Housing Finance The Way Forward
Silver Jubilee Year 2012-13
Keynote Address
Housing Finance The Way Forward
by
Dr. C. Rangarajan
Chairman
Economic Advisory Council to the Prime Minister
July 9, 2012
National Housing Bank
New Delhi
Housing Finance The Way Forward
by
Dr. C. Rangarajan
Chairman
Economic Advisory Council to the Prime Minister
It is a pleasure for me to be speaking to you on this important
occasion that commemorates the Founders Day as well as the Silver
Jubilee year of the National Housing Bank (NHB). I was touched when
Mr. Verma came to my office to invite me to this function, since
National Housing Bank holds a special place in my heart. He
reminded me that I had headed the Working Group set up under the
Seventh Five Year Plan which recommended the establishment of an
apex institution for the housing finance system in the country and
that institution came to be the National Housing Bank. It is indeed
very gratifying to see the progress made by NHB in fulfilling its
mandate to promote appropriate financial institutions to provide
housing finance and to create a vibrant housing market.
Soon after the NHB was set up, the Indian economy entered a new
phase, as it prepared to transit from a regulated regime to a
liberalized and market-based system. With the on set of financial
sector reforms, new challenges were faced, particularly by those
institutions which had been newly set up. They had to cope with a
paradigm shift. I am happy that NHB met those challenges fairly and
squarely both as a regulatory and supervisory body as well as a
developmental financial institution for the housing sector. Let me
congratulate the NHB, its management and staff, past and present,
on their achievements.
Over the last 25 years, there has been a veritable revolution in
housing finance in India. The formal institutional funding for
housing in 1982-83 was Rs.1,071 crores; in 2010-11 the
corresponding figure was Rs. 1,75,000 crores. In the last five
years, the housing finance portfolio of banks and housing finance
companies has expanded at a Compound Annual Growth Rate of 15.9 per
cent. Access to housing finance has thus been considerably widened.
Housing loans are available at all the metropolitan, urban and
semi-urban branches of banks and in almost all branches of housing
finance companies.
No doubt, government and RBI policies have been supportive. Tax
concessions for housing, availability of land at below market rates
for sections of urban dwellers and favourable regulatory treatment
of housing loans by RBI as distinct from loans to commercial real
estate have given major fillip to institutional housing
finance.
At any milestone in the life of any entity, it is customary to
do stocktaking look back at the past at successes and failures and
identify the road ahead. I am sure NHB and its Board of Directors
would have done this exercise. In this connection, it is useful to
compare NHBs achievements which are numerous and well acknowledged
with the objectives originally envisaged by the High Level Group
which recommended the setting up of NHB in 1987. The Group
envisaged broadly five main functions for NHB.
First, to promote new housing finance institutions (HFIs)- some
with countrywide remit and some with local jurisdictions;
Second, to regulate the working of the housing finance
institutions and coordinate their activities, as also those of
other agencies in the housing field;
Third, to extend financial support to the housing finance
institutions at the national/regional/local level including apex
cooperative housing finance societies;
Fourth, to formulate policies relating to mobilization of
resources and extension of credit for housing including creation of
new instruments of savings linked to housing; and
Fifth, to play a facilitative role in identifying and removing
various impediments legal, fiscal, physical, technical,
environmental, to the active involvement of the household sector in
deploying their savings in housing .
A broad brush scanning of the housing finance field reveals a
substantive track record of NHB in discharging the above functions.
The number of housing finance institutions registered with NHB has
grown from an almost negligible number to 52 currently. I am happy
to note that these intermediaries are spread across the country and
are quite diverse in their housing finance activities. It should be
a matter of satisfaction to NHB as a regulator that none of the
registered housing finance companies went into distress even at
times of economic slowdown. NHB has also done well to provide
financial support to HFIs and even commercial banks in times of
need, in the form of refinance against the housing loans that the
HFIs have generated on their balance sheet. NHB set up the Rural
Housing Fund in 2009 to give an impetus to rural housing and has
been steadily enlarging its corpus.
