FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

P.K. Gupta Chairman & Managing Director, National Housing Bank New Delhi

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Welcomes the Participants to ‘Session V B’ on Financing Real Estate and Housing on Thursday, the 6th October, 2005

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Presentation Outline

• Real Estate and Housing • Housing – A Macro View 1 • Housing – A Macro View 2 • Contribution of Housing Credit to GDP • Housing Finance – A Key Driver for Economy • Credit Growth to Housing & Real Estate • Spurt in Credit Growth in Housing • Housing Finance Interest Rate in India • Increase in Consumer Demand for Housing • About National Housing Bank – An Apex Institution for Housing Finance System in India • Rural Housing – Some Aspects • Market for Residential Mortgage Backed Securities (RMBS) • Housing Finance – Moving Forward • Industrialist View on Housing and a Visionary

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Slide 2

FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Real Estate and Housing

• Dictionary meaning of Real Estate is immovable property consisting of land and buildings.

• Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings/houses. • Reserve Bank of India clarifies exposure to, – Residential Mortgages, as lendings fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented; – Commercial Real Estate, as lendings secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.) • In India, about three fourth ( 3 / 4 ) of real estate development is for 1 / 4 ) is predominantly for commercial use.

• Indian Real Estate and Housing Industry – is growing annually at around 30 per cent.

– – – – has significant backward and forward linkages with over 250 ancillary industries.

is the second largest employment generator, next to agriculture.

can create a significant impact on our economic growth, over the medium term.

can play a prominent role in the healthy development of our Nation.

• From every Rupee spent on construction, an estimated 75 – 80 paise is added to GDP.

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Slide 3

FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

Housing – A Macro View 1

1981

(in million)

1991 2001

(Source: Census of India, 2001)

Growth of 1991 over 1981 (%) Growth of 2001 over 1991 (%)

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Population

Rural Urban

Total Census Houses

Rural

of which pucca residential stock (in %)

Urban

of which pucca residential stock (in %)

523.87

159.46

683.33

113.96

22.53

35.48

64.70

628.70

217.60

846.30

742.00

285.00

1027.00

142.98

30.58

52.03

72.74

177.50

35.36

71.60

74.70

20.01

36.46

23.85

25.47

---

46.65

---

18.02

30.97

21.35

24.14

---

37.61

-- Total 149.44

195.01

249.10

30.49

27.74

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Housing – A Macro View 2

Housing Completions & Condition

• Average Annual Housing Completions (housing units per 1000 population)

UN Recommendations for Developing Countries Urban Areas of India Rural Areas of India 8 to 10 Around 7 Around 5

• Condition of Residential Stock-Good &Livable (in %)

(Census,2001)

Residential Stock Good Livable Ratio Urban 64.1% 32.3% 2:1 Rural 45.0% 48.7%

• Housing Shortage (2001) – Urban – Rural – Total • Estimated Investment in Housing

(HUDCO)

7.1 million dwelling units 24.0 million dwelling units 31.1 million dwelling units 1:1 Tenth Plan (2002-07)

– Public

INR 4,150 bn (US$ 94.15 bn)

( INR/USD = 44.0800 ) – Private

INR 3,113 bn (US$ 70.62 bn)

– Total

INR 7,263 bn (US$ 164.77 bn)

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Contribution of Housing Credit to GDP

• Accelerated growth of housing finance in India has increased the outstanding housing loans as percentage of GDP from 3.4% in 2001 to 6.1% by 2004.

• Our Mortgage Debt as per cent of GDP is way below

China’s 12%,

22% in Malaysia, 40% in Honk-Kong and 65% in US. • Housing Finance played a significant role in developed economies.

• Tenth Plan targeted an average annual growth rate of GDP at 8.1%.

“The government is determined to put in a world class infrastructure to push all round growth.” “Money is flowing into the country and if we can mobilize these investments and channel them into infrastructure development, India's GDP will easily rise to 9 percent a year”

Second Annual India Investment Forum, New York, 21-09-05

“My goal is to maintain 7% and aim at 8% (GDP) . In the medium term, it should go beyond 8%. I am happy with the first quarter (Apr.-Jun., 2005-06) growth, but we are still second (to China in GDP) . We must strive to become the first.”

