2018

Study on Financial
Markets

CAPITAL MARKETS/MUTUAL FUNDS/HOUSING FINANCE

SATAKSHI

[COMPANY NAME] | [Company address]

Introduction
A financial market brings buyers and sellers together to trade in financial assets such as
stocks, bonds, commodities, derivatives and currencies. The purpose of a financial
market is to set prices for global trade, raise capital, and transfer liquidity and
risk. Although there are many components to a financial market, two of the most
commonly used are money markets and capital markets.

Money markets are used by government and corporate entities as a means for borrowing
and lending in the short term, usually for assets being held for up to a year.
Conversely, capital markets are more frequently used for long-term assets, which are
those with maturities of greater than one year.

Capital markets include the equity (stock) market and debt (bond) market.
Together, money markets and capital markets comprise a large portion of the financial
market and are often used together to manage liquidity and risks for companies,
governments and individuals.

Capital Markets

Capital markets are perhaps the most widely followed markets. Both the stock and bond
markets are closely followed, and their daily movements are analysed as proxies for the
general economic condition of the world markets. As a result, the institutions operating
in capital markets – stock exchanges, commercial banks and all types of corporations,
including non-bank institutions such as insurance companies and mortgage banks – are
carefully scrutinized.

The institutions operating in the capital markets access them to raise capital for long-
term purposes, such as for a merger or acquisition, to expand a line of business or enter
into a new business, or for other capital projects. Entities that are raising money for
these long-term purposes come to one or more capital markets. In the bond market,
companies may issue debt in the form of corporate bonds, while both local and
federal governments may issue debt in the form of government bonds.
Structure of Indian Financial Markets

Capital market participants

The supply in this market comes from savings from different sectors of the economy.
These savings accrue from the following sources:

1. Individuals.

2. Corporate.

3. Governments.

4. Foreign countries.

5. Banks.

6. Provident Funds.

7. Financial Institutions.
All these entities contribute to savings in the economy part of these savings naturally
flow in the capital markets. Individuals invest in these markets directly by investing in
shares or debentures of companies through bond issues of public sector units or
through mutual funds. Corporate who have more savings than their requirement for
funds also are participants in this market

Developments in Indian Capital Markets

 Growth in Underwriting of Securities:

The New Issue Market as a segment of capital market can be activated through
institutional arrangements for the underwriting of new issues of securities. During
the pre-independence period, the volume of securities underwritten was quite
minimal due to lack of an adequate institutional arrangement for the provision of
underwriting. Stock brokers and banks used to perform this function.

In recent years, the volume and amount of securities underwritten have

tremendously increased owing to increasing participation of specialized financial
institutions like LIC and UTI and the developed banks like 1FC1,1CICI and IDBI in
underwriting activities. It is evident from the fact that the amount of securities
underwritten was only 55 per cent in 1960-61, whereas at present it is about 99 per
cent.

 Growth in Response to the Offer of Public Issues of Shares and

Bonds:

Traditionally investors in India being risk-investors had been reluctant to invest in

shares of public limited companies. Hence, industrial securities as a form of
investment were not popular in India before 1951. However, since 1991 public response
to corporate securities has been improving. But equity-cult has yet to be developed in
rural areas.
It is important to point out that the public response to new issues of shares and
bonds depends upon number of factors such as rates of return on industrial
securities relative to rates of return on non-marketable financial assets and real
assets, government’s monetary policy and fiscal policy and above all legal protection
to investors in recent years.

All the above mentioned factors have contributed to the growth of public response to
new issue of corporate securities. In short, growing response to public issues has
strengthened the Indian capital market. It is evident from the fact that the number of
shareholders rose from 60 lakh in 1985 to 160 lakh in 1994.

 Growth of Merchant Banking:

The role of merchant banking in India’s capital market can be traced back to 1969 when
Grind lays Bank established a special cell called the ‘Merchant Banking’. Since then all the
commercial banks have set up the ‘Merchant Banking Division’ to play an important role in
the capital market.

The merchant banking division of commercial banks advises the companies about economic
viability, financial viability and technical feasibility of the project. They conduct the initial
‘spade work’ to find out the investment climate to advise the company whether the public
issue floated would be fully subscribed or under-subscribed.

