to check any reference furnished. There would also be
a visit to the site of the proposed house/flat.
II. The lending institution has professional assessors empanelled with
them, who are asked to do a property valuation. The assessors verify
the property details - land, flat, house, improvements etc. and report on
its location, surroundings, current market value, forced sale value, loss
value and other information related to the development.
III. Discuss and freeze the requirements of the customer, work out and
advise the EMI (Equated Monthly installment). At this stage, the

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 customer’s debt servicing capacity is examined and adjustments are
made to the loan amount, if possible, or to the EMI.
IV. Advise the customer about the interest rate option (fixed or floating rate
and options for switchover during the currency of the loan) available to
him.
V. Agree with the customer on the mode of repayment, a) whether by way
of check off facility or b) by way of post— dated cheques.
The following verification is also carried out:

In case of an individual employed with a company and drawing monthly

salary:

I. Does a credit check on the employer and obtain market information

about the company’s reputation. Contact the employer and establish the
applicant’s income, employment status, whether he is permanent or
temporary, and the number of years of service remaining. The
employer's confirmation is obtained verifying the information provided,,
including salary particulars.
II. Calculate the Net Monthly Income of the customer taking into account
regular income, minus taxes and recoveries. Any one of income is
excluded. If other income is available to service the loan, this is verified
from the source.
III. Check other liabilities of the borrower e.g. Credit card dues, loans from
friends and relatives, co-operative societies etc.
IV. Inquiries may be made to determine if there is a prior history of default
on other retail loans.
V. The verification process, as related to professionals and self-employed:

VI. Check the business activity levels, sales, average profit earned for the
past 3 years.
VII. Collect market intelligence on the customer's reputation and business

integrity.

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VIII. Collect information on competition and prospects.
IX. Check the other liabilities of the applicant, and repayment
commitments.
X. In respect of self employed/professionals Net Monthly Income is
computed excluding items like depreciation, any subsidy etc. The lender
will use his judgment on what items to include and what to
exclude, for arriving at income available to service the loan.
Step 3 Appraisal and Sanction: Sanction of the loan (usually on the 7th

working day after step-1.)

The banker/lending institution works with some standard forms

and templates of documents. These forms and documents are
listed under the heading ’appraisal’ in the next chapter. The
officer prepares the appraisal which captures the income details,
establishes repayment capacity, and an assessment of the
project cost which determines the loan eligibility, security cover
available and spells out the mode and schedule of disbursement.
He then obtains internal approvals and sanction of the loan and
prepares the documents for execution and registration.

Appraisal

I. Check that the application form is complete with all enclosures/detaiis.

II. Check that the information provided in the forms is complete and has
been validated through independent reports of credit verification
agency, employer, valuer, credit officer etc.
III. Check that the applicant meets the lender’s qualification criteria in
terms of age, income level, credit history etc, and is not in the
negative list.
IV. Prepare a credit rating for the applicant.

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 V. Check that the property profile is in accordance with policy
prescriptions of the lender, it is in an area approved for exposure by
the lender and that it is not in a negative list.
VI. Check that the property value is reasonable, if possible, compare it with
similar home loan data available with the lender.
VII. Check the cash flow and personal financial particulars of the applicant.
Validate his income levels and financial status to service the loan and
meet the margins, without stretching himself.
VIII. Check and confirm that security and margin levels are acceptable.
IX. Check individual exposure limits, area exposure limit, if any and budget
avail ability.
X. Finalize the interest rate, based on credit rating of the applicant,

mortgage cover available, other security, applicant's credit history etc.

XI. Sign off, recommending the home loan for approval by the appropriate
sanctioning authority.
Credit Rating

There are two sets of credit rating, available in the sector: CRISIL and

ICRA are now giving ratings of Builders and Properties. In case of loan being

applied for a flat/bungalow built in a township/colony, the rating, if available,

should be new. This will ensure timely completion, and proper determination of

the resale value in the event of enforcement.

‘Risk Assets Acceptance Criteria' (RAAC) prescribes risk parameters

like age, income, property value, local area where finance will be extended, the

maximum loan amount the bank will lend to any borrower etc. RAAC is a bank

level policy statement that lays down minimum eligibility criteria a borrower, or

property will have to meet to qualify for a home loan from the lender.

In addition to the general risk asset criteria, the lending institution also

attempts to rate the credit risk of the individual risk exposure that is

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considered. The parameters for risk rating at the pre-sanction stage could

include the following:

1. Personal details like a) Age of the borrower b) Educational Qualification,

c) Marital status d) Mobility of individual - location e) Number of
dependents excluding spouse
2. Employment details like a) employment status b) gross monthly income

c) number of years in current employment/business d) designation

3. Financial details like a) percentage of financing by individual b) actual

EMI as percentage of maximum EMI c) other assets like securities and
bank balance as percentage asset of loan amount d) land, building, etc.
as a percentage of loan amount e) existence of liabilities like bank loans
and other loans
4. Property details like a) quality condition of construction b) location
c) presence of amenities d) marketability of property,
5. Other details like a) presence of guarantor b) presence of collateral
c) life style of the borrower

Each of the parameters can be assigned a weight, with the composite

carrying a weight of 100%. Each sub criteria under each of the parameters may
be assigned a score, ranking from I to 5, with 5 representing the least risk and
the highest 3 risk. The sum of all they scores multiplied by the weight for each
category will give the total score. The total score may be divided by 5 to arrive
at the risk grade for the borrower An empirical cut-off score could be a starting
point for deciding the acceptability of the credit risk. This then could be
refined, based on experience. The credit rating will also be used for interest
rate quotes. A higher grade should entitle a borrower to a lower interest rate
and vice versa.

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Sanction letter

A sanction letter is issued to the customer on completion of the

appraisal process. This letter contains the loan amount and terms and

conditions of the loan. This is required to be signed by the borrower

unknowingly the terms and conditions continued in the letter.

Some lenders specify a time limit tor unwilling the loan utter which the

sanction will lapse. In other causes, the bank may stipulate u commitment tee,

normally 1% of the unutilized mount of the loan. The commitment fee applies if

the loan is not drawn in down as agreed/ stipulated.

Step 4 Documentation: Submission of original property documents und

signing the loan agreement. This is usually done on the 8th/1 Oth

working day after step I. The documents are usually executed at

the office of the lending institution. Equitable mortgage on the

property is also created at this office.

Step 5 Disbursal: Disbursal of the loan and issuing of the Cheque

usually take place on the 10th - 15th day after step 1.

I. A home loan is disbursed as a term loan.

II. It is a single payment (made directly) to the seller where a ready-to-
occupy house/flat is bought.
a. Bank issue a demand draft/pay order and often a bank
representative delivers this directly to the seller and takes a
stamped receipt from him acknowledging the payment. This fact
may be recorded in the sale deed.
III. Where a loan is bought and a house constructed thereon, or where a flat

under, construction is financed, the disbursement takes place in stages.

At each stage, disbursement would represent the lender’s share after

ensuring that the customer has brought in his margin up to that stage.

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IV. The lender verifies that the funds released for each stage are used as

they are meant to be used. This is done through calling for verification

and certification of expenses by a Chartered Accountant and

verification of construction done through a Chartered Accountant and

verification may be useful for making disbursement in stages:

Purchase of land /
a. Up to basement 30%
b. Up to lintel 20%
c. Up to ceiling 20%
d. On completion 30%
VI. If it is a takeover from another financing institution, the payment should
be made directly to the institution under acknowledgement and original
document should be collected thereafter.

3.17 COMMERCIAL BANK SCHEME FOR HOME LOANS

3.17.1 Purpose

Banks have a slew of home loan products such as:

1. Home loans for construction of new house/flat, purchase of old house/

flat etc: initially, lenders approved a home loan for family/own residence

only. After gaining experience and more importantly to be competitive,

lenders now y approve loans even when the applicant has more than

one house or flat/ apartment. Today there is no general restriction on

the number of houses owned by an individual. The only stipulation is

that the home loan funds should not be used for commercial purposes.

2. Home extension loans for additions/alteration to an existing house.

3. Home improvement loans for repairs/renovation including

waterproofing, plumbing, compound wall, digging of well/tube-well,

flooring/tiling, additions like built-in cupboards/shelves, internal repairs

including replacing doors/windows, etc. A loan for purchase

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 of household furniture including space-saving-furniture (kitchen racks,

cupboards, etc.) may also be sanctioned as a home improvement loan.

4. Home loans for purchase of housing sites. Here again, initially many
banks did not approve such loans. However; market forces have now
made this a universal feature of the home loan market. However, care
has been taken in structuring the schemes for avoiding financing for
purchase of land for speculation purposes.
5. Home equity loans. HDFC sanctions this loan, a category quite common
in the United States. The value in a house, left over after covering the
mortgage amount, keeps increasing a) with regular repayment and b)
with appreciation in property values. Some home owners prefer to re
finance the home when the residual value becomes substantial.
However, others prefer to take a loan against the value available in the
property. This is called a home equity loan.
6. Also, HFCs give loans against house properties and commercial

properties where the end use could be consumption or any other need

of the borrower.

3.17.2 Target Group

Individuals - Salaried class, Businessmen, Professionals and Self-

employed people, who have a certain minimum period of service/experience.

Age of the person and residual years of service are important criteria, as the

lender would like the loan to be repaid while the individual is in active service.

Non— Resident Indians (NRIs) - Professionals with regular income or

gainfully employed abroad with a residual contract period of service of at least

three years. Loans can also be given to. an NRI as a principal borrower with a

resident as guarantor. Such loans can also be given when an NRI owns the

land jointly with a relative who is a resident.

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3.17.3 Quantum Of Finance

The quantum of loan is generally a certain multiple of the applicant’s

gross or net annual earnings or a percentage of the project cost, whichever is

lower As a thumb rule, a ceiling is stipulated at either 36 months’ gross salary

or 60 months’ net salary of the individual concerned. Lenders generally adopt

a single exposure norm, based on their capital structure and risk dispersal

norms.

