Effects of Demonetization on The Indian Mortgage Industry

The Mortgage Industry in India is one of the biggest divisions in the banking, financial services and insurance sector in India. Unlike licenses for commercial banking, now being planned to be offered easily, licensing norms for housing finance companies (HFCs) have been fairly liberal. In fiscal year 2016, 11 new licenses were given even as one license was withdrawn. One of the new entrants is Vastu Housing Ltd, founded by senior bankers, including Bharat Financial Inclusion Ltd chairman P.H. Ravikumar. According to its managing director and CEO Sandeep Menon, since January, Vastu has disbursed around Rs.75 crore to 600 customers through 10 branches in six states, using “innovative, disruptive” technology. Many in the universe of 76 HFCs and state-owned as well as private banks have started using technology to reach out to the lower end of the customer segment for home loans.

In 2016, new home loan disbursements were to the tune of Rs.2.9 trillion and, net of repayment, the growth has been close to Rs.2 trillion. The growth will be higher this year, riding the government’s thrust on meeting the housing needs in Asia’s third-largest economy. There is an estimated housing shortage of 18.7 million in urban pockets and 39.3 million in rural India. The government wants to take care of this by 2020.

Apart from being proactive in giving new licenses to HFCs, sensitive mortgage regulator NHB (National Housing Bank), is also the nodal agency for regulations, supervision as well as concessional refinancing. It offers rural housing finance to intermediaries at 6.12%, which can be lent to customers at 9.12%. Similarly, refinancing for urban housing is being offered at 6.5%. So far, it has disbursed Rs. 24,927 crore for 1.5 million rural units and Rs.5,950 crore for 170,000 urban units. Besides, it maintains a normal refinance window where banks and HFCs can get loans at around 8-9%. In fiscal year 2016, it disbursed some Rs.21,590 crore worth of refinance, taking its outstanding refinance book to around Rs.1.64 trillion.

Eight states have 80% share of the shortage of housing in urban pockets. They are Madhya Pradesh, Rajasthan, Bihar, Tamil Nadu, Andhra Pradesh, West Bengal, Maharashtra and Uttar Pradesh. At least four government schemes have been in the works to meet the housing shortage of 18.7 million across 681 cities. The schemes include the redevelopment of slums, creation of affordable housing through public-private partnerships, subsidy for economically weaker sections of the society and a credit-linked subsidy.

The promotion of affordable housing for weaker sections through credit-linked subsidy is a vertical under the Pradhan Mantri Awas Yojana and probably the most promising one. Under the credit-linked subsidy scheme, a person buying her first house, costing between Rs.3 lakh and Rs.6 lakh, gets 6.5% interest subsidy. This is discounted upfront and credited to the customer’s account within 10 days of the disbursement of the loan, before the first equated monthly instalment or EMI starts. Around 140 intermediaries including commercial banks, cooperative and regional rural banks as well as HFCs have signed up with the NHB to implement this scheme in 29 states, effective from mid-June 2015 to March 2022. Till now, the NHB has made total subsidy disbursement of Rs.119.53 crore to 57 agencies for more than 7,000 households.

The other agency involved in this project is the Housing & Urban Development Corp. Ltd (HUDCO), under the administrative control of the Ministry of Housing and Urban Poverty Alleviation (MHUPA). Many of the beneficiaries of this scheme are primary school teachers. The NHB has been regularly holding workshops to create awareness about this scheme—both among the beneficiaries as well as financial intermediaries.

Mortgage-backed securitization, which accounts for almost half of the entire securitization deals, slowed after demonetization, rating company Crisil said. Housing finance companies slowed issuances of securitization deals, while banks, which invest in such deals, were largely busy in carrying out the humongous task of withdrawing delegalized currency notes and pumping in new notes in the system.

Mortgage-backed securitization (MBS) surged in the first half of the fiscal year after the government removed distribution tax on such deals for investors and as banks moved to quarterly assessment of priority sector. Small ticket housing loans are considered as priority lending for banks. Crisil’s senior director Krishnan Sitaraman told ET that the housing finance companies are expected to be back in this market again in the fourth quarter. “Some slowdown was seen in mortgage-backed securitization deals after demonetization. But the volume for FY2017 may still be close to last year’s level,” he said.

Volume of MBS, which includes residential loans and loans against property, was about Rs 29,000-30,000 crore last fiscal, capturing 42% of the market. The securitization market as a whole was at eight-year high last fiscal with volume touching to Rs 70,000 crore.

The size of India’s housing finance sector is Rs 5 lakh crore and just about 5-6% of the loans are being securitized. In contrast, about half of housing loans in the US is securitized. Securitization of loan pool can be done in two ways – direct assignment of loans by originators and through pass through certificates which are issued by trusts or special purpose vehicles. Around one-fifth of the MBS was executed through PTC route.

MBS issuances in India have demonstrated high stability across economic cycles. Crisil believes that mortgage-backed PTCs – due to their longer tenures and low delinquency — can attract long term investors such as insurers and pension funds. Insurance Regulatory and Development Authority of India allows insurance companies invest in MBS. Employees Provident Fund Organization too permits investment in PTCs.

Private Sector banks and foreign banks invest in securitization deals to prop up their priority sector lending portfolio. Public sector banks buy housing portfolios to show credit growth in their books, Sitaraman said.

MBS also diversifies resource base for housing finance companies and help lowering in fund cost.



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