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Towards consolidation of the housing finance system in India
Building and Environment, Vol. 26, No. 3, pp. 241-243, 1991. Printed in Great Britain.
0360-1323/91 $3.00+0.00 © 1991 Pergamon Press plc.
Towards Consol!dation of the Housing Finance System in India S. K. SHARMA* Indirect or direct subsidy is an essential component of a shelter programme for the underprivileged in any developing country. This calls for a multilayered housing finance system to tackle the problem on a long term basis. The magnitude of the problem, always eluding solution, requires expert management of such a financial system to ensure continuous cash flow. The setting up of the Housing and Urban Development Corporation (HUDCO) by the government two decades ago filled a large void that existed in the chain o f resources necessary for tackling India's housing problem. It was set up with seed money which, through prudent management, has been multiplied now many times with thousands of underprivileged having benefited by its direct and indirect assistance to build houses. The author, the Chief Executive of the organization, has brought out through this paper the need for further consolidation of fiscal resources as a primary objective of any housing programme to be successful in any developing country. HUDCO couM be a model finance institution for any developing country having similar objectives. (Ed.)
THE LAST few decades have seen significant institutional development in the area of housing finance in India. There is an increasing awareness that practices and procedures need to be streamlined to enable institutions to mobilize resources efficiently at minimum cost and to facilitate access of the disadvantaged sections of society to affordable housing. The housing finance system that has emerged is quite diverse. We have now a national level public sector institution, the Housing and Urban Development Corporation (HUDCO), catering to all income groups in an integrated and financially viable composition. In the private sector, the Housing Development Finance Corporation (HDFC) is catering to individual loan requirements and there are moves to set up more of this type of institution in India. Efforts are also on to include the banking sector and provident fund resources in the housing sector more meaningfully with an assured supply of money at reasonable cost. The Life Insurance and General Insurance Corporation is also reviewing its mode of lending to help reduce the collateral costs of borrowing. H U D C O has been trying to gain greater involvement of Unit Trust of India in the housing sector. The State Cooperative Banks are being approached by H U D C O to lend resources for housing in their respective states. The Government of India has set up a National Housing Bank with the primary role of mobilizing deposits required for housing through local saving and loan associations and to consolidate the housing finance system. Deliberations are also at an advanced stage to promote a separate company to take on the job of introducing mortgage finance in India. The vital feature o f H U D C O is that it is the only financing institution which, besides catering to the special interests of the economically weaker section and low
income groups, considers the environmental aspects, technical details and project impact analysis of housing development including housing in the regional and urban context. At the state level, apart from the State Housing Boards a number of Development Authorities and Improvement Trusts with jurisdiction over specific urban areas have been and are being established which deal with area development and often also with housing and site and services programmes. There is now an attempt to further augment the institutional structure at state level by establishing specialized agencies for various purposes like area development, rural housing, slum upgrading, weaker section housing, police housing, water supply, sewerage, municipal finance and shelter finance. A number of State Housing and Development Authorities are now, with H U D C O assistance, offering cash loans for housing to a greater extent than before. Kerala State has already demonstrated that the cash loan programme handled through state agencies can promote weaker section housing using traditional technologies in a very meaningful way. Karnataka State has adopted this programme in its six major cities and other states are also following in their footsteps. There are two facets of this programme. The first is that in area development schemes an option may be given that the allottee can either have a built house or a plot with a cash loan. The second is a cash loan on a plot owned by the applicant in any location. HUDCO's main thrust is on the first alternative, though it does not discourage the second. Through this reorientation of functions, the state agencies will emerge as powerful facilitators of increased access to land and cash assistance with people building their own houses according to their requirements and means. In these loan programmes, mobilization deposits from the people will be integrated. This will herald the development of loanlinked deposits. This will not only bring household
* Chairman and Managing Director, HUDCO, India. 241
S. K. Sharma
242 Table I. Pattern of investment household savings 1984-85" Deposits Currency Insurance Provident/pension fund Claims on government Compulsory deposits Investments in equity/debenture/ units etc. Trade credit
44.7 13.0 7.0 15.6 12.8 0.3
1990t (expected) 22
78
4.9 1.7 100.0
100
* Report on Currency and Finance 1984 85 Vol. Economic Review. Reserve Bank of India, Bombay, p. 11. t Estimates by experts.