In addition to the applicant’s salary income, the following may be

included in the gross income to arrive at the quantum of finance:-

1. Income from other sources like interest on investments, rental income

etc.
2. Income of the spouse:- Banks use their discretion to estimate the

reliability of this income, depending upon where the spouse is working,

e.g. an MNC or a private firm, the nature of employment etc.

3. The income declared in case of non-salaried persons, by verification of

income tax returns for 3 years or other reliable sources.
A loan for acquiring a housing plot can be given, say, up to 50% of the

purchase price. As a rule, a loan will not be granted for purchase of a housing

plot as an investment. It is expected that house construction follows the

purchase of land.

Legal fees, approved valuer’s charges, stamp duty, registration charges

and insurance premium can be reckoned as part of the project cost while

arriving at the eligibility for the home loan.

In case of ready-built homes, lenders seek a valuation report from

(Government-approved) valuers. The value of property will also decide the

quantum of loan, depending on the margin.

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3.17.4 Margin

I. A borrower is asked to contribute a minimum of 10 to 15% of the total

cost as margin. This stake is expected to keep the borrower
committed to the project.
II. Borrower is asked to bring in his entire contribution prior to
disbursement of the loan for purchase of a "ready to occupy" flat. He
can bring in his margin pro-rata in the case of construction of house
or flat, in line with the stages of construction.
III. The value of land owned by an applicant can be taken as his/her margin,
it the loan is for construction of a house/flat on that plot of
land. The usual stipulations on valuation of the land will apply.
3.17.5 Debt-Servicing Capacity

For a "salaried-class” borrower with a take-home pay of less than a

stipulated amount, say, Rs. 20,000 to Rs. 25,000 a debt-servicing ratio of 1:1.5
is stipulated. In other words, not more than 60% of the gross income shall be
appropriated towards EMI (debt servicing). A minimum of 40% of gross income
should be available at the disposal of a borrower to meet the household
expenses. Debt servicing capacity will be enhanced if the income/cash flow of
co-applicants can be reckoned. However, care should be exercised about
ability of such funds towards debt servicing.

3.17.6 Rate Of Interest

The lender decides the rate of interest chargeable on the home loan, taking the

following into consideration:

I. Cost of funds: The cost of funds is different for each lender, depending

upon the mix of liabilities, liability-raising costs (based on the image of

the bank in the market) and with different costs in different maturity

buckets etc. The lender generally takes the average for reckoning the

cost of funds. An important point to be kept in mind, though, is whether

the lender is required to raise new

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 funds for the new home loan asset. If the lender has a balanced asset
liability book and has to raise fresh deposits, the asset will have to be
priced on incremental cost of funds raised.
II. Tenor of the loan: Generally, banks have borrowed funds with
maturities up to 5 years, and some capital fund surpluses, which may
be available for allocation to home loan assets. It would therefore be
possible for a bank to make a home loan, say, for a five-year period,
linked to their 5-year liability cost. Specific home loans could then be
priced to the advantage of the applicant. On the other hand, for the
general run of home loans with maturity above 5 years, banks will incur
liability management costs, which will be an add-on
to the basic liability cost. .
III. Capital allocation costs: Banks are required to allocate capital based
on the risk weight of each class of asset taken on to the balance sheet.
This will be another element added to the pricing matrix.

IV. Costs for administering the specific scheme.

V. Swap costs, other funding costs.
VI. Profit margin.
VII. It is a moot point whether costs of creating a general/specific loan loss
pro- vision should be included as a pricing constituent.
VIII. Tenure of the loan is an important factor in pricing the loan.
IX. Special considerations like group lending, which may bring down the
administration or monitoring costs.
X. Competition: The lender may have to levy interest at market rates,
even if his cost plus margin is higher than competition. This will cut into
the profit margin, yet a lender may have to do this anyway, for
fear of being priced out of the market.
XI. Marketing strategy: A fresh entrant to the home loan market may
have to offer interest rate concessions or other freebies to make
inroads into the market.

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3.17.7 Interest Rate Option

Borrowers have the option to choose either fixed or floating rate of

interest at the time of availing the loan. The choice of a fixed rate of interest
makes sense for the borrower it there is an expectation that interest rates will
generally be on the rise in the foreseeable future. Banks quote fixed rates at a
premium to the market interest rates, to offset the costs of swapping the fixed
interest rate into floating rate streams. However if the rate climbs too steeply,
the premium included in the quote may not be adequate to absorb the higher
swap costs. To provide for this contingency, banks add a clause in the loan
document that they may change the rate quoted under exceptional
circumstances. Floating interest rates change periodically along with the
reference rate, which may be the prime lending rate of the lender. Banks may
also quote floating rates periodically independent of their prime lending rates.
Floaters reflect the current cost of funds for banks and hence require little
interest rate risk management as against fixed rates where active interest rate
risk management is called for Either form of interest charges may be levied
on reducing balance or at flat rates.

Banks stipulate penal interest charges for pre-payment of home loan

instalments as such prepayments adversely affect their liquidity planning. In
case of long duration home loans, some banks waive a few instalments at the
back end, as an incentive for prompt payments.

During the currency of loans, banks may allow borrowers to switch

over from fixed rate loans to floating rate loans. There may be a cost attached
to this switchover in the form of a fee. Banks with a strong treasury and
efficient risk management/ALM practices in place will be better placed to offer
such switchovers and earn a fee. As part of the loan terms and conditions,
banks stipulate, ab initio, and obtain borrowers' consent to interest re-setting
clauses. This entitles the banks to vary the interest rates during the currency
of the loans. In case of changes in
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interest rates, the EMI also changes. Some lenders prefer to keep the EMI
amount constant, but extend the number of instalments. These interest rate
changes usually mirror the changes in market interest rates, plus the risk
premium and other components of the interest rate, all of which may vary with
changes in the environment. If the lenders have a well-developed credit rating
system for the borrowers, changes in the credit rating assigned to the
borrower will also be reflected in the interest rate changes. Lenders may
design home loan repayment with variable EMI options, if satisfactory
evidence of cash flow protections is provided to them, establishing the
borrower’s debt servicing capacity.

3.17.8 Period Of Loan

A maximum of 20 years is allowed for home loan repayment, although

there are some institutions, which sanction up to a maximum of 30 years. This
is inclusive of initial holiday period and will also apply to the take-over loans.
In the latter case, the period of loan will include the period already run with the
previous lender Repayment of loan commences tram the month following the
month in which the loan is fully disbursed. Holiday period is usually not
extended for houses/flats bought “ready to occupy". Exceptions may be
considered on the merits of a case. Where construction is involved, the
holiday period shall not exceed a period, say, 18 months. Replacement of loan
instalments, holiday period etc. may have to be considered it there are delays
in completing construction, for whatever reason. Such rescheduling may have
to include interest charges, not serviced, during the period of delay.

3.17.9 Insurance Of Property

Property is insured for full market value and full term of the loan against

normal insurable risks, with bank clause, at borrower’s cost.

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3.17.10 Security

A simple registered mortgage or equitable mortgage on the property

acquired out of the loan is taken as security. This is the primary security tor
the loan. Where the loan is tor home improvement, or other purposes, a
mortgage is created on the house, as a collateral. Other collaterals could be a
charge on land, building, deposit receipts, Life Insurance Policy, NSC etc. In
the case of applicants who have availed of a loan against the mortgage of the
house from another lender or their employers, a second mortgage charge is
taken to secure the additional loan offered by the bank.

In case of flats of a Group Housing Society, Tripartite Agreement shall

be entered into.In case of stage by stage financing of a flat acquired the

agreement of the builder should be to register the flat in the name of the

borrower and give the document directly to the financing institution

In case of jointly owned properties, it should be ensured that all the co-

owners and co-applicants execute the documents. This, however; need not be

necessary in case at the Karta of a HUF

3.17.11 Personal Guarantee

Banks obtain personal guarantee of a spouse where his/her income is

taken into account tor determining the loan eligibility. It is preferable, however

to ask the spouse to be a co-borrower and as such a principal debtor rather

than being a guarantor In case of joint ownership, guarantee of the other joint

owners is taken, it such joint owners are not co-borrowers.

It the plot is owned by one spouse - irrespective of his/her employment

status the loan can be sanctioned to the other spouse without insisting upon
transfer of land in the name of the applicant of the loan. Of course, preferably
the loan should be sanctioned in their joint names. In case of joint ownership
of land by close blood relatives i.e., father mother, son and daughter a home
loan can be sanctioned to one of them after

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obtaining an undertaking by way of an affidavit, from all owners, to the effect

that, they do not have any objection to the borrowing arrangements against

the mortgage of the property. Such cases involve certain legal issues and

should be treated with due diligence.

3.17.12 Documentation

All the documents that are to be obtained tor securing the loan, like a

Promissory note, mortgage deed and all other supporting documents, need to

be obtained.

3.17.13 Disbursement of Loan

The bank will follow the normal procedures related to disbursements,

as per policies of the bank. It is described in some detail in a later section.

3.17.14 Computation of Drawing Limit

The drawing limit of a home loan is arrived at as under.

Loan amount minus (EMI x No. of instalments payable + interest debited so

tar).

3.17.15 Overdues In Housing Finance

Branches shall maintain a Demand Collection and Balance register for

home loans. The details under the different headings will be dealt with in the

following manner:-

Demand: The demand during the period of reporting is the overdue amount, it

any, as at the beginning of the period plus the EMIs falling due during the

period.

Collection: The collection is the amount actually received during the period.

Overdue: The shortfall in recovery being overdue (Demand-collection)

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3.17.16 Processing Fee

Banks may charge or waive Processing Fee/Documentation Fee on

home loans. The fees vary from 0.25% up to 1%, depending upon the size of
the loan, the documentation involved and policy of the bank concerned.

