CHAPTER 5 HOUSING FINANCE IN INDIA AND

CHAPTER 5 HOUSING FINANCE IN INDIA AND KERALA: AN EVALUATION The importance of housing sector as the engine of growth has been historically acknowledged in most of the developed nations of the world. In India, the housing finance business has assumed significance during the last 10 years, spearheaded by the keen interest evinced by the commercial banks in this sector. The growth potential further gathered momentum through continued fiscal and monetary fillips and budgetary provisions. The burgeoning middle class, increasing purchasing power, changing demographics and increasing number of nuclear families, scaling down of the real estate prices and a softer interest rate regime and traditionally low default rate resulting in low non performing assets as compared with the other sectors also enabled the housing finance sector to grow at a Compounded Annual Growth Rate (CAGR) of 32.15% during the last 5 years. The housing demands of various economic and demographic sections of the population are met by Housing Finance Companies (HFCs), Scheduled Commercial Banks (SCBs), and Primary Housing Co-operatives (PHCs) by way of their housing loan schemes. The SCBs have the largest network of branches and are also the largest mobiliser of savings in the country. Since housing finance becomes a part of the 40 per cent Priority Sector lending, it makes business sense for banks to provide home loans. Moreover, a favourable tax and regulatory regime, act as catalyst for doing business in this sector. Further, the earmarking of 3 per cent of incremental deposits of SCBs to finance housing activities has ensured availability of adequate funds for housing sector. 180

Table 5. 1 Housing Finance Disbursements by Various Institutions in India (Rs. in Crore) Lending Institutions 2000-01 2001-02 2002-03 2003-04 2004-05 Amount % to Total Amount % to Total Amount % to Total Amount % to Total Amount % to Total SCBs 5553 29.14 8566 35.91 23553 56.04 32816 60.43 50398 65.61 HFCs 12638 66.34 14614 61.25 17832 42.43 20862 38.42 26000 33.85 CHFSs 868 4.52 678 2.84 642 1.53 623 1.15 421 0.54 Total 19059 100 23858 100 42027 100 54301 100 76819 100 Annual Growth (%) Source: Annual Reports, NHB. 25.18 76.15 29.21 41.47 Over the past few years, the steady growth registered in housing finance disbursements indicates continued buoyancy in the industry. Table 5.1 reveals that the housing finance disbursements have shown a significant increase during the year 2004-05. The total disbursements of housing finance stood at Rs. 7,6819.00 crores registering an overall growth of 41.47 per cent. The dominant players in this industry continue to be SCBs (65.61 per cent) and HFCs (33.85 per cent). Cooperative banks and other co-operative sector institutions have developed their own niche in rural areas and have been catering to their markets extensively. 181

Figure 5.1 Housing Finance Disbursements 70 60 50 40 SCBs HFCs CHFSs 30 20 10 0 2000-01 2001-02 2002-03 2003-04 2004-05 Source: Annual Reports, NHB. According to Fig. 5.1 SCBs and HFCs are the most important providers of housing loans in India. The market share of Apex Co-operative Housing Federations has consistently declined in recent years. From 2000 to 2005, it fell from 4.52 to.54 percent. In order to increase the market share, the housing finance providers are competing with each other by offering very attractive terms to customers in the form of lower rate of interest, liberal collateral requirements, longer repayment period or a very high loan-to-value (LTV) ratio which at times goes up to or even beyond 100% of the value of the house including the cost of land. In recent years, the lending institutions also introduced floating rate products besides the fixed rate ones with the option available to the borrower for conversion against a nominal payment. Besides, the speedier processing and disbursement, efficient advisory services, waiver or reductions in associated up-front fees have also become common tactics for enhancing the market share. Thus, fierce competition has given rise to continuous innovation 182

in product design as well as processes, with the customers having a wide array of sophisticated products and a high standard of services. The institutional performance of these institutions has been influenced by more than just customer demand. Stricter NPA norms, rising interest rates and stiff competition in mobilizing low cost deposits, have all affected the supply side factors, which in turn has influenced the performance of these institutions in terms of volume and competitiveness. 5.1 INSTITUTIONAL FRAMEWORK FOR HOUSING FINANCE Institutional Framework for housing finance in India comprises of the following institutions: National Housing Bank Scheduled Commercial Banks Scheduled Cooperative Banks (Scheduled State Co-operative Banks, Scheduled District Cooperative Banks and Scheduled Urban Cooperative Banks) Regional Rural Banks, Agriculture and Rural Development Banks Housing Finance Companies State Level Apex Co-operative Housing Finance Federations Primary Housing Co-operatives 183

Figure 5.2 Institutional Framework for Housing Finance National Housing Bank Commercial Bank Co-Operative Bank Housing Finance Companies Apex Co-operative Housing Federation Primary Housing Cooperatives A brief account of the major institutions/companies/co-operatives and successful housing finance schemes are presented in the following sections. 5.1.1 National Housing Bank (NHB) National Housing Bank (NHB) was established in July 1988 to function as the apex body for the housing finance sector. It is wholly owned by the Reserve Bank of India, and has an authorized and fully paid-up share capital of Rs 450 crores. NHB s three primary responsibilities are to mobilise resources for the housing sector, promote the development of HFCs, and regulate the operations of HFCs. As a promoter, NHB provides financial support to HFCs and facilitates access to institutional credit. It provides refinancing to 46 HFCs and other entities according to a refinancing schedule whereby refinance rates are based on loan sizes. As a regulator, NHB sets prudential norms for HFCs based on required capital adequacy ratios, income recognition, asset classification, and acceptable levels of nonperforming assets. 184