The Hindustan Times, New Delhi, 01-10-05

P. Chidambaram

Hon’ble Finance Minister Government of India

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Housing Finance - A Key Driver for Economy

• Housing

– is a basic necessity, for an individual – supports economic activities, for a family / community – is a catalyst, for creating multiplier effect in other sectors – is a labour intensive activity, for increasing the per capita income – is an engine of growth, for the national economy

• Housing Finance

– Strengthens the Financial System – Leads to Investment Demand – Increases the Assets Formation – Leads to Formation of Household Physical Assets – Serves the Social Cause – Key to Development of Human Settlement

• Household Saving-Per cent of GDP

(at current market prices)

(Source: RBI)

Item Household Saving

a. Financial Assets b. Physical Assets

1995-96 to 1998-99 (Ave) 17.9

9.8

8.1

1999-00 20.8

10.5

10.3

2000-01 21.9

10.7

11.2

2001-02 22.6

11.2

11.4

2002-03 23.3

10.3

13.0

2003-04 24.3

11.4

13.0

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

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Credit Growth to Housing & Real Estate

• Outstanding Gross Bank Credit

Particulars 23-Mar-01

(INR in billion)

22-Mar-02 21-Mar-03 Gross Bank Credit (GBC) Housing Hsg. as % of GBC Real Estate Loans (RELs) 4691.53

161.43

3.44

17.66

5367.27

223.46

4.16

25.96

6695.34

365.87

5.46

58.94

RELs as % GBC 0.38

0.48

• Outstanding Credit by HFCs (INR billion)

Particulars 2000-01 2001-02 0.88

2002-03 Housing Loans Other Loans 332.50

81.63

418.44

96.66

492.38

133.58

• Direct Housing Finance Disbursals (INR billion)

Primary Lending Institutions (PLIs) 2000-01 2001-02 2002-03 1. Commercial Banks 2. Housing Finance Companies 3. Co-operative Institutions 4. TOTAL 5. Annual Growth (in %) 55.53

126.38

8.68

190.59

35.07

85.66

146.14

6.78

238.58

25.18

235.53

178.32

6.42

420.27

76.15

(Source: RBI)

19-Mar-04 7643.83

519.81

6.80

55.77

0.73

18-Mar-05 9725.87

751.73

7.73

106.12

1.09

(Source: NHB)

2003-04 591.44

158.47

2004-05 * 725.00

* 163.00

(Source: NHB)

2003-04 2004-05 328.16

208.62

6.23

543.01

* 457 260 -- 717 29.21

32.04

* - Estimated

Slide 8

FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Spurt in Credit Growth in Housing

• Liquidity in the System • Lower Inflation Rate • Softer Interest Rate Regime • Housing Loan has the Lowest Non Performing Assets (NPAs) (as at the end of March, 2004) (RBI)

Retail Portfolio of Banks Net NPAs

as % of outstanding loans

Housing Loan Consumer Durables Credit Card Receivables Other Personal Loans 1.4

4.0

2.4

1.6

TOTAL Retail Loans TOTAL Loans & Advances 1.6

2.8

• Fiscal Concessions • Legal Reforms • Wider Network - Banks/Housing Finance Companies • Consumer Friendly Products/Approach • Increasing number of Real Estate Developers

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

Housing Finance Interest Rate in India

Source: HDFC, 2004

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20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% Ja n-9 5 Ju l-9 5 Ja n-9 6 Ju l-9 6 Ja n-9 7 Ju l-9 7 Ja n-9 8 Ju l-9 8 Ja n-9 9 Ju l-9 9 Ja n-0 0 Ju l-0 0 Ja n-0 1 Ju l-0 1 Ja n-0 2 Ju l-0 2 Ja n-0 3 Ju l-0 3 Ja n-0 4 Ju l-0 4

Months

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Slide 10

FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING N H B

Increase in Consumer Demand for Housing

• Services sector remained the key driving force of the economy. The services sector’s contribution to GDP growth has been more than 50% since 1997-98.