3.17.17 Post Dated Cheques In Payment Of Instalments

It is a practice of banks to ask the borrowers to handover post-dated

cheques corresponding to the instalment dates. This serves two purposes al
the follow up for payment of each instalment is avoided and b) the dishonour
of a cheque is a cognizable offence punishable with imprisonment. Banks can
independently proceed against the borrower if a cheque issued towards
instalment dues is dishonoured.

3.17.18 Classification of Loans And Provisioning

It any interest or principal/instalment in a home loan account remains

overdue for a period of more than 90 days, then banks shall classify such an
account as a Non-Performing Asset. Interest income on such account will not
be recognized and will be taken to the profit and loss account after such
classification.

However this rule will not apply to interest debited during the holiday
period. Such interest debited will be treated as part of principal it specifically
permitted in the sanction terms and EMI will be computed based on the
balance at the end of the holiday period. The account will continue to be
treated as a standard asset during the holiday period.

Effective from 31-3-2005, an account will be classified as sub standard

for a period of one year; on being identified as a NPA. It it continues as a
NPA for a period beyond one year, banks will classify it as a Doubtful Asset.
The guidelines for making these provisions are;

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 • Provision at the rate of 0.25% of their total outstanding of Standard

home loans and

• 10% of their substandard home loans.

• 20% of the secured portion of the loans in Doubtful category up to one

year,

• 30% tor Doubtful category from one year to three years and

• 50% tor Doubtful category over three years

• 100% provision at the unsecured portion of the loans under Doubtful

category.
• 100% of outstanding balances tor loans under Loss category.
In the case of a Housing Finance Company, an asset shall become
Non-Performing Asset [NPA] it interest or instalment is overdue for 90 days
(instead of 180 days) commencing from March 31 , 2005. Similarly, from that
date, an asset that has been classified as NPA tor a period not exceeding 12
months shall be substandard and an asset that remains sub standard for a
period exceeding 12 months shall be doubtful asset. In order to mitigate the
burden of additional provisioning arising out of adoption of the above revised
norms, NHB has permitted Housing Finance Companies (HFCs) to phase out
the additional provisioning over a period at three years, commencing tram the
year ending 31.3.2005 with a minimum of 20% of the additional provisioning
required being made each year HFCs were also advised to start making
additional provisions for such loans starting from the year ending 31-3-2004,
which would strengthen their balance sheets and ensure smooth transition to
the revised norms coming into effect from March 31,2005.

3.17.19 Reforms And Shortfalls

The Indian housing sector has seen several reforms in recent years. While

some reforms have been successfully implemented, others are yet to be fully

implemented. The laudable efforts include:

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a) Passing of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security interest Act (The Securitization Act) in 2002, as a
protection to banks/registered MFCs against defaults. The Act gives banks
the right to attach assets of the defaulters without intervention of lengthy
and time-consuming court procedures.
b) Allowing 100% FDI into the real estate sector: Though the condition on
which the FD1 is allowed has come in the way of foreign investments, the
recent amendment, reducing the minimum area for development from 100
acres to 25 acres is a positive step. Within weeks of the Governments
announcement of the amendment, developers from different countries,
which include, the United States, Canada, Middle East, and Southeast Asia,
expressed their desire to invest in India.
c) The development of a secondary mortgage market: Securitization serves the
purpose of raising resources from the capital market and helps address a
number of issues related to capital adequacy and risks inherent in mortgage
financing. The pilot issue of Mortgage Backed Securities was launched by
the NHB in August 2000. Since then the securitization market has grown
rapidly— three pools worth Rs. 14.1 billion (approx. $320 million) were
securitized in 2002-2003 and I I pools worth Rs.23.4 billion (approximately
$530 million) in 2003-2004, and growth of Residential Mortgage Backed
Securities issuance is expected at more than 50% per year until 2006.

There are other reforms suggested by the Government that could give a

boost to the economy if implemented, but have Failed to take off. These

include:

a) The Government’s decision to launch the Mortgage Credit Guarantee

Scheme (announced in Union Budget 2002 -03): With a view to help
pioneer the First mortgage guarantee company For India, the Asian
Development Bank (ADB) approved an investment of up to US $10 million
equivalent in November 2002. The National Housing Bank (NHB) was
entrusted with the task of floating India Mortgage Guarantee
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 Company (IMGC) along with the International Finance Corporation (IFC),

the World Bank’s investment atm. Later, the Canadian Mortgage Housing

Corporation (CMHC) was taken in as a third equity partner to IMGC. The

organization is expected to protect mortgage lenders in cases of default,

thereby inducing housing Finance companies to expand the size and

scope of their lending operations. However, the proposal seems to be in

cold storage due to the Government Failure to Frame guidelines and

decide on a regulator For I such companies in India. This means that till

such guidelines come into existence, Formation of mortgage insurance

companies will remain a Forbidden territory.

b) Repealing of the Urban Land (Ceiling and Regulation) Act in some states:
The ULCRA was enacted by the Indira Gandhi Government in 1976 to
check the concentration of land in a Few hands, which results in restricted
housing supply for the poorer sections of society. The Act imposed a
ceiling on the quantum of vacant land that individuals/ companies can own
in urban areas (max. 500 sq. meter of land in one city is the limit). However,
ULCRA failed to serve the purpose for which it was enacted. A major
reason for this failure was the misuse of Sections 20 and 21 of ULCRA,
which empowered State Governments to grant discretionary exemptions
on a variety of reasons. In fact, these sections aided corruption and threw
open the gates for litigation over property. To counter this, a few states in
India have already repealed ULCRA. Today, the restriction on holding of
land through ULCRA is coming in the way of economic progress in fast-
growing urban areas - these are signs that this Act no more serves the
purpose for which it was enacted and hence to be withdrawn, fast.

c) Repeal of Rent Control Laws in certain states: The origins of the rent

control legislation in India can be traced back to the beginning of the

Second World War. The war brought pressure on the existing urban

housing stock and wartime shortages prevented an increase in supply.

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 The then ruling British government introduced laws relating to the control
of rent and accommodation as a temporary measure at this stage, but
later, various state governments continued to extend the rent regulations
with the result that rent control became a permanent feature. In case of
this law too the focus has shifted away from allotment of vacant premises
by a public authority to freezing of rent at existing levels and the
protection of the tenancy rights of the occupants. Consequently, the
owners increasingly found it difficult to maintain the buildings in a good
state and dissuaded further investment in housing stock leading to
housing shortages. Till date, only a few states like Maharashtra, Karnataka,
Goa and West Bengal have brought balanced laws.

3.17.20 Legal Problems

Apart from the ULCRA and Rent Control Act, the Indian housing sector

is grappling with many other legal issues also.

Clear Titles:

Lack of clarity over the title deed continues to be a major concern. Evidence of
a good title, indicating that a property is free from past residual and future
claims is necessary for smooth property transactions. However, due to the
inefficiencies relating to property registration, today, 90% of civil cases in
India relate to land disputes. Such instances have given rise to a sense of
insecurity in the minds of general public who wince at the idea of dealing in
real estate. Once the deficiencies in laws pertaining to property rights are set
right, avenues will automatically open for setting up of subsidiary services like
title guarantee insurance.

Foreclosure norms. Reform in laws pertaining to credit default and

consequent foreclosure and repossession o f the property must be revised to

boost the housing finance business.

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Stamp duty & registration:

Rationalization o f a Stamp duty across the country is a priority.

Presently, in many stares the stamp duty rates for land and developmental

activity are as high as 13 - 1 4 . 5 percent. To avoid such high duties people

resort to dubious practices like disclosing lower property values on paper. If

stamp duties are reduced, the Government collections will increase, as then

the collection base is bound to widen. Further, the registration procedure has

to be made transparent and simple to minimize corruption.

Property tax:

Property tax serves two main causes-first, it is a major source of

revenue for municipalities, which are expected to use the same for public
welfare activities secondly, it acts as a disincentive to holders of untenable
quantum of land, motivating them to divest some part of the property.
However, in India, the present system of property tax calculation is defective,
unscientific and arbitrary. Tax levy is based on the built up value of the land.
This means, that more the vertical construction, higher the taxes-this acts as a
disincentive to construction rather than against higher holding of vacant
property. Restricting optimal utilization of land amounts to a gross abuse of a
limited natural resource which is already under much pressure in the country,
due to the increasing population. Thus, it is high time property taxes are
assessed on a more rational basis across the country.

Implementation of zoning laws has become necessary with the pace of

real estate development picking up. Zoning involves, designing of residential

and commercial areas, based on design norms and landscaping in keeping

with specific floor space index rations. Such laws will ensure economic land

use and better looking localities.

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 Development of infrastructure facilities, — motion of research and
developmental activities are some of the other activities that have to be
taken care of.

3.18 INITIATIVES NEEDED AND STEPS TAKEN TO ENCOURAGE

HOUSING ACTIVITY

The ideal strategy to tackle the housing issue would be simultaneous

intervention in the financial as well as the real sectors. It should

a) Address the need for increased supply of loanable funds for creation of
housing stock.
b) Focus its efforts to augment the supply of developed land and building
materials, containing the costs of construction and enhancing levels of
affordability.
c) Aims at rationalisation of the various laws and regulations governing the
housing sector and simplification of the rules and processes relating to
land records'maintenance and title verification.
d) Simplify Municipal laws governing the supply of infrastructure services and
provision of housing, simultaneously.
e) A simplification in the procedures for enforcing the security would go a long
way in improving the health of the sector. The extra procedures are long
winded and add considerably to the costs. The lender adds these costs in
his pricing which makes the loan expensive. Foreclosure or direct sale of
mortgaged property without the intervention of the courts would encourage
lending on easier terms with ascent on repayment capacity.

The government's efforts towards the development of a sound

regulatory mechanism for housing finance in India can be traced back to
1987 when it came out with a 'National Housing Policy', Acting on the
policy dictates, the 'National Housing Bank Act' was enacted by Parliament
in 1987, The 'National Housing Bank' (NHB) was established on 9th July,
1988 as per the above Act, to function as a principal agency
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 to promote Housing Finance Institutions and to provide financial and other

support to such institutions.

