Author: indiafreenotes

Key Performance Indicators, popularly known as KPIs, are very important in the evaluation of business performance on different levels. They basically represent a set of measures that focus on important aspects of business performance for the overall success of the business. KPIs in the credit world are invaluable for the following reasons:

• They help a business to stay focused on productivity.
• They give you an insight into the overall health of your portfolio.
• Through the generated data, you can get easy and actionable insights that will drive your business to profitability.

There is so much risk-taking in a credit card business. Since companies are always at risk of losing a high amount of money, they have to constantly evaluate just how safe the business is. They also need to evaluate the information protection measures in order to improve their system stability and the security of the business.  For every financial institution, it is important to always evaluate its credit risk from the expected revenue and the expected loss. Every part of credit card processing needs to be gauged to track down how each operation has been occurring after a certain period of time.

Performance of Debit Cards

Building Customer Loyalty

A growing body of research shows that highly active debit cards drive overall customer engagement, strengthening a bank’s relationship with its customers and increasing their loyalty.

Optimizing debit portfolios and driving debit card usage can pay dividends beyond the value of additional transactions. A highly engaged current-account consumer can generate substantially more revenue for a bank by remaining more loyal and adopting multiple banking products.

Highly-engaged debit consumers are also big e-commerce shoppers, using both debit and credit cards, and they’re more prone to want the latest technologies. According to Digital Transactions, a recent survey by Auriemma Consulting Group found that the use of debit cards is increasing for online and big-ticket purchases, a sign of rising consumer trust in e-commerce and confidence in personal finances.

Cross-Sell Opportunities

At the same time, debit can boost cross-sell opportunities for banks. The more a customer uses a debit card, the stronger their relationship is with the bank, and the greater the chance that they will expand the relationship to additional products and act as a brand advocate. As a result, banks can more easily migrate customers from initial checking and savings accounts to credit, loans, investments and new technologies like contactless and digital wallets. For example, if a highly-engaged debit customer decides to buy a home, the bank holding the debit account is more likely to be top of mind when shopping for a mortgage.

Debit card fraud occurs when a criminal gains access to your debit card number and in some cases, personal identification number (PIN) to make unauthorized purchases or withdraw cash from your account. There are many different methods of obtaining your information, from unscrupulous employees to hackers gaining access to your data from a retailer’s insecure computer or network. Fortunately, it doesn’t take any special skills to detect debit card fraud.

When your debit card is used fraudulently, the money goes missing from your account instantly. Payments you’ve scheduled or checks you’ve mailed may bounce, and you may not be able to afford necessities. It can take a while for the fraud to be cleared up and the money restored to your account.

Credit card fraud is an inclusive term for fraud committed using a payment card, such as a credit card or debit card. The purpose may be to obtain goods or services or to make payment to another account, which is controlled by a criminal. The Payment Card Industry Data Security Standard (PCI DSS) is the data security standard created to help financial institutions process card payments securely and reduce card fraud.

Credit card fraud can be authorised, where the genuine customer themselves processes a payment to another account which is controlled by a criminal, or unauthorised, where the account holder does not provide authorisation for the payment to proceed and the transaction is carried out by a third party. In 2018, unauthorised financial fraud losses across payment cards and remote banking totalled £844.8 million in the United Kingdom. Whereas banks and card companies prevented £1.66 billion in unauthorised fraud in 2018. That is the equivalent to £2 in every £3 of attempted fraud being stopped.

Credit cards are more secure than ever, with regulators, card providers and banks taking considerable time and effort to collaborate with investigators worldwide to ensure fraudsters aren’t successful. Cardholders’ money is usually protected from scammers with regulations that make the card provider and bank accountable. The technology and security measures behind credit cards are becoming increasingly sophisticated making it harder for fraudsters to steal money.

Protection

Go Paperless

Signing up for paperless bank statements will eliminate the possibility of having bank account information stolen from your mailbox. Shredding existing bank statements and debit card receipts using a paper shredder when you’re done with them will significantly reduce the possibility of having bank account information stolen from your trash.

Get Banking Alerts

In addition to checking your balance and recent transactions online daily, you can sign up for banking alerts. Your bank will then contact you by email or text message when certain activity occurs on your accounts, such as a withdrawal exceeding an amount you specify or a change of address.

