Transcript PNB HOUSING FINANCE LTD. Foreclosure Laws

HOUSING FINANCE
By- Rahul Jain
Characteristics of housing finance
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Long term finance with repayments spread
over 15-20 years
Most of the people prefer loan at fixed
interest rate. The concept of variable
interest rate is slowly picking up
Market is becoming very competitive after
the entry of banks in financial institutions in
retail lending.
The spreads are declining due to
competition and unless long term funds at
reasonable interest rates are made
available, it would be very difficult to
maintain bottomline.
Housing Shortage and resource requirement
A. Housing Shortage
• India is a vast country with a population of over 1 billion
people. More than 50 million people are living in slums.
• India has a current housing shortage of 22 million units
(both in rural and urban areas). It will increase to 42
million by the end of 9th five-year plan.
• Rural areas are still neglected, both under infrastructure
and housing, resulting in shift towards urban centres.
• India is far behind Asian Countries such as Singapore,
Hongkong, Malaysia, Bangkok, Korea and China in
fulfilling this basic human need.
Housing Loan Market in India
• The size of mortgage loan market is relatively very small
compared to developed countries. Our estimated size of
mortgage loans with HFCs is about Rs. 32000 crores.
• In developed countries like UK and USA, the outstanding
mortgage loan to GDP is above 55%, Japan 33%, Korea over
10%, in Malaysia over 20% and Hongkong over 30%.
• In India the ratio is just around 1.6%. After including other
indirect agencies like Govt. and institutions, the percentage
share will be less than 2%
• However, new Mortgage loans as %age of GDP is 11% in
USA and 9% in U.K. I.e. about 20% of outstanding.Whereas
in India it is 0.6% I.e. about 37%of outstanding.
What is Primary and Secondary market:
• The primary market constitutes housing loan companies
(HFCs) and the borrower. The (HFCs) hold the mortgages
of a borrower in their books.
• The participants in the secondary market are specialised
institution, to whom housing loan mortgages are sold by
(HFCs) at a market determined interest rate.
• These loans are sold in the market to interested buyers in
the form of mortgage backed securities (MBS). These
interested buyers could be insurance companies, pension
funds, mutual funds and even individuals.
• By this process, the avenues for funds are increased,
there is a greater participation of individuals and the
housing finance company is able to raise the long-term
funds from the secondary market.
A. Mortgage loan Insurance:
• In developed economies, the risk of default under mortgage loans
is covered under an Insurance Policy for a nominal premium.
• As a result the Mortgage loans become risk free and only 50% risk
weight is allotted on Housing Loans, which vastly improves Capital
adequacy ratio.
• In India, in the absence of such Insurance cover, the risk of nonpayment/ failure exists to a larger extent and hence the risk
weight is 100%.
• Indians are traditionally and emotionally attached to their own
house therefore, the default ratio is low.
• the recovery percentage is as high as 98 to 99%. Taking this
factor into consideration, RBI has now reduced the Risk weight to
75% taking into account the good asset quality.
Housing Finance Company
• A HFC is a company which mainly carries on the business
of housing finance or has one of its main object clause in
the Memorandum of Association of carrying on the
business of providing finance for the housing.
Requirements for commencing housing finance business
by an HFC under the NHB Act:
• For commencing the housing finance business, an HFC is
required to have the following in addition to the
requirements under the Companies Act, 1956:
• (a) Certificate of registration from NHB
• (b) Minimum net owned fund of Rs. 200 lakhs ( w.e.f.
16.02.2002)
Problems of long term finance in India:
• The mortgage loans are long term loans for 15-20
years. In some countries such as Japan these are also
available for 25-30 years
• There are very limited options for availability of funds
for such a long period and at a fixed interest rate
• The long term Debt market has not so far developed or
stabilised in India.
• Most of the institutions are suffering from asset liability
mismatch and the consequences would be felt when
liabilities will mature for payment.
• The interest rate risk will be exposed once the interest
rates start moving northwards.
B. Foreclosure Laws:
• Repayment of housing loan is in monthly instalment (EMI)
over 15 to 20 years.
• Under Prudential Norms the account will become a nonperforming asset if there is default in recovering six monthly
instalments.
• The countries, where foreclosure laws are in place, the
account can be pre-closed, the lender can call back the
entire dues after default of 6 monthly instalments,
irrespective of the fact that the amount is due to be repaid
over a period of 15 to 20 years.
• The various agreements obtained by the lender will have
such clauses to recall the entire balance due in case of
default as prescribed.
SECURITISATION:
• Origins in the USA in the 1970s. It is now one of the
most important innovations in the financial markets
of developed countries.
• Securitisation refers to conversions of cash flows
into marketable securities. The illiquid assets called
Asset Backed Securities (ABS) are packaged,
converted into tradable securities and sold to the
third party investors, without recourse.
• The securities are highly tradable. In case of housing
loans these are referred to as Mortgage Backed
Securities (MBS).
How the system works:
• A financial intermediary gets repayment along with interest
over a period of time. The lender who collects the periodic
instalments has to wait till the final maturity of the loan to
recover his full principal and interest.
• Securitisation allows the financial intermediary to sell its right
to receive the future payments from the borrowers to a third
party and receive consideration for the same up front. The
proceeds are re-deployed in business. This cycle could be
repeated several times leading to efficient usage of capital.
Benefits of Securitisation:
• It is an alternative source of funding.
• The asset is transferred and It generates cash without
any addition to borrowings, thus pressure on capital
adequacy is averted.
State of Securitisation in India and
related problems:
• The route for securitisation was cleared with the amendment in
the National Housing Finance (Amendment) Act, 2000. The
NHB was allowed to act as a Special Purpose Vehicle to handle
securitisation. NHB has already handled two/three issues.
• The high stamp duty in most of states on bonds with the
exception of Maharashtra, Karnataka Gujrat, Tamil Nadu and
West Bengal, where the stamp is 0.1% is an obstacle.
• A high incidence of stamp duty makes the issue un-attractive
and costly for the originator.
• The Companies have availed refinance from NHB and book
debts are charged to it. If a Housing Finance Company wants to
securitise these loans, NHB should accept pre-payment and
release these securities.
• NHB has imposed prepayment charges on Refinance availed @
1% on the amount for the remaining period of loan outstanding,
which works out to more than 4% on the outstanding amount. If
securitisation is to be successful, NHB should reconsider the
levy of charges.