- Email: [email protected]
An institutional framework for housing finance in India
~ABITAT~~TL. Vol.U.No. Printed in Great Britain.
0197-3975/$8$3.~ + O.aO @ 1989 Pergamon Press plc
4,pp.21-27.1988.
An Institutional Framework for Housing Finance in India P.S.A. SUNDARAM” Ministry of Urban Development,
India
The housing sector in India has an important role to play in the development process, as investment in housing and related services sustains the productivity of urban areas and stimulates the rest of the economy through multiplier effects on the production of building materials, engineering, transport and urban infrastructure. Housing activity monetises and brings into economic use dormant savings of individuals, especially the low-income groups, as the prospect of home-ownership offers one of the most powerful incentives to save. Homelinked savings can thus provide a great impetus to resource mobilisation effort at the national level. Finally, as is being appreciated by all the developing countries and international donor agencies, housing helps to achieve the socioeconomic objective of improvement in the quality of life through the provision of a dwelling unit in a serviced neighbourhood, and thus lays the basis for attainment of the goals of employment, health care, education, family welfare and basic services at the individual and city level. Current housing policy is summarised in Appendix A. The scale and intensity of the urban shelter problem is certainly tremendous. The urban population in India has increased from 62.50 million in 1951 to 159.73 million in 1981. It has grown by 47.62% over the decade 1971-1981. Of this urban population, nearly 42 million reside in the 12 metropolitan cities viz., Bombay, Calcutta, Madras, Delhi, Hyderabad, Bangalore, Lucknow, Nagpur, Jaipur, Ahmedabad, Pune and Kanpur. The shortage of housing in the urban areas has been mounting due to increase in population, rate of urbanisation and demand for shelter on the one hand, and inadequate supply of dwelling units and developed land on the other. The Working Group on Housing set up by the Planning Commission for the Seventh Plan has estimated the housing shortage at 5.9 million at the beginning of the Seventh Plan period. Apart from this backlog, the increase in population during 1985-1990 would generate an additional requirement of housing to the extent of 3.8 million. At the present rate of construction, the deficit is expected to increase to 9.3 million by the year 2000 A.D. The present situation is highlighted by congestion and the sub-standard quality of housing as witnessed by the high percentage of families living in dilapidated single and double room dwellings and the growing numbers of families in slums and squatter settlements. Despite the realisation about the magnitude of the housing problem, successive programmes in the national and state plans have not touched even a fraction of the total housing requirements. The total production of houses by the public sector is a tiny percentage of the total housing stock created every year and bulk of the public housing has gone to meet the needs of the middle and high income groups. As the Task Force on Shelter appointed by the Planning Commission in 1982 points out, despite professions in successive Plan docu*Address 11011.
for correspondence:
Ministry of Urban Development.
Nirman Rhavan, New Delhi 11, India
22
P.S. A. Sundaram
ments, the urban poor have not demonstrably benefited from various housing schemes executed during the first six Plans, and public investment has made only marginal contribution to housing for the poor. The bulk of the housing of all income groups including the poor is supplied by private initiative in a variety of ways ranging from organised activities of private developers and co-operatives to unauthorised housing efforts in the form of illegal colonies or squatting on public lands and pavements. The growing number of slums and substandard housing in the bigger cities is an index of both the pull of the employment opportunities for the migrants as of the inability of the urban poor to secure affordable shelter in the context of unfocused public policies for land, investment and services. The Seventh Plan document recognises that there is a need for radical orientation of all policies relating to housing, and all sectors of the economy, viz., Government, public enterprises, private/corporate sector, co-operative sector and the household sector, will have to participate in a co-ordinated manner in housing activities. It is recognised that the major responsibility for house construction should be left to the private and household sector. Building houses according to the differing preferences, capacities and requirements of different households, and economy in house construction can become possible only if the prospective home-owner himself participates or is involved in all stages of the activity. It is recognised that large-scale house construction by the households has been inhibited in the past by inadequate provision of institutional finance. Among other things, two major prerequisites for a big jump in house construction in urban areas are the mobilisation of resources from the household sector through the establishment of appropriate institutions, and the development of suitable serviced sites by the public sector on a large scale for allotment to the public. In this context, the Seventh Plan projections of expenditure on the housing sector in the public and private sectors are revealing. It is envisaged that during the Seventh Plan period, the total public sector investment would be of the order of Rs. 2458 crones while the private sector is expected to contribute about Rs. 29,000 cyores or over 10 times the investment of the public sector. This emphasises the need both for a major effort to mobilise resources for housing and for the Government to take up