Don’t Make Purchases with Your Debit Card

Use a credit card, which offers greater protection against fraud, rather than a debit card.

Destroy Old Debit Cards

Some shredders will take care of this for you; otherwise, your old card floating around puts your information at risk.

Don’t Keep All Your Money in One Place

If your checking account is compromised, you want to be able to access cash from another source to pay for necessities and meet your financial obligations.

Stick to Bank ATMs

Bank ATMs tend to have better security (video cameras) than automated teller machines at convenience stores, restaurants, and other places.

Beware of Phishing Scams

When checking your email or doing business online, make sure you know who you’re interacting with. An identity thief may set up a phishing web site that looks like it belongs to your bank or another business you have an account with. In reality, the scammer is looking to get access to your personal information and may attempt to access your bank account.

Use a Secured Network

Don’t do financial transactions online, when using your mobile devices or computer in a public place or over an unsecured network.

Protect Your Computer and Mobile Devices

Use firewall, anti-virus, and anti-spyware software on your computer and mobile devices, while keeping it updated regularly.

Card information is stored in a number of formats. Card numbers formally the Primary Account Number (PAN) are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in a machine-readable format. Fields can vary, but the most common include Name of the card holder; Card number; Expiration date; and Verification CVV code.

In Europe and Canada, most cards are equipped with an EMV chip which requires a 4-to-6-digit PIN to be entered into the merchant’s terminal before payment will be authorized. However, a PIN isn’t required for online transactions. In some European countries, if you don’t have a card with a chip, you may be asked for photo-ID at the point of sale.

In some countries, a credit card holder can make a contactless payment for goods or services by tapping their card against a RFID or NFC reader without the need for a PIN or signature if the cost falls under a pre-determined limit. However, a stolen credit or debit card could be used for a number of smaller transactions prior to the fraudulent activity being flagged.

Card issuers maintain several countermeasures, including software that can estimate the probability of fraud. For example, a large transaction occurring a great distance from the cardholder’s home might seem suspicious. The merchant may be instructed to call the card issuer for verification or to decline the transaction, or even to hold the card and refuse to return it to the customer.

Credit Rating Agencies in India

Infomerics Valuation and Rating Private Limited

An RBI-accredited and SEBI-registered credit agency, Infomerics Valuation and Rating Private Limited saw its inception by eminent finance professionals and is now run under the leadership of Mr. Vipin Mallik. The credit bureau strives to offer an unbiased and detailed analysis and evaluation of credit worthiness to NBFCs, banks, corporates and small and medium scale units. It is through their rating and grading system that they determine the credit worthiness of an organisation. Infomerics helps in reducing any kind of information asymmetry amongst investors and lenders. Keeping transparency as it is core value, the credit bureau makes sure to deliver comprehensive and accurate reports and records of all their clients.

India Rating and Research Pvt. Ltd

India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the company is recognised by the Reserve Bank of India and National Housing Bank.

Credit Analysis and Research limited (CARE)

Launched in 1993, CARE offers credit rating services to areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. Headquartered in Mumbai, CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. The company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions. CARE Ratings has also ventured into valuation services and offers valuation of equity, debt instruments, and market linked debentures. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.

Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in 1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30 years in 2017. CRISIL acquired 8.9% stake in CARE credit rating agency in 2017. It launched India’s first index to benchmark performance of investments of foreign portfolio investors (FPI) in the fixed-income market, in the rupee as well as dollar version in 2018. The company’s portfolio includes, mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

Acuite Ratings & Research Limited

Acuité Ratings & Research Limited is a full-service Credit Rating Agency registered with the Securities and Exchange Board of India (SEBI). The company received RBI Accreditation as an External Credit Assessment Institution (ECAI), for Bank Loan Ratings under BASEL-II norms in the year 2012. Since then, it has assigned more than 8,300 credit ratings to various securities, debt instruments and bank facilities of entities spread across the country and section of industries. It has its Registered and Head Office in BKC, Mumbai.

Brickwork Ratings (BWR)

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork Ratings is recognised as external credit assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.

ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and several Indian financial and banking service organisations. The ICRA Group currently has four subsidiaries – Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes rating for corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market linked debentures and so on.

Limitations of Rating

Biased rating and misrepresentations:

In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that the reports impartial and judicious recommendations for rating committee.

