HOUSING AND HOUSING FINANCE

International Conference on Growth & Stability in Affordable Housing MarketsNHB & APUHFV. S. Rangan, Executive DirectorHousing Development Finance Corporation LimitedJanuary 30, 2012Country Highlights: India

COUNTRY HIGHLIGHTS*India remains the second fastest growing economy after ChinaIt took 60 years after independence to reach US$ 1 trillion in 2007 India will be a US$ 2 trillion economy by 2013-14 Expected to be a US$ 4 trillion economy before 2020

India is a domestic and consumption driven economyConsumption accounts for 70% of Indias GDPIndia is more insulated from global markets compared to export oriented economies

Services sector contributes close to 60% of GDPLast 10 years have seen incremental but valuable changes Greater stabilisation; Strengthening of the regulatory environment; and The world recognised Indias potential

Market Scenario High demand growth driven by:Improved AffordabilityRising disposable income Tax incentives (interest and principal repayments deductible)Affordable interest rates Increasing UrbanisationFavorable Demographics60% of Indias population is below 30 years of ageRapid rise in new households owing to nuclear families as against jointHousing shortage estimated at 24.7 million units Rural:14.1 million units, Urban:10.6 million units (Census Report)

DRIVERS OF THE MORTGAGE MARKET IN INDIA*

RAPID URBANISATION *

Urbanisation Population2011: 31%2030(P): 40%

Number of cities with population >1 million2011: 53 cities2021(P): 75+ cities

Housing the urban population is challengingGrowth in urbanisation has outpaced the ability to provide adequate housing and urban infrastructure

McKinsey estimates that Indian cities will require US$ 1.2 trillion of additional capital investment by 2030.Source: Census of India

Chart1

12

23

35

53

75

Cities with a million plus population

Cities with a population > 1 mn

Sheet1

Cities with a million plus population

198112

199123

200135

201153

2021 (P)75

To resize chart data range, drag lower right corner of range.

MORTGAGES AS A % OF GDP

*

Chart1

0.01

0.02

0.03

0.06

0.09

0.17

0.2

0.26

0.29

0.32

0.39

0.41

0.814

0.876

Column1

Sheet1

Column1

Pakistan1%

Indonesia2%

Bangladesh3%

Sri Lanka6%

India9%

Thailand17%

China20%

Korea26%

Malaysia29%

Singapore32%

Taiwan39%

Hong Kong41%

USA81%

UK88%

LOW MORTGAGE PENETRATION IMPLIES ROOM FOR GROWTHMortgage to GDP ratio currently estimated at 9%; compared to 2% in 2002Mortgages comprise the largest component in banks retail portfolioMortgages have grown from 1.5% of banks advances to 10% over the last 10 yearsBCG-IBA Report estimates that outstanding mortgages will increase 8 fold from Rs. 5 trillion currently to Rs. 40 trillion by 2020.

*Source: BCG-IBA Report, HDFC estimatesMortgage to GDP ratio projected at 20% by 2020

Chart1

0.02

0.04

0.09

0.11

0.14

0.17

0.2

Mortgage as a % of GDP

Mortgage as a % of GDP

Sheet1

Mortgage as a % of GDP

20022%

20064%

20099%

2012P11%

2015P14%

2018P17%

2020P20%

BANKS V/S HFCs*

BanksKey PlayersHousing Finance Companies (HFCs)

Reserve Bank of IndiaRegulatorNational Housing Bank

Access to low cost funds via current/saving accountsAdvantagesDedicated players, better customer serviceExtensive branch networkLower operating costsHigh operating costsDisadvantagesSmaller branch networkMandated priority sector requirements, maintenance of cash reserve ratio & high statutory liquidity ratioHigher capital adequacy ratio

MORTGAGE FINANCE: KEY PLAYERS *Major PlayersBanks Housing Finance Companies (HFCs)Banks became major players in the mortgage market only from the late 1990sAs per the ICRA Report on housing:Market share in FY11 Banks 69%HFCs 31%Top 3 players dominate the market combined share of 48%Asset quality for HFCs and banks have been goodMost banks and HFCs target customers in the formal sector, but a few new players are focusing on the informal sector

Source: ICRA

Chart1

0.740.26

0.750.25

0.750.25

0.730.27

0.730.27

0.70.3

0.690.31

Banks

HFCs

Home Loan Portfolio - Breakup

Sheet1

Market ShareBanksHFCs

200574%26%

200675%25%

200775%25%

200873%27%

200973%27%

201070%30%

201169%31%

Chart1

20050.50.32

20060.330.28

20070.250.23

20080.130.24

20090.160.21

20100.080.21

20110.150.24

Housing Credit Growth Still Robust

Credit Growth

Banks

HFCs

Sheet1

Credit GrowthBanksHFCs

200550%32%

200633%28%

200725%23%

200813%24%

200916%21%

20108%21%

201115%24%

INITIATIVES TO STRENGTHEN MORTGAGE FINANCE Implementation of Foreclosure NormsNo foreclosure norms existed till 2002Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) enacted to facilitate recovery of defaulted loansHelped reduce non-performing assets and brought discipline amongst borrowers to repay loans

Credit BureauIndias first credit bureau established in 2000Has helped in strengthening the credit appraisal process

NHB RESIDEXIndex to monitor city wise residential price movements

Mortgage RegistryThe Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) became operational in March 2011.Central registry helps to reduce frauds arising from multiple lending by different lenders on the same immovable property

Mortgage Guarantee/InsuranceCredit risk will be mitigated to some extent, thereby encouraging lenders to provide loans to those from the informal sector or lower income groups

*

*NO IMPACT OF THE SUBPRIME CRISIS ON INDIAMost mortgage lenders offer vanilla, amortising home loansNo interest only, 2/28 ARMs, piggy-back loansNo subprime or Alt A categories Borrowers are cautious and averse to high leverageTypical borrower is a first time home buyerLow loan to value (LTV) ratioPrepayments are commonCash not asset based fundingSecuritisation market at a nascent stage, limited exposure to structured productsFinancial institutions have limited direct exposure to US subprime mortgagesTimely intervention by the regulators to prevent build up of any real estate bubbleIncreased risk weights and provisioning requirements Prevented banks/HFCs from financing land

*

Counter Cyclical Prudential Regulation: Retail Housing Loans*Source: Financial Stability Report, December 2011, RBI

Counter Cyclical Prudential Regulation: Commercial Real Estate*Source: Financial Stability Report, December 2011, RBI

ROAD FORWARDHousingHigh cost of land in metropolitan cities hinders affordable housingUrban infrastructure upgradationSingle window clearance for approvalsInvest in low-cost building technology, prefab housing Investment linked tax incentives for developers to increase the supply of affordable housingMore effective public private partnerships to tackle the shortage of housing especially in the low income group

Housing FinanceDeepen the debt market to ensure availability of long-term fundingEncourage development of new funding instruments such as covered bondsSecuritisation still at a nascent stageHelpful for smaller housing finance players so they do not need to keep raising capitalIntroduce a specialised institutional mechanism for providing credit enhancement which will enable smaller players to obtain investment grade ratings on the securitised pools*

THANK YOU *