supporting actions such as making available adequate developed land at affordable prices and making necessary policy changes to promote housing activity such as modification in the Rent Control and Urban Land Ceiling legislation, fiscal incentives, liberalisation of building and planning standards, removal of administrative and procedural constraints to spontaneous housing etc. This has been spurred by the initiatives forming part of the International Year for Shelter for the Homeless (IYSH), with the ultimate goal of shelter for all the homeless by the year 2000 A.D. In recognition of the inadequacy of the public effort so far in housing, the thrust of the Government appears to be not so much to build itself directly, but to promote and facilitate housing activity through the provision of necessary fiscal and financial infrastructure and the physical inputs required for housing. The effort would be to minimise the construction role of the Government, provide elements of shelter which the private initiative cannot provide for itself, and expand facilitating activities for large scale construction by the public individually or in groups. The private sector has come to play a major role in the housing sector, but no serious effort has been made to assure it the necessary inputs to enable it to play its developmental role effectively. In this context, lack of financial resources has been identified as a crucial constraint on housing activity. Economic development, rapid urbanisation and growth in the levels of income call for the establishment of an effective housing finance system by expanding the role of institutional intermediation and incentives in the housing sector. It is unfor-
An Insritutional Framework for Housing Finance in India
23
tunate that, until a few years ago, there hardly existed anything approaching an organised housing finance system, and even now, the institutionally mobilised financial flows into housing form a small part of the total needs. It is not just the lack of financial resources that is the real problem, but the absence of any grassroots level institutional system that would mobilise the existing household savings in the economy for investment in housing, stimulate a shift from consumption to savings for investment in housing, provide institutional intermediation on a mass basis and encourage the individual to invest in housing at an early stage in their earning life. In addition, the housing finance system has to constitute an interface between the housing market and the capital market, both domestic and international. It is out of this realisation that the Seventh Plan emphasises the need for the establishment of a proper diversified institutional structure for housing finance and construction. While the Housing and Urban Development Corporation (HUDCO) and the Housing Development Finance Corporation (HDFC) are to be strengthened, the vast majority of individuals seeking houses would need to be looked after through the creation of local housing finance societies. These societies are expected to raise deposits from the public including the prospective home-owners and also draw upon funds from the capital market with the help of different financial institutions. To facilitate this process, the Government of India set up a specialised financial institution in the form of a National Housing Bank comparable to one in the agricultural finance sector. Major institutional initiatives are needed - and are possible - on the part of the Central and State Governments in order to mobilise more funds for the housing activity for all income groups and make it easier for people to raise longterm loans for a variety of shelter needs in towns of different sizes through various institutional options. Otherwise, the urban poor would be kept outside the pale of schemes of shelter for the homeless and the benefit of allotment of developed plots would not materialise in the form of constructed dwelling units. In order to provide the proper perspective for a discussion on the strategy for - and the modalities of - achieving the above objective of strengthening the housing finance market, it is necessary to make an assessment of the operations in the formal and informal housing finance markets. In the process, the inadequacies in the existing housing finance system and the main constraints on the spread of institutional intermediation can be identified. The formal segment of the housing finance market can be divided into two parts, viz., general financial institutions and specialised financial institutions. The general financial institution sector includes the commercial banks, insurance companies (primarily consisting of the Life Insurance Corporation of India and the General Insurance Corporation group), and the Provident Fund organisations. They do not consider the financing of housing as their primary function. They participate in the housing sector mainly because they are expected to make some proportion of investment in social service sectors of the economy such as housing, and also to meet the housing finance needs of their employees, policy-holders and major clients. Their primary objective is to safeguard the interest of their major customers and to ensure an adequate return to their savings/investments. It is only incidentally that there is an involvement in housing and they are aware of the fact that investment in housing does not yield an adequate rate of return. The commercial banking sector makes only a small contribution to the housing finance effort. At present, the RBI directive provides for advances for housing up to 0.5% of the total advances or up to Rs. 150 crores from this sector. In practice, it is seen that the proportion of direct financing to the total has never exceeded 16% of the permitted advances owing to the perceptions of the banking sector about term-lending for housing on a large scale.