Concealment of material information:

Rating Company might conceal material information from the investigating team of the credit rating company. In such cases quality of rating suffers and renders the rating unreliable.

Human bias:

Finding off the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.

Down grade:

Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairiring the image of the company.

Reflection of temporary adverse conditions:

Time factor affects’ rating, sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company’s interest.

Rating is no guarantee for soundness of company:

Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the user public in general of the rating symbol.

Static study:

Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company’s health through rating is momentary and anything can happen after assignment of rating symbols to the company.

Dependence for future results on the rating, therefore defeats the very purpose of risk indicativeness of rating. Many changes take place in economic environment, political situation, government policy framework which directly affect the working of a company.

Guidelines for Asset Liability Management System in HFC

Housing Finance Companies (HFCs) are exposed to credit and market risks in view of the asset-liability transformation. With liberalisation in Indian financial markets over the last few years and growing integration of the domestic markets with external markets, the risks associated with the operations of an HFC have become complex and large, requiring strategic management.

HFCs are operating in a fairly deregulated environment and are required to determine on their own, interest rates on advances and deposits, subject to the ceiling on maximum rate of interest they can offer on deposits, on a dynamic basis. The interest rates on investments of HFCs in government and other securities are also now market related. Intense competition for business involving both the assets and liabilities has brought pressure on the managements of HFCs to maintain a good balance amongst spreads, profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The managements of HFCs have to base their business decisions on a dynamic and integrated risk management system and process driven by corporate strategy. HFCs are exposed to several major risks in the course of their business; Credit risk, Interest rate risk, equity/commodity price risk, liquidity risk and operational risk. It is, therefore, important that HFCs introduce effective risk management systems that address the issues relating to interest rate and liquidity risks.

• ALM Information System

⇒ Management Information Systems 9- n

⇒ Information availability, accuracy, adequacy and expediency

• ALM Organisation

⇒ Structure and responsibilities

⇒ Level of top management involvement

• ALM Process

⇒ Risk parameters

⇒ Risk identification

⇒ Risk measurement

⇒ Risk management

⇒ Risk policies and tolerance levels

a) Successful implementation of the risk management process would require strong commitment on the part of the senior management in the HFC, to integrate basic operations and strategic decision making with risk management. The Board should have overall responsibility for management of risks and should decide the risk management policy of the HFC and set limits for liquidity, interest rate, exchange rate and equity price risks.

b) The Asset-Liability Committee (ALCO) consisting of the HFC’s senior management including the Chief Executive Officer (CEO) should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the HFC (on the assets and liabilities sides) in line with the HFC’s budget and decided risk management objectives.

c) The ALM Support Groups consisting of operating staff should be responsible for analysing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) reflecting the impact of various possible changes in market conditions on the balance sheet and recommend the action needed to adhere to HFC’s internal limits.

• Liquidity risk management
• Management of market risks
• Funding and capital planning
• Profit planning and growth projection
• Forecasting and analysing ‘what if scenario’ and preparation of contingency plans

Fair Trade Practice Code for HFC’s

Housing Finance Companies (HFCs) which are a part of the financial system contribute to the economic growth by increasing the outreach of the housing credit delivery mechanism. To provide for transparency in transactions between the institutions and the end users and also to provide for well-informed business relationships, some broad guidelines have been considered necessary. In this backdrop, the National Housing Bank, has framed the Guidelines on Fair Practices Code for HFCs to serve as a part of best corporate practices and to provide transparency in business practices. This Code has been formulated by the EHFL to achieve the following objectives:

• To promote good and fair practices by setting minimum standards in dealing with customers.
• To increase transparency so that the customer can have a better understanding of the services that can be expected from the Company.
• To encourage market forces, through competition, to achieve higher operating standards.
• To promote a fair and cordial relationship between the Company and its customers.
• To foster confidence in the housing finance system.

Transparency

The Company shall at all times abide to act in fair, reasonable and transparent manner in all its dealings with the customer by safeguarding that:

• The Company fulfils the commitments and standards of this Code for the products and services offered by it and in the procedures and practices that its staff follows
• The products and services of the Company meet all the relevant laws and regulations in letter and spirit
• The dealings with its customers are based on the ethical principles of integrity and transparency.