Figure 5.3 Growth of the Total Assets of NHB 20000 18000 16000 Total Assets in Crore 14000 12000 10000 8000 6000 4000 2000 0 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Year The objectives of NHB are to promote a sound, healthy, viable and cost effective housing finance system to cater to all segments of the population by augmenting resources for the sector and channelising them for housing in order to make housing credit more affordable. NHB s promotional endeavours are also directed towards capacity building for the housing finance system besides enlarging the credit absorption capacity. The Bank has also been entrusted with the task of introducing new product /service features in the Indian mortgage market in line with international developments such as creation of a secondary mortgage market for residential mortgage backed securitization and mortgage credit guarantee. The National Housing Bank (NHB) has completed its seventeenth year of operation in 2004-05. Its total assets crossed the Rs. 18,000 crore mark during 2005 (see Fig.5.3). The National Housing Bank continued its support 185

and assistance in promoting a healthy housing finance market in the country. The financial assistance to the sector is steadily growing with the refinance disbursement during the year 2005 reaching an all time high of Rs.8,088.73 crore. Of this Rs. 3,536.16 crore i.e. 44 per cent of the total refinance disbursement was under the Golden Jubilee Rural Housing Finance Scheme (GJRHFS). As a measure of developing the market for securitisation, NHB also launched the Residential Mortgage Backed Securitisation (RMBS) under NHB s corporate guarantee. In its endeavour to provide housing for the poor, the Bank also started lending to Micro Finance Institutions (MFIs) ensuring that housing finance reaches the grassroots in the category where lending is feasible. Table 5.2 presents the financial performance of NHB during the last two years. Table 5.2 Financial performance of NHB (2003-2005) (Rs. in Crore) Type 2003-04 2004-05 1 Net owned fund 1656.78 1652.00 2 Disbursement 3297.38 8088.73 3 Total Assets 13107.51 18947.91 4 Profit before tax 155.46 77.63 5 Profit after tax 118.13 44.04 Source: NHB, 2005. 5.1.2 Role of NHB in Housing Finance 5.1.2.1 Refinance Disbursements The refinance schemes of NHB applicable to primary lending institutions (PLIs) was introduced in 1989 with uniform pricing and security requirements irrespective of risk perception or varying capability and credibility of the PLIs. This uniform policy, though justifiable from the 186

promotional point of view, especially in the nascent years of housing finance sector, would result in distortion in a more competitive environment, as it is tantamount to intervention. Figure 5.4 Share of Various Institutions in Refinance by NHB in 2004-05 0.47 27.48 HFC Bank Co-operatives 72.05 Source: Annual Reports, NHB. In February 2003, the NHB has introduced a Liberalised Refinance Scheme (LRS) applicable to Scheduled Commercial Banks and Housing Finance Companies. The introduction of LRS resulted in growth of refinance disbursal which reached the figure of Rs. 2709.72 crore in 2002-03, as compared to the previous year s figure of Rs.1024.80 crore resulting in a growth of 164.4 %. The financial assistance extended by the Bank during 2004-05, in the form of refinance, stood at Rs.7,500.04 crore, as against Rs.3,252.89 crore during the previous year, registering a growth of 130.6 per 187

cent (Table 5.3). Fig. 5.4 shows comparative position of disbursements under refinance to various categories of Primary Lending Institutions (PLIs) in 2004-05. Table 5.3 Refinance Disbursements by NHB (Rs. in Crores) 2001-02 2002-03 2003-04 2004-05 HFCS 705.33 1766.69 1845.86 2060.95 Banks 76.99 790.00 1275.50 5404.09 Co-operative Institutions 219.15 139.77 118.10 35.00 Gujarat Earthquake Scheme 23.33 13.26 13.43 -- Total 1024.80 2709.72 3252.89 7500.04 Source: Annual Reports, NHB. Table 5.4 Cumulative Refinance Disbursements of NHB up to 30th June, 2005 (Rs. in Crores) Institutional Category Housing Finance Companies Scheduled Commercial Banks Co-operative sector institutions 2002-03 2003-04 2004-05 Amount Amount Growth % Amount Growth % 7303 9164.87 25.49 11141.82 21.60 1232.42 2516.63 104.20 7920.72 214.70 1425.66 1543.76 8.28 1578.76 2.20 Total 9961.08 13225.26 32.77 20641.30 56.10 Source: Annual Reports, NHB. 188

As of June 2005, NHB had refinanced a total of Rs 20,641.30 crores for three categories of approved borrowers: HFCs, SCBs, and cooperative institutions. HFCs account for 54 percent of all refinancing; SCBs for 38 percent, and cooperative institutions for 8 percent. Table 3.6 indicates that the annual growth achieved by SCBs was the highest at about 215 per cent followed by HFCs (22 percent) and Co-operative Sector Institutions (2 per cent). 5.1.2.2 Project Finance During the year 2005, the Bank sanctioned finance for 12 projects. The disbursals under Project Finance aggregated to Rs.27.17 crore. Approximately 46,222 dwelling units have been constructed with this assistance. Cumulatively, till the end of June 2005, the Bank sanctioned 384 projects with a project cost of Rs.2,808.14 crore and a loan component of Rs.1,971.58 crore. Of these 384 projects, 228 projects were financed through the refinancing route and the remaining 156 projects were financed through the direct finance window. So far, the Bank has disbursed Rs.658.30 crore as project finance of which Rs.245.79 crore was disbursed as refinance, and the remaining Rs.412.52 crore as direct finance. The total number of dwelling units that have received finance from NHB is 1,99,445 and the number of plots that were covered for housing project development was 17, 936. 5.1.2.3 Golden Jubilee Rural Housing Finance Scheme The Golden Jubilee Rural Housing Finance Scheme (GJRHFS) was launched in August 1997 to commemorate the Golden Jubilee year of India s independence. This is a housing loan scheme without any subsidy element for areas with a population less than 50,000 as per the Census of India, 1991 and the Primary Lending Institutions (PLIs) are free to decide the terms and conditions of lending. The targets under the GJRHFS for the year 2004-2005 189