The major specialised financial institutions are the HUDCO, HDFC, and the state co-operative housing finance societies. These institutions have been specifically set up to undertake and/or finance house construction and house purchase activities. While HUDCO functions primarily as an apex body to finance field agencies like the state housing boards or the co-operative housing federations and also undertakes promotional activities, the state level agencies either offer on hire purchase built-up units or offer sites and financial support to construct a house. All these institutions operate in the public or semi-public sector. The HDFC is the only financial intermediary in the private sector which directly finances the housing activity of individuals, groups and corporate bodies. It has also started in a small way as developers and builders. HUDCO was set up in 1970 by the Government of India to finance and undertake housing and urban development projects all over the country. Its lending to housing agencies and development authorities is guided by affordability of beneficiaries, ceiling costs, differential interest rates and adoption of planning and norms suited to cost reduction, optimum land utilisation and cultural factors. Some 55% of its funds are applied for low income groups to yield 75% of dwelling units for them. Up to the end of January 1986, HUDCO had financed 4122 schemes with a project cost about Rs. 3014 cruxes for the construction of over 2 million houses and plots in urban and rural areas. HUDCO has relied mainly on inter-institutional transfers for raising resources and has not made any efforts to mobilise funds directly from individuals. The Housing Development Finance Corporation (IIDFC) was set up in 1977 as a private company promoted by ICICI. It provides loans for home-ownership to individuals, groups and corporate bodies. Its main source of funds are deposits of the public and corporate bodies and funds raised in the US capital market under the USAID Housing Guarantee Programme. It had approved till the end of March 1986 loans of Rs. 610 crores in respect of the construction/purchase of 152,000 houses spread over 640 towns. Some 77% of the loans in 1985-1986 were for individuals, mainly of middle and higher income groups. It has recently introduced the loan-linked deposits scheme modelled on the West German system. The activities of HDFC are as yet concentrated in the larger cities, and the repayment terms are patterned on a conservative basis. Most of the state governments have established apex housing finance societies to finance construction of houses by the primary co-operative societies. The major source of funds for them is the loans advanced by LIC on a regular basis and project-based loans from HUDCO. The borrowers from the apex society are co-operatives located in urban and rural areas. The apex societies typically offer loans at 13.5% repayable over 15-20 years. The terms for rural housing are much softer. The total loan disbursed by the end of June 1984 was Rs. 1217.72 crones and over 600,000 units had been constructed by the borrowers. It is seen from a study of HUDCO, HDFC, and the state housing finance societies that about half a million dwelling units are at present financed every year by the three agencies involving an annual sanction of Rs. 740 crones and a disbursement of Rs. 480 crones, with HUDCO accounting for the lion’s share. HUDCO represents the most comprehensive coverage with a distinct bias for the poorer groups and the average loan per dwelling unit amounts to about RS. 11,000. However, it does not deal directly with individuals but operates through borrower agencies. The HDFC caters to the relatively better-off sections and the average loan per tenement has gone up from Rs. 37,588 to Rs. 48,682 over 3 years from 1980-1982. By and large, the same trend is seen from the study of housing finance societies and the average loan in the case of the Maharashtra society is Rs. 37,000. Unlike HUDCO, the interest rates of both HDFC and the housing finance societies are high and affordable only by the higher income groups except under the new home savings scheme of HDFC.
An Institutional Framework for Housing Finance in India
25
While the total investment in housing in absolute terms has gone up from Rs. 250 crones in the First Plan to Rs. 2,500 croYeS in the Sixth Plan and the private investment went up from Rs. 900 crones to Rs. 10,455 crones over the same period, the percentage of this investment in both the sectors as a percentage of total investment in the economy has come down from 34 to 8% over the same period. The proportion of annual contribution of housing to the gross domestic capital formation has also fallen from 18.8% in the 1950s to 10.8% in the 1980s. Some estimates of the annual flow of funds into the housing sector have been made by the National Institute of Public Finance and Policy in their 1984 report. In 1982-1983, the GDCF in the housing sector was estimated to be of the order of Rs. 4,179 cyores of which 22.6% was financed through identifiable sources from the formal housing finance market such as the budgetary allocations, general financial institutions and specialised institutions. The informal housing finance market contributed almost four-fifths (77.4% to be exact) of the total annual resources in the housing sector. No doubt, there has been a proportionate increase in the contribution of the institutional financing and a fall in the share of the informal housing finance market from 82% in 1975-1976 to 77.4% in 1982-1983. In the absence of a well-developed institutional management, the informal sector has become the main support of housing activity for the vast majority of people. It includes three sources. First, the self-generated sources covering cash, bank deposits, savings during construction, etc. It constitutes the most important source of housing finance for all the income groups, especially the lowest and highest income groups. Secondly, there is the mobilisation of resources by the disposal of assets, such as shares, jewellery, land and building, agricultural property and others. Assets are mostly liquidated by the low and middle income home owners. Thirdly, there are external sources like relatives, friends, indigenous bankers and other intermediaries, out of which around 14% of the finance is provided by friends and relatives. The indigenous money-lenders are an important component of the informal market. They supply mainly short-term and medium-term credit. The notional rate of interest may range from 15 to 36%) but the effective rate of interest may be higher, depending on the period of amortisation, in view of the practice of deducting the full interest charges at the time of disbursement. The salient operational features of this credit market are easy accessibility, quick processing, flexible collateral, unequal bargaining power, high rate of interest, excellent monitoring system and good recovery record. The predominant role of the informal housing finance market is brought out effectively in the analysis of data obtained in the NIPFP study in 1984. While in the formal housing sector, the home-owners mobilised almost four-fifths of their resources from informal sources of finance, in the informal housing sector, nine-tenths of the resources were mobilised from these sources. In fact, in the slum settlements, almost the entire amount was mobilised from informal sources. Any analysis of the measures to strengthen financial institutional intermediation ought to focus on the problems faced by the home-owners in raising resources from these institutions, which leads them to depend so much on the informal sector. These can be classified into two categories. (1) Institutional inadequacies stemming from the terms of credit, which are inherent in any conventional financing system, namely: (a) adequate income level for the eligibility for loan; (b) regular and verifiable flow of income; and (c) acceptable collateral. (2) Operational inadequacies of an underdeveloped housing finance system, which can be traced to the following factors: (a) loan amount linked to amount of income of home-owner and minimum contribution of homeowner subject to monetary ceiling on loan amount; (b) large initial
26
P.S.A.