Advertising, Marketing & Sales

• The Company shall ensure that all advertising and promotional material is clear, and not misleading.
• The Company shall ensure that any advertising in any media and promotional literature that draws attention to a service or product of the Company and includes a reference to an interest rate, shall also indicate whether other fees and charges will apply and that full details of the relevant terms and conditions, if any, shall be made available on request.
• In case of availing third party services for providing support services, the Company shall ensure that such third parties handle customer’s personal information (if any available to such third parties) with the same degree of confidentiality and security as the Company would.
• The Company ensures to provide the information on interest rates, common fees and charges through putting up notice(s) at its branches/offices; through telephone or help-line; on company’s website; through designated staff/ help desk or by providing service guide / tariff schedule.
• The Company shall communicate to the customer from time to time, on various features of the products availed by them. Information about the other products/services or promotional offers in respect of its products/services of the Company may be conveyed to customers only if he / she has given his / her consent to receive such information / service, including, by way of an email or by registering for the same on the Company’s website or on customer service number of the Company.
• The Company shall ensure the Code of Conduct the Direct Selling Agencies (DSAs) whose services are availed by the Company to market products / services, amongst other matters, specifically requires the DSAs to identify themselves while approaching a customer for selling the products personally or via phone.
• The Company shall ensure that in the event of receipt of any complaint from the customer that the Company’s representative/ courier or DSA has engaged in any improper conduct or acted in violation of this Code, appropriate steps shall be initiated to investigate and handle the complaint and to make good the loss caused, if any.

Loan Application & Processing

a) Loan application forms should include necessary information which affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other HFCs can be made and informed decision can be taken by the borrower. The loan application form may indicate the list of documents required to be submitted with the application form.

b) The Company should devise a system of giving acknowledgement for receipt of all loan applications. Preferably, the time frame within which loan applications will be disposed of should also be indicated in the acknowledgement.

Guarantors

• Whether the Company will have recourse to his / her other monies in the Company if he/ she fails to pay up as a Guarantor.
• Whether his/her liabilities as a guarantor is limited to a specific quantum or are, they unlimited
• Time and circumstances in which his/ her liabilities as a guarantor will be discharged; and the Company shall keep them informed of any material adverse change in the known financial position of the borrower to whom they stand as a guarantor.
• In case the guarantor refuses to comply with the demand made by the creditor /lender, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter.

Housing Finance Agencies

State Housing Finance Agencies (HFAs) are state-chartered authorities established to help meet the affordable housing needs of the residents of their states. Although they vary widely in characteristics such as their relationship to state government, most HFAs are independent entities that operate under the direction of a board of directors appointed by each state’s governor. They administer a wide range of affordable housing and community development programs.

At the center of HFA activity within the states and NCSHA’s work in Washington are three federally authorized programs:

• The Housing Bonds
• The Housing Credit
• The HOME Investment Partnerships (HOME) program.

An important aspect of venture capital investing is the exit strategies. Venture capital funds primarily invest with an exit in mind after a few years. After successfully funding at seed, pre-production, production and expansion stages, a venture capitalist will start assessing exit strategies. The exit in the form of disinvestment or liquidation is the last and final stage of the venture capital funding.

The key types of liquidation/disinvestments are trade sales, sale of quoted equity post initial public offering (IPO), and write-offs. Let’s look at each of these in detail:

• Trade Sales: In this type of strategy the private company is sold or merged with an acquirer for stocks, cash, or a combination of both.
• IPO: If the company has done well, the venture capital investors will take the IPO route, by issuing shares registered for public offering. The venture capital investors and other private investors will get their portion of shares who can put them in the open marketplace for trading after an initial lock-in period.
• Write-offs: These are voluntary liquidations that may or may not result in any proceeds.
• Buy-back: In this method the entrepreneur buys-back the investment share from the venture capitalists and takes it back to being a privately held company. Investors who invest in a venture capital fund get distributions of public stock or cash from realized venture capital investments. Sometimes the fund may require further investments from limited partners. At other times, they may make cash or share distributions at random times during the lifetime of the fund. Investors can sell their interests to another buyer if they find one.

Venture Capital Investment process

Deal origination

Origination of a deal is the primary step in venture capital financing. It is not possible to make an investment without a deal therefore a stream of deal is necessary however the source of origination of such deals may be various. One of the most common sources of such origination is referral system. In referral system deals are referred to the venture capitalist by their business partners, parent organisations, friends etc.

