Mortgage push coming from tier-II, tier-III cities

Written by Raj Kumar Ray | Arun S | Updated: Apr 14 2014, 10:24am hrs
The retail housing sector has been growing at a brisk pace even though GDP growth has fallen below 5% in the last two years. Much of this success could be attributed to the vibrant mortgage industry and regulatory changes. The National Housing Bank, which is the regulator for mortgage firms, is now working on ways to boost low-cost housing finance. In an interview, NHB chairman RV Verma tells Arun S and Raj Kumar Ray that more housing reforms are on the anvil to bridge the gap in demand and supply. With such growth in the housing sector, Verma expects RBI's housing start-up and NHB's Residex indices to emerge as a set of major macro indicators. Edited excerpts:

How has the housing sector fared amid the general slowdown in the economy

Unlike many other sectors, the housing sector has remained recession-proof. Overall, the housing sector has been very stable, given the growth and trends in retail lending. The asset that is created typically appreciates in value while generating a multiplier effect on other sectors with all its positive externalities. With rising demand, both banks and housing finance companies (HFCs) are looking at retail customised products.

There is ongoing competition in the industry, which is promising to be beneficial and in the interest of buyers/borrowers. Competitive lending rates and prices can lead to sustained rising demand. Earlier, acquiring a house used to be the last project in one's life. Now, it is perhaps the first. The society has become very aspiration-driven, which is also fuelling the demand. What has now made a substantial difference to the scenario is the easy availability of credit and customized housing loan products.

With rise in confidence, the mortgage industry has registered a growth of nearly 20 % as at end March 2014. This has been possible with the rise in demand in tier-II and tier-III cities. And mind you, there has been no dilution of due diligence even in smaller cities. The gross NPAs in the housing sector has been lowest among all sectors at 0.70% for HFCs and 1.81% for banks as on December 2013.

With inflation moderating, is there a case for interest rates, especially home loan rates, to soften

One positive development is that the mortgage lending industry is fully integrated with the financial sector and therefore, interest rate movements in the broader financial market influence the trends in the mortgage market. However, the home loan industry is very competitive today, and will continue to be so as the lenders capitalise on the strengths of this market, its growth and size while credit growth in other sectors remains sluggish. This trend is likely to continue through the year 2014-15, which is likely to see softening in the interest rates, with the inflationary pressure moderating. As far as NHB is concerned, we had last raised the bank's prime lending rate (PLR) by 25 basis points from 10.25% to 10.50% in March 2011. Thereafter, we brought down the PLR to 10% in September 2012 and further down to 9.75% in January, 2013, broadly in tune with the market signals with due regard to liquidity and affordability conditions.

Unlike the US housing start-up data that signals recovery or downturn and moves the financial markets world over, Indias mortgage sector is yet to send such a signal despite growing at a rapid pace.

The RBI along with ministry of urban development (NHB is also part of it) has initiated a housing start-up index (HSUI). The current challenge with this index is that it is not easy to get the data on new approvals of housing units from states and municipalities. The new metric is still evolving as it will continue to include more number of states.

NHB has its own residential price index (Residex), which maps the trend in residential property prices in 26 cities. Last set of data that we released for the quarter October-December 2013 showed broadly uppish trend across the country with corrections happening in some of the markets. There is some uppish trend but not volatile.

The housing indices do relate to the real economy a spurt in housing generates demand for cement, steel, labour, bank finance, etc.

The combination of the two data the housing start-up index and NHB Residex can emerge as powerful indicator of growth in coming years as the mortgage loan outstanding as a per cent of GDP grows from the current level of about 9% to double digit in the range of about 15% or so. In other developed economies, the mortgage market accounts for more than 50% and in some countries nearly 75% of the country's GDP.

Talking of due diligence, there were lot of frauds on property deals. How is the situation now

After the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (Cersai) was set up in March 2011, the confidence of the lenders has improved as the banks/HFCs are getting to see and check the security/encumbrance status of properties on the Cersai/Central Registry portal. Cersai has recorded more than 1 crore transactions on its portal as a result of which the incidence of frauds involving multiple financing has also come down as banks can check the status of a mortgaged property before lending for the same unit again.

There is still a growing concern over real estate projects pricing, time of completion and quality. How do you ensure buyers get a fair deal

To a large extent, these could be addressed through the enactment of the Real Estate Regulatory Bill. However, new initiative in this direction has been taken through the rating device.NHB along with Indian Banks' Association are considering a rating mechanism that would be operated through the accredited rating agencies but branded as NHB-IBA rating. The new proposed mechanism will be more focussed on the projects, and will include the builder rating also.

It won't be mandatory but incentive-based as lenders will get the confidence in funding it, and based on risk-based pricing, may charge lower interest to the customers who buy units in these rated projects. The recommendations also include regulatory incentives, in due course of time for the lenders, such as lower risk weight for the loans to the individual borrowers in such projects, as also for lending to such projects. While the new rating system will cover greenfield projects initially, NHB and IBA may consider ongoing projects too. The report and the recommendations are currently being considered by the Centre and RIB.

Considering that most of the mortgages we are talking about are in the formal sector, especially in the cities, banks and HFCs have not tapped into low-cost housing, especially in villages. Is it possible to offer mortgages at the lowest level as the Mor panel, constituted by RBI, suggested

In India, the housing shortage is 18.7 million and 90% of it is in the EWS/LIG segment. The potential is huge. NHB in collaboration with UK's Department for International Development (DfID) has conducted a study on housing micro-finance involving right institutional model and right product. For financial inclusion, it is vital to connect the formal financial system (banks and HFCs) with the unorganised and informal sector, including those in the rural areas through self-help groups and savings-linked loan products.

We strongly believe that providing housing to the people in this segment will be the surest and the most sustainable means for their financial inclusion and at the macro level, a source for inclusive growth. We need to look at this segment with a more flexible approach and a long-term product for better affordability.

The lenders also have to engage in proper due diligence for which appropriate appraisal and underwriting tool kit together with capacity development are required. This is an important engagement for NHB, which we are currently working on.

How has NHB's loan growth been What are your fund-raising plans for FY15

During FY14 (July-June), we have projected our disbursal in the range of about Rs 20,000 crore, which will be about 15% higher than last year.

We have so far disbursed about Rs 13,400 crore, with one quarter left as our financial year is July-June. During the year, we have allocation for Rs 6,000 crore under Rural Housing Fund (RHF), Rs 2,000 crore of Urban Housing Fund (UHF), Rs 4,000 crore of tax-free bonds, Rs 1,200 crore ($200 million) of ECB, about Rs 2,000 crore of external line of credit, and some borrowings through domestic unsecured taxable bonds.

We have launched a number of niche products, such as energy-efficient housing, solar power-aided housing, housing for women, low-income housing, long-term fixed rate mortgages, besides our normal lending under RHF and UHF.