Enabling Affordable Housing for
All – Issues and Challenges* Harun R. Khan
It is a pleasure to address such a distinguished gathering of delegates at the
international conference and the well-known experts from the sector who have
assembled here. It is my pleasure to be here not only as a representative of the
Reserve Bank of India but also as a member of the Board of the National
Housing Bank (NHB). Over the years, the Reserve Bank and the NHB have
committed to the cause of improving the condition of the Indian housing sector
considering that housing constitutes one of the four basic requirements for
human survival roti (food), kapada (clothing), makan (housing) and izzat
(dignity). Our experience shows that housing tends to serve as a catalyst for a
change in socio-cultural milieu and also aids in economic development. More
importantly, housing lays the foundation for a life of dignity. By investing in
homes, people, in particular, the low-income groups, accumulate equity that can
then be used as collateral, making them more credit-worthy for accessing
finance through formal channels and also for generating income. Against this
background, addressing housing shortage and improving affordability remains an
integral part of our national policy towards poverty alleviation.
Dilemmas for the Policymakers
2. The recent housing bubble in the US which, in
many ways, contributed to global financial market
crisis is still fresh in the minds of all the stakeholders
in the fi nancial markets. The housing crisis in the
US has yet again proved that the mission of social
objectives, if not driven with regulatory caution, can
lead to financial instability. Such events not only cause severe structural damages to the financial system but
also lead to further intensification of the problem
that the mission originally was seeking to overcome.
Therefore, dilemma for policymakers is to choose
either a policy which aims at affordable houses for all
without compromising the stability of the financial
sector or a policy which enables all to afford houses
with focus on inclusive growth for the people at large.
3. The mandate of Reserve Bank of India, whether stated explicitly or otherwise, is
for promotion of inclusive growth without undermining financial stability. The
dilemma is all the more significant in the context of housing sector initiatives as
they involve framing policies on affordability of housing and also harnessing and
promoting markets so as to serve the entire spectrum of customers, irrespective
of their levels of income and the phase of business cycle.
The Extent of Problem
4. Housing shortage has always been a major problem over the years in our
country since independence. Such shortage estimated as excess households over houses including houseless households, congestion (number of married
couples requiring separate house), and replacement/ up-gradation of kutcha/
unserviceable kutcha houses and obsolescence/ replacement of old houses,
etc. had grown over the decades.
5. The Working Group on Rural Housing for the
Eleventh Five Year Plan (2007-12), has estimated the
total housing shortage in rural areas at 47.43 million
units at the end of 2012. As per Government estimates,
the total housing shortage in the urban areas, at the
beginning of the 11th Plan period was around 24.71
million units and is likely to go up to 26.53 million
units by 2012. The urban situation is equally appalling
with 99 per cent of the housing shortage pertaining
to the Economically Weaker Section (EWS) and Low
Income Group (LIG) categories. It is also of major
concern that 90 per cent of the rural housing shortage (approximately, 42.69 million units) are in respect of
Below the Poverty Line (BPL) categories.
6. According to a report of Industrial Credit and
Rating Agenncy (ICRA)1, housing loans as a percentage
of GDP have remained at around 7 per cent,
significantly lower than the levels achieved in most
of the developed countries. It indicates the extent of
opportunity for deeper penetration of such market.
With improving demographics and economies of scale,
the mortgage to GDP ratio is likely to increase. The
stakeholders, however, need to reckon with problems
and impediments in the process which may arise
from changes in the economic cycle, uncertainties
surrounding land acquisition policies, changes in the
policy framework and systemic risk that could arise
out of rapid credit expansion with lax due diligence
standards.
Concept of Affordability
7. ‘Affordability’ as a concept is very generic and
could have different meanings for different people based on differences in income levels. Different
countries have defined affordable housing to present
the economic potential of an individual buying
a house. In developed countries like the US and
Canada, a commonly accepted guideline for affordable
housing is that the cost of housing should not exceed
30 per cent of the gross income of the household.
Affordable housing and low-cost housing are often
interchangeably used but are quite different from
each other. Low-cost housing is generally meant for
the Economically Weaker Sections (EWS) categories
and comprises bare minimum housing facilities
while affordable housing is mostly meant for the Low
Income Groups (LIG) and the Middle Income Groups
(MIG).