Sundararn
contribution of home-owner; (c) home-loan to home-cost ratio; (d) low standard amortisation schedule; (e) computation of the equated monthly instalment without taking into account the potential income levels of the borrowers; (f) high rate of interest; and (g) complicated procedures and irrational affordability criteria. The above-mentioned problems bring out the highly undeveloped state of the housing finance system in the country and the small impact made by the specialised institutions in the country as a whole. Individuals and groups in the lower income brackets and also relatively young in age, and residing in small and medium towns, face a greater hardship in securing funds for housing than those in the bigger towns, who at least have some access to institutional support. The dependence on the informal market is greater for those in the smaller towns; but, it is even more substantial for those in the lower income groups in these towns. It is seen from a number of studies that the profile of the prospective beneficiary in the housing finance system varies according to the urban area, income group, per capita income, type of occupation, savings and expenditure patterns, extent and type of assets held, type of dwelling unit desired, manner of acquiring or constructing or repairing the house, the timespan of construction/ acquisition/repair envisaged, the extent of group identity, access to organised housing finance market, the morphology of the informal housing finance market in the place of residence etc. The profile will also be different for the prospective seeker of legal shelter, and those in need of upgrading the present so-called illegal shelter. It will be different for the purchaser of dwelling unit from the public agency, and for the person relying on the private builder, as well as for the clients of developers of unauthorised colonies on the city peripheries. It will again be different for the people residing in substandard legal shelter, whether rental or owned, which is in need of major repairs or renovation, where the need is to conserve the present housing stock. It is thus clear that the institutional form to be devised for housing finance in India will have to be varied, flexible and decentralised enough to comprehend different requirements and profiles of the prospective beneficiaries in different urban areas. The following objectives could be envisaged for setting up such a framework: (1) strengthening the existing system by tackling various perceived inadequacies, and through the provision of support services in order to spread risk and increase liquidity; (2) mobilisation of increasing volume of household savings by the development of special institutional mechanisms and financial instruments such as loan-linked deposits, chit funds, housing lottery etc.; (3) development of innovative non-conventional approaches and delivery mechanisms to provide housing finance to hitherto non-eligible groups of population and sectors of activity; (4) closer interaction of formal and informal housing finance markets among themselves and with the capital market, as also the integration of public housing activity and the housing finance system; (5) attainment of greater recirculation of available financial resources into the housing sector by adaptive systems of refinancing, secondary mortgage systems, mortgage insurance, and by streamlining conveyancing and foreclosure instruments; (6) rationalising and supporting legal systems of rental control, land management, building standards and planning regulations, framework for group housing activity, extension of trunk infrastructure, and controlling the activities of private developers. It has been decided by the Government of India to establish a National
An Institutional Framework for Housing Finance in India
27
Housing Bank under the Reserve Bank of India, and necessary legislation for this purpose has been recently passed. The new Bank is expected to: mobilise resources for the housing sector; promote and regulate housing finance institutions both at local and regional levels; provide financial, technical and administrative assistance to such institutions; provide advisory services in operational policies; identify the legal, fiscal, institutional and other constraints to the development of the housing finance system, and strive to remove them with the help of central and state agencies. The Seventh Plan document refers to the need for the promotion of institutions like the savings and loan associations, housing finance companies, and cooperative forms of credit for the mobilisation of savings and the provision of finance for a variety of shelter needs, besides the credit needs of the producers of building materials. The HDFC has been collaborating with the leading nationalised banks to set up housing finance institutions in the north-eastern as well as southern parts of India. The state governments have been exhorted to promote the formation of housing finance institutions at state and local levels. There is often a danger in laying too much stress on institutional forms, when one seeks solutions to endemic problems in the system. The craving for institutional perfection could become an end in itself, and divert the Government from the long-term objective of ensuring the provision of finance on a flexible and decentralised basis for a variety of shelter needs of different income groups. It is important to devote equal attention to the reduction of non-financial constraints to housing efforts.
REFERENCES of India,
Report of Working Group on Housing for the Seventh Five-Year
Planning Plan.