The merchant banks in India act as the underwriter as well as the manager of new issues
of securities. The Securities and Exchange Board of India (SEBI) regulates all merchant
banks as far as their operations relating to issue activity are concerned. To sum up, the
emergence of merchant banking has strengthened the institutional base of Indian capital
market.

 Growth of Credit Rating Agencies:

Of late, credit rating agencies have emerged in the financial sectors. This is an important
development for the growth of Indian capital market. Investment Information and Credit
Rating Agency of India (ICRA) rates bonds, debentures, preference shares, CDs (Corporate
Debentures) and CPs (Commercial Papers).
As Credit Rating Information Services of India Ltd. (CRISIL) is a pioneer in credit rating, it
rates debt instruments of banks, financial institutions and corporate firms. The credit
assessment of companies issuing securities helps in the growth of New Issue Market
segment of the capital market.

 Growth of Mutual Funds:

Mutual funds companies are investment trust companies. Mutual funds schemes are
designed to mobilise funds from individuals and institutional investors, who in exchange get
units which can be redeemed after a certain lock-in period, at their Net Asset Value (NAV).
The mutual fund schemes provide tax benefits and buy back facility.

The Unit Trust of India (UTI) can be regarded as pioneer in the setting up of mutual funds in
India. Of late, commercial banks have also launched in India mutual funds schemes. Can-
stock scheme of the Canara bank and LIC’s scheme, such as Dhanashree, Dhanaraksha and
Dhanariddhi are mutual funds schemes.

Since mutual funds schemes help to mobilise small savings of the relatively smaller savers
to invest in industrial securities, so these schemes contribute to the growth of capital
market. The total assets of mutual funds companies increased from Rs. 66,272 crore in
1993-94 to Rs. 99,248 crore in 2005 and to Rs. 4,13,365 crore in 2008. The investment of
mutual funds in the secondary market influences the share prices in the stock exchange.

 Stock Exchange Regulation Act:

The growth of capital market would not have been possible had the Government of India not
legislated suitable laws to protect the investors and regulate the Stock Exchanges. Under
this Act, only recognized stock exchanges are allowed to function. This Act has empowered
the Government of India to enquire into the affairs of a Stock Exchange and regulate it’s
working.

The Government of India established the Securities and Exchange Board of India (SEBI) on
April 12, 1988 through an extra ordinary notification in the Gazette of India. In April 1992,
SEBI was granted statutory recognition by passing an Act. Since 1991, SEBI has been
evolving and implementing various measures and practices to infuse greater transparency
in the capital market in the interest of investing public and orderly development of the
securities market.
  Liberalisation Measures:

Foreign Institutional Investors (FII) have been allowed access to Indian capital market.
Investment norms for NRIs have been liberalized, so that NRIs and Overseas Corporate
Bodies can buy shares and debentures, without prior permission of RBI. This was expected
to internationalize Indian capital market.

To sum up, the Indian capital market has registered an impressive growth since 1951.
However, it is only since the mid-1980s that new institutions, new financial instruments and
new regularity measures have led to speedy growth of the capital market. The liberalisation
measures under New Economic Policy (NEP) gave a further boost to the growth of Indian
capital market.

Key Points to Note

 Gross national savings above 30 per cent of GDP

In 2016, India’s Gross National Savings (GNS), as a percentage of GDP, stood at 28.9
per cent, as against the GNS of developed nations like the UK (15.1 per cent) and that
of emerging nations like Brazil (15.8 per cent) and Russia (28.6 per cent).

 India’s HNWI population to double by 2020

India has 219,000 high net worth individuals having net wealth of US$ 877 billion as of
2016, and the population of HNWIs is expected to double by 2020.

 Robust AUM growth

Mutual fund industry AUM recorded a CAGR of 15.25 per cent over FY07–17. India is
considered one of the preferred investment destinations globally. The Association of
Mutual Funds in India (AMFI) is targeting nearly fivefold growth in assets under
management (AUM) to INR 95 lakh crore (US$ 1.47 trillion) and a more than three
times growth in investor accounts to 130 million by 2025.