savings into the housing sector but also motivate the household to increase their savings rate. The percentage of household savings as bank deposits is now decreasing, attraction being towards other financial assets. It is certain that not more than 22% of savings is now being invested in banks. Table 1 shows the current investment pattern of household savings. A major contribution in the housing finance sector is made by the cooperative system. The State Apex Cooperative Housing Finance Societies, largely funded by Life Insurance Corporation and General Insurance Corporation and supported by HUDCO, are promoting housing in a big way. There are some significant features of the cooperative structure. An important one is the acceptance of share capital contributions from prospective loanees, there are practice of "loan linked deposits" which in recent years is being projected. This establishes a new concept in mobilizing personal savings for housing. It needs consideration at the policy level whether new institutions called saving and loan associations should be set up or the cooperative should be strengthened and, if necessary, remoulded. Another feature is that cooperatives provide a medium through which the organized private sector, namely promoters and builders, can be brought in to participate in housing development in a disciplined manner. Some of the cooperatives, however, suffer due to recovery and inadequate managerial capabilities. TOWARDS CONSOLIDATION The above developments are taking place on a wide scale and need to be consolidated so as to upgrade the housing finance system. The institutions should be so linked at national, state and local levels to avoid duplication of effort and prevent a scramble for scarce resources. The long term housing finance policy ought to outline and define issues focusing on the legislative and statutory back-up required in the context of these developments and the development perspective visualized in the Five Year Plan. The policy perspective should be distinct enough to identify the physical and financial parameters with roles assigned to each institution in terms of areas of operation and the financial and legal back-up required for the housing finance system.
LEGISLATION What we need is a set of basic laws in housing, which deal with resource mobilization, define institutional roles at national, state and local level, promote security of hire purchase lending by facilitating foreclosure of mortgage and mortgage insurance, and establish a secondary mortgage market. It is essential to clearly define the role and manner of functioning of the private sector, including registration of promoters and developers, regulation of corporate condominium development, rent control, and land price controls. One of the most appropriate ways to direct household savings into the housing sector would have been to utilize provident fund and life insurance funds for the purpose. However, allocation of long term funds for housing from these institutions has not been adequate and has to be frequently borrowed on commercial terms. Furthermore, each financial institution is developing conspicuous tendencies to tap directly the savings available at the disposal of households leaving very little with them for investment in housing. If the overriding emphasis has to be on the household deposit mobilization for housing then there is a need to create a proper financial incentive structure, if necessary through legislation, for investment in the form of deposits and deposit-linked loans with housing agencies and cooperatives. The success of the loan and saving type of institution in countries like West Germany and the United Kingdom can be directly attributed to the tax incentives that these institutions derive. A survey of various other countries shows a number of other collateral measures taken towards effective mobilization of household savings for housing. These include income tax concessions, attractive rates of interest, some sort of indexing of the assets of the associations to protect them from inflation or fluctuations in interest rates, protection against too much demand against limited deposits of funds, attracting other institutions to extend requisite support and ensuring limited administrative cost while maintaining a high level of depositor satisfaction. Since lending policies for institutions working in the area of housing for the weaker sections will continue to be subsidized, there is a need for a state policy support to these institutions. These institutions can be supported by income tax exemption, interest differential support and allowed more leeway to mobilize and deploy resources to achieve financial viability. A balanced financing package facility, capital interest cost subsidization in favour of housing for the weaker sections, balanced area development with mandatory land allocation for the weaker sections, adequate social and economic infrastructure within the poor neighbourhoods and viability of the operations of the state housing agencies to enable them to maintain a proper flow of housing stock. These factors cannot be ignored.
CORPORATE INVESTMENTS Another area in which considerable work has to be done is corporate investments in the housing sector. In some countries such as France, Italy and Japan, the corporate sector is required to deposit 1% of their wage bills for housing. There is a need to promote such schemes. Funds
Consolidation of Housing Finance in India so mobilized can be placed at the disposal of institutions promoting housing. One could, in fact, allow the private companies to have various options of investment. They could utilize these funds to provide housing loans, reduce interest incidence or give matching contribution for staff housing cooperatives or directly finance low income housing projects.