Commission,
Government
Planning
Commission,
Seventh Five Year Plan (1985-1990).
0197-3975/$8$3.~ + O.aO @ 1989 Pergamon Press plc
4,pp.21-27.1988.
An Institutional Framework for Housing Finance in India P.S.A. SUNDARAM” Ministry of Urban Development,
India
The housing sector in India has an important role to play in the development process, as investment in housing and related services sustains the productivity of urban areas and stimulates the rest of the economy through multiplier effects on the production of building materials, engineering, transport and urban infrastructure. Housing activity monetises and brings into economic use dormant savings of individuals, especially the low-income groups, as the prospect of home-ownership offers one of the most powerful incentives to save. Homelinked savings can thus provide a great impetus to resource mobilisation effort at the national level. Finally, as is being appreciated by all the developing countries and international donor agencies, housing helps to achieve the socioeconomic objective of improvement in the quality of life through the provision of a dwelling unit in a serviced neighbourhood, and thus lays the basis for attainment of the goals of employment, health care, education, family welfare and basic services at the individual and city level. Current housing policy is summarised in Appendix A. The scale and intensity of the urban shelter problem is certainly tremendous. The urban population in India has increased from 62.50 million in 1951 to 159.73 million in 1981. It has grown by 47.62% over the decade 1971-1981. Of this urban population, nearly 42 million reside in the 12 metropolitan cities viz., Bombay, Calcutta, Madras, Delhi, Hyderabad, Bangalore, Lucknow, Nagpur, Jaipur, Ahmedabad, Pune and Kanpur. The shortage of housing in the urban areas has been mounting due to increase in population, rate of urbanisation and demand for shelter on the one hand, and inadequate supply of dwelling units and developed land on the other. The Working Group on Housing set up by the Planning Commission for the Seventh Plan has estimated the housing shortage at 5.9 million at the beginning of the Seventh Plan period. Apart from this backlog, the increase in population during 1985-1990 would generate an additional requirement of housing to the extent of 3.8 million. At the present rate of construction, the deficit is expected to increase to 9.3 million by the year 2000 A.D. The present situation is highlighted by congestion and the sub-standard quality of housing as witnessed by the high percentage of families living in dilapidated single and double room dwellings and the growing numbers of families in slums and squatter settlements. Despite the realisation about the magnitude of the housing problem, successive programmes in the national and state plans have not touched even a fraction of the total housing requirements. The total production of houses by the public sector is a tiny percentage of the total housing stock created every year and bulk of the public housing has gone to meet the needs of the middle and high income groups. As the Task Force on Shelter appointed by the Planning Commission in 1982 points out, despite professions in successive Plan docu*Address 11011.
for correspondence:
Ministry of Urban Development.
Nirman Rhavan, New Delhi 11, India
22
P.S. A. Sundaram
ments, the urban poor have not demonstrably benefited from various housing schemes executed during the first six Plans, and public investment has made only marginal contribution to housing for the poor. The bulk of the housing of all income groups including the poor is supplied by private initiative in a variety of ways ranging from organised activities of private developers and co-operatives to unauthorised housing efforts in the form of illegal colonies or squatting on public lands and pavements. The growing number of slums and substandard housing in the bigger cities is an index of both the pull of the employment opportunities for the migrants as of the inability of the urban poor to secure affordable shelter in the context of unfocused public policies for land, investment and services. The Seventh Plan document recognises that there is a need for radical orientation of all policies relating to housing, and all sectors of the economy, viz., Government, public enterprises, private/corporate sector, co-operative sector and the household sector, will have to participate in a co-ordinated manner in housing activities. It is recognised that the major responsibility for house construction should be left to the private and household sector. Building houses according to the differing preferences, capacities and requirements of different households, and economy in house construction can become possible only if the prospective home-owner himself participates or is involved in all stages of the activity. It is recognised that large-scale house construction by the households has been inhibited in the past by inadequate provision of institutional finance. Among other things, two major prerequisites for a big jump in house construction in urban areas are the mobilisation of resources from the household sector through the establishment of appropriate institutions, and the development of suitable serviced sites by the public sector on a large scale for allotment to the public. In this context, the Seventh Plan projections of expenditure on the housing sector in the public and private sectors are revealing. It is envisaged that during the Seventh Plan period, the total public sector investment would be of the order of Rs. 2458 crones while the private sector is expected to contribute about Rs. 29,000 cyores or over 10 times the investment of the public sector. This emphasises the need both for a major effort to mobilise resources for housing and for the Government to take up supporting actions such as