 Fundraising via IPOs on the rise

A total of 153 initial public offers (IPOs) were issued in the Indian stock markets in
2017, which raised a total of US$ 11.6 billion.
 SEBI plans to make monitors mandatory for IPOs up to Rs 500 crore
The SEBI board is also likely to discuss allowing options trading for commodities,
unified licence for brokers, use of e-wallet for investments in mutual funds and
instant withdrawal facility in mutual funds among other things.

 In India, the biggest challenge is to develop the corporate bond and

securitization market.
Emerging market issuers lack options to diversify funding and to match funding with
their needs. The absence of a long-dated bond market reduces the flexibility of
corporate borrowers to align funding structure with assets.
The inability to match long-term savings with future pension and health requirements,
combined with aging populations, risks creating a generation of poor retirees,”
McKinsey said in the report.

 Deeper capital market to help India unlock $100 billion in funding every year
India can unlock $100 billion of fresh funding every year for corporates and core
sector companies if policymakers take steps to deepen the country’s capital market,
McKinsey & Co said Wednesday.
 The consulting firm pegged the size of India’s capital market at $140 billion but
termed India’s ability to funding at scale as moderate with shallow pricing efficiency.

Current Scenario of Capital Markets in India

Growing Demand
 Rising incomes are driving the demand for financial services across income
brackets
 Financial inclusion drive from RBI has expanded the target market to semi-urban
and rural areas
 Investment corpus in Indian insurance sector can rise to US$ 1 trillion by 2025

Innovation
 India benefits from a large cross-utilisation of channels to expand reach of
financial services
 Maharashtra will be the 1st state, to launch its mobile wallet facility allowing
transferring of funds from other mobile wallets.
 Airtel recently got the payments bank license from the RBI and is starting its pilot
services across 12000 outlets in Karnataka in supplement to Andhra Pradesh and
Telangana

Policy Support
 Government has approved new banking licenses and increased the FDI limit in the
insurance sector
 Gold Monetization Scheme,2015, Atal Pension Scheme, Pradhan Mantri Suraksha
Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana,RERA in housing.
Growing Penetration
 Credit, insurance and investment penetration is rising in rural areas.
 HNWI participation is growing in the wealth management segment
 Lower mutual fund penetration of 5–6 per cent reflects latent growth
opportunities
 In January 2017, Central Government inaugurated the INX (International stock
exchange), subsidiary of BSE Ltd., in the International Finance Services Centre,
Gujarat.

Analyzing the Markets

ASSETS UNDER MANAGEMENT HAVE MORE THAN DOUBLED SINCE FY07

 The asset management

industry in India is among the
fastest growing in the world. As
of November 2017, 42 asset
management companies were
operating in the country. At the
end of January 2018, the assets
under management of the
mutual fund industry stood at Rs
22.41 lakh crore (US$ 346.15
billion.)
 Inflows in India's mutual
fund schemes via the systematic
investment plan (SIP) route
reached Rs 53,446 crore (US$
8.26 billion) between April-
January 2018.
  India registered a record inflow of amount of US$ 51.02 billion in mutual funds in
FY 2016-17. According to the Association of Mutual Funds in India (AMFI) data, this
was the highest investment in mutual fund schemes since the fiscal 1999-2000.
 Equity mutual funds have registered a net inflow of Rs 13,404 crore (US$ 2.07
billion), thereby taking their asset base to Rs 7.04 lakh crore (US$ 108.74 billion)
in January 2018.
 The number of mutual fund (MF) portfolios have increased to 66.5 million as of
December 2017, backed by rising interest in MFs among investors.
 Mutual fund (MF) equity portfolios in India reached a 10-year high of 49.3 million,
by end of 2017.