The Union Budget for the year 2000-01 contained several measures to

aid rural housing. A goal of providing 25 lakh dwelling units in rural areas

was set with the following specific objectives:

a) To provide more than 12 lakh houses under the ‘Indira Awas Yojana’ tor
people below poverty line. To construct 1 lakh houses for families with
income below Rs. 32,000 per annum, under a credit-cum-subsidy
scheme.
b) To construct 1.5 lakh houses under ‘Golden Jubilee Rural Housing
Finance Scheme' with refinance assistance tram the National Housing
Bank to banks and housing finance companies.
c) To increase the equity capital at HUDCO by Rs. 100 crores to facilitate
construction at about 9 lakh houses in rural areas.
d) To support construction of another 1.5 lakh houses through co
operative sector and voluntary agencies etc.
Over the years, Union Budgets have announced tax concessions,
waivers etc. to encourage housing. In the Union Budget, the limit tor deduction
of interest on borrowed capital from the taxable income in the acquisition or
construction of a house for self-occupation, available under section 24(l)(vi) of
the Income Tax Act, 1961, has been continued at Rs. 1,50,000. The ceiling on
the amount eligible for rebate under Section 88C of the IT Act, on the
repayment of principal of housing loan, has been increased to Rs. 1,00,000.
Exemption from Income-tax under section 54F in respect of long-term capital
gains arising from the transfer of capital assets (not being a residential house)
and invested in the manner prescribed, is made available to an assessed, even
if he already owns one house.

The Government has enlarged the scope of SARFAESI Act, 2002 to

include the Housing Finance Companies (HFCs) within its purview. This

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helps HFCs to recover their bad loans more effectively. Mortgage Backed
Securitization (MBS) is now available in India as a product tor generation of
resources, consequent to the amendment in the National Housing Bank Act.
NHB has already commenced securitization of housing loans. At the end of
March 2004, NHB has completed securitization of TO pools involving housing
loan assets aggregating Rs. 664.43 crores. This effort marks the coming into
age of a secondary market for the trading in mortgage-backed securities. With
this, the flow of funds to the housing sector would increase. Also, NHB will be
making available its ‘Mortgage Credit Guarantee Scheme1 to all housing loans.
Once this is available, lenders will have full protection against default.

In order to encourage the banks’ exposure to housing, RBI had initially

reduced the risk weight on housing loans to 50% increasing the capital
available for allocation to this sector and thus encouraging additional
exposure. Reacting to the pace at which housing finance has grown in the last
few years, RBI has raised the risk weight requirement to 75% in the Credit
Policy of October 2004. This measure would pressurize banks to be a bit more
selective in their housing finance effort. In a balancing move, RBI raised the
limit of direct bank finance to individual housing unit, to be eligible for priority
sector lending Rs. 15 lakhs irrespective of the location. By these moves, RBI
tries to guide the banks towards better risk management on the part of the
banks without bringing down the sectoral exposure levels.

3.18.1 Programmes

Various programmes have been introduced to provide shelter for rural

poor such as Indira Awas Yojana, Jawahar Rozar Yojana and Rural
Housing Scheme. The rural housing schemes recently launched by the

government lay special emphasis on the use of cost effective technology by

the building centres (Nirmithi Kendras). The Nirmithi Kendra concept was

initiated in 1985 in Kerala and was a success. About 20 per cent of all
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public works are carried out through the Nirmithi Kendras and some Kendras
in Kerala have international recognition. The Kendras practise and adopt cost
effective environments from technologies developed by institutions like
Central Building Research institute and others. Demonstration, training
programmes, development of rural artisans and several other innovative
programmes has enabled the Nirmithi concept of fully integrated housing to
be widely applied.

The rural housing stock was 6,5 crore in 1961, increasing to 7.5 crore
in 1971, 8.9 crore in 1981 and 9.3 crore in 1991 with a projected figure of
11.2 crore units by the end of the century. At that point of time, the housing
shortage will be Rs. 2.7 crore. Unless there is acceleration with increased
construction and quality housing stock, the problem will become intensive;
The issues are complex imbibing engineering, socio-economic, political and
geographical parameters. The housing problem may be considered with
reference to the policy issue which includes improvement of overall rural
habitation, removal of legal constraints with reference to land ownership,
increase in the supply of serviceable land, provision of stimulants and support
for housing through mobilisation of credit finance, promotion of cost effective
and appropriate housing technologies, provision of a delivery system in which
poorest segmentation of population is taken care of and employment
generation becomes appropriate with timely housing activities.

The professional issues relate to institutional role and upgradation of

research and development efforts of the professional agencies working in the
field of rural housing. The part played by the voluntary agencies and other
institutions, their relationship with beneficiaries and also with government
agencies is a professional issue.

The highlights of the plan have been promotion and encouragement of

sell-help housing, cost reduction through better science and technology effort,
and stimulus for private housing. The major objectives of the
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National Housing Policy as outlined in VIIIth plan have been to assist all in
securing affordable shelter through access to developed land, building
materials, finance and technology. Creation of efficient delivery system,
expansion-of infrastructure facilities, improvement of settlement environment,
option of poverty reduction programme, financial support from the various
institutions, promotion of equitable distribution of land and houses in different
regions and setting up of housing investment system through mobilisation of
local resources.

In past, governments have taken up only infrastructural activities and

house construction was left mostly to private initiative. Now-a-days it is
recognised that the State should play an increasing role not only in
infrastructure development but also in house construction and environmental
improvement. The strategy of the VIIIth Plan thus includes expansion of basic
infrastructure, mobilisation of additional resources by tapping capital market
and additional saving sources, environment development, cost effectiveness,
promotional self-help systems, establishing link between formal and informal
credited workers including voluntary agencies, geneticai development,
effective management of information system and special assistance
programmes for the disadvantaged groups.

3.18.2 National Housing Policy

The National Housing Policy recognises the housing norms will have to
be evolved at the local level with regard to diverse climatic conditions and life
styles of the people. The rural housing problem cannot be solved by directly
subsidised programmes. Of course, these programmes provide the safety net
to the disadvantaged groups where individuals /may not be able to meet or
arrange for financial resources required for fulfilling the basic needs. In many
cases creation of collective self-help groups may benefit the scheme.

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 The public sector has to play a facilitating role in housing by
accelerating investment through financial deepening. However, these seemed
that the share of savings in financial asset has been stagnating and housing
investment has declined in the Sixth Plan.

Investment in housing has been considered as a social welfare sector

and not as a key indicator of national economy. Housing is not in the priority
list though it is one of the primary basic needs.

From the formal financial sector only 15 per cent assistance has been
allocated to housing. Though the household sector saves 45 per cent of fixed
savings in the commercial banks, the share for housing is very meagre.
Housing has a high employment generating and multiplier effect. Housing
development and servicing which are not completely developed. Mortgage
financing largely helps middle and higher groups rather than the low income
groups in whose case effective schemes are not many. Making available land
and services with adequate financial incentives become essential for
coordination of the low income and poorer sections in housing investment.

3.18.3 Problems and Issues with the Housing Finance Industry in

India

A) Variation in standards

The housing sector is witnessed varying standards and practices

among the lending community, be it in origination and documentation
or monitoring and supervision. Variation in standards across the
industry imposes systematic risks, which can be a potential threat.

B) Aggressive approach may lead to defaults

Growing competition coupled with reduction in risk weights on housing

loans has led the lending institutions to adopt aggressive

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 practices including very high loan has led the lending institutions to

adopt aggressive practices including very high loan to value loans,

softening of collateral requirements, competitive pricing etc. with such

an aggressive approach being followed may lead to increase in the

default rates.

C) Cost of funds

The prevailing interest rate war has resulted in constant downward

revision of interest rates. Further, the spreads are increasingly
becoming thin as the lending rates are fast nearing the cost of funds,
while during 1993-94, the interest rate on housing loans were in the
range of 17-18% the same right now are in the range of 7%-8.5%. this
may lead to erosion of profitability in the long run.

D) Security Deficit due to norms

Many primary lending institutions are making terms and conditions of

sanction flexible and liberal, thus enabling the borrowers to avail the
loans even more than value of security for long tenure of 20 to 25 years.
The large quantum of institutional finance in the property transactions
may lead to the problem of security deficit. Logically, the RBI has
stipulated higher risk weightage of 75% as against 50% in November
2004.

E) Due diligence Issues

Increasingly, there have been instances of dilution in due diligence on

the part of lenders. Sometimes, loans are sanctioned without strictly

complying with laid down rules, systems and procedures. This situation

arises primarily out of fierce competitive pressures. It is observed that

the growing customer expectations force the PLIs to

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 compromise due to diligence, field verification process and appraisal

norms, in a rush to sanction the loan at the earliest.

F) Lack of Uniformity of norms amongst industry players

While banks and HFCs are the prominent players, HFCs face few
constraints. The regulatory norms stipulate 10% capital adequacy for
banks whereas the same is 12% for HFCs. Further, banks have access
to lower cost retail funds compared to HFCs. Uniformity in norms and
hence a level playing field has to be ensured for a healthy housing
finance system. These are newer challenges which need to be
addressed and resolved in times to come.

G) Industry Fragmentation

The fragmented nature of the housing finance industry is a major

impediment for its further growth. Despite this, the industry has
managed to grow mainly due to consistent decline in interest rates, tax
incentives given by the government and changing income profile of the
Indian middle class population.

H) Conflicting Interests

While the private housing finance institutions are required to abide by

the guidelines of the NHB, the general financial institutions, which
include the commercial banks, follow the guidelines set by the RBI.
Today, both these sections are competing with each other for the
same housing pie but their functioning and lending practices seem to
bear no similarity.

I) Asset Liability Management (ALM)

Asset liability mismatch is one of the biggest risks housing finance

institutions are confronted with. Funding of long term loans with short

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 term deposits, leads to a mismatch between assets and liabilities that
can be overcome by adopting appropriate asset liability management
(ALM) techniques.