making available adequate developed land at affordable prices and making necessary policy changes to promote housing activity such as modification in the Rent Control and Urban Land Ceiling legislation, fiscal incentives, liberalisation of building and planning standards, removal of administrative and procedural constraints to spontaneous housing etc. This has been spurred by the initiatives forming part of the International Year for Shelter for the Homeless (IYSH), with the ultimate goal of shelter for all the homeless by the year 2000 A.D. In recognition of the inadequacy of the public effort so far in housing, the thrust of the Government appears to be not so much to build itself directly, but to promote and facilitate housing activity through the provision of necessary fiscal and financial infrastructure and the physical inputs required for housing. The effort would be to minimise the construction role of the Government, provide elements of shelter which the private initiative cannot provide for itself, and expand facilitating activities for large scale construction by the public individually or in groups. The private sector has come to play a major role in the housing sector, but no serious effort has been made to assure it the necessary inputs to enable it to play its developmental role effectively. In this context, lack of financial resources has been identified as a crucial constraint on housing activity. Economic development, rapid urbanisation and growth in the levels of income call for the establishment of an effective housing finance system by expanding the role of institutional intermediation and incentives in the housing sector. It is unfor-
An Insritutional Framework for Housing Finance in India
23
tunate that, until a few years ago, there hardly existed anything approaching an organised housing finance system, and even now, the institutionally mobilised financial flows into housing form a small part of the total needs. It is not just the lack of financial resources that is the real problem, but the absence of any grassroots level institutional system that would mobilise the existing household savings in the economy for investment in housing, stimulate a shift from consumption to savings for investment in housing, provide institutional intermediation on a mass basis and encourage the individual to invest in housing at an early stage in their earning life. In addition, the housing finance system has to constitute an interface between the housing market and the capital market, both domestic and international. It is out of this realisation that the Seventh Plan emphasises the need for the establishment of a proper diversified institutional structure for housing finance and construction. While the Housing and Urban Development Corporation (HUDCO) and the Housing Development Finance Corporation (HDFC) are to be strengthened, the vast majority of individuals seeking houses would need to be looked after through the creation of local housing finance societies. These societies are expected to raise deposits from the public including the prospective home-owners and also draw upon funds from the capital market with the help of different financial institutions. To facilitate this process, the Government of India set up a specialised financial institution in the form of a National Housing Bank comparable to one in the agricultural finance sector. Major institutional initiatives are needed - and are possible - on the part of the Central and State Governments in order to mobilise more funds for the housing activity for all income groups and make it easier for people to raise longterm loans for a variety of shelter needs in towns of different sizes through various institutional options. Otherwise, the urban poor would be kept outside the pale of schemes of shelter for the homeless and the benefit of allotment of developed plots would not materialise in the form of constructed dwelling units. In order to provide the proper perspective for a discussion on the strategy for - and the modalities of - achieving the above objective of strengthening the housing finance market, it is necessary to make an assessment of the operations in the formal and informal housing finance markets. In the process, the inadequacies in the existing housing finance system and the main constraints on the spread of institutional intermediation can be identified. The formal segment of the housing finance market can be divided into two parts, viz., general financial institutions and specialised financial institutions. The general financial institution sector includes the commercial banks, insurance companies (primarily consisting of the Life Insurance Corporation of India and the General Insurance Corporation group), and the Provident Fund organisations. They do not consider the financing of housing as their primary function. They participate in the housing sector mainly because they are expected to make some proportion of investment in social service sectors of the economy such as housing, and also to meet the housing finance needs of their employees, policy-holders and major clients. Their primary objective is to safeguard the interest of their major customers and to ensure an adequate return to their savings/investments. It is only incidentally that there is an involvement in housing and they are aware of the fact that investment in housing does not yield an adequate rate of return. The commercial banking sector makes only a small contribution to the housing finance effort. At present, the RBI directive provides for advances for housing up to 0.5% of the total advances or up to Rs. 150 crores from this sector. In practice, it is seen that the proportion of direct financing to the total has never exceeded 16% of the permitted advances owing to the perceptions of the banking sector about term-lending for housing on a large scale.