8. Defining affordable housing in India is a difficult task given that for every square
kilometer of the country the dynamics of the market are different. Keeping in
mind that the housing shortages affect mostly the EWS and LIG, and the
younger group of urban-urban migrants changing cities in search of better
prospects, affordable houses, for the purpose of such schemes, are taken as
houses ranging from about 300 square feet (super built up area) for EWS, 500
square feet for LIG and 600 to 1200 square feet for MIG, at costs that permit repayment of home loans in monthly installments not exceeding 30 per cent to
40 per cent of the monthly income of the buyer.
9. A major issue involving the affordable low cost housing is the quality of housing.
As per the 2001 census data, only 51.62 per cent of Indian households stay in
pucca (concrete) houses. As on end-June 2009, 55 per cent of the rural
households and 92 per cent of the urban households lived in pucca structures (Table I).
Table I: Distribution of Households with respect to Kutcha (non-concrete) & Pucca (concrete) Categories |
(In per cent) |
|
1991 |
2001 |
2009 |
Pucca |
Semi-Pucca |
Kutcha |
Pucca |
Semi- Pucca |
Kutcha |
Pucca |
Semi-pucca |
Kutcha |
Urban |
85.7 |
10.6 |
3.7 |
88.0 |
9.1 |
2.9 |
91.7 |
6.2 |
2.1 |
Rural |
48.8 |
28.7 |
22.5 |
49.8 |
21.4 |
18.8 |
55.0 |
28.0 |
17.0 |
Source: Report of National Sample Survey Office – Housing Condition & Amenities in India |
The Challenges in India – Reasons for Low
Affordability
10. Although India has been registering a fast paced growth during the first decade
of the 21st century there is still a significant population below the poverty line
(BPL), irrespective of the parameters defining the line. This requires economic
and social support to get above the poverty line. The levels of unemployment
also remain significantly high, thereby rendering housing unaffordable to many.
It is also important to reckon the fact that even today there is a large population
which remains financially excluded from the formal banking/financial systems
and, in the process, is deprived of access to housing finance.
Rural Housing
11. The vulnerabilities to the rural housing sector are often thought to be limited to
the delivery system for housing materials, services and finance. The sector,
however, is deeply affected by infrastructure deficit – roads, electricity supply,
drinking water and sanitation. The housing finance which played a key role in
the urban housing revolution, if I may say so, is rather conspicuous by its
absence in the rural setting. To aggravate the situation further, there is a real
paucity of common or non-agricultural land for meeting the housing needs of the
poor; whatever little is available is pre empted by the demands from other
sectors. The lack of vibrancy in the market for village properties and the marked
volatility in agricultural incomes combine to dampen the prospects of this
nebulous sector.
Challenges from Urban Migration
12. The other challenge emanates from the economic condition of our rural areas
which leads to migration of population. The number of people in urban cities and
towns has gone up substantially primarily as a by-product of demographic
explosion and poverty induced rural-urban migration. This situation has resulted
in tremendous pressure on urban infrastructure and consequent increase in the
number of homeless people living on the streets. As per the 2001 census, the total urban homeless population was 0.78 million, which would be much more
currently given the inadequate availability of affordable/low cost housing. As per
the 2001 census, the country’s urban land mass (2.4 per cent of total land mass)
housed approximately 28 per cent of the population, excluding people who live
on the streets (Chart I).
|
13. If we look deeper into the extent of availability of basic amenities, the position is
all the more disturbing. As per the Report of Housing Condition & Amenities in
India (2009), 65 per cent of rural and 11 per cent of urban households do not
have adequate sanitation facilities. 34 per cent of the rural and 4 per cent of the
urban households did not have the facility of electricity. Only 18 per cent of the
rural households had all the three facilities (drinking water within premises,
sanitation & electricity) whereas in urban areas, all the three facilities were
available to 68 per cent households.