J) FDI Constraints

FDI guidelines for real estate development have come under a lot of
flay. Guidelines requirements such as a minimum capitalization of
US$10 million for a wholly owned subsidiary and US$5 million for joint
ventures with Indian partners, development of a minimum area of
acres, a minimum lock in period of 3 years from completion of minimum
capitalization before repatriation of original investment, act as
constraints to foreign investors.

3.19 PROPECTS AND RECOMMENDATIONS A FUTURE OUTLOOK

A) Future Outlook

Though Indian housing finance system has got its own share of
problems, given the huge tapped housing loan market, government
support and favourable macroeconomic environment, reasonably
resilient banking system, the industry has got excellent growth
prospects. The present growth rate at about 40% +, appears to be
sustainable in the foreseeable future.

The tenth plan has estimated the urban housing shortage at the level
of 8.9 million dwelling units. The tital investment required for the above
is estimated at the level of Rs 4,15,000 crore. And such a huge amount
cannot be raised by the Central and State Governments alone. Rather
active private sector participation is very much essential for achieving
this goal, at least partly.

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B) Greater Uniformity of standards

Thus, there is a need for following measures to help the market

perform more efficiently:- Adoption of uniform practice by the housing
finance industry relating to matters like appraisal and documentation,
prepayment of housing loans, conversion of fixed rate loans into
floating rate loans etc.

Greater transparency in dealings with the borrowers to enable them to

exercise informed choices about products and lending institutions.

C) Promotion of Securitisation

In the budget 2002-03, the FM announced that NHB would launch a

mortgage credit guarantee company will work to achieve the following
goals:

Generate a greater volume of mortgage lending in the Indian market,

Lower down payment requirements to as low as 5%, Broaden the
eligibility for mortgages; and Extend mortgage repayment periods up to
25 years.

These changes will facilitate capital market development by promoting

securitization and increasing home ownership. Further, measures to
promote residential mortgage backed securitization market in India can
further strengthen our housing finance system and make it more
competitive.

D) Central registry for housing mortgages

In order to address the issue of rising incidence of frauds in housing

finance, section 20 of the SARFAESI Act introduced the provision of
setting up a central registry to provide a statutory backing to the
security interest created in favour of banks and financial institutions

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 and enabling them to claim priority over other claimants while enforcing

the securities. Introduction of such a registration system would be

conducive to credit would become easy resulting in competition

amongst lenders and better interest stared for the borrowers.

Reverse mortgages reverse mortgages are a financial tool to enable

consumers and investors tap this source of funds for more productive
usage. It is an arrangement wherein once the monthly instalments, a
lump sum amount or a line of credit. The present circumstances like
higher life expectancy, growing nuclear families, house rich but cash
poor populations suggest that the time is just right to introduce this
instrument in India.

E) Asset Liability Management (ALM)

Techniques and schemes should be put in place for a proper asset

liability management and explain the generally followed ALM

techniques to counter an issue that could threaten the very existence of

an institution.

F) Autonomy to banks

We propose to the banks through RBI, to undertake lending for housing

purposes as it will provide a remunerative avenue. The RBI has
permitted banks to grant loans for housing schemes up to certain limits
from their own resources. Introduced stipulations regarding maximum
loan amount and margins, charging of penal interest, security, term of
the loan, graduated installments (where installments are progressive),
etc. for PCBs housing loans.

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G) Interest rates not too much of a concern

Both the banks and HFCs are increasing their business at the stake of

decreasing returns. However, a consoling factor is that mortgages are

just 2% of GDP and about 10% of the advances of the banking sector.

Hence even if the bubble were to burst, it may be withstood by the

country.

3.20 HOUSING SECTOR IN INDIA

With the growth of real estate sector in India, housing finance

companies and banks are cashing on this sector by offering home loans at
cheap and attractive rates. Banks have many plans and offers that range right
from buying a land to possessing a flat or a house. The policies of the
government have made it easier for banks as well as consumers to seek and
procure home loans.

There are different types of home loans:

• Home improvement loans

• Home extension loans
• Home equity loans
• Top up loans
• Home purchase loans
• Land purchase loans
• Commercial property loans

Private and public sector banks like ICICI Bank, HDFC Bank, Bank of India,

Standard Chartered, IDBI Bank, State Bank of India, Union Bank of India and

Citibank offer home loans as per the guidelines of the government.

If you are looking to buy a home then you can easily apply for home loans

even before you find a suitable property. Your loan amount will
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depend on your eligibility that comprises of many factors like salary, fixed
deposits etc. Indian government has made it easier for NRIs to procure home
loans but an NRI can't avail tax benefits on home loans unless he/she files
returns. However there is a tax exemption to a home loan customer under
sections 88 and 24 of the income tax act.

3.20.1 Home Loans in India

The Home loan sector in India is the pi-votal role player in the growth
of the real estate scenario in India. With tax incentives given to the housing
finance sector in the annual budget of 2001, transactions related to buying
and selling of residential properties increased considerably and was much
higher as compared to previous years.

Since the new class of buyers are relatively younger set of customers
who are more aware about legal documentation and approvals, buyers are
now more 'end-users' rather than investors; the property market in India
undergoes transformation to align itself with global standards with an
increased emphasis on quality & cost control and documentation methods. In
the current economy of India, the real estate sector has the maximum
propensity to generate income and demand for materials, equipment and
services. It can be said that housing finance companies were formed for co-
existing with buyer's requirements of housing loans for investing in properties.
Home loans are made available by financial institutions to both Indian and
NRI customers at floating and fixed rate of interest and also at attractive EMI
options.

• For construction or buying a new home

• For home repairs and renovations
• For purchase of plots
• Against mortgage of property

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 No tax benefits are available for NRI customers unless you file returns

and thereby become eligible to avail of the tax benefits. Besides home loans,

Commercial property loans are also available and different financial

institutions in India provide commercial loans at different rates and different

upper limits.

Real estate loans are available to builders, promoters and real estate
developers. The experience and financial standing of the builders is taken into
account before the loan is granted which is to be returned with the minimum
instalments. Today, the amount of money that a city dweller spends on rent is
roughly the same, or only slightly less than the amount he pays as an EMI on a
housing loan. Earlier the home loan sector in India was solely dependent on
nationalized and public sector banks, but the entry of public sector banks into
the housing finance business marked the beginning of the first round of
interest rate cuts. And this reduction in interest rates has enhanced the
borrowing power of customers. Moreover, HFCs are offering incentives to
attract investors like

• Some companies sanction the housing loan without requiring you to

identify property as a pre-requisite for eligibility
• Free accident insurance & property insurance
• Waiving of pre-payment penalty
• Waiving of processing fee

There are a few documents which the finance companies require for setting up

criteria for eligibility of Home loans.

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Salaried Employee
 The latest salary slip showing Self-employed
statutory deductions Computation of income for the
previous two years, certified by
Form 16 (showing tax deducted a Chartered Accountant Profit &
at source by employer) Loss Account and Balance
Sheet for the previous two
years, certified by a Chartered
Proof of age (birth Accountant
certificate/voter identity Proof of age (birth
card/passport/school-leaving certificate/voter identity
certificate/valid driving license card/passport/school-leaving
Proof of residence (phone certificate/valid driving license)
bill/eiectricity bill/ration card). Proof of residence (phone
bill/electricity bill/ration card).

The realty boom in India has given a new dimension to the finance
sector in India - both in Home Loans and Home insurance segments. This
has not only given a competitive edge to the finance companies to provide
attractive options to customers but has also contributed to the increased
investments in the real estate sector. This has resulted in 13 new
institutions foraying into the housing finance business in the last three
years.

Major Home Loan Providers

Banks & Public State Bank of India, Corporation Bank, Punjab
Sector Housing National Bank, Central Bank, Dena Bank,
Finance Allahabad Bank, Bank of Maharashtra, Bank of
Companies Baroda Housing Finance, Can Fin Homes, GIC
Housing Finance, LIC Housing Finance, PNB
Housing Finance, SBI Home Finance, Centbank
Home Finance, HUDCO, LIC, etc.
Financial HDFC, ICICI Ltd, Citibank, HSBC,
Institutions StandardChartered- Grindlays, IDBI Bank, etc

3.20.2 Home Loan Providers in India

Real estate in India is currently one of the hottest investments

options in Asia. A recent survey of the real estate scenario acknowledge
the Indian metropolis of Mumbai, Bangalore and New Delhi as the top
three investors' choices for real estate investment in Asia. But there were

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concerns mainly related to the availability of necessary funds for investment
and in the more recent times, the boom in the real estate market opened the
doors for a host of realty funds from financial institutions. Prior to five years,
the real estate segment in India was neither organized nor were there too
many large institutions in the construction industry. But now with an organized
finance sector and with the increase in transparency levels, it has become
easier to create financing vehicles.

The decrease in housing loan interest rates and an increase of

disposable income has contributed largely to an increased demand in the
residential segment. In spite of a rise in home loans interest rates and
qualitative sanctions being levied by the RBI on banks, buying interest has
not waned because home loans are still cheaper than ten years ago. The
retail markets are also undergoing a defining change with the introduction of
larger retailing formats. The financial institutions also wasted no opportunity in
tapping the fund requirement catering to the inflow of potential buyers in the
retail sector. While most funds were initially floated by financial Institutions or
banks such as HDFC, ICICI Bank and IDBI Bank to name a few, real estate
developers like DLF Universal and even retailers such as Pantaloons Retails
(India) have now entered the real estate sector for creating more retail
facilities and have been hugely successful.

As the realty prices in India skyrockets, housing complexes

mushrooming and city landscapes becoming unrecognizable, the growth
across all real estate segments and experts estimate that demand will remain
steady at the currently high levels because of the improving economic
environment and the real estate sector is expected to grow 30% every year.
This rising property prices encourage banks and financial institutions to lend
more with the increase in collateral values. Although the home loan providers
have hiked their rates twice in less than three months, home loans continue
to be nearly 45 per cent cheaper than what they were in early 2001. Because
if statistics are referred to, the interest rates which

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now range between 9-10 per cent, are still much lower than what they were ten

years ago, at 16-17 per cent.