The major specialised financial institutions are the HUDCO, HDFC, and the state co-operative housing finance societies. These institutions have been specifically set up to undertake and/or finance house construction and house purchase activities. While HUDCO functions primarily as an apex body to finance field agencies like the state housing boards or the co-operative housing federations and also undertakes promotional activities, the state level agencies either offer on hire purchase built-up units or offer sites and financial support to construct a house. All these institutions operate in the public or semi-public sector. The HDFC is the only financial intermediary in the private sector which directly finances the housing activity of individuals, groups and corporate bodies. It has also started in a small way as developers and builders. HUDCO was set up in 1970 by the Government of India to finance and undertake housing and urban development projects all over the country. Its lending to housing agencies and development authorities is guided by affordability of beneficiaries, ceiling costs, differential interest rates and adoption of planning and norms suited to cost reduction, optimum land utilisation and cultural factors. Some 55% of its funds are applied for low income groups to yield 75% of dwelling units for them. Up to the end of January 1986, HUDCO had financed 4122 schemes with a project cost about Rs. 3014 cruxes for the construction of over 2 million houses and plots in urban and rural areas. HUDCO has relied mainly on inter-institutional transfers for raising resources and has not made any efforts to mobilise funds directly from individuals. The Housing Development Finance Corporation (IIDFC) was set up in 1977 as a private company promoted by ICICI. It provides loans for home-ownership to individuals, groups and corporate bodies. Its main source of funds are deposits of the public and corporate bodies and funds raised in the US capital market under the USAID Housing Guarantee Programme. It had approved till the end of March 1986 loans of Rs. 610 crores in respect of the construction/purchase of 152,000 houses spread over 640 towns. Some 77% of the loans in 1985-1986 were for individuals, mainly of middle and higher income groups. It has recently introduced the loan-linked deposits scheme modelled on the West German system. The activities of HDFC are as yet concentrated in the larger cities, and the repayment terms are patterned on a conservative basis. Most of the state governments have established apex housing finance societies to finance construction of houses by the primary co-operative societies. The major source of funds for them is the loans advanced by LIC on a regular basis and project-based loans from HUDCO. The borrowers from the apex society are co-operatives located in urban and rural areas. The apex societies typically offer loans at 13.5% repayable over 15-20 years. The terms for rural housing are much softer. The total loan disbursed by the end of June 1984 was Rs. 1217.72 crones and over 600,000 units had been constructed by the borrowers. It is seen from a study of HUDCO, HDFC, and the state housing finance societies that about half a million dwelling units are at present financed every year by the three agencies involving an annual sanction of Rs. 740 crones and a disbursement of Rs. 480 crones, with HUDCO accounting for the lion’s share. HUDCO represents the most comprehensive coverage with a distinct bias for the poorer groups and the average loan per dwelling unit amounts to about RS. 11,000. However, it does not deal directly with individuals but operates through borrower agencies. The HDFC caters to the relatively better-off sections and the average loan per tenement has gone up from Rs. 37,588 to Rs. 48,682 over 3 years from 1980-1982. By and large, the same trend is seen from the study of housing finance societies and the average loan in the case of the Maharashtra society is Rs. 37,000. Unlike HUDCO, the interest rates of both HDFC and the housing finance societies are high and affordable only by the higher income groups except under the new home savings scheme of HDFC.
An Institutional Framework for Housing Finance in India
25
While the total investment in housing in absolute terms has gone up from Rs. 250 crones in the First Plan to Rs. 2,500 croYeS in the Sixth Plan and the private investment went up from Rs. 900 crones to Rs. 10,455 crones over the same period, the percentage of this investment in both the sectors as a percentage of total investment in the economy has come down from 34 to 8% over the same period. The proportion of annual contribution of housing to the gross domestic capital formation has also fallen from 18.8% in the 1950s to 10.8% in the 1980s. Some estimates of the annual flow of funds into the housing sector have been made by the National Institute of Public Finance and Policy in their 1984 report. In 1982-1983, the GDCF in the housing sector was estimated to be of the order of Rs. 4,179 cyores of which 22.6% was financed through identifiable sources from the formal housing finance market such as the budgetary allocations, general financial institutions and specialised institutions. The informal housing finance market contributed almost four-fifths (77.4% to be exact) of the total annual resources in the housing sector. No doubt, there has been a proportionate increase in the contribution of the institutional financing and a fall in the share of the informal housing finance market from 82% in 1975-1976 to 77.4% in 1982-1983. In the absence of a well-developed institutional management, the informal sector has become the main support of housing activity for the vast majority of people. It includes three sources. First, the self-generated sources covering cash, bank deposits, savings during construction, etc. It constitutes the most important source of housing finance for all the income groups, especially the lowest and highest income groups. Secondly, there is the mobilisation of resources by the disposal of assets, such as shares, jewellery, land and building, agricultural property and others. Assets are mostly liquidated by the low and middle income home owners. Thirdly, there are external sources like relatives, friends, indigenous bankers and other intermediaries, out of which around 14% of the finance is provided by friends and relatives. The indigenous money-lenders are an important component of the informal market. They supply mainly short-term and medium-term credit. The notional rate of interest may range from 15 to 36%) but the effective rate of interest may be higher, depending on the period of amortisation, in view of the practice of deducting the full interest charges at the time of disbursement. The salient operational features of this credit market are easy accessibility, quick processing, flexible collateral, unequal bargaining power, high rate of interest, excellent monitoring system and good recovery record. The predominant role of the informal housing finance market is brought out effectively in the analysis of data obtained in the NIPFP study in 1984. While in the formal housing sector, the home-owners mobilised almost four-fifths of their resources from informal sources of finance, in the informal housing sector, nine-tenths of the resources were mobilised from these sources. In fact, in the slum settlements, almost the entire amount was mobilised from informal sources. Any analysis of the measures to strengthen financial institutional intermediation ought to focus on the problems faced by the home-owners in raising resources from these institutions, which leads them to depend so much on the informal sector. These can be classified into two categories. (1) Institutional inadequacies stemming from the terms of credit, which are inherent in any conventional financing system, namely: (a) adequate income level for the eligibility for loan; (b) regular and verifiable flow of income; and (c) acceptable collateral. (2) Operational inadequacies of an underdeveloped housing finance system, which can be traced to the following factors: (a) loan amount linked to amount of income of home-owner and minimum contribution of homeowner subject to monetary ceiling on loan amount; (b) large initial
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P.S.A.