Constraints to Housing Sector
14. Any sector is likely to be influenced by both demand and supply constraints. On
the demand side, mainly income levels of the people, overall cyclical condition
of the economy and affordability of housing play the most important role and
availability of land, finance at reasonable price, infrastructure, legal and
regulatory framework are some of the major constraints from the supply side.
Constraints of Land Availability
15. Amongst the four constraints, land bears particular relevance in the Indian
context. The continuous tussle between agriculture and industry in a country
with a vast segment employed in agriculture and with a policy attempting to
boost the manufacturing sector has its undesired effects on sectors like housing.
But the required policy support to the housing sector cannot be ignored since
construction has direct linkages with the manufacturing sector and any boost in
this sector is likely to boost the manufacturing sector as well. On the other hand,
with growth in the rural sector, demand for low-cost and affordable housing is
expected to increase. The recent bill on Land Acquisition and Rehabilitation &
Resettlement has proposed to fix the compensation for rural and urban land at four and two times the market value respectively. It also stipulates a specified
period for the completion of projects. Many feel that the law is likely to increase
prices of land and property and also further constrain land availability. If this
happens, it may increase the proportion of land cost in the total cost.
16. As mentioned earlier, urban land mass is under
severe constraint to meet the housing requirement
of the country’s urban population which is growing
rapidly. This implies that the vision of ‘Affordable
Housing for All’ will require acquisition/supply of
large land parcels on a regular basis. At the same time,
we need to ensure proper development of the housing
sector; otherwise we may be seeing increasing number
of slums and unauthorised settlements.
Financial Constraints
17. Another important constraint that has been existent all along for the housing
sector is finance for the developers as well as finance for the households,
particularly for the low cost/affordable housing category. The current financing
mechanism prevalent in the country mostly targets middle and high income
sections of the society while the households falling under low income and
economically weaker sections category find it difficult to secure formal housing
finance. Commercial banks and traditional means of housing finance typically do
not serve low-income groups, whose income may vary with crop seasons or is
below the ‘viable’ threshold to ensure repayment or those who cannot provide
collateral for loans. In India, as mentioned earlier, the mortgage to GDP ratio is
estimated at around 7 per cent. This contrasts with mortgage to GDP ratio of
over 51 per cent in USA. However, even if one were to benchmark with more
comparable counterparts, the ratio ranges between 15 and 20 per cent for South
East Asian countries. The penetration level of mortgages is miniscule when
compared with the shortage of housing units. This problem is more acute for low
income families seeking affordable houses.
Need for Long-term Debt Market
18. Housing constitutes a long term asset for a large segment of population in rural
and urban areas. As debt markets are not very deep, access to long-term
funding for housing finance institutions is difficult. Most banks use their shortterm
funds from deposits and deploy these funds in long-term housing loans,
thereby creating an asset liability mismatch. Reserve Bank of India has
cautioned banks of the dangers of borrowing short and lending long. To mitigate
such problem, in some countries, banks have been permitted to float long-term
mortgage bonds to match their mortgage assets. To tackle the interest rate
risks, most assets and liabilities are on a floating rate basis. In India, there has
been a long-standing demand to allow pension and provident funds to invest in
housing finance. These funds are suppliers of long-term capital. They typically
have a low risk tolerance but do crave for diversification. The mutuality of
interest is strong between homeowners and long-term institutional investors.
Going forward, to tide over the paucity of funds, it is imperative to develop the
secondary mortgage market. Securitisation ensures recycling of funds. While
some countries in South Asia have issued mortgage-backed securities, most
transactions are sporadic and ad-hoc. Rigidities in the legal framework, high
stamp duties and lack of uniformity in underwriting norms are recognized as
some of the hindrances in the development of mortgage market. Of course, regulatory concerns for unbridled securitization and massive growth in home
loan portfolio with very lax underwriting standards which caused considerable
damage to the financial markets, particularly in the context of the advance
economies like the US, have to be kept in view. Drawing upon the lessons from
imprudent securitization of mortgages which contributed to a larger extent to the
recent global financial crisis, Reserve Bank of India is reviewing the regulatory
framework for securitization in India. It is expected that the market for residential
mortgage backed securities (RMBS) will develop on safe and sound lines under
the new regulatory framework.