In addition to funds being raised by the Indian financial institutions like

HDFC, ICICI and IDFC abroad, the money could be used to develop business

and IT parks and townships. A study has revealed that as many as one million

homes are financed every year in India now with an estimated home

mortgages market of US$ 10.7 billion - contributing to India's phenomenal

realty prospect.

3.20.3 Banking and Finance

Indian Real Estate is on its way to donning the image of an organized

industry with global standards, as fragmentation, disorganization, poor

governance and inefficient infrastructure; take a backseat. Much of the positive

zing lies in the significant rise in investment, not only from within India but

from offshore as well. The last couple of years have been a clincher in terms of

the increasing interest shown by international property consultants,

developers and commercial banks in investing in Real Estate in India.

The expansion in terms of space and range encompasses residential,

commercial, infrastructure and logistics. With the retail boom poised for huge
growth, a good chunk of new projects are in the Commercial Real Estate space.
The residential sector commands its own share. With the growth in living
standards amongst the average Indian, and increase in disposable income,
new apartments are selling like hot cakes. It is not a wonder, then that the total
investment required in the tenth plan period, has been estimated at Rs
1,108,800 crore approximately.

Most of the financial institutions offer home loans to both Indian and

NRI customers at floating and fixed rate of interest or blended ones and have

customized packages for the purposes of constructing/ buying a new

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house, vacant plot or extension and even home improvement. Loans for non-

residential premises, home equity and top-up/personal loans are also

available.

Moreover, a person looking for a housing loan can avail himself of life
insurance covers, home protection insurance, and other privileges related to
banking facilities. With the host of Real Estate Funds from Financial
Institutions, financial support from the Banks and Housing Finance
Companies (HFCs) that have access to low cost retail funds and refinance
given by National Housing Board at competitive rates, more investors are
willing to pledge their assets to the realty sector. Nevertheless, the alertness
on the part of the consumer seeking a housing loan should be geared towards
increasing the loan eligibility, getting the valuation of the property done and
keeping photocopies of the title document.

Banks and HFCs are entering or seeking to enter into tie-ups with

builders/development authorities/ private developers in order to improve the

credit delivery system and devise competitive pricing and aggressive strategy.

Foreign banks are also able to woo retail customers by fine-tuning their

housing loans.

The Annual Monetary and Credit Policy Statement for the Year 2007 has
presented the finding that the growth in activity in financing, insurance, real
estate and business services stood at 11.1%, as compared to 10.9 % in 2005-
06. This definitely can be a positive concluding note as we look forward to
enthusiastic development in Finance and Banking in the year
2007

3.20.4 Home Insurance in India

The Home Insurance sector in India has seen considerable

transformation in the last few years. One of the key responsible factors has

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been the booming real estate sector in the country. Recent statistics reveal
that the home insurance premium touched the Rs 150 crore-mark registering a
growth of 25% in the last financial year and the trend is predicted to continue.
As per individual estimates, 60% of the revenue in premium is generated in the
new housing development areas; prominent among which are the real estate

investments in the fast developing National Capital Region (NCR) and Navi

Mumbai.

Home Insurance plays a categorically pivotal role in protecting your

house and valuable possessions as this insurance policy is a guarantee
provided by the insurance company that combines insurance on the home, its
contents the personal possessions of the homeowner, as well as liability
insurance for accidents that may happen at the house like fire and natural
calamities. The extent of the risk covered however depends on the type of
policy. A formatted Home Insurance policy usually covers calamities - natural
and man-made.

• Fire
i
• Earthquake
• Lightning, Storm, Cyclone, Flood
• Tsunami
• Riot, Strike, Malicious damage
• Terrorism
• Aircraft laws
• Impact from rail/ road vehicles
• Landslide
• Burglary

Moreover, influencing the home insurance sector are the financial

institutions, which in their latest inclusion have made home insurance

obligatory, for housing loans approval. The housing finance sector contributes

to a major chunk of the home loan market. Industry sources

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point out that, if this sector continues in its stand to make home insurance

mandatory for seeking home loans, then the insurance segment is soon set to

achieve a 100%growth.

Another responsible factor for an upswing in the home insurance sector

is the recent spate of natural calamities that hit the country. The extent of
losses met by calamities like the earthquake, floods, storms and tsunami have
also made people become more aware contributing to an additional upsurge in
the current financial year. And as home insurance become obligatory and
people are more interested in protecting their homes, the home insurance
sector are providing their customers with attractive policy plans to suit their
needs.

• The initial procedure for home insurance begins with the evaluation of

your property. The value of your house is evaluated as per the area of

your home multiplied by the rate of construction per. sq. feet, as on the

date of taking the policy. For example, if your home is 1500 sq. feet and

the construction rate till date per sq. feet is Rs1000/-, then the sum

insured for your home’s building structure is Rs. 15,00,000.

• The insurance of household possessions or contents are ascertained

on the market value of the goods. This means that if there were a loss,

the claim would be paid on the value of purchasing a similar new item,

less reduction for the usage.

The thriving real estate sector in India is considered to be the driving

force in the resurgence of the Home Insurance sector. Predicting a booming
market, more and more companies are making their foray into the home
insurance sector. Apart from the predominant players in the public sector like
New India Assurance, United India Insurance, Oriental Insurance and National
Insurance Company, the companies which have

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played a significant role in the revolutionary growth in this sector are private

insurance companies like ICICI Lombard General Insurance, Bajaj Allianz

General Insurance, IFFCO-TOKIO and Royal Sundaram Alliance to name a few.

There is a huge untapped market in the home insurance segment and with real

estate expanding beyond metropolis to the Tier II and Tier III zones, the sector

is expected to touch new heights.

3.20.5 Mortgage in India

The Mortgage Financing industry was estimated approximately at US $ 18

billion in India. The mortgage industry is undergoing a change as the market is

dominated by banks in the direct housing finance sector. Though the housing

finance industry in India is growing for the past few years still financing

through the organized sector continues to account only for 25% of the total

housing investment in India (Source: LIC Housing finance).

The top players in this industry are housing finance companies,

commercial (local as well as foreign) banks, cooperative banks and other non-
banking financial companies (NBFCs). Presently Housing Development
Finance Corporation (HDFC) is the market leader followed by State Bank of
India (SBI). The Industrial Credit and Investment Corporation of India (ICICI)
Bank and the Life Insurance Corporation (LIC) Housing Finance Limited also
have significant market share. The industry sources has reported that, 8 to 10
percent of the market share that foreign-owned banks have in the industry,
Citibank has 5 percent share, followed by Standard Chartered and HSBC with
about the 3 to 5 percent.

The formal mortgage finance sector continues to elude the lower

income groups. The twin problems of affordability and accessibility that
hinder the progress of housing in South Asia need to be addressed. For this,
governments have to withdraw from direct participation in the housing and
housing finance sector and instead need take on the role as facilitators to
create the enabling environment to encourage private sector capital.

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Further efforts of the government are required to strengthen foreclosure laws,

land records need to be computerised and archaic land laws especially rental

laws need a complete overhaul. Small steps such as encouraging credit

bureaus, introducing mortgage insurance, allowing real estate mutual funds

and creating a favourable environment to facilitate foreign direct investment in

housing will help stimulate the housing finance sector. The road is long but

not untenable.

3.20.6 Special Economic Zones - The Emerging Investment Option

Moreover, as real estate sector expands beyond the city limits with
government promoting industrial belts, real estate developers are eyeing
special economic zones (SEZs) as an extension of their business. Several
upcoming special economic zones are also expected to provide the
momentum to the commercial office space development in related area where
the land comes cheaper; and a SEZ developer is entitled for tax exemptions
like a 10-year corporate tax holiday.

On the whole, Indian real estate sector is slated to mark the growth to
$40-50 billion in the next five years. Also, India is witnessing developments of
hi tech cities, a trend that has been embraced by most Indian cities. Further,
India's improving image, as a corporate base for Asian markets and strong
growth opportunities in emerging sectors such as financial services,
pharmaceuticals, telecommunications, and biotechnology will also boost
demand and broaden the occupier base.

3.20.7 FDI - Inviting Real Estate Investments

Not surprisingly, most foreign investors have aimed India in a big way,

largely through joint ventures. Along with curtailing the risk factor, it provides

the participating companies an exit route. Since 2005, when FDI

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in Indian real estate sector was permitted, US $7-8 billion have been parked

in.

The Government of India's liberalization and economic reforms

programme encourages industrial policy reforms that have reduced the
industrial licensing requirements, removed restrictions on investment and
expansion, and facilitated easy access to foreign technology and FDI.
Increased inflow of investments arising out of flexible FDI policies is sure to
have a direct and positive impact on the real restate scenario of India. More
investments mean more job opportunities and more jobs means more
workforces. This has created a huge demand and supply gap in housing in
India. The booming IT industry has also resulted in a large section of young
investors who with high-income jobs chose real estate as an investment
option.

3.20.8 Investors Choice - Top Indian Cities

India becomes the favourite investor’s hub for the IT, ITES and the
BPO sector. As a result of this, the real estate market in top Indian these
cities is witnessing a boom. Apart from the IT/BPO sector, the ancillary
industries (banking, insurance, hotels, transport, catering) which are growing
as a result of the IT/BPO boom are going to account for a large share of the
real estate boom.

Moreover, the liberalized FDI policies of the government have initiated

investments in many other sectors. This includes sectors like retail,
hospitality, telecom services, power trading, processing, development of new
airports, laying of natural gas pipelines, petroleum infrastructure and
warehousing of coffee and rubber.