were enhanced to 2.50 lakh dwelling units from 2.25 lakh dwelling units in the previous year. The target was further sub-allocated amongst the various participating institutions. Table 5.5 shows details of the targets and the achievements under GJRHFS for various categories of institutions during 2004-05. Table 5.5 Institutional-wise performance under GJRHFS in the year 2005-06 (No. of dwelling units) Category of Institutions Target Achievement Banks 92250 74001 Housing finance companies 157750 184262 Others including Co-operative sector institutions -- 299 Source: Annual Reports, NHB. Total 250000 258562 5.1.2.4 Housing Finance to Micro Finance Institutions In its first initiative to support the housing needs of the Micro Financing Institutions (MFIs), the Bank disbursed a loan of Rs. 58.19 lakhs to an NGO viz. SPARC Samudaya Nirman Sahayak for construction of 147 flats for slum dwellers in Dharavi, Mumbai during 2004-05. The Bank also sanctioned its first loan to a Federation of Women Self Help Groups (SHGs), Sri Padmavathy Mahila Abyudaya Sangam at Tirupati for construction of 300 houses in slums at various places in Tirupati. Rs. 10.80 crore was sanctioned to SHARE Micro Finance Ltd., a Micro-Financing Institution based at Hyderabad, for the construction and up gradation of 4500 houses of women group members. 190

5.1.2.5 Residential Mortgage Backed Securitization During the year 2002-03, Reserve Bank of India issued notification assigning a risk weight of 50% for investments by Banks and Financial Institutions in Mortgage Backed Securities (MBS) originated by Housing Finance Companies registered and supervised by NHB, subject to fulfillment of specified conditions. Recognizing the potential of RMBS as a financial instrument and its role in linking the housing sector with the Capital Market, NHB has been working towards establishing systems and procedures for standardization of primary housing finance activities and documents in order enable a sophisticated secondary RMBS market. Accordingly, NHB has formulated a RMBS Policy and has been undertaking securitization transactions in accordance with the policy. Till June 30, 2005, NHB completed thirteen RMBS transactions amounting to Rs.763.26 crore originated by HFCs and SCBs.. During the year, NHB completed three issues of RMBS involving 2892 housing loans amounting to Rs. 99.33 crore originated by one HFC and fully wrapped with NHB s guarantee. These are the initial form of RMBS issues in India with the Guarantee of NHB conceptualised on the lines of the RMBS issued by institutions such as Fannie Mae and Freddie Mac of USA. The success of the issues of RMBS has significantly provided means to understand and address the various legal, regulatory, fiscal, accounting and other capital market related issues relating to such transactions, as also various policy issues for a healthy environment for such issuances (NHB, 2005). 5.1.3 Housing Finance Companies (HFCs) The banking institutions have entered the housing finance market with great vigour in the last few years forcing the housing finance companies to 191

reinvent their areas of core competence. This phenomenon has brought about significant qualitative change in the fabric of housing finance system in India. As a result of aggressive competition and gradual softening of the rate of interest, the HFCs are being forced to operate on the basis of a comparatively thinner spread. The coming years are expected to witness many mergers and consolidations in this segment of financial institutions which would eventually determine the future of HFCs. The key survival factors of a mortgage lender would depend on its ability to successfully manage the interest rate risk and maintain asset quality, to introduce and adopt technology advancement, to improve service range and quality while controlling the operating expenses. As on 30 June 2005, NHB had registered 46 HFCs in terms of the provisions of Section 29A of the National Housing Bank Act, 1987. Of these, 24 HFCs have been given the Certificate of Registration (COR) with permission to accept public deposits. The sources of funds of HFCs include public deposits, institutional borrowings (from banks etc.), refinance from NHB and their own capital. 5.1.3.1 Performance of Housing Finance Companies Mobilisation of Funds The paid-up capital of these HFCs (including the preference share capital which is compulsorily convertible into equity) increased from Rs. 2,941.31 crore to Rs. 3,148.68 crore registering a growth of 7.05 per cent. As a result of increase in the paid up capital, outstanding housing loans, which were Rs.59111.44 crore as on 31st March, 2004 increased to 70533.88 crore as on 31st March, 2005 (see Table 5.6) 192

Table 5.6 Important Financial Indicators of HFC (Rs. in Crore) Type Paid up Capital Free reserves Public Deposits 2001 2002 2003 2004 2005 Amount Amount Growth % Amount Growth % Amount Growth % Amount Growth % 1970.95 2322.04 17.82 2761.77 18.94 2941.31 6.50 3148.68 7.05 3934.70 4612.46 17.23 5476.73 18.74 6255.67 14.22 7152.17 14.33 8719.29 11268.18 29.23 12760.32 13.24 13534.71 6.07 12422.00 (-)8.22 Housing Loans 33249.80 41843.65 25.85 49237.97 17.67 59111.44 20.05 70533.88 19.32 Source: Trend and Progress of Housing in India, NHB. The total outstanding public deposits with the HFCs have decreased from Rs. 13,534.71 crore as on 31st March, 2004 to Rs. 12,422.00 crore as on March 31, 2005, recording a negative growth of 8.22 per cent. This is noteworthy as the growth rate has been on the downward since 2003. This has affected the cost of funds of the HFCs for whom sourcing funds at competitive rates has become a challenge. Housing Loans The aggregate outstanding housing loan of HFCs, which were Rs.33248,79 crore as on March 31, 2001 increased to Rs.70,533.88 crore as on March 31, 2005 recording a compounded annual growth rate of 20.68 per cent. Table 5.7 indicates that the loan in the term period above 7 years which formed 66.50 per cent of the total housing loans outstanding as on March 31, 2003 declined to 50.68 per cent as on March 31, 2005. This shows borrowers preference for shorter-term loans. 193