Loan Products
19. A housing loan is inherently different from any other retail loan. This is because
a house is probably the single largest investment a person makes in his/her
lifetime. It has been noticed that a customer seeking a housing loan does not
just require finance – they may also need ancillary services like loan counselling
or legal advice to ensure the title of the property is clear or technical advice to
ensure that the structural aspects of the property are in order. It is these add-on
services that distinguish the good quality of services from not so good. The
typical mortgage borrower of South Asian countries, including India belongs to
the upper or middle class, is of an average age of 35-40 years, usually a first
time home buyer and by and large a salaried employee.
20. Most loan products are fairly standardised – plain vanilla home loan products,
loans for home improvement and extension, land loans, loans for non-residential
premises and the newer breed of loans include home equity and topup/
personal loans. Against the backdrop of lower interest rates seen across the
region, most home loans are on floating rate loans. In India, the floating rate of
some banks and housing finance institutions is benchmarked to prime lending
rate. It has been noticed that several customers opt for floating rate loans
without understanding the inherent risks involved. Even most of the existing
fixed rate loans have been converted into floating rates. To tide over the
dilemma of whether to opt for a fixed or floating rate loan, blended options are
being offered wherein the customer can hedge part of the interest rate risk by
opting for a combination of fixed and floating rates. The major issue, however, is
that most individual borrowers find it difficult to manage the interest rate risk
under pure or semi floating interest rate regime. Hence, there is greater need for
fixed interest rate loan products for individual borrowers. Coming to currency
risk, fortunately, home loan borrowers in the Asia-Pacific region and India, in
particular, are not exposed to exchange rate risks as borrowings are in domestic
currency. Another area of product innovation could be deposit linked home loan
products. This would be very useful for low income groups as they can build
equity and establish payment capability track record for availing of home loans.
Legal Constraints
21. A major feature of the Indian urbanization process is its non-uniform
geographical spread. While smaller cities and towns are fast emerging as centre
of demand, the pressure on existing four metros remains enormous. A crucial
factor behind this tendency is the barrier for major players in real estate in
tapping the vast land potential in rural areas reinforced by poor enforcement of
laws against encroachment of public lands as well as lack of clear titles to private lands causing an artificial scarcity of land in rural areas. Another major
issue is absence of large scale digitization of land records and the easy access
to such records for checking titles/encumbrances.
22. The dynamics between rural and urban housing demand is also different with
housing in rural India still largely for own use rather than for sale and resale. A
possible reason for this, among other things, could be the problem of
transferring ownership rights. As we reach limits to urbanization in metros, rural
areas should increasingly come under the focus of real estate development and
we would require strong legal framework to prevent the bottlenecks.
Role and Responsibilities of Stakeholders
23. Given the dimensions of the problem and various constraints that affect a viable
and sustainable solution, well-coordinated and concerted effort on the part of all
the stakeholders, including the private sector, is required. This will ensure that
all segments of the population genuinely aspiring to own a house are effectively
catered to without of course compromising on financial stability and ecological
balance. Efforts of regulators and government/ government bodies to tackle this
colossal housing shortage will have limited impact until and unless the private
sector joins hands to meet the challenge.
Commercial Banks and HFCs
24. The Indian banking sector has an expansive reach
and is well-geared to serve all segments of the society,
including the underprivileged. The banking sector has
been actively involved in lending to the housing sector
with an outstanding of `3,786 billion as on December
30, 2011 which is an increase of `410.10 billion (12.10
per cent) over the previous corresponding year. The
housing loan portfolios of HFCs registered a growth of
21.71 per cent during 2010-11. This was comparatively
higher than the 15 per cent growth reported by
commercial banks (Tables II & III).