Sundararn
contribution of home-owner; (c) home-loan to home-cost ratio; (d) low standard amortisation schedule; (e) computation of the equated monthly instalment without taking into account the potential income levels of the borrowers; (f) high rate of interest; and (g) complicated procedures and irrational affordability criteria. The above-mentioned problems bring out the highly undeveloped state of the housing finance system in the country and the small impact made by the specialised institutions in the country as a whole. Individuals and groups in the lower income brackets and also relatively young in age, and residing in small and medium towns, face a greater hardship in securing funds for housing than those in the bigger towns, who at least have some access to institutional support. The dependence on the informal market is greater for those in the smaller towns; but, it is even more substantial for those in the lower income groups in these towns. It is seen from a number of studies that the profile of the prospective beneficiary in the housing finance system varies according to the urban area, income group, per capita income, type of occupation, savings and expenditure patterns, extent and type of assets held, type of dwelling unit desired, manner of acquiring or constructing or repairing the house, the timespan of construction/ acquisition/repair envisaged, the extent of group identity, access to organised housing finance market, the morphology of the informal housing finance market in the place of residence etc. The profile will also be different for the prospective seeker of legal shelter, and those in need of upgrading the present so-called illegal shelter. It will be different for the purchaser of dwelling unit from the public agency, and for the person relying on the private builder, as well as for the clients of developers of unauthorised colonies on the city peripheries. It will again be different for the people residing in substandard legal shelter, whether rental or owned, which is in need of major repairs or renovation, where the need is to conserve the present housing stock. It is thus clear that the institutional form to be devised for housing finance in India will have to be varied, flexible and decentralised enough to comprehend different requirements and profiles of the prospective beneficiaries in different urban areas. The following objectives could be envisaged for setting up such a framework: (1) strengthening the existing system by tackling various perceived inadequacies, and through the provision of support services in order to spread risk and increase liquidity; (2) mobilisation of increasing volume of household savings by the development of special institutional mechanisms and financial instruments such as loan-linked deposits, chit funds, housing lottery etc.; (3) development of innovative non-conventional approaches and delivery mechanisms to provide housing finance to hitherto non-eligible groups of population and sectors of activity; (4) closer interaction of formal and informal housing finance markets among themselves and with the capital market, as also the integration of public housing activity and the housing finance system; (5) attainment of greater recirculation of available financial resources into the housing sector by adaptive systems of refinancing, secondary mortgage systems, mortgage insurance, and by streamlining conveyancing and foreclosure instruments; (6) rationalising and supporting legal systems of rental control, land management, building standards and planning regulations, framework for group housing activity, extension of trunk infrastructure, and controlling the activities of private developers. It has been decided by the Government of India to establish a National
An Institutional Framework for Housing Finance in India
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Housing Bank under the Reserve Bank of India, and necessary legislation for this purpose has been recently passed. The new Bank is expected to: mobilise resources for the housing sector; promote and regulate housing finance institutions both at local and regional levels; provide financial, technical and administrative assistance to such institutions; provide advisory services in operational policies; identify the legal, fiscal, institutional and other constraints to the development of the housing finance system, and strive to remove them with the help of central and state agencies. The Seventh Plan document refers to the need for the promotion of institutions like the savings and loan associations, housing finance companies, and cooperative forms of credit for the mobilisation of savings and the provision of finance for a variety of shelter needs, besides the credit needs of the producers of building materials. The HDFC has been collaborating with the leading nationalised banks to set up housing finance institutions in the north-eastern as well as southern parts of India. The state governments have been exhorted to promote the formation of housing finance institutions at state and local levels. There is often a danger in laying too much stress on institutional forms, when one seeks solutions to endemic problems in the system. The craving for institutional perfection could become an end in itself, and divert the Government from the long-term objective of ensuring the provision of finance on a flexible and decentralised basis for a variety of shelter needs of different income groups. It is important to devote equal attention to the reduction of non-financial constraints to housing efforts.
REFERENCES of India,
Report of Working Group on Housing for the Seventh Five-Year
Planning Plan.
Commission,
Government
Planning
Commission,
Seventh Five Year Plan (1985-1990).