Table 5.7 Term-wise Housing Loans Outstanding by HFCs (%) Term of Housing Loan 2001 2002 2003 2004 2005 Upto 1 year 9.81 9.23 5.5 6.9 13.23 1 to 3 years 9.13 15.88 9.5 13.3 11.11 3 to 5 years 9.48 14.00 9.1 11.6 16.31 5 to 7 years 8.56 12.70 9.4 8.3 8.67 Above 7 years 63.02 48.19 66.5 59.9 50.68 Total 100 100 100 100 100 Source: Estimated from Annual Reports of NHB. Housing loans up to Rs. 3 lakh increased from Rs. 2,933.70 crore in 2003-04 to Rs. 4,578.49 crore in 2004-05. However in percentage terms, there was a minor fall from 27.70 per cent of the total housing loans disbursed in 2003-04 to 26.91 per cent of the total loans disbursed under this category in 2004-05. Housing loans above Rs.10 lakh increased from Rs.2,663.94 crore in 2003-04 to Rs.5,804.08 crore in 2004-05 and accounted for 34.12 per cent of the loans disbursed during 2004-05 ( Table 5.8). An important trend to be noted in the HFCs performance is shift in their housing loan portfolio, from small value loans to high value loans. This was strikingly seen in the year 2004-05. Disbursements of high value loans in 2004-05 were 118 per cent higher than the previous year. 194

Table 5.8 Size-wise disbursement of Housing Loans by HFCs (%) Size of Housing Loans (Rs.) 2001-02 2002-03 2003-04 2004-05 Less than 50,000 11.38 0.18 0.20 0.20 50,001 1,00,000 1.52 1.68 4.80 7.11 1,00,001 3,00,000 27.32 30.48 22.70 19.60 3,00,001 5,00,000 22 24.67 22.20 23.89 5,00,001 10,00,000 21.33 23.06 25.00 15.08 Above 10,00,000 16.45 19.93 25.10 34.12 Total 100 100 100 100 Source: Estimated from Annual Reports of NHB. 5.1.4 Scheduled Commercial Banks The National Housing & Habitat Policy, among other things, envisaged the development of a viable and accessible institutional system for the provision of housing finance wherein housing boards and development authorities would concentrate on acquisition and development of land and infrastructure with the financial system providing easy access to more affordable institutional finance for individuals for construction/buying of houses/flats. In this context, the banking sector, with its vast branch network throughout the length and breadth of the country, occupy a very strategic position in the financial system and is expected to play an important role in providing credit to the housing sector. One of the significant aspects of budding housing finance business in India in the last 5 years has been the increasing participation of the commercial banks. In the year 2002-03, the return on assets of the banking 195

sector witnessed a marked improvement driven by increases in all major income categories. The spurt in the retail and housing segments mainly boosted both lending and fee incomes. The year 2002-03 witnessed a sharp increase in housing loans, with a quantum rise to 6.1 per cent of non-food gross bank credit as on March 31, 2003, from 4.6 per cent as on March 31, 2002, reflecting several policy initiatives in this regard (RBI, 2003). In fact, banks have consistently exceeded the targets prescribed for providing housing loans during the last few years. Scheduled Commercial Banks (SCBs) have shown a robust growth in terms of credit flow to the housing sector during 2004-05. A large network and access to low cost retail deposits have helped them to offer home loan products at competitive rates giving stiff competition to the HFCs. Housing loans constitute 50 per cent of the retail loan portfolio of the Banks (see Table 5.9). The total housing finance disbursement by the SCBs during the year was Rs. 50,398 crore, registering a growth of 53.50 per cent (RBI, 2005). Table 5.9 Retail Portfolio of banks as on 31 st March 2005 Items Amount Outstanding (Rs. in Crores) % of the Total Housing Loans 1,34,653 50.43 Consumer durables 3810 1.43 Credit card receivables 8405 3.15 Other personal loans 120120 44.99 Total retail loans 266988 100.00 Source: Trend and Progress of Banking in India, RBI, 2005. 196

5.1.4.1 Operational Performance Housing Loan The spurt in housing finance by banking sector can be attributed to the facilitating role of the Reserve Bank of India through various policy pronouncements in pursuance of National Housing Policy of Central Government, which helped augmenting the flow of credit to housing sector. During last two years, the housing sector has emerged as one of the sectors attracting a large volume of bank finance. The current focus of RBI s regulation is to ensure orderly growth of housing loan portfolio of banks. Scheduled commercial banks are engaged in offering retail credit for housing on highly competitive prices and customer-friendly terms, supported by strong marketing efforts to enhance their customer appeal. Consequently, real estate lending by commercial banks experienced moderate to significant increases. The flow of credit (i.e. increase in outstanding credit or disbursements minus repayments) for housing loans in 2001-02 was Rs. 6203 crore; in 2002-03 it rose to Rs.12308 crore. Strikingly this was larger than the flow of credit from SCBs to all of agriculture, which was just Rs.10848 crore in 2002-03. The contrast is more even striking in March August 2003 when the flow of housing is more than double that of agriculture. However, in 2003-04, housing loans have been overshadowed by rapidly growing consumer loans for the purchase of cars and other consumer durables. 197

Figure 5.5 Housing Finance by Commercial Banks 40000 35000 30000 25000 20000 15000 10000 5000 0 Allocation Achievement 1999-2000 2000-2001 2001-'2002 2002-'2003 Source: Annual Reports, NHB. It is evident from the Figure 5.5 that every year since 1999-2000, the banking sector crossed the stipulated minimum allocation by a significant margin. Table 5.10 Population-Group wise Classification of Outstanding Housing Loans of Scheduled Commercial Banks (2001-05) (Rs. in Crores) Year Amount RURAL URBAN ALL INDIA % to total Growth % Amount % to total Growth % Amount Growth % 2001 2533.83 9.97 -- 22878.59 90.03 -- 25412.42 -- 2002 3159.87 9.63 24.71 29666.05 90.37 29.66 32825.92 29.17 2003 5386.77 10.98 47.24 43680.14 89.02 47.23 49066.91 49.48 2004 7712.09 9.04 43.16 77634.35 90.96 77.73 85346.44 73.94 2005 13024.21 10.27 68.89 113772.82 89.73 46.55 126797.03 48.57 Source: Annual Reports, NHB. 198