Table II: Comparative Position of Housing Sector Credit by Commercial Banks and HFCs |
(in per cent) |
|
Share of |
Mar 05 |
Mar 06 |
Mar 07 |
Mar 08 |
Mar 09 |
Mar 10 |
Mar 11 |
Housing
Credit |
HFC |
25.84 |
25.03 |
24.64 |
26.50 |
27.31 |
29.61 |
31.16 |
Bank |
74.16 |
74.97 |
75.36 |
73.50 |
72.69 |
70.42 |
68.84 |
Credit
Growth |
HFC |
32 |
28 |
23 |
24 |
21 |
21 |
21 |
Bank |
50 |
33 |
25 |
13 |
16 |
8 |
15 |
Source: Reserve Bank of India & ICRA |
Table III: Outstanding housing loans of HFCs‡ |
(as on March 31) (` Billion) |
|
2009 |
2010 |
2011 |
Outstanding loans |
1,268.23 |
1,531.88 |
1,864.38 |
|
(16.12%) |
(20.79%) |
(21.71%) |
‡ Source: National Housing Bank
Figures in bracket reflect the year-on-year percentage growth. |
25. The housing loan portfolio of any financial institution is a product of two
variables – number of accounts and loan outstanding per borrower. It has been
observed that there has been a noticeable slowdown in the growth of the
portfolio (Tables IV & V). One plausible reason is that post-crisis, banks have
realised that while the demand for housing loans is tremendous, there is no
substitute for prudent lending policies. This probably explains the slowdown in
the growth rate of number of accounts. Another reason which has affected the
demand has been the rising prices of property and prevalence of relatively high
rate of interest in the context of high inflation rates.
Table IV: Outstanding Gross Bank Credit§ |
(` Billion) |
Sector |
Dec 18,
2009 |
Mar.26,
2010 |
Dec 31,
2010 |
Mar 25,
2011 |
Dec 30,
2011 |
Gross Bank Credit |
28,019.3 |
30,885.7 |
35,681.3
|
37,314.7 |
41,304.7 |
|
|
|
(27.3%) |
|
(15.8%) |
Food Credit |
475.0 |
485.6 |
633.0 |
641.1 |
846.9 |
|
|
|
(33.3%) |
|
(33.8%) |
Non-food Credit |
27,544.3 |
30,400.1 |
35,048.2
|
36,673.5 |
40,457.8 |
|
|
|
(27.2%) |
|
(15.4%) |
Housing (Including
Priority Sector
Housing) |
2,936.5 |
3,009.3 |
3,376.0 |
3,461.1 |
3,786.0 |
|
|
|
(15.0%) |
|
(12.1%) |
Figures in brackets reflect the year-on-year percentage change.
§Source: Reserve Bank of India Report on Sectoral Deployment of Bank Credit
– December 2011. |
Table V: Growth Rate of Number of Accounts and Outstanding Amounts in the Housing Sector
Portfolio of Commercial Banks |
(in per cent) |
|
Accounts |
Outstanding |
Mar-08 |
9.05 |
9.25 |
Mar-09 |
13.03 |
15.55 |
Mar-10 |
11.53 |
8.72 |
Source: Statistical Tables Relating to Banks in India, RBI. |
26. It is encouraging to note that the share of HFCs in the Indian housing market
has been exhibiting a rising trend. Looking ahead, HFCs are likely to gain
sufficient experience in the sector and would be able to maintain their market
share on the strength of their focused approach, targeting of special customer
segments and relatively superior customer service. This in a way would pave for
constructive competitive environment as traditional lenders like banks would need to tap their extensive network and broad customer base more effectively
and at the same time maintain the priority sector lending targets.
27. In order to remain competitive, both commercial banks and the HFCs need to
realize that a customer seeking a housing loan does not just require finance –
they also need ancillary services and hand-holding like loan counseling, legal
advice, etc. Selling a loan product is a small step in the process of making
affordability of housing a reality; bigger leaps by way of encouraging deeper
financial inclusion coupled with financial literacy is the need of the hour.
28. Re-engineering of the existing business models is extremely essential given the
fact that a large number of the targeted and potential customers are possibly
financially excluded. Assessment of the customers and their credit requirement
can be achieved more effectively by adopting a field based approach, such as,
using surrogates, triangulation and building up knowledge about the customer.
Banks and HFCs have to provide innovative products to the sector and work in
close collaboration with the other stakeholders in the industry. They also need to
adopt different appraisal and risk management methods for low ticket housing
loans.