Screening

Screening is the process by which the venture capitalist scrutinises all the projects in which he could invest. The projects are categorised under certain criterion such as market scope, technology or product, size of investment, geographical location, stage of financing etc. For the process of screening the entrepreneurs are asked to either provide a brief profile of their venture or invited for face-to-face discussion for seeking certain clarifications.

Evaluation

The proposal is evaluated after the screening and a detailed study is done. Some of the documents which are studied in details are projected profile, track record of the entrepreneur, future turnover, etc. The process of evaluation is a thorough process which not only evaluates the project capacity but also the capacity of the entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as entrepreneurial skills, technical competence, manufacturing and marketing abilities and experience are put into consideration during evaluation. After putting into consideration all the factors, thorough risk management is done which is then followed by deal negotiation.

Deal Negotiation

After the venture capitalist finds the project beneficial he gets into deal negotiation. Deal negotiation is a process by which the terms and conditions of the deal are so formulated so as to make it mutually beneficial. The both the parties put forward their demands and a way in between are sought to settle the demands. Some of the factors which are negotiated are amount of investment, percentage of profit held by both the parties, rights of the venture capitalist and entrepreneur etc.

Post investment activity

Once the deal is finalised, the venture capitalist becomes a part of the venture and takes up certain rights and duties. The capitalist however does not take part in the day-to-day procedures of the firm; it only becomes involved during the situation of financial risk. The venture capitalists participate in the enterprise by a representation in the Board of Directors and ensure that the enterprise is acting as per the plan.

Exit plan

The last stage of venture capital investment is to make the exit plan based on the nature of investment, extent and type of financial stake etc. The exit plan is made to make minimal losses and maximum profits. The venture capitalist may exit through IPOs, acquisition by another company, purchase of the venture capitalists share by the promoter or an outsider.

Venture Capital in India

• Low level financing for proving and fructifying a new idea.
• Start-up financing where the new firms need funds for expense relating marketing and product development.
• First round financing which includes manufacturing and early sales funding
• Second round financing, which includes operational capital given for early stage companies which are selling products but not returning a profit
• Third round financing, which is also called a Mezzanine financing and includes the money needed to expand a newly beneficial company
• Fourth round financing also called Bridge financing and includes the financing the going public process.

Urban Land Ceiling and Regulation Act (ULCRA) of 1976 has been wrongly implemented and is the main culprit of the spiralling real estate prices. Land is not available to housing due to restrictions placed on conversion of agricultural land to non-agricultural land. The land prices in Bombay, Calcutta and Delhi are very high as compared to cities in the west like London and Washington. A boost to housing can rejuvenate the economy since has the maximum propensity to generate income and demand for materials, equipment and services. Moreover, funds allocated to shelter, return in the shape of income and demand to other sectors. To boost growth in the housing sector, there is an imperative need to have greater access to credit for housing in a regulated fashion. This necessitates a good housing finance system. Housing finance companies need to be recognized as being part of the total financial system, and should be given a level playing field.

Amidst liberalization, certain provisions of the Companies Act 1956, such as restrictions on inter-corporate loans and deposits continue to discriminate housing finance companies against other NBFC’s. Also certain tax laws such as deduction of tax at source, and restrictions acceptance of cash as deposits are disadvantages to housing finance companies. RBI has put housing finance on priority as core sector lending. In the developed countries, the flow of housing finance forms a substantial share of the total finance system. In fact, the savings for housing is among the single largest source of funds in their entire financial system.

Thus, it is imperative that India priorities the housing sector in order to enable a varied advantage to the economy in the form of employment, non-inflationary growth and reduced pressure on the balance of payments. The housing sector in India has been put under a lot of strain since Independence. Builders and developers too face varied problems.

Growth Factors

The Pradhan Mantri Awas Yojana (PMAY) aims to build over 2 crore affordable homes across 305 rural and urban centres.

Under this scheme, which is a part of the Housing for All vision, people can avail interest subsidy of 4% on loans up to Rs 9 lakh and 3% for loans up to Rs 12 lakh. There is also a 3% interest subsidy on a Rs 2 lakh loan for a new home in the rural areas.