Of course, the regular influx of huge investments in all the

aforementioned sectors has augured well for the real estate sector of India
and numbers corroborate the fact. As per the industry reports, the sector is

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currently pegged at US$ 70 billion and is expected to attain the size of US$ 120

billion by the end of 2010, thus clocking a consolidated growth rate of

staggering 70 per cent in three years.

These sectors account for 70-80% of the commercial real estate space

absorption in these cities. This heavy absorption by the knowledge industry

has resulted in the total commercial space absorption in India going up to

almost 15 million sq ft in 2004 from 8-9 million sq ft a few years ago. In terms

of IT and real estate activity levels, the Indian cities can be classified as Tier I,

Tier II and Tier III.

• Tier I cities are those which account for almost 60% of the real estate
space absorbed.
• Tier II cities are the ones which saw substantial IT activity and saw good
real estate growth in the last few years
• Tier 111 cities are the ones that are yet to emerge as key IT/BPO

destinations.

As the boom continues, the real estate investors from India and all over
the globe are setting up operational bases in the top cities Tier I and Tier II
cities to cater to the increasing gap between the demand and supply of
residential and commercial properties in India. They can be considered as the
hottest destinations with sustained buoyancy, offering double digit returns on
real estate investment.

The major investments in the corporate sectors mainly the IT and BPO
sectors are concentrated in the premier cities of India like Delhi, Mumbai,
Bangalore, Chennai, Kolkata, Hyderabad, Gurgaon, Chandigarh, Pune etc. The
real estate development in these cities in the last few years has been
phenomenal and the realty prices in these cities have also skyrocketed. Real
estate investors in any part of the world would always opt for cities to set up
homes or corporate offices where there is a planned

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outlay of the city and its associated infrastructure. Coming to basic

infrastructure and investment options Delhi, Mumbai and Bangalore have

emerged as the top three investors’ choices for real estate investment.

The realty in hot metro destinations is driven by the global outsourcing

wave sweeping India. As far as the commercial, retail and entertainment

segments are concerned; estimates suggest that by the end of 2008, the eight

largest Indian cities will experience a supply of around 66 million sq ft of new

retail space through more than 200 proposed retail centres.

3.20.9 Most Preferred Cities for Investment

A) Delhi and NCR

Delhi and NCR with the happening and investment hub cities of Gurgaon
and Noida are the hot markets for real estate in India. This is due to the
good infrastructure and quality of life provided in the city and remains
the basic cause for the large scale investments in the IT, ITES and the
BPO sector in this region. Delhi’s residential real estate market is driven
more by investors rather than by end-users. The overheated markets like
Delhi and NCR had as much as 100 percent escalation in property prices
but now there are already corrections happening in the market. The
overheated property market in Delhi which witnessed over 100 percent
escalation in prices, still continue to rock as a hot destination for real
estate investment.

Delhi has been losing steadily to its suburban counterparts in office

market share primarily due to poor quality of buildings and high real
estate cost in the CBD. The residential property is going to witness
increase in prices on the strength of high-end housing. Even the rentals
in CBD are expected to go up with Delhi Metro becoming operational in
that area this year.

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B) Noida with well-defined master plan, good connectivity to Delhi and

impressive infrastructure is fast turning into an investor’s paradise both

in the residential and commercial sector. Moreover, the government’s

initiative to invite investments has transformed Noida into an IT hub of

the country.

C) Gurgaon on the other hand apart from being the corporate addresses of

many MNCs is fast turning into a city to hunt for luxury homes. And with

job opportunities flourishing and burgeoning disposable incomes, the

cities in India are experiencing a shift towards premium living.

D) Mumbai
Mumbai continues to reign as the commercial and financial capital of
India, the real estate prices in the city are at an all time high. A survey
reveals that an office space in Mumbai is more expensive than
Manhattan; ranking it as the world’s 15th most expensive city. There has
been a lot of real estate investments in the retail and residential sectors
in Mumbai and the growth of the IT and ITES sector is reflected in the
real estate boom in the satellite city of Navi Mumbai.

E) Pune

Pune which has emerged as the IT, research and academic destination

of India apart from being a major industrial belt is seen as a winner in

terms Nof real estate investments. IT and retail are key drivers of real

estate in Pune that is witnessing its transition from a sedate industrial

destination to a vibrant corporate city. With a wide range of population

and service sectors to cater to and its close proximity to Mumbai has

made Pune a hot destination for real estate investors.

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 Also the IT revolution in Pune has made it home to all major IT
companies, both Indians and multinationals, making it today one of the
most preferred IT /ITES and BPO investment destination in India. IT
and ITES boom has given a big fillip to commercial space with demand
touching 1.2msf annually. Pune has witnessed frantic activity in the
residential sector. To make most of this opportunity, several Pune
developers like Kumar, Magarpatta Panchsheel, Kolte, Embassy etc
have joined the race to develop township projects. The Magarpatta
project is spread over 400 acres with IT, residential and retail
developments.

F) Kolkata
Kolkata is another emerging city in the real estate investors list. Apart
from offering lucrative business plans for investors in IT and retail
sector, Kolkata is becoming one of the hottest cities for real estate
investors as the city is witnessing resurgence in its economy after
years of stagnation; into being the business destination of India.

Much of the credit for Kolkata’s emerging as the investment destination

goes to the West Bengal government, which is promoting knowledge
industry in a big way. The IT boom in Kolkata is clearly evident from
the huge investments by IT companies to set up their base in the city.
The 10,000 hectare Rajarhat is emerging as the next hot destination
for the IT and ITES. More IT parks are also growing up in Kolkata with
Ascendas, DLF, Videocon-Salarpuria, Bengal Intelligent Park,
Technopolis, Infinity Benchmark, Infinity Waterside, Millennium and
The Hub together set to create over 37 million square feet of space in
Rajarhat and Sector V.

G) Hyderabad
Hyderabad once famous as the city of pearls, Hyderabad is today
known for it’s IT and IT Enabled Services, Business Process

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 Outsourcing (BPO) firms Pharmaceuticals, Biotechnology and

Entertainment industries. The city harboring a number of IT Parks have

established themselves as the IT hub of India.

Hyderabad is a major center for pharmaceuticals with companies such

as Dr. Reddy's Laboratories and is fast developing into a centre of
biotechnology sector in India. Genome Valley and Nanotechnology Park
are some of the upcoming projects. This sector is surely going to spur
up the economy of the city with more companies willing to set up its
operations in the coming years.But as of now, IT and ITES sector attract
the maximum investors to Hyderabad. Several MNCs have opened their
base in Hyderabad and both Indian and global companies are changing
from smaller operation to big operations. A few names among them are:
Motorola, Google, Dell, Deloitte, Microsoft R&D India Pvt. Ltd., Wipro
Technologies Ltd, Tata Consultancy services and Infosys Technologies
Limited.

H) Bangalore
Bangalore over the years has transformed itself from being a

‘Pensioner’s Paradise’ to the ‘Silicon Valley’ of India. It is recently

evolving into a R&D destination attracting real estate investors to cash

on into the demand for residential and commercial properties in the

cities. Riding high on the IT boom, Bangalore is maintaining its position

as a prime destination for property investments.

The booming IT sector which is responsible for the real estate growth in
the city has also collaborated to making it one of Asia’s fastest growing
cities with annual growth rate of 3.5 percent. The city also accounts for
more than 35 percent of the software exports of our country with largest
number of software companies; which is the main driver of commercial
property in Bangalore.

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I) Chennai
Chennai, the automobile capital of India has also developed into an IT
and ITES hub in the recent years; mobilizing the real estate investors
to take note of it as a promising destination of the future. The IT & ITES
boom coupled with expats choosing Chennai as their operational bases
has given a real boost to the real estate. The commercial real estate
has been on the upswing as IT companies were the prime occupants of
commercial spaces.

Areas with proximity to the IT/ITES hubs have emerged as localities

with major demand for residential development in Velachery,
Madipakkam and Tambaram to name a few. Prices have been
significantly going up in southern Chennai because of its proximity to
IT/ITES nerve centre and as the preferred locality of the expats.
Localities like Alwarpet, Boat Club, and Poes Garden have come up as
upmarket residential areas. On the other hand, places such as
Velachery, Mogappiar and Thiruvanmixur are the favourite spots for
budget apartments.

3.20.10 Why Invest In India?

The Indian economy and the real estate sector in particular are high on
its ride to prosperity. As India’s economic growth curve rises, real estate India
has emerged as one of the most appealing investment areas for domestic as
well as foreign investors. Indian real estate has huge potential demand in
almost every sector, but especially commercial, residential, retail, industrial,
hospitality, healthcare etc. But maximum growth is attributed to its growth
from the booming IT sector, since an estimated 70 per cent of the new
construction is for the IT sector.

Investment scenario has certainly undergone a paradigm shift in India.

Gone are the days when potential investors used to sought after investment
options like equity bonds and park money in shares where your
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return ranges between 5.55 to 6%. Data showcased by property surveys show

that returns from rental incomes on investment in commercial property in

Indian metros, is around 10.5%, the highest in the world.

1. Selling and buying Indian property is now considered as the most

profitable and attractive business opportunity in the present real estate

scenario in India. New demands have added to strength of real estate

markets across the commercial, residential and retail sectors in India. Not

surprisingly, demand for Indian property has been increasing steadily for

the past few years and it has exceeded supply.

There has also been an upward swing on the real estate price values in

the recent years. Due to the huge demand and rising prices, investment

and speculative interest in real estate is growing while excess money

supply, stock market gains and policy changes are adding to the trend in

favour of the real estate sector.

2. In the last one year, the capital values of the commercial office spaces has

increased by up to 40% owing to the increase in the demand from IT / ITES

and BPO sector across major metros in India.

3. India has a distinct regulatory and financing management in place.

4. Real estate boom in India is supported by its own flourishing economy on

a sustainable basis. Here, growth of the property market is not a result of

renovation and overhauling; but rapid development that witness for India

riding the high growth wave.

3.20.11 Factors Favouring Investments

Tremendous growth has been taking place in both residential as well as

commercial segments that is attracting huge investments phenomenal price

escalation (more than 100% in several places) in last couple of years.