CAUTION Though the needs for housing investment is growing rapidly, the evolution of specific financial intermediation must take place in a way that will not promote further fragmentation of the capital market. Too often, policy recommendations have been limited to specific institutions. Reforms in the financial structure have not been based on a comprehensive data analysis of savings and the structure of the flow of funds. Isolated operations typically lead to further fragmentation. A housing finance system with a large number of institutions may ultimately prove inadequate whereas a well balanced, effective system may require a smaller number of institutions. In many less developed countries, proliferation of institutions is leading to frittering away of scarce managerial resources. The creation of new agencies must go beyond the assumption that increased competition cannot hurt and that some financial institutions might follow the principles which necessitate the creation of a "Lender of the Last Resort Institution" are totally different from creating apex institutions in a segmental manner while working out an overall housing finance development and regulatory mechanism. Three prin-
243
ciples of financial regulations are clear. They are to (1) create alternating sources and thus improve competition towards improvement of the quality of loan servicing, (2) increase efficiency and (3) stimulate long term finance. CONCLUSION There is one aspect which needs to be re-emphasized. While we are deeply concerned about mobilizing resources for a meaningful housing development programme and developing institutions to support it, the social and technical aspects of housing should not be overlooked and should, in fact, be the foundation on which the entire structure is built. Financing individual housing units even in fairly large numbers is a relatively simple matter but to sustain such a programme, problems of land assembly and planning with clear cut allocation in favour of the poor in the overall regional and urban context require a positive comprehensive approach. If this is left entirely to the State Housing Development Authorities with the financing institutions playing no role in it, it could lead to lopsided housing development neglecting the needs of the weaker sections and an indifferent standard of environmental quality. The housing finance institutions with their in-built capacity to enforce sanctions should not only provide positive support through financial incentives but also through interventions and enforcement of conditions and stipulations in loan sanctions. However, all housing finance institutions are not equipped to do this. If financing institutions are to look into these areas, they will have to be adequately equipped technically with strong research backup.
0360-1323/91 $3.00+0.00 © 1991 Pergamon Press plc.
Towards Consol!dation of the Housing Finance System in India S. K. SHARMA* Indirect or direct subsidy is an essential component of a shelter programme for the underprivileged in any developing country. This calls for a multilayered housing finance system to tackle the problem on a long term basis. The magnitude of the problem, always eluding solution, requires expert management of such a financial system to ensure continuous cash flow. The setting up of the Housing and Urban Development Corporation (HUDCO) by the government two decades ago filled a large void that existed in the chain o f resources necessary for tackling India's housing problem. It was set up with seed money which, through prudent management, has been multiplied now many times with thousands of underprivileged having benefited by its direct and indirect assistance to build houses. The author, the Chief Executive of the organization, has brought out through this paper the need for further consolidation of fiscal resources as a primary objective of any housing programme to be successful in any developing country. HUDCO couM be a model finance institution for any developing country having similar objectives. (Ed.)