PROMINENCE OF CORPORATE INVESTORS IN MUTUAL FUNDS CATEGORY

 In December 2017, corporate investors accounted for around 43.03 per cent of
total AUM in India, while HNWIs and retail investors accounted for 29.65 per cent
and 25.25 per cent, respectively.
 In 2016,

corporate investors
accounted for
around 46.9 per
cent of total AUM in
India, while HNWIs
and retail investors
accounted for 28.6
per cent and 22.3
per cent, respectively.
 Category 3 Alternative Investment Funds (AIFs) in India, which are hedge funds
investing in public markets, have raised Rs 8,521 crore (US$ 1.3 billion) during the
first nine months of 2017
LEADING AMC’S IN INDIA

EQUITY MARKET TURNOVER INCREASED SIGNIFICANTLY IN RECENT YEARS

 Steadily rising turnover in financial markets has led to rapid expansion of the
brokerage segment
 Between FY96 and FY17, the annual turnover value in NSE witnessed growth at a
CAGR of 19.13 per cent reaching a value of US$ 790.21 billion in FY17
 Indian stocks markets, S&P Sensex and Nifty 50, rose 27.9 per cent and 28.6 per
cent respectively in CY 2017, thereby yielding the best returns since 2014.
 The number of companies listed on the NSE rose from 135 in 1995 to 1,870 by the
end of January 2018.
 India has scored a perfect 10 in protecting shareholders' rights on the back of
reforms implemented by Securities and Exchange Board of India (SEBI).

 The number of listed companies on NSE and BSE increased from 6,445 in FY10 to
7,483 in January 2018.
 The market capitalisation of all the companies listed on the BSE reached a record
Rs 150 lakh crore (US$ 2.33 trillion) backed by high gains in the broader market.
  The revenues of the brokerage industry in India are estimated to grow by 15-20
per cent to reach Rs 18,000-19,000 crore (US$ 2.80- 2.96 billion) in FY 2017-18,
backed by healthy volumes and a rise in the share of the cash segment.

 The amount raised by IPOs in India increased from US$ 318 million in FY 2008-09
to US$ 10,888 million in FY 2017-18*.
 Initial Public Offers (IPOs) by small and medium enterprises (SMEs) in India
received record funding of Rs 16.79 billion (US$ 259.35 million) in 2017 through
133 issues.
 A total of 153 initial public offers (IPOs) were issued in the Indian stock markets in
2017, which raised a total of US$ 11.6 billion.

WEALTH MANAGEMENT IS A HIGHLY EMERGING SEGMENT

 Between 2011 and 2016, number of HNWIs in India has seen a steady rise at a CAGR
of 12.73 per cent.
 High net worth households would grow at an even faster rate till 2019 growing at
a CAGR of about 21.5 per cent.
 By the end of 2025, global HNWI wealth is estimated to grow to over US$ 100
trillion.
 Advisory asset management and tax planning has one of the highest demand
among wealth management services by HNWIs; this is followed by financial
planning.
PHENOMENAL RISE OF NBFC’S

 NBFCs are rapidly gaining prominence as intermediaries in the retail finance

space NBFCs finance more than 80 per cent of equipment leasing and hire
purchase activities in India.
 The public deposit of NBFCs increased from US$ 293.78 million in FY09 to US$
6,089.52 million in FY17, registering a compound annual growth rate (CAGR) of
46.10 per cent.
 The gross loans of India’s Non- Banking Finance Company Microfinance
Institutions (NBFC-MFIs) increased 24 per cent yearon-year in Q2 FY18 to Rs
38,288 crore (US$ 5.89 billion).
OPPORTUNITIES
GROSS NATIONAL SAVINGS GROWING AT A HEALTHY PACE

 Gross national savings are estimated to increase from US$669 billion in 2015 to
US$ 940 billion in 2019, growing at a CAGR of 8.87 per cent.
 India’s HNWIs wealth is likely to expand at a CAGR of 19.7 per cent and reach
around US$ 3 trillion by 2020.

 As per Union Budget 2017-18, government has allocated US$ 1.48 billion for
recapitalisation of Public Sector Banks in the country. As per the Union Budget
2018-19, the recapitalisation of public sector banks is expected to allow banks to
lend additional Rs 5 lakh crore (US$ 77.23 billion).
PROMISING GROWTH IN EQUITIES AND RELATED PRODUCTS.