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 Lower interest rates, easy availability of housing finance, burgeoning

income and better job prospects, increase of nuclear families have given a

boost to the demand for residential properties in India. The net yields (after

accounting for ail outgoings) on residential property are currently at 4-6% p.a.

However, these investments have benefited from the improving residential

capital values. As such, investors can count on potential capital gains to

improve their overall returns. Capital values in the residential sector have risen

by about 25-40% p.a in the last 2 years.

The retail market in India has been growing due to increasing demand
from retailers, higher disposable incomes and opening up of FDI in Retail. The
capital appreciation in this sector is close to 20-35% p.a. However, the risks
associated with this sector are higher as retailers are prone to cyclical
changes typical of a business cycle. Changing consumer behaviour combined
with increasing disposable incomes will ensure further growth of the retail
sector in India. In the present day scenario, if there is any powerful investment
tool that brings burgeoning financial returns, it is INDIAN REAL ESTATE!!!
Investors should consider the parameters minutely and meticulously to find
out why investing in Indian real estate now is the best viable option.

3.20.12 Tax Benefits on Home Loans

As the Indian real estate market makes an upward swing, and investors
opt for housing finance or home loans, tax benefits obtained from them is a
lucrative option. Customers availing of Home Loans can claim a certain
portion of the interest and principal that they pay towards the loan instalments
for reducing tax liability. Resident Indians are eligible for certain tax benefits
on principal and interest components of a loan under the Income Tax Act,
1961. Moreover, an added tax benefits under Sec 80 C on repayment of
principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce
your tax liability by about Rs. 30,000 p.a.

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Tax benefits can be claimed on both the principal and interest components of

the home loan as per the Income Tax Act, 1961. These deductions are available

to assesses, who have taken a loan to either buy or build a house, under

Section 24(b). Interest on borrowed capital is deductible up to Rs 150,000 if the

following conditions are satisfied:

• Capital is borrowed on or after April 1, 1999 for acquiring or

constructing a property.
• The acquisition/construction should be completed within 3 years from
the end of the financial year in which capital was borrowed.
• The person, extending the loan, certifies that such interest is payable in
respect of the amount advanced for acquisition or construction of the
house
• A loan for refinance of the principle amount outstanding under an

earlier loan taken for such acquisition or construction.

If the conditions stated above are not fulfilled, then the interest on borrowed

capital is deductible up to Rs 30,000 though the following conditions have to

be satisfied:

• Capital is borrowed before April 1, 1999 for purchase, construction,

reconstruction repairs or renewal of a house property.
• Capital should be borrowed on or after April 1, 1999 for reconstruction,
repairs or renewals of a house property.
• If the capital is borrowed on or after April 1, 1999, but construction is

not completed within 3 years from the end of the year, in which capital

is borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is

eligible for a deduction of up to Rs 100,000 under Section 80C from

assessment year 2006-07.

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3.20.13 Terms and Conditions for Availing Tax Benefits on Home
Loans

1. Tax deductions can be claimed on housing loan interest payments,

subject to an upper limit of Rs 150,000 for a financial year. Interest on
the fresh loan can be claimed as a deduction, subject o the stated upper
limit.
2. An additional loan for extension/addition to the same house and the
person's deductions on the existing loan are less than Rs 150,000; he
can claim further benefits from the additional loan taken, subject to the
upper limit of Rs 150,000 for a financial year.
3. Tax benefits under Section 24 and deduction under section 80C of the
Income Tax Act can be claimed only when the payment is made. If a
person fails to make EMI payments, he cannot claim tax benefits for the
same.
4. According to the Income Tax Act, only the person who has taken the
loan can claim tax rebates.
5. The interest on home loans taken for repairs, renewals or
reconstruction, also qualifies for the deduction of Rs 150,000.
6. A husband and wife, both of whom are tax-payers with independent
income sources, get tax deduction benefits, with respect to the same
housing loan; to the extent of the amount of loan taken in their own
respective name.
7. If a person buys a house and sells it within the same year/after 3 years,
and if any profit is made, then a capital gains tax liability arises on the
same for which the individual is liable to pay short-term capital gains tax
since the sale took place in the same year. But, if the sale had taken
place after 3 years, then a long-term capital gains tax liability would
have arisen.
8. If it is proved that the home loan is simply an arrangement between the

loan-seeker and the builder or with a third party for the purpose

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 of claiming tax benefits, then tax benefits will not be allowed and
benefits, previously claimed, will be clubbed to the income and taxed
accordingly.
9. Tax benefits on interest on housing loans are allowable only for the
original loan and for a second loan taken to repay the first loan and not
for subsequent loans. This means that if you have already availed of one
loan to refinance the original loan and want to now avail a third loan to
refinance the second loan, tax rebate on interest payments will not be
permissible. This is because the Section 24 (1) only talks of the second
loan and not of subsequent loans. Even if you take the second loan at a
rate of interest higher than the original loan, you will be eligible for a tax
rebate on the second loan.

3.21 TYPES OF HOME LOANS BY HOUSING FINANCE

INSTITUTIONS

A person seeking investments for house or a property opts for Home Loans

for a variety of purposes ranging from construction to renovation. The Housing

Finance Companies (HFCs) now offer individuals with various alternatives to

choose from while buying a home loan and the availability of Home Loans

offered is as varied as their requirements.

• Home Purchase Loans

• Home Construction Loans
• Home Improvement Loans / Home Conversion Loans
• Home Extension Loans
• Land Purchase Loans
• Stamp Duty Loans
• Bridge Loans
• Balance Transfer Loans
. Refinance Loans
• Loans to NRIs

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Home Purchase Loans

This is the basic home loan for the purchase of a new home.

Home Construction Loans

This loan is available for the construction of a new home on a said

property. The documents that are required in such a case are slightly different
from the ones you submit for a normal Housing Loan. If you have purchased
this plot within a period of one year before you started construction of your
house, most HFCs will include the land cost as a component, to value the
total cost of the property. In cases where the period from the date of purchase
of land to the date of application has exceeded a year, the land cost will not
be included in the total cost of property while calculating eligibility.

Home Improvement Loans

These loans are given for implementing repair works and renovations
in a home that has already been purchased, for external works like structural
repairs, waterproofing or internal work like tiling and flooring, plumbing,
electrical work, painting, etc. One can avail of such a loan facility of a home
improvement loan, after obtaining the requisite approvals from the relevant
building authority.

Home Extension Loans

An extension loan is one which helps you to meet the expenses of any
alteration to the existing building like extension/ modification of an existing
home; for example addition of an extra room etc. One can avail of such a loan
facility of a home extension loan, after obtaining the requisite approvals from
the relevant municipal corporation.

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Home Conversion Loans

This is available for those who have financed the present home with a
home loan and wish to purchase and move to another home for which some
extra funds are required. Through a home conversion loan, the existing loan
is transferred to the new home including the extra amount required,
eliminating the need for pre-payment of the previous loan.

Land Purchase Loans

This loan is available for purchase of land for both home construction
or investment purposes

Stamp Duty Loans

This loan is sanctioned to pay the stamp duty amount that needs to be
paid on the purchase of property.

Bridge Loans

Bridge Loans are designed for people who wish to sell the existing
home and purchase another. The bridge loan helps finance the new home,
until a buyer is found for the old home.

Balance-Transfer Loans

Balance Transfer is the transfer of the balance of an existing home

loan that you availed at a higher rate of interest (ROI) to either the same HFC
or another HFC at the current ROI a lower rate of interest.

Re-finance Loans

Refinance loans are taken in case when a loan for your house from a
HFI at a particular ROI you have taken drops over the years and you stand to
lose. In such cases you may opt to swap your loan. This could be done

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from either the same HFI or another HFI at the current rates of interest, which

is lower.

NRI Home Loans

This is tailored for the requirements of Non-Resident Indians who wish

to build or buy a home or property in India. The HFCs offer attractive housing

finance plans for NRI investors with suitable repayment options.

3.22 FUTURE OF HOUSING FINANCE IN INDIA

The Housing finance is likely to remain a low risk low margin business
that records fast growth in the foreseeable future. The market is likely to get a
little broader based (Mistry K K 2002). The HDFC’s market share may be eaten
by ICICI. The industry will continue to be dominated by a handful of big
players. It is difficult to se beyond HDFC. LIC Housing Finance and ICICI as
dominant players at this point. The HFCs will continue to operate in a highly
competitive market with higher demand for home finance. The housing
shortage and the government initiatives and above all the customer-centric
interest rates will be the drivers of HFCs. The improvement in products
services, access and reduction in interest rates will retain and create
customers. The buyers are the ultimate beneficiaries at large. There are
several bottlenecks exist in this industry. They have to be taken care, before
any of the above can bring about an improvement in the prospects of the
industry. The overall demand for housing is ever rising and the same would be
reflected on the demand for funds. Hence the profitability of the industry
should commence on the positive track in the future.

The HFCs and banks may adopt some marketing strategies in future to

increase their market share in the home loan sector. They may tape newer

segments such as packages for professional’s single clearance loans up to

Rs. 15 lakhs providing personalized services to customers,

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cross selling by ca p ita lizin g on th e n e tw o rk s o f o th e r c o m p a n ie s

c o m p e titiv e pricing in te rm s o f lo w e r in te re s t ra te s a n d fro n t e n d c h a rg e s .

T h e y a ls o h a v e s ta rte d e n te rin g into tie -u p s w ith re p u te d b u ild e rs a n d

d e v e lo p m e n t au th o rities a n d p riva te d e v e lo p e rs . T h e ho using fin a n c e

institutions will in c re a s e th e ir re a c h b y p e n e tra tin g into rural and semi

u rb a n a re a s . T h e g re a te r publicity th ro u g h n e w s p a p e rs w e b s ite s a n d o th e r

m e d ia w ill te c h g re a te r im p o rta n c e in this industry .

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