THE LAST few decades have seen significant institutional development in the area of housing finance in India. There is an increasing awareness that practices and procedures need to be streamlined to enable institutions to mobilize resources efficiently at minimum cost and to facilitate access of the disadvantaged sections of society to affordable housing. The housing finance system that has emerged is quite diverse. We have now a national level public sector institution, the Housing and Urban Development Corporation (HUDCO), catering to all income groups in an integrated and financially viable composition. In the private sector, the Housing Development Finance Corporation (HDFC) is catering to individual loan requirements and there are moves to set up more of this type of institution in India. Efforts are also on to include the banking sector and provident fund resources in the housing sector more meaningfully with an assured supply of money at reasonable cost. The Life Insurance and General Insurance Corporation is also reviewing its mode of lending to help reduce the collateral costs of borrowing. H U D C O has been trying to gain greater involvement of Unit Trust of India in the housing sector. The State Cooperative Banks are being approached by H U D C O to lend resources for housing in their respective states. The Government of India has set up a National Housing Bank with the primary role of mobilizing deposits required for housing through local saving and loan associations and to consolidate the housing finance system. Deliberations are also at an advanced stage to promote a separate company to take on the job of introducing mortgage finance in India. The vital feature o f H U D C O is that it is the only financing institution which, besides catering to the special interests of the economically weaker section and low
income groups, considers the environmental aspects, technical details and project impact analysis of housing development including housing in the regional and urban context. At the state level, apart from the State Housing Boards a number of Development Authorities and Improvement Trusts with jurisdiction over specific urban areas have been and are being established which deal with area development and often also with housing and site and services programmes. There is now an attempt to further augment the institutional structure at state level by establishing specialized agencies for various purposes like area development, rural housing, slum upgrading, weaker section housing, police housing, water supply, sewerage, municipal finance and shelter finance. A number of State Housing and Development Authorities are now, with H U D C O assistance, offering cash loans for housing to a greater extent than before. Kerala State has already demonstrated that the cash loan programme handled through state agencies can promote weaker section housing using traditional technologies in a very meaningful way. Karnataka State has adopted this programme in its six major cities and other states are also following in their footsteps. There are two facets of this programme. The first is that in area development schemes an option may be given that the allottee can either have a built house or a plot with a cash loan. The second is a cash loan on a plot owned by the applicant in any location. HUDCO's main thrust is on the first alternative, though it does not discourage the second. Through this reorientation of functions, the state agencies will emerge as powerful facilitators of increased access to land and cash assistance with people building their own houses according to their requirements and means. In these loan programmes, mobilization deposits from the people will be integrated. This will herald the development of loanlinked deposits. This will not only bring household
* Chairman and Managing Director, HUDCO, India. 241
S. K. Sharma
242 Table I. Pattern of investment household savings 1984-85" Deposits Currency Insurance Provident/pension fund Claims on government Compulsory deposits Investments in equity/debenture/ units etc. Trade credit
44.7 13.0 7.0 15.6 12.8 0.3
1990t (expected) 22
78
4.9 1.7 100.0
100
* Report on Currency and Finance 1984 85 Vol. Economic Review. Reserve Bank of India, Bombay, p. 11. t Estimates by experts.
savings into the housing sector but also motivate the household to increase their savings rate. The percentage of household savings as bank deposits is now decreasing, attraction being towards other financial assets. It is certain that not more than 22% of savings is now being invested in banks. Table 1 shows the current investment pattern of household savings. A major contribution in the housing finance sector is made by the cooperative system. The State Apex Cooperative Housing Finance Societies, largely funded by Life Insurance Corporation and General Insurance Corporation and supported by HUDCO, are promoting housing in a big way. There are some significant features of the cooperative structure. An important one is the acceptance of share capital contributions from prospective loanees, there are practice of "loan linked deposits" which in recent years is being projected. This establishes a new concept in mobilizing personal savings for housing. It needs consideration at the policy level whether new institutions called saving and loan associations should be set up or the cooperative should be strengthened and, if necessary, remoulded. Another feature is that cooperatives provide a medium through which the organized private sector, namely promoters and builders, can be brought in to participate in housing development in a disciplined manner. Some of the cooperatives, however, suffer due to recovery and inadequate managerial capabilities. TOWARDS CONSOLIDATION The above developments are taking place on a wide scale and need to be consolidated so as to upgrade the housing finance system. The institutions should be so linked at national, state and local levels to avoid duplication of effort and prevent a scramble for scarce resources. The long term housing finance policy ought to outline and define issues focusing on the legislative and statutory back-up required in the context of these developments and the development perspective visualized in the Five Year Plan. The policy perspective should be distinct enough to identify the physical and financial parameters with roles assigned to each institution in terms of areas of operation and the financial and legal back-up required for the housing finance system.
