Housing Finance

Chapter 8 Financial Services M Y Khan

Housing Finance Introduction

Till 1988 provided mostly by the Govt. of India In 1988 National Housing Bank (NHB) set up as apex institution . A fully owned subsidiary of RBI. Objective to operate as a principal agency to promote housing finance institutions(HFIs) at both local and regional levels. -- also providing finance for housing either directly or indirectly. So performs a regulatory , promotional and financial role in supply of housing finance.

Management & Business

All business affairs vested with the Board of Directors. They have all powers to execute all activities on NHBs behalf. Business : Promoting and supporting HFIs Providing loans for housing activities to HFIs, Banks, State Cooperatives, & other institutions . Guaranteeing financial obligations of HFIs, and underwriting the issue of stocks/bonds/debentures of HFIs. Buying of loans/advances secured by mortgage of immovable property relating to banks/HFIs.

NHB - Business

Undertaking housing mortgage insurance. Providing guidelines to HFIs for growth and providing technical and administrative assistance. Formulating schemes for purposes of mobilizing resources for extending housing credit. Undertaking research and surveys on constructing techniques.

NHB - HFC Prudential Norms

They are guidelines to HFCs with respect to the Acceptance of Public Deposits, (payment, Interest Rates on Them, and Overdue interest etc,), Particulars in the Application Form, Advertisement and Statement in Lieu of Advertisement, Accounting Standards for income recognition, expenses etc, Provisioning for Bad and Doubtful Debts. Asset Classification, Directions to Auditors.

Guidelines for extending Equity support to HFCs

Organization & Main Activity The HFC should be a public ltd co. - 75% of capital employed of HFC invested by way of long term finance for housing. Minimum Paid up Capital & listing : - HFCs to have minimum paid up capital of Rs.5 crore. Promoters capital as per SEBI guidelines. NHBs equity participation lower of Rs.1 crore or 10% of paid up capital . For HFCs stock listing , all above guidelines Plus rules prescribed by NHB.

Guidelines for extending Equity support to HFCs.

Submission of Application : Filling of forms and furnishing of information as required by NHB. Name of the Company & Promoters; - For NHB equity participation the Company name should not - match with a construction Co. with which promoters of HFC are associated. Should not be subsidiary of construction co. Should not promote a construction co. Its Chairman, MD or director should not be the same for a construction co.

Guidelines for extending Equity support to HFCs.

Board of Directors The appointment of Chief Executive of HFC, in consultation with NHB. In case of equity participation from NHB, atleast One non rotational nominee director on HFCs board , from NHB. Credit Rating: -Compulsory credit rating by HFC, from CRISIL/ICRA/FITCH INDIA, CARE. Minimum rating CARE3, CRISIL 6, ICRA 6 required for equity participation from NHB. Shareholders Agreement HFCs to enter into Shareholders Agreement with NHB for undertaking new business, amalgamation, mergers, takeovers, floatation of subsidiaries, appointment of nominee directors etc.

Guidelines for Extending Refinance Support to HFCs

Minimum Paid Up Capital and Listing : Minimum net owned funds Rs. 10 crore. Promoters contribution in Share Capital as per requirement of SEBI. Submission of Application : as per NHB guidelines.

Guidelines for Extending Refinance Support to HFCs

Name of the Company and Promoter: Name not similar to any construction co., with which the promoters of the HFC are associated. HFC should not be a subsidiary of the Construction co. Directors, MD, etc. should not be holding same position in any construction co., with which the promoters of HFC are associated. Board of Directors A of A should contain provision for appointment of nominee directors by the NHB. Appointment of CEO of the HFC , if necessary should be consultation with NHB.

Guidelines for Extending Refinance Support to HFCs..

Compliance with the Provisions of Housing Finance Companies (NHB) Directions , 2001, as amended from time to time. Submission of Returns : quarterly , half yearly and annual returns as prescribed by NHB. Loans : Objective of loans , to help individuals or home seekers and groups of individuals to have easy access to institutional housing finance. The motto should be to render quality service to individual households.

Guidelines for Extending Refinance Support to HFCs..

Lending Rates : HFCs interest rates on housing loans to be refinanced from the NHB , should be as prescribed by the NHB. Front End Charges: All application/processing/administrative fee should not exceed 2% of the sanctioned amount. Prepayment Charges: Prepayment charges can be levied, provided transparent policy adopted , duly approved by the Board of directors.