Micro Finance Institutions (MFIs)
29. In the wake of micro-finance revolution in India, housing micro-finance has
assumed a lot of importance and has potential of having notable impact on the
stakeholders engaged in the mission for affordable housing. Microfinance has
the potential to enable small borrowers to start planning for a house and
arranging requisite resource for it. At the same time, these institutions can have
an impact on the household decision making, portfolio diversification of lenders,
expansion of housing sector and growth of the local economy as a whole.
30. Microfinance for housing is believed to progressively upgrade poor families'
homes. Such upgradation would include improving existing rooms, adding a
room, or installing water or electricity. Based on their credit history microfinance
for housing should be designed for the low-income households who wish to
expand or improve their dwellings or build a home in incremental steps, relying
on small loans raised over a period of time. It has to be a sustainable approach
suited to the needs of the low-income market.
31. MFIs are considered to be the next best
alternative for financing the EWS and LIG category.
MFIs, however, face challenges which prevent them
from extending housing loans. The challenges are
primarily due to the longer period of housing loans
(typically between five to seven years minimum, if
not more) as against usual micro loans of one to two
years duration and due to the larger amount of loan
compared to usual micro loans extended by MFIs.
Typically, a house, particularly in the urban areas,
will cost about `0.1 million, whereas MFIs extend
livelihood finance, between `10,000 to `35,000. If
they have to lend to a significant number of people,
the amount to be loaned has to increase substantially.
This can lead to problems for MFIs. Another problem
with the MFIs is of availability of finance and ensuring
regular collection of larger installments from the
borrowers. Recognising the importance of communitybased
financial institutions as delivery mechanisms
for housing finance to the financially excluded, the
NHB has initiated a housing microfinance programme
by way of financial assistance to the MFIs. The
programme is based on an integrated habitat and
partnership approach with customised product
intervention aimed at supplementing various other
financial sector interventions.
Private Sector Stakeholders
32. Today, technological innovations have transformed the conventional style of
trade and commerce. There are numerous examples which reflect that with
adoption of technology, the end-product can be highly improvised and made
affordable to all segments of customers. Some of the best examples would be
the rapid technological innovation in the mobile telephone industry, marketing
innovation in consumer non-durable sector, etc. It is high time that the real
estate sector also invests resources for more research and development to
enable construction of environment friendly, low cost houses. It is important to
realize that the terrain of our country, climatic conditions of regions, economic
conditions of people and the intensity of the problem changes as we traverse
across the country. A search for one technology fits all would not be viable and
practically feasible.
33. One model which could be considered and developed is the hub and spoke
model for enhancing rural housing construction. The ‘hub’ of the service could
be located in a district/taluka headquarters and the services into rural/interior
areas are provided by local rural centres i.e. the ‘spokes’. The hubs will be the
centre, say, for pre-fabrication of semi-finished structures for housing and skilled
labour and will provide men & material to the spokes. This will ensure scale of
economies in technologically innovative and homogenous low cost housing to
the rural centres.
National Housing Bank (NHB)
34. NHB was set up with an objective of channelising
long-term finance to individual households, thereby
proving the much-needed impetus to the housing
sector. NHB acts as a principal agency to promote
housing finance institutions both at local and regional
levels and also provides financial and other support
to such institutions. The year 2010-11 has been an
important year for the NHB as it had crossed `120
billion loan disbursements, of which approximately
50 per cent was for rural housing, during the financial
year. Since inception, NHB has been supporting the
housing finance companies and during the year 2010-
11, over 50 such companies had a portfolio of over
`1,100 billion2. One of its flagship projects is the
Golden Jubilee Rural Housing Finance Scheme which
aims at the rural households. The scheme offers a
platform for easier access to housing finance to enable
an individual in the rural area to either build a house or improve the existing house3. The initial success of
the scheme can be gauged from the fact that over 3
million dwelling units have been financed.
35. NHB is also playing a significant role in creating market infrastructure for
housing finance and has made efforts in plugging the demand supply gaps, particularly for the low and moderate income households in urban and rural
areas. It had led initiative in developing the secondary mortgage market and the
standards for securitisation market in the country. The Bank is also leading the
initiative for setting up a Government-sponsored Credit Guarantee Trust Fund
for low income housing in close collaboration with the Ministry of Housing, Govt
of India, and for setting up a Mortgage Guarantee Company in partnership with
other Internatial Financial Institutions.