LEGISLATION What we need is a set of basic laws in housing, which deal with resource mobilization, define institutional roles at national, state and local level, promote security of hire purchase lending by facilitating foreclosure of mortgage and mortgage insurance, and establish a secondary mortgage market. It is essential to clearly define the role and manner of functioning of the private sector, including registration of promoters and developers, regulation of corporate condominium development, rent control, and land price controls. One of the most appropriate ways to direct household savings into the housing sector would have been to utilize provident fund and life insurance funds for the purpose. However, allocation of long term funds for housing from these institutions has not been adequate and has to be frequently borrowed on commercial terms. Furthermore, each financial institution is developing conspicuous tendencies to tap directly the savings available at the disposal of households leaving very little with them for investment in housing. If the overriding emphasis has to be on the household deposit mobilization for housing then there is a need to create a proper financial incentive structure, if necessary through legislation, for investment in the form of deposits and deposit-linked loans with housing agencies and cooperatives. The success of the loan and saving type of institution in countries like West Germany and the United Kingdom can be directly attributed to the tax incentives that these institutions derive. A survey of various other countries shows a number of other collateral measures taken towards effective mobilization of household savings for housing. These include income tax concessions, attractive rates of interest, some sort of indexing of the assets of the associations to protect them from inflation or fluctuations in interest rates, protection against too much demand against limited deposits of funds, attracting other institutions to extend requisite support and ensuring limited administrative cost while maintaining a high level of depositor satisfaction. Since lending policies for institutions working in the area of housing for the weaker sections will continue to be subsidized, there is a need for a state policy support to these institutions. These institutions can be supported by income tax exemption, interest differential support and allowed more leeway to mobilize and deploy resources to achieve financial viability. A balanced financing package facility, capital interest cost subsidization in favour of housing for the weaker sections, balanced area development with mandatory land allocation for the weaker sections, adequate social and economic infrastructure within the poor neighbourhoods and viability of the operations of the state housing agencies to enable them to maintain a proper flow of housing stock. These factors cannot be ignored.
CORPORATE INVESTMENTS Another area in which considerable work has to be done is corporate investments in the housing sector. In some countries such as France, Italy and Japan, the corporate sector is required to deposit 1% of their wage bills for housing. There is a need to promote such schemes. Funds
Consolidation of Housing Finance in India so mobilized can be placed at the disposal of institutions promoting housing. One could, in fact, allow the private companies to have various options of investment. They could utilize these funds to provide housing loans, reduce interest incidence or give matching contribution for staff housing cooperatives or directly finance low income housing projects.
CAUTION Though the needs for housing investment is growing rapidly, the evolution of specific financial intermediation must take place in a way that will not promote further fragmentation of the capital market. Too often, policy recommendations have been limited to specific institutions. Reforms in the financial structure have not been based on a comprehensive data analysis of savings and the structure of the flow of funds. Isolated operations typically lead to further fragmentation. A housing finance system with a large number of institutions may ultimately prove inadequate whereas a well balanced, effective system may require a smaller number of institutions. In many less developed countries, proliferation of institutions is leading to frittering away of scarce managerial resources. The creation of new agencies must go beyond the assumption that increased competition cannot hurt and that some financial institutions might follow the principles which necessitate the creation of a "Lender of the Last Resort Institution" are totally different from creating apex institutions in a segmental manner while working out an overall housing finance development and regulatory mechanism. Three prin-
243
ciples of financial regulations are clear. They are to (1) create alternating sources and thus improve competition towards improvement of the quality of loan servicing, (2) increase efficiency and (3) stimulate long term finance. CONCLUSION There is one aspect which needs to be re-emphasized. While we are deeply concerned about mobilizing resources for a meaningful housing development programme and developing institutions to support it, the social and technical aspects of housing should not be overlooked and should, in fact, be the foundation on which the entire structure is built. Financing individual housing units even in fairly large numbers is a relatively simple matter but to sustain such a programme, problems of land assembly and planning with clear cut allocation in favour of the poor in the overall regional and urban context require a positive comprehensive approach. If this is left entirely to the State Housing Development Authorities with the financing institutions playing no role in it, it could lead to lopsided housing development neglecting the needs of the weaker sections and an indifferent standard of environmental quality. The housing finance institutions with their in-built capacity to enforce sanctions should not only provide positive support through financial incentives but also through interventions and enforcement of conditions and stipulations in loan sanctions. However, all housing finance institutions are not equipped to do this. If financing institutions are to look into these areas, they will have to be adequately equipped technically with strong research backup.