The subsidies, which have made home loans affordable for the low-income group, have greatly helped people working in the unorganised sector, according to Arvind Hali, chairman of ART Affordable Housing Finance.

The government help has also resulted in housing finance companies disbursing more loans. To lend perspective, loans up to Rs 2 lakh witnessed the maximum year-over-year (Y-O-Y) growth of 10.4% in FY 2016-17.

New Dynamics:

An important development in the housing finance business has been the entry of new players. The relatively low risk in a housing portfolio has spurred new entrants in the last few years. Arguably the most significant entrant has been ICICI Home Finance. Among non-banking finance companies, Sundaram Finance and Tata Finance have launched housing finance subsidiaries in the recent past, while banks shown increased interest in acquiring housing assets.

The entry of new players and the consequent increase in competition has been followed by an interesting trend. The interest rates of most housing finance companies (HFC) move in unison, thereby suggesting that interest rate is not likely to be a competitive tool. The high level of competition has made it impossible for an HFC, with branches across the country, to charge an interest rate higher than the competition. Commercial banks are an exception to the rule, in the sense that they always charge lower than the competition.

Budgetary Support:

Tax benefits, a low interest rate regime and high salary levels among certain sections are chiefly responsible for fuelling fast growth in the housing financial services sector. Tax benefits for housing finance contribute to housing development. For this purpose, RBI maintains a soft interest rate regime. The bank rate of interest is constantly being slashed so that it acts as a stimulant for housing demand.

Similarly, a sharp increase in size of pay packets has played an important role in making a house affordable. Regardless of salary levels, if the cost of a house comes down, it would pep up the demand for housing finance. There is reason to believe that we are witnessing a gradual movement towards loosening the restrictions that increase the cost of a house.

Housing Finance Institutions in India

The below-mentioned list of housing finance companies have been granted Certificate of Registration (COR) with permission to accept public deposits –

• Aadhar Housing Finance Limited (Formerly: DHFL Vysya Housing Finance Limited)
• Housing and Urban Development Corporation Limited
• Housing Development Finance Corporation Limited
• Can Fin Homes Limited
• Cent Bank Home Finance Limited
• Manipal Housing Finance Syndicate Limited
• PNB Housing Finance Limited
• Dewan Housing Finance Corporation Limited
• ICICI Home Finance Company Limited
• LIC Housing Finance Limited
• Sundaram Home Finance Limited

Listed below are the Housing Finance Companies having valid Certificate of Registration that can accept public deposits with prior permission obtained from the National Housing Bank for accepting public deposits:

• National Trust Housing Finance Limited
• Saral Home Finance Limited.
• GIC Housing Finance Limited
• Ind Bank Housing Limited
• REPCO Home Finance Limited
• L&T Housing Finance Limited

The Housing Finance Company is yet another form of non-banking financial company which is engaged in the principal business of financing of acquisition or construction of houses that includes the development of plots of lands for the construction of new houses.

The Housing Finance Company is regulated by the National Housing Bank. Any non-banking finance company can operate as a housing finance company, subject to the fulfillment of basic requirements as specified in the Companies Act, 1956.

• The company should obtain a certificate of registration (COR) from the National Housing Bank (NHB). The company conducting such business without a COR is an offense punishable under the provisions of the National Housing Bank Act, 1987, also the NHB can demand the winding up of such company.
• The company should have its primary business of providing finance for housing, whether directly or indirectly.
• The company should have minimum Net Owned Fund of Rs 10 Crore.

Once these basic requirements are fulfilled, the company should comply with the following conditions to get registered as a Housing Finance Company:

• The affairs of the housing finance company should not be detrimental to the interest of the present and future depositors.
• The company shall be in such a position that it is able to meet the full claims of its present as well as future depositors as and when these accrue.
• The management of the company should not be prejudicial towards public interest or to the interest of its depositors.
• The Company should have an adequate capital structure and better income prospects.

The certificate of registration shall not be prejudicial to the operation and growth of housing finance sector of the country.

Housing Finance Policy Aspect

India’s national housing policy insists on providing more dwelling houses to the citizens. It is only natural for the government to create institutions which can provide housing finance.

At the international level, institutions such as World Bank and Asian Development Bank provides both grants and loans, especially soft loans for removing slums and for the creation of housing colonies. In fact, in India, the World Bank has financed Sites and Service Schemes to a number of state governments, thereby, both housing and promotion of small-scale industries are simultaneously encouraged.