Government/Government Bodies
36. The Government policies have remained geared towards alleviating poverty with
a host of direct intervention programmes. The early eighties was the period of
shift in the policy orientation from the exclusive focus on nutrition based
approach towards poverty to cover broader perspectives of providing affordable
housing to all. The Scheme of Affordable Housing in Partnership promotes
various types of public-private partnerships – of the government sector with the
private sector, the cooperative sector, the financial services sector, the state
para-statals, urban local bodies, etc. It has the potential to provide a major
stimulus to economic activities through affordable housing for creation of
employment, especially for the construction workers and other urban poor who
are likely to be amongst the most vulnerable groups in during the economic
downturns.
37. Government bodies can consider single window clearance mechanism for the
purpose of further simplifying the approval processes for low cost affordable
housing alongwith reconsideration of the taxation policies. The public agencies
and the state and local governments should work to bring efficiency in land
market, approval processes, provision of efficient infrastructure and egovernance
viz. introducing electronic record for land and bringing in more
transparency in the record of land and houses, etc. It will add good value if the
financing agencies can also connect into these developments and together drive
the reforms at the state and local levels. In order to meet the enormous needs of
the housing sector, short cuts through the subsidy approach are no longer
sustainable over the long period. As subsidy based approach cannot be
stretched beyond a point, a more viable and sustainable strategy has to be
evolved. There is, therefore, a need for having a market oriented mechanism to
meet the challenge of the affordable housing sector.
State Governments
38. In the entire process for creating an enabling environment for affordable
housing, the role of State Government is extremely critical. State Governments
may contemplate forging Public-Private Partnerships to ensure a fair return on
investment to the private land owners/developers through guided development
and availability of serviced sites for allotment to low income families at
affordable prices. Incentives and provision of infrastructure can induce private
sector entrepreneurs to invest in housing including that for the poor. It can
consider measures to control the spiralling increase of land prices and curb
speculative activities for developing land and also check unregulated and
environmentally damaging land development activities. Another aspect which
may be considered is the promotion of high density housing in selected areas in
cities through appropriate amendments to zoning and land use regulations. This may obviate the necessity of costly land acquisition and avoid high infrastructure
costs. State Governments may also revisit the current provision of tenancy
rights and promote rental housing by creating a balance between the interests of
the landowner and the tenant. This will pave the way for supply of rental housing
at affordable rents and act as an incentive for people to build houses for
themselves and for others.
Reserve Bank of India
39. The supportive policy of the Reserve Bank of India and enabling fiscal regime
has together contributed to the growth and expansion in the housing market. As
regulators of the banking system, it is, however, important for the Reserve Bank
of India to remain cautious against imprudent practices for short term gains. The
current focus of its regulations is to ensure orderly growth of housing loan
portfolios of banks. The policy orientation of the Reserve Bank, simply put, is to
ensure and promote inclusive growth without adversely impacting the
equilibrium of financial stability. Reserve Bank remains supportive of initiatives
of the stakeholders as long as the programmes of affordable houses for all do
not lead to structural damages to the financial eco-system.
40. Alongwith the Government, SEBI, Reserve Bank’s endeavors have been to
develop a deep and vibrant debt market including for mortgage securities in a
calibrated manner so as to ease financing pressures on the banks and also to
provide an alternate avenue for raising long term resources. Reserve Bank has
permitted investments by banks in mortgage backed securities subject to certain
conditions. We are also constantly reviewing existing policy framework including
those governing the priority sector lending to ensure that the bank credit to
these sectors remain growing, smooth and uninterrupted.
41. The Reserve Bank has been using pre-emptive
countercyclical provisioning and differential risk
weights – supplemented by varying loan-to-value (LTV)
ratios – to contain excessive credit growth to sectors
which show signs of risk build-up. In order to prevent
excessive leveraging, the Reserve Bank had advised
banks in December 2010 that the LTV ratio should
not exceed 80 per cent in respect of housing loans.