As can be seen from the Table 5.10, outstanding housing loan of the banking sector has grown by 49.46 per cent annually for the last 5 years to reach Rs.126797.03 crore at the end of March, 2005 as compared to the growth rate of 73.94% registered in the previous year. Though the outstanding housing loans in rural areas have increased from Rs. 7712.09 crore as on March 31, 2004 to Rs. 13,024.21 crore as on March 31, 2005, registering a growth of about 69 per cent, the share of rural housing loans in the total outstanding housing loans has marginally increased to 10 per cent as on March 31, 2005 from 9 per cent as on March 31, 2004. On the other hand, the share of urban areas in total outstanding housing loans continues to be steady at 90 per cent as on March 31, 2005. This clearly shows the rural urban divide that prevails in the housing finance sector in India. One significant trend that can be observed from the Table 5.11 is the growth of the share of outstanding housing loans in the last slabs above Rs. 5 lakhs, all of which registered a more than 100 per cent increase. The outstanding housing loans in the slab of Rs.2 lakh to Rs.5 lakh continued to account for the single largest share in the overall housing loan outstanding, accounting for 28.47 per cent of the total outstanding loans. There has been a remarkable increase in the outstanding loans in all the slabs except for the category of less than Rs. 25,000. The reduction has been in the range of 13 per cent. The share of outstanding housing loans in the slab of Rs.25,000 to Rs.2 lakh has declined to 13.49% in 2005 from 37.56% in 2001 whereas the share of housing loans in the slab alone 10 lakhs has increased to 34.87% in 2005 from 16.08% in 2001. It can be seen that the growth in outstanding housing finance has been robust on the higher loan slabs. This indicates an increase in the average loan size. This also establishes that scheduled commercial banks are increasingly finding favour with high value loans. 199

Table 5.11 Size wise Classification of Outstanding Housing Loans of Scheduled Commercial Banks (2001-05) (Rs. in Crores) Loan Slab Amount 2001 2002 2003 2004 2005 % to Total Amount % to Total Amount % to Total Amount % to Total Amount % to Total Rs. 25,000 and below 552.09 2.17 280.10 0.85 555.62 1.13 335.78 0.39 292.14 0.23 Above 25,000 and upto Rs.2 Lakhs Above Rs.2 Lakh and upto Rs. 5 Lakhs Above Rs. 5 Lakh and upto Rs.10 Lakhs 9543.99 37.56 10840.76 33.02 12874.06 26.24 16041.53 18.80 17110.97 13.49 9232.89 36.33 10979.69 33.45 15973.65 32.55 25931.05 30.38 36099.24 28.47 1996.41 7.86 4305.70 13.12 8242.24 16.80 18902.20 22.15 29086.9 22.94 Above 10 Lakhs 4087.04 16.08 6419.67 19.56 11421.34 23.28 24135.87 28.28 44207.78 34.87 Total 25414.42 100 32825.92 100 49066.91 100 85346.43 100 126797.03 100 Source: Annual Reports, NHB. 200

5.1.5 Co-operative Institutions The cooperative housing movement in India was started in the early 20th century to fulfill the desire of a common man of owning a decent home. The movement has made significant strides over the years and housing cooperatives have acquired a position of prominence as being the effective organizational form best suited for the supply, maintenance and management of housing stock in the country. The National Housing & Habitat Policy (NHHP) 1998 also envisaged forging strong partnerships between private, public and cooperative sectors to enhance the capacity of the construction industry to participate in every sphere of housing and habitat. The cooperative sector is expected to play a lead role, particularly in land acquisition, allotment of land and housing sites to encourage group housing and development of amenities in their projects, as envisaged in the National Housing and Habitat Policy. NHHP also advocated that cooperative sector should be given preference in allotment of land and house sites to encourage group housing by this sector. In the nine decades of its existence, it has made significant progress in providing affordable housing with easy accessibility to finance for lakhs of families. The concept of Co-operatives as an institutional mechanism for satisfying various needs of the people is premised on the principles of selfhelp as well as collective effort. At present there are 92,000 housing cooperatives at the grass-root level with a membership of about 65 lakh all over the country represented by 26 Apex Co-operative Housing Federations (ACHFs) at the state/ union territory level and the National Co-operative Housing Federation of India (NCHF) at national level. Although the housing cooperatives are playing a commendable role in mitigating the housing problems in the country; their performance is highly constrained by the fund shortage, land scarcity and legal bottlenecks. The laws relating to housing cooperatives need amendment to facilitate housing 201

cooperatives to take up more housing projects and it is proposed that a special chapter on housing cooperatives be added to the Cooperative laws in the States. 5.1.5.1 The National Co-operative Housing Federation of India The National Co-operative Housing Federation (NCHF) was established in 1969 as an apex organization for coordinating, guiding and promoting cooperative housing activities in the country. The cooperative housing structure consists of primary housing cooperatives at the grass root level and Apex Cooperative Housing Federations (ACHFs) at the state level. ACHFs at the state level are affiliated to NCHF, which looks after their growth strategies, policy formulations and evolving housing programmes besides inter-facing with various institutions to channel finances for these societies for onward lending to the ultimate borrowers. In addition, NCHF also helps the ACHFs in improving their financial, organizational and technical capabilities.at present there are 26 Apex Cooperative Housing Federations (ACHFs) which are currently members of NCHF. During the year 2005, NCHF took a number of initiatives for increasing the flow of funds to this sector at affordable rates. Besides, it also organized the national level Cooperative Housing Congress, drafted the Model Cooperative Housing Societies Law and also completed a study on Assessment of Housing Stock in the Country and the Report on Capacity Building of ACHFs. 5.1.5.2 Apex Co-operative Housing Federations The primary housing co-operatives functioning at the grass root level are supported by 26 ACHFs all over the country with a membership of over 65 lakhs. These ACHFs represent about 92,000 housing co-operatives all over the country out of which, about 31,000 housing co-operatives are affiliated to state level ACHFs for getting financial assistance. The rest of the cooperatives are (i) those that get finances from other sources viz. HDFC, LIC, 202

