Market of Housing Finance, Housing Finance in India; Major Issues

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.