 The Indian equity market is expanding in terms of listed companies and market
cap, widening the playing field for brokerage firms. Sophisticated products
segment is growing rapidly, reflected in the steep rise in growth of derivatives
trading.
 With the increasing retail penetration there is immense potential to tap the
untapped market. Growing financial awareness is expected to increase the
fraction of population participating in this market.
 As of February 2017, National Payments Corporation of India (NPCI) is planning to
make Hyderabad as its hub. The company will set up its office and data centre in
the city. NPCI is
an origination for
all retail
cashless
payments in the
country, which
will play a main
role in the push
for making a
cashless
economy.
 ChrysCapital, a private equity firm, raised its 7th funding worth US$ 600 million,
in February 2017, from various investors such as Harvard Management Company
and Singapore Investment Corporation (GIC).
 Total
wealth held by
individuals in
unlisted equities is
projected to grow
at a CAGR of 19.54
per cent to reach
Rs 17.64 lakh
crore (US$
273.69 billion) by
FY22.
  Private equity (PE) investments in India increased 59 per cent to US$ 24.4 billion
in 2017, with average deal size of US$ 42.8 million.

HUGE UNTAPPED POTENTIAL IN THE RURAL INDIA AND THE HWNI

Two-thirds of India’s population lives in rural areas where financial services have made
few inroads so far. Rural India, however, has seen steady rise in incomes creating an
increasingly significant market for financial services.
There are several standalone networks of SHG, NGO’s and MFI’s in different parts of rural
India. Cross-utilisation of these channels can facilitate faster penetration of a wider suite
of financial services in rural India.
Increasing use of technology to reach rural India is the paradigm-shifting enabler.
Internet kiosk based channels are expected to become the bridge that connects rural
India to financial services.

CREDIT INVESTMENTS

Safe investment options have a

Rural credit segment is a large market,
which can be tapped by ensuring timely
loans which are critical to agricultural
sector.
 Self Help Groups and NGOs are useful
vehicles to make inroads into rural
India.
potential to tap into rural household
savings.
Some private players are coming up
with innovative products like 3rd party
money market mutual funds to cater to
rural investment needs.
India is one of the fastest growing wealth management markets in the world.
The HNWI population in India is young and therefore more receptive towards
sophisticated financial products.
India has over 286,000 households with net worth of more than US$ 1 million with assets
close to US$ 584 billion.

INVESTOR BRAND INNOVATION

PROTECTION BUILDING AND
DIGITALIZATION

The regulatory
Brand building coupled Investment in required
environment for fiduciary
with partnership based technologies, imbibing
duties in wealth
model will improve the state-of-the-art best
management is evolving;
advisory penetration. practices of advisory and
players will benefit greatly
Greater focus on creating customised and
from quickly adopting new
transparency will speed up innovative products will
investor protection
the process enable growth
measures

FAVOURABLE POLICY MEASURES AND GOVERNMENT

INITIATIVES

Budgetary Measures
 Under the Union Budget 2018-19, the government has allocated Rs 3 trillion (US$
46.34 billion) towards the Mudra Scheme.
  Union Budget 2017-18 had allotted a capital infusion of US$ 1.48 billion in public
sector banks (PSBs). As per the Union Budget 2018-19, the recapitalisation of
PSBs is expected to allow banks to lend additional Rs 5 lakh crore (US$ 77.23
billion).

Goods and Services Tax (GST)

 The Goods and Services Tax (GST) on financial services transactions like banking
transactions, mutual funds, insurance and stock market has been increased from
the current 15 per cent to 18 per cent.
 The Government of India is planning to introduce a two percentage point discount
in the Goods and Services Tax (GST) on business-to-consumer (B2C) transactions
made via digital payments
Tax incentives
 Insurance products are covered under the EEE (exempt, exempt, exempt) method
of taxation. This translates to an effective tax benefit of approximately 30 per
cent on select investments (including life insurance premiums) every financial
year
 Reduction in securities transaction tax from 0.125 per cent to 0.1 per cent on cash
delivery transactions and from 0.017 per cent to 0.1 per cent on equity futures
 Indian tax authorities plan to sign a bilateral advance pricing agreement with a
number of companies in Japan. The agreement is aimed at avoiding conflicts with
multinational companies over sharing of taxes between India and the countries
where these firms are based