Commercial Banks etc., (ii) those that have not yet started construction activities and (iii) those which have repaid their loans fully. The ACHFs obtain loans from the financial institutions for onward lending to their affiliated primary housing cooperatives for construction of dwelling units for their members and some of them are also providing direct loans to individuals. The ACHFs have so far disbursed a loan of Rs. 9702 crore to primary housing co-operatives for construction of dwelling units for their members. The co-operatives in turn have constructed 23.28 lakh houses 21.69 lakh units completed and 1.59 lakh units in progress. 5.1.5.2.1 Operational Performance Mobilization of Resources Table 5.12 presents the details of resource mobilisation by the ACHFs during the last five years. LIC, which was the major source of funding for ACHFs in the initial years, now holds lower shares in the funds of the ACHFs. The share of LIC in total borrowings has shown a declining trend and stood at 40.50 per cent. It has decreased from 49.83 per cent in 1999-00 to 41.40 per cent in 2002-03. While the share of HUDCO in total borrowings has shown a marginal decline from about 20.68 per cent in 1999-00 to 19.10 per cent in 2003-04, the share of Banks has increased from 13.15 per cent to 19.90 per cent during the same period. Similarly, the contribution from State Governments in the overall borrowings of ACHFs has increased from 0.86 per cent 1999-00 to 3.00 per cent in 2003-04. Over the period 1999-00 to 2003-04, the contribution of NHB to total borrowings by ACHFs has increased marginally from about 7.73 to 9.10 per cent. Though the total borrowings of ACHFs have increased to Rs.81.34 crores in 2003-04 from Rs.5691 crores in 1999-00 the rate of growth has declined to 5.26% from 13.02%. 203

Table 5.12 Borrowings of Apex Co-operative Housing Federations (Cumulative) (Rs. in Crores) 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Amount % to Total Amount % to Total Amount % to Total Amount % to Total Amount % to Total LIC 2835.71 49.83 2985.65 46.42 3121.81 44.4 3198.81 41.4 3297.77 40.5 NHB 440.12 7.73 483.06 7.51 595.06 8.5 706.56 9.1 738.21 9.1 HUDCO 1176.71 20.68 1449.42 22.54 1514.84 21.6 1539.78 19.9 1557.34 19.1 State Government 48.97 0.86 50.13 0.78 50.13 0.7 229.97 3.0 247.43 3.0 Deposits 185.77 3.26 156.63 2.44 130.59 1.9 115.09 1.5 185.33 2.4 Banks 748.6 13.15 982.00 15.27 1184.17 16.9 1448.44 18.7 1620.50 19.9 Debentures 142.60 2.51 145.26 2.26 142.60 2.0 142.60 1.8 142.60 1.8 Others 112.28 1.98 179.57 2.78 283.40 4.0 346.25 4.6 345.10 4.2 Total 5690.76 100 6431.72 100 7022.50 100 7727.50 100 8134.28 100 Annual Growth % 13.02 9.19 10.24 5.26 Source: Annual Reports of NCHF. 204

Deployment of Resources Table 5.13 Lending Operations of Apex Housing Federations (Rs. in Crores) Type 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Loan sanctioned 705.33 842.81 730.12 672.99 595.45 Loan disbursed 700.86 867.72 677.58 641.48 623.08 Source: Annual Reports of NCHF. Table 5.13 presents sanctions/disbursements of housing loans by ACHFs during the last five years. Both the loans sanctioned and disbursed show a declining trend over the last five years. The average loan per dwelling unit for all ACHFs was about Rs.1.14 lakh in 1999-00, which increased to Rs.1.88 lakh during 2003-04 (see Table 5.14). Tamil Nadu accounts for about 34.72 per cent of the housing loans disbursed by all ACHFS during 2003-04 followed by Kerala whose share stood at 18.66 per cent. Punjab s share in total disbursement stood at 18.46 per cent during the year. These three states together account for more than 70 per cent of the housing loan disbursements by ACHFs during 2003-04. 205

Table 5.14 Housing Loans Disbursed and Units Constructed 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Units constructed/ financed Loans Disbursed (Rs. in crores) 61308 55368 37877 32481 33165 700.86 867.72 677.58 641.48 623.08 Per unit loan size (Rs. in Lakhs) Source: Annual Reports of NCHF. 1.14 1.57 1.79 2.0 1.88 The quantum of cumulative sanction of housing loans by the ACHF increased to Rs.9,601.8 crore during 2004-05 while cumulative disbursal rose to Rs.9,182.40 crore. Cumulatively, the financial assistance provided by ACHFs till March 31, 2004 enabled construction of 23 lakh houses. 5.1.5.3 Refinance Assistance from NHB The refinance granted by NHB to the co-operative sector institutions amounted to Rs.118.10 crore (3.63 per cent of the total refinance disbursements) during the year 2003-04 as against Rs.139.77 crore (5.16 per cent of total refinance disbursements) during the year 2002-03. The cumulative refinance to this sector registered a growth of 8.28 per cent during 2003-04 and stood at Rs.1,543.76 crore (11.67 per cent of total), as on June 30, 2004. The refinance availed by the institutions in the cooperative sector has declined during the year 2004-05 (see Table 5.4). Similarly the percentage of cumulative refinance for this sector to the total refinance disbursements by NHB has also shown a declining trend. 206