• Migration for Employment Opportunities leads to – Changing Demographics – Increase in Households – Formation of Nuclear Families – Burgeoning Middle Class (expected to cross 92 m by 2005-06) – More Disposable Income – Increasing Purchase Power • Increase in the desire for consumers to have their own homes • Further, – Softer interest rate regime • Coupled with – Fiscal benefits and – Aggressive lending by Primary Lending Institutions (Banks, HFCs, etc.) • Leading to decline in Cost of House to Annual Income Ratio

• DRIVES THE HOUSING DEMAND

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

About National Housing Bank (NHB) – An apex Institution for Housing Finance System in India

• Established in 1988 by an Act of the Parliament • Preamble of the National Housing Bank Act, 1987

“An Act to establish a bank to be known as the National Housing Bank to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions and for matters connected therewith or incidental thereto.”

• Equity fully held by the Reserve Bank of India • Functions – Promotion & Development of Housing Finance System • Co-ordination with the Government • Participation in the equity of HFCs • Training Programmes /Workshops • Promotion of RMBS Issues • Research in Housing & Habitat related areas – Regulation & Supervision – Refinance to Primary Lending Institutions – Project Finance to Public Agencies / SHGs / MFIs

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Rural Housing – Some aspects

• Estimates indicate that about 10% of disbursements are going towards Rural Housing, whereas 70% of India lives in villages. • Estimated Housing Requirements further to 37% in 2030. Workforce.

• Impediments – Higher Stamp Duties – Irregular earnings – High Operational Cost • Need a fillip – to arrest urban migration – to create job opportunities – to reduce poverty – 24 million dwelling units • Share of Agriculture Workforce to Total Workforce has declined from 60% in 1993-94 to 57% in 1999-2000 and is expected to decline • Housing Construction in rural areas can absorb the Rural • NHB’s Golden Jubilee Rural Housing Finance Scheme, till June, 2005 financed around 1.41 million houses – Non-availability of Clear Land Title Deeds – Difficulties in Obtaining Tangible Marketable Securities

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Market for Residential Mortgage Backed Securities

(RMBS) • Housing loans of nearly 70% in Canada, 67% in US, 50% in

UK and 50% in Germany, 45% in Italy and 42% in France are securitized.

• CRISIL study indicated that the share of MBS in total

housing loans has increased from 0.6% in 2000-01 to 5.7% in 2002-03.

• ICRA reported the growth of RMBS market by 13% during

2004-05 to INR 33.40 bn (2003-04 = INR 29.55 bn).

• NHB has played a pioneering role in RMBS market in

India.

• So far, 13 MBS issues amounting to INR 7.63 bn

(US$ 0.17 bn) have been issued through NHB SPV.

• Secondary Mortgage Market lacks liquidity – RMBS not reckoned as security under Securities Contracts

(Regulation) Act, 1956, thereby inhibiting the tradability.

– Long-term funds such as Superannuation and Gratuity Fund

are not eligible for investment in RMBS.

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Housing Finance – Moving Forward

• Development Authorities to act as Facilitators for supply of land • Self-Help Groups and Micro Finance Institutions Involvement • Legal Reforms - Land Laws, Rent Control Act • Rationalization of Stamp Duty, Property Taxes • Streamlining of Land & Property Records • Creating a Reliable Centralized Database on Housing Sector • Developing a Housing Price Index – Nation-wide • Rating Mechanism for the Builders/Projects • Encouraging Public-Private Partnership (PPP) for the Development of Large Scale Township/Satellite Housing Projects • Flow of FDI for Real Estate & Housing Development • Institutional Arrangement for Mortgage Credit Guarantee/Title Insurance

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FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

MORTGAGE FINANCING

Industrialist View on Housing and a Visionary

Let me conclude the presentation with – “We need to overhaul our land related laws, taxation and information system. It is estimated that 90% of land in India are subject to legal disputes over the ownership. Stamp duty ranges between 8-15% of the property value, encouraging avoidance. On the other hand, property tax rates are low and collection is inefficient. All this has led to Indian lend prices being the highest among the Asian nations related to average incomes and low tax collections is hampering our ability to maintain urban infrastructure. Effective land reforms can really boost housing and retail sectors, two of the largest sectors of the economy outside of agriculture and generate huge employment opportunities.”

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Azim Premji Chairman, Wipro

JRD Tata Memorial Lecture, The Economic Times, 31-08-05 Slide 16

FICCI – IBA Conference on GLOBAL BANKING: Paradigm Shift

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Thank You

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