NHB has also acquitted itself commendably in its facilitative
role be it the support to Government and RBI in policy formulation
and modification or the various market infrastructure building
measures such as the setting up and management of the Central
Electronic Registry of Mortgages, or its most recent initiative,
which I understand has been recently launched, viz., a Mortgage
Guarantee Company. These activities contribute to the widening and
deepening of the housing finance market.
While looking at the growth and developments in the housing
finance market, we should be sensitive to the housing needs of the
lower segment of the population where government support continues
to be relevant. A judicious mix of market and state support will
serve this segment effectively. Also, in general, pro-active and
efficient policies in the real sector dealing with land,
infrastructure, approvals, stamp duty and registration, building
materials and technology will generate all round confidence of
investors and credit institutions.
Housing is one of the most important segments of the economy due
to its backward and forward linkages and interrelationships with
other sectors such as manufacturing and services. Housing
activities not only generate employment opportunities but also add
to capital formation. Improved levels of housing have an overall
positive impact on the human resource quality of the country. A
conscious national policy of maximizing home ownership in the
country will certainly depend on the depth and stability of the
mortgage market. Thus, in a country such as USA, UK and Western
Europe where home ownership levels are very high, the mortgage
markets have been wide and deep. It is ironical in a sense that
precisely the mortgage markets in these countries are the ones that
were responsible for triggering the current global crisis. However,
we need to draw appropriate lessons from the sub-prime mortgage
market crisis of the advanced countries. There was an
indiscriminate growth of housing loans as the term sub-prime
indicates. The expansion of the mortgage markets was sustained, so
long as interest rates remained low and housing prices continued to
rise. But once this phenomenon came to an end, the mortgage markets
collapsed. But this would have remained a purely a mortgage market
crisis, had it not been for the fact that these mortgages were
securitized and sold as investment grade products. With the
emergence of the housing crisis, these products became suspect. The
mortgage market crisis spread initially to all the financial
institutions which held these securitized products in their
portfolio and eventually to the rest of the financial system. Once
again it is difficult to fault with securitization as a means of
mobilizing resources. What was wrong to start with was loaning to
borrowers whose income and net worth did not warrant the grant of
such loans. What is clearly needed is a balance between regulation
and innovation. Too little regulation may lead to instability but
too much of it can come in the way of innovations which are badly
needed. As far as housing market in our country is concerned, we
need to be imaginative and innovative and at the same time the
regulatory framework must be prudent. If the normal precautions in
the form of sufficient diligence, comprehensive appraisals and
conservative valuations are taken, there is no reason why loans
should go bad.
The importance of customer protection and satisfaction in
mortgage lending cannot be overemphasized. The mortgage lenders
should strive to take all possible measures to improve the level of
transparency, by disclosing all terms and conditions, not imposing
any hidden charges / conditions, offering a fair treatment to the
customers, as also ensuring that the customers are aware of the
exact implications of the transaction and of its terms and
conditions. This will lead to increased customer confidence, boost
the goodwill of the lenders and add to the vibrancy in the
markets.
As I mentioned earlier, housing to very low income groups will
need some States support. In this context, one tends to ask the
question, Is the demand for housing finance at reasonable terms
fully met for the salaried class in the public and private sectors?
With appropriate coordination and assistance from the State
governments, the aspirations of a large number of Government
employees to acquire homes can be fulfilled. Similarly such a
possibility exists in the organized private sector. NHB must take
this as a priority issue. I would also encourage NHB to device
innovative schemes particularly in the mobilization of households
savings for housing. Apart from tapping households savings, the
scope for revisiting securitization of the housing loans in the
light of Basle framework keeping in view considerations for the
financial stability may also be looked into by NHB.
The housing sector has potential to contribute greatly to the
long term growth and development of the economy, both as a
stimulant and as an engine of growth. A responsive and meaningful
regulatory regime and complimentary government policies are keys to
a sustainable long term growth of the housing sector. A house as an
asset transcends generations and provides benefits beyond mere
financial returns. It improves the quality of living and directly
or indirectly contributes to enhancement in earning capacity. Home
ownership still remains at a low level in India. The goal of
Affordable Housing for All is what we must seek to achieve. NHB can
play both a catalytic and a direct role in this respect. I once
again congratulate NHB and its staff on this happy occasion and
wish them well in their future endeavours.