Other initiatives
 SBI and FTSE Russell, the arm of the London Stock Exchange, announced plans to
jointly develop a Bond Index for global investors to benchmark Indian bond
market, against that of its competitors
 The Government of India has launched the 'Bharat 22' exchange traded fund (ETF),
which will be managed by ICICI Prudential Mutual Fund, and is looking to raise Rs
8,000 crore (US$ 1.22 billion) initially.
 The Securities and Exchange Board of India (SEBI) has allowed exchanges in India
to operate in equity and commodity segments simultaneously, starting from
October 2018.
 SEBI has decided to allow strategic investors such as registered Non-Banking
Financial Companies (NBFCs) and international multilateral financial institutions to
invest upto 25 per cent of the total offer size of Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (InvITs).
Housing Finance in India

The demand for housing is ever-increasing with the growing population and urbanisation
and access to housing finance needs to keep pace with it; therefore, the regulators,
lenders and other market participants need to be incentivised to continue to
progressively cater to the growing housing finance needs. Enhancing access to housing
finance plays a quintessential role in meeting the growing demand for housing.
A large population of the country lives in substandard living conditions and there is dire
need for improved sanitation, basic infrastructure and affordable housing. Deep, resilient
and affordable housing finance markets are necessary for the middle and lower income
households to manage formal housing. The policy initiatives of the government of India to
propel the access to housing finance and to make it sustainable and viable for the
financiers are much needed. Increasing access to capital markets, long term funds,
facilitating regulations, etc. have been key efforts from the government and the
regulators. However, there is a lot of ground to cover. National Housing Bank has also
been proactively registering more and more housing finance companies to cater to areas
ignored by conventional lenders thus far. The recent surge in housing finance companies
from 33 to 89 companies and the urge to spread them geographically also gives a
perspective of the regulator to offer inclusive growth.
Several of these housing finance companies are finding ways and means of offering
financial inclusion by replacing collateral requirements from proper land titles to pseudo
collaterals, introducing qualitative measures for assessment of low income borrowers,
offering developmental housing loans and more. The housing finance sector has over the
years has been largely driven by banks or a handful of housing finance companies. The
scenario is fast changing. With the growing number of housing finance companies, the
challenge is not just to render financial inclusion, but to create a conducive environment
for them to sustain and scale and therefore the support from the regulators will be ever-
increasing. The path to a more resilient housing finance market is difficult one but surely
an achievable one and soon.
KEY POINTS
 Rapid urbanisation, decreasing household size & easier availability of home loans has
been driving demand for housing
 Personal finance, including housing finance provide an essential cushion against
volatility in corporate loans
 The recent improvement in property value have reduced the ratio of loan to collateral
value
 Credit to housing sector increased at a CAGR of 11.96 per cent during FY09–FY17,
wherein, value of credit to housing sector increased from to US$ 114.1 billion in FY16 to
US$ 133.1 billion in FY17.
 Demand in the low & mid-income segments exceeds supply 3 to 4 fold
 This has propelled demand for housing loan in the last few years
 The sector will also benefit from economic stability & credibility of the monetary
policy.
India’s housing finance sector has remained relatively underpenetrated compared to its
peers as evident by its low mortgage-to-GDP ratio (9% as on March 2015), compared to
its regional peers (17% for Thailand, 20% for China, 34% of Malaysia).
A new way for housing Finance- Affordable Housing
With a slew of reforms and push from the government, affordable housing -- so far the
poor second-cousin of real estate -- is emerging as the preferred segment for housing
finance institutions and developers alike, say industry stakeholders.
 Affordable housing has the potential to be clean and quick, leading to lower
operational and marketing costs and helping in creating a new category within the
realty space.
 While the segment is on a growth curve, the goal of providing affordable housing to
all will be achieved by bridging the gap that currently exists between access to
capital and execution capability.
 The other aspect of affordable housing will be the increasing use of newer material
for building houses and construction techniques which might revolutionise the
sector.
According to a report by domestic ratings agency Crisil, affordable homes are
altering mortgage market dynamics. It estimates that the segment was worth
around Rs 1.6 lakh crore as on March 31, 2017 -- accounting for over 25 per cent of
all housing loans.
The trend of rural-urban migration is set to continue aligning to estimates that until 2050
urbanisation is likely to grow at a CAGR of 2.1%—double that of China. The government’s
announcement is a timely acknowledgment of the inherent potential of the industry as well
as strong steps to achieve its ‘Housing for All’ objective. This, together with the Credit
Guarantee for SMEs, will enable small business owners and the middle class salaried
customer to make better progress in their businesses, take a step towards higher
aspirations and seek to move into their own houses.