Guidelines for Extending Refinance Support to HFCs..

Administrative Cost: HFCs should aim at keeping administrative cost low, not exceeding 1.5% of the outstanding loans in the long run. Prudential Norms: HFC should follow all prudential norms with respect ot income recognition, accounting standards, provisioning for bad and doubtful debts, capital adequacy and concentration of investments. Others The refinance facility is at the sole discretion of the NHB and cannot be claimed as a right by the HFC.

Refinance schemes for HFCs

Scope : refinance provided only for direct lending to individuals/groups of individuals. Overdue loans, bought over loans from any other HFCs/banks , loans for purchasing old houses not eligible for refinance Eligibility Criteria : - compliance with NHB Refinance Guidelines, Overdue(3 mths) housing loans not to exceed 10% of total housing demand for preceding 12 mths. - NPAs not more than 5%. Scale of Refinance : for individual housing loans not exceeding Rs.50 lakhs. - For upgradation/repairs refinance restricted to 25% of total refinance obtained. - Refinance provided upto 100% of housing loans sanctioned and disbursed by the HFC.

Housing Finance System.

Central and State Government National Housing Bank HUDCO Insurance Organizations/Corporations Commercial Banks Cooperative Banks Specialized Housing Finance Institutions(HFIs).

Housing Finance System.

NHB as apex since 1988, has fulfilled the long term need for having a well set housing Financing Industry in India. At present 320 HFCs in India, out of which 26 registered with the NHB, and account for 98% of the total housing loan disbursed.

Housing Finance System.

Main organizations in this system

Central and State Governments Indirectly support the housing building effort, through various urban development schemes, & various social housing schemes. Financing through loans and subsidies to State governments, and union territories. HUDCO set up the Central Govt. undertakes housing and urban development programmes, development of land for satellite towns, and sets up the building materials industry.

HUDCO

Principal mandate to facilitate the housing conditions of the low income group and economically weaker sections . Form of Assistance Housing : rural housing, cooperative housing, urban employment through housing and shelter upgradation. Infrastructure: land acquisition, basic sanitation, and environmental improvement of slums. Consultancy services : Building centres for technology transfer, building materials industries, and building technology.

HUDCO...

Training :
provides training in human settlements and technical assistance to all borrowing agencies. Financial assistance to govt. bodies like state housing boards, rural housing boards, slum clearance boards,etc,. Differential interest rate adopted for various categories of households , which provides and incentive to executing agencies to promoted housing for less privileged. The loan terms 10-15 years. In case of EWS sites, where the unit cost is less than Rs.7500/- HUDCO finances the entire project cost.

HUDCO..

Extent of financing of the house cost is 90% for EWS, 85% for LIG, 75% for MIG, 60% for HIG. Urban Infrastructure Also finances the urban infrastructure projects like water supply, sewerage, drainage, solid waste management, transport terminals, roads /bridges etc.

Housing Finance System

Insurance Organization/Corporations LIC & GIC support housing activity directly and indirectly. They subscribe to the bonds of the State Housing Boards, HUDCO and grant loans to State govt. for rural housing programmes. LIC Home Finance Ltd.(1989), GIC housing Finance Ltd.(1990). Commercial Banks As per RBI guidelines, 1.5 % of incremental deposits to disbursed as housing finance. Of this allocation , 20% to be way of direct housing loans, 30% for indirect lending by way of term loans to housing finance institutions , HFCs, and public housing agencies . Balance 50% , is for subscription to the HUDCO and NHB bonds. Specialized HFIs A Lead player HDFC ltd, other HFCs which are sponsored by banks like SBI Home Finance ltd., Canfin Homes Ltd, Indbank

Housing Finance Ltd, Citihome etc.

Mortgage based securitisation

Securitisation is a process, where the loans/future reasonbales are converted into tradeable securities. It involves packaging a designated pools of loans and receivables, collatarised by underlying assets and selling these packages to various investors. Process includes: Sale of specific loans to a trust/Special Purpose Vehicle(SPV). In turn the SPV issues securities. (the form of promissory notes, participation certificates, debt instruments). The securities are rated by an independent agency. The seller of the loan , continues to service them. The excess cash flows, (after deducting Int, Prinicpal, Fees) accrue to the seller. Features include, reliance of the investors on the performance of the asset, rather than the credit of the originator(seller) or issuer(SPV).