In 2019, ‘Infrastructure Leasing & Financial Services Limited’ (IL&FS), India’s leading infrastructure development Non-Banking Financial Company (NBFC) defaulted on its debt payments. Housing Finance Companies, including HDFC, Dewan Housing Finance Ltd (DHFL), PNB Housing Finance Ltd (PNBHFL) and LIC Housing Finance Ltd (LICHFL), had high exposure to IL&FS. As a result, the crisis triggered a liquidity crunch in the housing finance sector. The Reserve Bank of India (RBI), therefore, proposed to take over the regulation of Housing Finance Companies (HFCs) by amending the National Banking Act from the National Housing Bank (NHB). The NHB had been set up as an apex institution to regulate housing finance in 1988.

The overall mandate given to the NHB is to make retail housing finance affordable to all sections of the society. The RBI, in November 2019, issued a notification withdrawing exemption given to HFCs which allowed the NHB to regulate them. HFCs came under the purview of the RBI through Section IIIB of the RBI Act.

Sources of Funds

Commercial banks and co-operative societies are providing housing finance. Life Insurance Corporation is also in the race for housing finance.

While providing housing finance, the lender and borrower enter into an agreement under the Transfer of Property Act, whereby the house to be constructed is mortgaged along with the land to the creditors who is called mortgagee. The borrower is the mortgagor and he cannot sell the house to any third party until the loan is repaid. In other words, the financing institution has a charge on the property of the borrower until he repays the loan.

When the housing loan is repaid, the mortgage is lifted and the ownership of the house is transferred to the owner. The owner has now an absolute right to transfer or sell to any party he likes. In the case of granting housing loan to existing houses for the purpose of rebuilding or expansion, the house will be mortgaged to the financing company, till the loan is repaid.

NBFCs raise capital in the short-term (1-3 months) commercial paper (CP) market at a lower cost, as compared to the long term (5-10 years) nonconvertible debenture (NCD) market but face the risk of rolling over the CP debt at short frequencies of a few months.4 The frequent repricing exposes NBFCs to the risk of facing higher financing costs and, in the worst case, credit rationing.

Advantages of Housing Finance

• Industries such as cement, brick manufacturing, sanitary products, electrical fittings and glass industries experience more demand due to house construction.
• Among the financial services, housing finance creates employment, both directly and indirectly.
• Rural housing develops not only rural areas but prevents migration of labor to urban areas.
• Factories or industrial establishments create townships by providing more housing facilities to their employees. Housing finance thereby reduces congestion in urban areas.
• Housing finance helps in creation of more houses which results in building up more infrastructure facilities, such as roads, electricity generation, drinking water facilities, etc.
• Due to housing finance, there is a vertical expansion and re building of dilapidated houses and re modelling of the existing houses.
• Non conventional energy gets popularized due to modern housing facilities which is one of the major benefits of housing finance.
• Housing facilities not only improve, they also reflect the culture of the country. Chandigarh city is an example for modern housing which has been built by a French architect.

The Indian housing finance market witnessed a decent rise in home loan outstanding of approx. 16% during fiscals 2015 to 2020. It was primarily due to higher disposable income, robust demand, and a more significant number of competitors entering the vertical. In fiscal 2020, total housing loan outstanding remained at Rs 20.4 trillion. Housing loan outstanding growth plummeted in fiscals 2019 and 2020 due to the Housing Finance companies’ slow growth (or HFCs.) The pandemic-induced nationwide lockdown had a tremendous impact on the overall construction activity. The return of 80% construction workforce of migrant laborers to their villages further aggravated the problems. Shrinking job prospectus coupled with limited income growth negatively impacted demand from end-buyers, primarily self-employed borrowers.

Market Share of Lenders in Housing Finance

Various players operating in the housing finance market include public sector banks (or PSBs), housing finance companies (or HFCs), new private sector banks, old private sector banks, and other lenders based on housing loan outstanding and housing loan disbursement. PSBs and HFCs accounted for 40% and 39% of the market share based on the housing loan outstanding in FY2019. Over the last few years, the share of housing finance companies has expanded, whereas the same has contracted for public sector banks in the market based on housing loans outstanding. When measured in market share based on housing loan disbursement, PSBs’ share was 37%, while for housing finance companies, the same was 41% in FY2019. For both major players, the share remained more or less the same over the past couple of years. Although PSBs lead in value terms, HFCs enjoy the highest market share in terms of volume compared with other lenders.