5.2 HOUSING FINANCE IN KERALA 5.2.1 Housing Scenario The housing situation in Kerala is characterised by a large number of owner occupied houses and most modern palace like houses as well as considerable number of dilapidated houses. Cash remittances from abroad, which form 9.3 per cent of the State Domestic Product (SDP) (ER, 2000) triggered demand for housing in Kerala. The annual remittances from Middle East was around Rs. 3530 crore. A significant share of these remittances goes to construction of residential houses. The resultant excess demand for housing fuelled a housing boom in Kerala. The annual compound growth rate of new construction shot up from the rate of 0.85 per cent to 5.8 per cent. The share of the construction sector in the Gross Domestic Fixed Capital Formation of Kerala during the last two years of the 1970s was more than 90 percent (Gopikuttan, 1988) Kerala has witnessed high growth in housing investment and construction during the last 30 years. The average growth of houses was 16 per cent during the decade 1991-2001 as against the population growth of 9 per cent. The average annual housing investment in the rural panchayats in Kerala during 1993-1998 was estimated at about Rs. 25 lakhs and the average investment per household was about Rs. 5500. It is roughly equivalent to about 10 per cent of the total income of the rural households as against all- India percentage of 2.1 per cent (ER, 2004). However, housing boom of mid- 1970s sparked spiralling price rise for land and other inputs for the construction of houses. As a result the hopes of the poor to have a roof over their heads have been shattered. What is disturbing about the Kerala experience is that both the housing boom and the support led security strategy seem to have failed to satisfy the 207

needs of the weakest sections of the society. It is observed that those social, economic, and ethnic groups depending on the primary sector for their livelihood are living in extremely poor quality houses. Their habitats are characterised by overcrowding, lack of basic amenities and facilities such as drinking water and sanitation. The rich minority in the villages lives, on the other hand, in luxurious houses with all built-in facilities and conveniences comparable to the standards observed in urban centers of advanced market economies (Gopitkkuttan, 2002). 5.2.2 Housing Status The state s accomplishment in human and social sector development is reflected in the general housing situation. Housing situation in Kerala is better than the rest of India. While 75 per cent of the households in Kerala were living in pucca houses, it was only 63 per cent at the national level. As regards the rural households, the percentage of people living in pucca houses in Kerala was 66 per cent while it was only 44 per cent at the all India level. However, not much progress had been registered in Kerala as against all India level on urban households living in pucca houses. Table 5.15 shows the details about households living in kucha, semi pucca and pucca houses in Kerala and all India during 2003 (NSS Report No. 490, 2003). The Census 2001 reveals that on an average, a house in Kerala has three rooms while the all-india average is only two. 208

Table 5.15 Type of Dwelling Units in Kerala KERALA (%) INDIA (%) Rural Urban Rural Urban Kacha 9.20 4.70 21.20 4.80 Semi Pucca 25.10 11.30 34.90 13.40 Pucca 65.70 84.00 43.90 81.70 Total 100 100 100 100 Source: NSS Report No.490, 2003. As regards ownership of houses, 86 per cent of the households in Kerala are staying in their own houses; it was only 78 per cent at the all India level. Though there was not much gap on ownership of living houses in rural Kerala and rural India, the gap is much wider in urban areas. While 80 per cent of households in urban Kerala were living in their own houses, the position of it at the all India level was only 62 per cent (see Table 3.18). Table 5.16 Occupancy Status of Dwelling Units KERALA (%) ALL INDIA (%) Rural Urban Rural Urban Owned 93.5 79.5 93.9 62.1 Hired 3.9 16.5 3.8 32.5 Others 2.6 4.0 2.3 5.4 Source: Economic Review, Govt. of Kerala, 2004. 209

5.2.3 Housing Shortage Housing shortage is the gap between the total demand for and supply of residential units in an economy. But it is not ideal to simplify the housing gap as a mere demand-supply gap. Housing gap may arise due to many reasons. The phenomenal growth of population, spiralling price rise for land, building materials and wage rates of building labour, rapid urbanisation, inclination towards nuclear families, poverty, housing finance gap, scarcity of land etc. are the most important reasons for the housing shortage. As per the Census 2001, Kerala has a population of 318.39 lakh with a decadal growth of 9.42 per cent. Of the total population of Kerala, 74 per cent live in rural areas. The density of population in Kerala is 819 persons per sq.km. against 324 persons per sq.km. at all India level. Kerala s population density, which was 134 persons per sq.km in 1881, has gone up almost 6 times. There are 93.56 lakh houses in Kerala. Out of this 86.25 lakh are occupied and 7.31 lakhs are vacant. Of the occupied houses 64.95 lakh are used for residence (ER, 2003). According to the Survey on Housing and Employment in Kerala (1980), out of 40.66 lakh houses listed, 4.39 lakh (10.8 percent) houses were not older than two years. A sizeable share of these new houses might have come in the place of old houses i.e; replacing the old stock. Number of occupied residential houses in Kerala has registered a sharp and steady increase after 1951. The decadal growth rates peaked during the period since 1961. The net addition to the stock during 1971-81 was about 25 percent. Further it increased to 27 percent during the decade between 1981and 1991 (ER, 2004) 210

Table 5.17 Households, Housing Stock and Housing Shortage in Kerala and India Households Housing stock Housing shortage 1991 2001 1991 2001 1991 2001 Kerala (Lakhs) 55.13 65.95 54.59 65.32 0.54 0.63 India (Million) 160.6 20.92 129.60 187.10 31.00 22.10 Source: Economic Review, GOK, 2004. Table 5.17 reveals that there was shortage of 63000 housing units in 2001. As per Census 2001 the number of dilapidated houses was 5.33 lakh. Taking into account 4 lakh houses required for newly formed households and 2.3 lakh houses which require major repairs, total houses required cumulatively during 2005 was assessed at 11.63 lakh. It is paradoxical that 7.31 lakh houses are unoccupied when there is a severe shortage of housing in the State. 5.2.4 Government intervention in the housing sector in Kerala State intervention in the housing sector had begun in Kerala from the 1950s; till 1970, it was confined to implementation of schemes sponsored by the central government; from the beginning of the 1970s, the central government transferred their housing schemes to the State governments. The government of Kerala introduced several novel programmes of intervention in the housing sector. The One Lakh Housing Scheme implemented in 1972 was the first of its kind. It was designed to provide permanent dwelling for the landless agricultural labour households that had not received homesteads under the Kerala Agrarian Relations Act. The government implemented the scheme with generous support from voluntary organisations. This programme implemented with participation of local inhabitants, political parties and 211