However, for small value housing loans, i.e., housing
loans up to `2 million, LTV ratio was prescribed at
a higher maximum level of 90 per cent. Further, the
risk-weight for residential housing loans of higher
amounts, i.e., `7.50 million and above, irrespective
of the LTV ratio, has been prescribed at 125 per cent
to prevent excessive speculation in the high value
housing segment.
42. In the recent past, it was observed that some
banks were following the practice of sanctioning
housing loans at teaser rates, i.e., at comparatively lower rates of interest in the first few years, after
which rates are reset at higher rates. This practice
raised concern as some borrowers may find it difficult
to service the loans once the normal interest rate,
which is higher than the rate applicable in the initial
years, becomes effective. It was also observed that
many banks, at the time of initial loan appraisal,
were not taking into account the repaying capacity
of the borrower at normal lending rates. Therefore,
in view of the higher risk associated with such loans,
the standard asset provisioning on the outstanding
amount had been increased from 0.40 per cent to
2.00 per cent with effect from December 23, 2010.
The provisioning on these assets would revert to
0.40 per cent after one year from the date on which
the rates are reset at higher rates if the accounts
remain ‘standard’. Since restructuring of an account is
normally indicative of some problem in the account,
it was decided in November 2008 that restructured
housing loans should be risk-weighted with an
additional risk weight, i.e., 25 percentage points over
the risk weights normally applicable to the account.
43. Although some of these prudential norms appear to be restrictive for growth of
the housing finance sector, it needs to be kept in view that they are essential for
sustainable and orderly development of the sector as they are meant to address
macro-prudential concerns of financial stability.
Way Forward
44. The desire for a safe and secure home is timeless and universal. The twin
problems of affordability and accessibility that impede the progress of housing in
our country need to be addressed on a sustainable basis. For this, it would be
desirable for the governments to withdraw from direct participation in the
housing and housing finance sector and instead they need to take on the role as
facilitators to create the enabling environment to encourage greater private
sector participation. 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. Steps, such as, digitization of
land records, linking of central regulations with state regulations, encouraging
credit bureaus, introducing mortgage insurance, allowing real estate mutual
funds and creating a favourable environment to facilitate foreign direct
investment in housing for genuine and needy customers will help stimulate the
housing finance sector.
45. Currently, the real estate sector is largely unregulated with consumers often
unable to procure complete information or enforce accountability on builders and
developers in the absence of effective regulation. In order to plug the gap, the
Central Government has proposed to establish the Real Estate Regulatory
Authority in each state with specified functions, powers, and responsibilities. The
objective is to ensure regulation and planned development in the real estate
sector. Once these authorities are established, they should act as the nodal
agency to co-ordinate efforts regarding development of the real estate sector
and render necessary advice to the appropriate government agencies to ensure
growth and promotion of a transparent, efficient and competitive real estate
sector and also establish resolution mechanisms for settling disputes between
the builders/promoters and the allottees/ buyers.
46. There is also a felt need for the institutions involved in the financing of housing
sector to consider developing segment specific credit products to enable more
people to afford a house. One such product could be savings induced home
loan or a home loan deposit. The willing consumers may be induced to generate a savings balance by way of monthly or periodic deposits. This will enable
creation of a track record for repayment of a future home loan product. Once the
customer reaches a threshold balance, the financial institutions can consider
sanctioning of a housing loan. The balance in the account could act as collateral
or the margin. The amount deposited every month would act as the base to
assess the repayment capacity of the customer for the purpose of calculating
the monthly repayment installments.
47. The credit risks originating in the housing sector, particularly low ticket housing
segment, should also be internalized through proper insurance schemes for
banks and other lenders. The various stakeholders should aim at timely
completion of projects, delivery of houses/flats to target segments without cost
escalations and with valid titles and all necessary clearances.
48. In short, a comprehensive and holistic approach involving easy availability of
land, accessible financing, supportive legal framework and innovative
technology is required for making housing affordable for all. I am sure that this
conference will generate meaningful discussions and pave way for innovative
thinking and policy inputs to make housing affordable and available to all.
|