Major players in Housing Finance

The housing finance market in India is fragmented, with 80-plus players. However, two
large companies, HDFC and LIC, each has assets over Rs 1 lakh crore, cornering 57 per
cent, according to rating agency Icra. The next batch, of three HFCs — DHFL, Indiabulls and
PNB HFL — with a book size of Rs 15,000-50,000 crore each — have a combined market
share of 21 per cent.

To make a competitive product, as per our view following thing should be kept in mind:
 Pricing should be competitive enough in this industry due to cut-throat
competition.
 In most of the financial institutions, this pricing should be linked with CIBIL
score. The people who have good score should have less pricing and vice-versa.
 Turn Around Time (TAT) should be minimum to make yourself easily
approachable and appreciable.
 Processing charges/ File charges should also be competitive.
 Assessment of housing loan limit should be suited to the customer’s
requirement but the minimum 10% margin against the present valuation of the
house be maintained.
By Icra’s estimate, HFCs will require Rs 9,000-16,000 crore of external capital (11-19
per cent of existing net worth) to grow at a compounded annual rate of 20-22 per cent
for the next three years. The internal capital generation level (after dividend) would be
15-16 per cent and the gearing level is eight to nine times.
Most of this incremental capital requirement would be for the small HFCs, including
those operating in affordable housing. HFCs compete with commercial banks in home
loans and their market share has grown gradually.
With the spawning of new companies, especially for affordable housing, their share in
an expanding pie is expected to grow at a faster pace. HFCs' share in
total housing loans was 33 per cent in March 2012 and 37 per cent in March 2017.
Commercial banks’ share went from 67 per cent to 63 per cent.
Key challenges for the Indian Housing Finance Sector
The formal housing finance sector in the country is limited to organized sector
personnel and taxpayers. As a result, a huge proportion of this financing need is met
through the informal sector. This is more prominent in rural areas where the access
to formal funding is difficult.
Here are five key challenges faced by this sector
1. Having access to long-term and low-cost sources of funds
2. Procuring access to reliable credit histories and land records
3. Developing technical innovations and standards
4. Minimizing constraints through state laws
5. Extending finance to low-income group and economically weak borrowers
6. Despite of many processes going online, still many frauds and scams occur.

A Road Ahead in Housing Finance

During the last two decades, the housing finance sector has significantly evolved.
Nonetheless, some steps need to be taken to eliminate the challenges faced by this
sector. Improvements like creating a reliable database, addressing long-term funding
concerns, implementing valuation standards and uniform codes for improved
transparency, product innovations, introducing safety norms, and increasing
consumer awareness would play a vital role in the growth of this sector.
Some steps in favour and where a company can work upon to progress:
 The potential for housing finance is tremendous supported by economic growth
drivers such as population expansion, rising disposable incomes, personal
income tax benefits, increasing urbanisation, and economic growth of tier II and
tier II cities.
 As times transform and India gets online, the sector is also quickly adapting,
moving in a positive direction and taking new steps with a perk up in the interest
of small-finance banks and micro-lenders in this field.
 The shortage in the low income housing category is evident both in terms of
quality and quantity, and about 96% of this is composed of Economically Weaker
Section (EWS) and Low Income Group (LIG). The government’s announcement
has given further impetus to the transformation of the sector and is a great
step to empower people to invest in their dream homes.
 Overall, the sector outlook remains positive, with several positive supply side
initiatives underway through the Pradhan Mantri Awaas Yojana, which proposes
housing for all by 2022, by building two crore houses for urban poor including
LIG and EWS households, and the Real Estate (Regulation and Development) Act
2016, to enhance transparency and boost confidence of home buyers.
 The RBI’s decision to increase loan-to-value (LTV) ratio will also enable housing
finance companies to lend more to lower middle income customers.
 The associated technology transition is also expected to boost the ability of
housing finance institutions to lend credit through shorter and friendly
processes to assess eligibility and faster underwriting. With several benefits
associated, advantages of digital documents and fewer intermediaries, cost of
finance is expected to come down, which can be passed onto the customer.
 RERA
RERA seeks to address issues like delays, price, quality of construction, title and
other changes.
Delays in projects are the biggest issue faced by buyers. But, with the
introduction of The Real Estate (Regulation and Development) Act, 2016 (RERA)
will finally give India’s real estate sector a boost. Some key provisions are as
follows:

1. The promoter of a real estate development firm has to maintain a

separate escrow account for each of their projects. A minimum 70 per
 cent of the money from investors and buyers will have to be deposited.
This money can only be used for the construction of the project and the
cost borne towards the land.