social and cultural organisations became popular and kindled desire in the hearts of all the houseless poor to become house owners (Gopikkutan, 2002). There are several public and private agencies supporting housing sector in Kerala. These agencies are involved in financing housing, developing sites and services, evolving cost-effective designs, and monitoring implementation. The government agencies are mainly funding the housing for the poor in the state. Kerala State Housing Board, Kerala Police Housing and Construction Corporation Limited, Rural Development Department, Fisheries Department, SC/ST Departments, Sainik Welfare Department, Local Self-Governments, and Kudumbasree are the major government agencies involved in the housing development in the State. The Kerala State Housing Board (KSHB) is the premier institution engaged in housing activities for the poor as well as others. Table 5.18 Houses Assisted by Government Agencies (1998-2005) Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Houses (No.) 128097 135068 262233 41699 62746 44756 52709 % to Total 81.91 80.28 86.06 50.80 47.10 34.54 34.00 Annual Growth (%) - 5.44 94.15-84.10 50.47-28.67 17.77 C A G R -13.77 Source: Economic Review, GOK, 2005. During the seven years (1998-99 to 2004-05) these agencies/ departments have provided assistance to construct 7,27,308 houses. Out of 52709 houses constructed during 2004-05, 43291 (82%) houses were assisted by Rural Development Department under Indira Awaz Yojana. Since 1998-99 housing production by government agencies has shown an upward trend and it jumped to 262233 in 2000-01, registering a record growth of 94 per cent. However, it shrunk to 41699 in 2001-02, recording a negative growth of 84 212

per cent (see Table 5.18). While the share of government in providing residential houses declined markedly from 82 per cent in 1998-99 to 34 per cent in 2004-05 the share of market based housing agencies has risen from 18 per cent to 66 per cent over the same period. This implies that the government is slowly withdrawing from the onus of providing shelter to the poor. This also implies that, in future the state would play the role of facilitator rather than provider of houses to the poor. It is irony that even after the implementation of government supported popular housing programmes like One Lakh Housing Scheme and Indira Awas Yojana 8 per cent of the families in Kerala live in dilapidated houses against 5.6 per cent at all India level. Government programmes of support to the poor for housing seem to have failed to give them houses to the extent or of the types required. However, the public housing schemes showed impressive performance during the past two decades in terms of the magnitude of investment and physical achievements; yet, they could not make even a dent in the housing problems of the poorest sections in the rural areas (Gopikkutan, 2002). The results of the analysis corroborates with the above observation by revealing that the investment in the public housing scheme by the state govt. has declined sharply over the years. 5.2.5 Housing Finance by Agencies other than Government Table 5.19 provides a broad snap shot of houses financed by three major housing finance providers (other than government agencies/ departments) in Kerala. The figures in Table 5.19 suggest that the rate of new house construction is relatively high during 1998-2005. The table shows that in 2004-05 houses financed by these agencies in Kerala amounted to 1,02,640. Of this Scheduled Commercial Banks (SCBs) financed 72.40 per cent of houses. 213

Agencies Housing Finance Companies Scheduled Commercial Banks Primary Housing Cooperatives Table 5.19 Houses Financed by Various Agencies 1998-99 1999-2000 2000-01 2001-02 20002-03 20003-04 2004-05 Houses % Houses % Houses % Houses % Houses % Houses % Houses % 6679 23.61 6641 20.00 6574 15.47 6006 14.87 9034 12.82 7998 9.43 4928 4.80 3538 12.51 6565 19.79 10099 23.77 8686 21.51 40620 57.63 54454 64.21 74327 72.42 18069 63.88 19972 60.21 25815 60.76 25691 63.62 20828 29.55 122356 26.36 23081 22.78 Total 28286 100.0 33170 100.0 42488 100.0 40383 100.0 70482 100.0 84808 100.0 102336 100.0 Source: Economic Review, GOK, 2005. 214

According to Table 5.19, SCBs is the most important provider of housing finance in Kerala. This is due to their rural presence and focus on retail lending. The share of co-operative housing finance societies represented by housing federation has consistently declined in recent years. Its share fell from 64 per cent to 23 per cent. It seems that specialisation in housing finance provides an obstacle to achieve sufficient revenues for these institutions. Moreover, the low interest rates have led to heavy losses at the bottom line of the most of the co-operative societies. However, in general commercial banks and cooperative housing finance societies dominates housing finance market in Kerala. Housing finance companies are slowly advancing in the state. The biggest agencies in private sector are HDFC and ICICI. They focus on higher income groups and try to attract them with a wide array of sophisticated products and high standard services. Year 1998-99 Table 5.20 Houses Financed By HFCs 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Houses (No.) 6679 6641 6574 6006 9034 7998 4928 % to Total 23.61 20.00 15.47 14.87 12.82 9.43 4.80 Annual Growth (%) - -.56-1.008-8.64 50.42-11.47-38.38 C A G R -4.93 Source: Economic Review, GOK, 2005. Table 5.20 shows the operational performance of Housing Finance Companies (HFCs) in terms of number of houses assisted by them in Kerala. As is evident from the Table No. 5.20 the performance is not satisfactory. The total number of houses financed by HFCs shows a downward move except during 2002-03, when it grew by 50 per cent. The total number of houses financed by HFCs has declined from 6679 in 1998-99 to 4928 in 2004-05, recording a negative CAGR of 4.93 per cent. 215