The home loan market is concentrated in the top 15 states, which accounted for ~93% of the loan outstanding at the end of March 2019. With an overall share of 23%, Maharashtra tops the list, followed by Karnataka (10%), Tamil Nadu (NS:TNNP) (9%), Gujarat (8%), and Telangana (6%). The top four states account for slightly more than 50% of the home loans outstanding.

Growth Drivers

Higher affordability, increased transparency, growing urbanization, and government incentives should drive the housing finance market’s growth over the next five years. You should note that the urban population’s share in the total population has consistently increased over the years. From 17% in 1951, it has risen to 35% in 2021. Demography-wise, we have one of the highest young populations globally, with a median age of 28 years. ~90% of Indians were below the age of 60 by the end of 2020, of which around 63% were between 15 and 59 years. Nuclearization means a shift from a joint family to a small family. Nuclearization in urban areas is also driving the housing demand in India and, in turn, home finance.

Changing lifestyles, the rise of individual consciousness, social attitudes, and increased labor mobility have also pushed housing demand across the country. These trends are expected to continue in the future. Income growth gives rise to a tendency to shift to bigger houses. Higher demand for separate homes, young-age housing loan borrowers, government Initiatives of affordable housing, and interest subsidies under PMAY should keep pushing housing finance demand is going ahead.

Housing Demand and Housing Finance Market Growth

We have witnessed subdued demand for high-priced homes in metros and faster growth in smaller districts in the recent past, and it resulted in a higher share of smaller districts in overall home loans over the past few years. According to the CRISIL (NS:CRSL) study, the top 50 districts in India accounted for 72% of the housing demand in fiscal 2019. The last two years (2019 and 2020) have mainly seen vivid growth in the share of smaller districts in the home loan disbursements, and this trend is anticipated to continue in the future, according to CRISIL.

During fiscal 2014 to 2019, the home loan market grew at ~18% CAGR. In that market, the contribution of high-priced housing jumped from 44% in fiscal 2015 to 54% in fiscal 2019. Higher project launches in the high-priced housing segment led to the growth in contribution. Note that the market share of the high-priced housing segment is increasing, albeit slowly, in volume terms. However, the low-priced housing segment (less than Rs 25 lacs) still holds more than 80% of the market share.

Refinancing Instruments

Banks and HFCs can refinance by using own deposits or by turning to the capital market. In addition, they can also avail the refinance facilities offered by the NHB. Since the year 2000, the NHB is authorized to carry out securitization transactions and issue mortgage-backed securities (MBS) on behalf of private financial institutions. Its role is that of a financial trustee and credit enhancer for the private MBS. Besides, together with its private sector counterparts it is working to establish a Mortgage Credit Guarantee Company which is intended to offer mortgage insurance services. Despite continued efforts, the Indian MBS market is still not fully developed with only one per cent of housing loans being securitised.

Major Issues in housing finance market

Entering into an era of rate war: Now a days the finance companies have entered into an era of rate war. Many players have started examining the possibility of reducing their interest rates in order to remain competitive in the market place and attract the customers. The ability to get long term funds at cheap rates is an important competitive advantage.

Availability of funds: It is the most important problem of the HFCs. The borrowing capacity of the people has increased due to the budget proposals whereas the lending capacity has not changed much since it requires the long term finance.

Lack of Clear Title: Another major issue conforming Indian housing is the lack of clear title to property. Around 90 percent of all the land in India does not have clear title. The ownership is unclear and hence, the land is off the market, thereby creating scarcity of land. This problem could be attributed to poor record keeping and complicated processes.

Risk of default: Since the HFCs are running short of funds, any default by the customers will have the direct impact on the lending capacity of the companies as the fund remain blocked during the period. HFCs are not in a position to absorb such shocks due to the paucity of funds. However, HFCs have historically had much lower default rates when compared to the banks and other finance companies.

High Stamp Duty: The cost of transferring land, stamp duty and registration charges payable are prohibitively high. This dissuades people from seeking housing, development and financing. Moreover, the procedure followed is also not transparent.