2. To provide clarity to buyers, developers will have to keep them informed

of their other ongoing projects.

3. RERA requires builders to submit the original approved plans for their
ongoing projects and the alterations that they made later. They also have
to furnish details of revenue collected from allottees, how the funds
were utilised, the timeline for construction, completion, and delivery that
will need to be certified by an Engineer/Architect/practicing Chartered
Accountant.

4. It will be the responsibility of each state regulator to register real estate

projects and real estate agents operating in their state under RERA. The
details of all registered projects will be put up on a website for public
access.

5. RERA talks about the quality of construction in projects. Over the last
few years, buyers have protested about poor of flats. The regulator will
ensure protection to buyers in this matter for five years from the date
of possession. If any issue is highlighted by buyers in front of the
regulator in this period including in quality of construction and the
provision of services, the developer will have to rectify the same in a
matter of 30 days.

6. Developers can’t invite, advertise, sell, offer, market or book any plot,
apartment, house, building, investment in projects, without first
registering it with the regulatory authority. Furthermore, after
registration, all the advertisement inviting investment will have to bear
the unique RERA registration number. The registration no. will be
provided project-wise.
 7. After registering the project, developers will have to furnish details of
their financial statements, legal title deed and supporting documents.

8. After developers’ register with the regulator, a page will be created for
the builder on the regulatory authority’s website. The developer will be
given login credentials using which it will upload all the information
regarding the registered projects on the regulator’s website. The
number, type of apartments, plots and projects and their completion
status will be updated at a maximum quarterly basis.

To add further security to buyers, RERA mandates that developers can’t

ask more than 10 per cent of the property’s cost as an advanced payment
booking amount before actually signing a registered sale agreement.

The regulator will have the power to fine and imprison errant builders
based on a case by case basis. The imprisonment can go up to a period
of three years for a project.

Recommendation
With the study, it is evident that the housing finance sector is booming and the main
reason is the benefit all the stakeholders hold with this product. A brief version of
this is stated as follows:
Financing institution
 It is beneficial to financial institutions because there is less Non Performing
Assets (NPA) as shown by existing data, so same trend is expected in near
future.
 It is an asset based security or mortgage loan.
 It is like building a long term relationship as the repayment cycle is mostly
more than 5 years and up to 30 years. This long term relationship helps the
financial institution to push forward its other financial product to customer.
 Customer
 The rate of interest is very less compared to other loans. In India, as per
income tax law, the repayment of the principal of housing loan as well as
interest is exempted from taxable income.
 As customers are attached to their home emotionally and in most of the
cases Indians put all their savings to make that “dream home”. So, this
connect makes the lenders’ institute a positive one.
 After availing the housing loan, during the passage of time, the value of the
house increases against the loan outstanding by regular repayment of the
loan liability.
Economy
 It is the basic need of every citizen of country and holds a priority sector
advance classified by the government.
 It helps the associated industries such as cement, iron bar, labour which
boost the respective industries and hence help in the economic growth of the
country.
Generally, Despite of many processes going online, still many frauds and
scams occur. For this, we suggest that each person who is property owner should
maintain a property account with statutory body authorised by the government on
the similar lines of Demat account in case of share/bond. Each sale/ purchase of
the property should be routed through the account and should be entered in the
passbook just on the similar lines as Demat.
However, the property which is not entered in the account of seller of the property,
should be treated as owned by the government and their sale/purchase be allowed
with the government consent.
In nutshell, housing finance holds a good scope to grow with the help of government
impetus and good associated technologies. A major concern for any customer in
this field is Turnaround time (TAT) i.e. the time taken by any organization to revert
or start processing after submission of all the checklist documents. It would be a
great help to them if the whole process is user-friendly and approachable.