Housing Finance fmg18 Y
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The document outlines the business model of housing finance companies in India, emphasizing the growth potential driven by urbanization and the increasing aspiration of young people to become homeowners. It highlights the role of the National Housing Bank (NHB) in promoting and regulating housing finance institutions, as well as the diverse financial products offered to meet housing needs. Additionally, it discusses the risks and opportunities within the housing finance sector, including competition, regulatory changes, and the impact of economic factors.
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Housing Finance fmg18 Y
- 1. Business Model of Housing Finance Company in India
- 3. Housing Industry • From 28%(300 m) the Urban Population to increase to 40% (600 m) by 2030 • 70% of New jobs to be created in Cities* • Young people aspire to be come home owners • Change in Socio Culture of Society * as per McKinsey Global Industry research
- 4. 80 100 120 140 160 180 200 2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun Residex Chennai- Residex Source: NHB- Residex data
- 5. 80 90 100 110 120 130 140 150 160 170 180 2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun Mumbai- Residex Source: NHB- Residex data
- 6. 0 20 40 60 80 100 120 140 2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun Delhi-Residex Source: NHB- Residex data
- 7. 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun India- Residex Source: NHB- Residex data
- 8. 0 2000 4000 6000 8000 10000 12000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Amount(RsCrores) Total Loan Disbursements Source: NHB and IndiaStat
- 9. Housing Finance Housing finance connotes finance for meeting the various needs relating to housing Purchase of a Land Acquisition of a Flat Construction of a house Extension of a house Repairs, renovation and upgradation of a house/flat Taking over housing loans from other banks/HFCs.
- 11. Housing Loan • Term: • Security: – Primary: – Secondary: • Purpose: • Interest Rate: Long House Guarantee/ Collateral New Home/ Expansion/ Equity Land Purchase/Acquisition of House Fixed, Floating, Teaser
- 12. Mortgage Vs Lien
- 13. Importance of Housing finance Engine of equitable economic growth Reduce poverty Prevent slum proliferation Take part in financial sector liberalization Create and meet growing housing demand
- 14. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 Disbursements by NHB under refinancing Scheme Banks Disbursments Others Disbursments Housing Finance Companies Disbursments Source: India Housing Stat
- 15. Housing Finance system in India Reasons for a high annual growth in this sector: Demand Affordability Competition Policy Securitization Urbanization Nuclear families growing Tax incentives
- 17. National Housing Bank Commercial Banks Housing Finance Companies HUDC O HDFC Bank Sponsored Insurance Companies Sponsored Private Sector Companies Cooperative Institutions Apex cooperati ve Housing Federatio n State Cooper ative Banks Urban Coope rative Banks State cooperative Agri and Rural Bank HOUSING FINANCE SYSYTEM IN INDIA
- 18. Players NHB HFC SCB Developers Customers
- 19. National Housing Bank (NHB) • Set-up in 1988 as the Apex level institution for housing. • To promote housing finance institutions both at local and regional levels • NHB is wholly owned by Reserve Bank of India • Ensures a sound and healthy housing finance system through effective regulation and supervision of housing finance institutions.
- 20. Functions • Promotion function • Regulatory function • Financing function
- 21. Promotion function • With the setting up of NHB, there have been sustained efforts at creating and supporting a new set of specialized institutions to serve as dedicated centers for housing credit.
- 22. Regulatory function • The requirement of regulation emanates from the need for a credible and stable housing finance system. • It has come out with guidelines for approving HFCs for financial assistance and for participating in their equity. • It has also issued the Housing Finance Companies (HFC) Directions and guidelines for prudential norms for income recognition, assets classification etc.
- 23. Financing function • To provide financial assistance to various banks and housing finance institutions. • The principal focus of NHB’s programs is to generate large scale involvement of various primary lending institutions to serve as dedicated outlets for assistance to the housing sector. • The refinance assistance provided by NHB to HFCs has enabled them to increase their operations and cover a larger section of the population.
- 25. Strengths Active Mainstream sector Effective regulatory framework Extensive network of regional banks and institutions Specialized skills as Dedicated Players in the housing industry Weakness Interest war persist Dilution in due diligence on part of lenders Lack of uniformity in norms Increase in default rate Asset Liability Mismatch Opportunities Increase Urbanization Housing microfinance has potential Tax rebates on house loans Falling interest rate Lower SLR will enhance liquidity so more loans can be offered Threats High Cost of Funds Competition from SCBs Higher cost of home ownership is dampening demand
- 27. RBI Mid-term Review Highlights pertaining to Housing Sector • The RBI in its mid-term review policy, released on 2nd November, 2010 made the norms for housing loans more stringent to curb the excessive borrowing that has pushed property prices in most metros to levels seen before the global financial meltdown and even beyond. • Among the steps mandated by the RBI are:
- 28. • Increase in the risk weight of high-value loans of Rs 75 lakh and above to 125 per cent. Increasing the risk weight means banks will have to keep more money aside against high value loans. • Bringing down the ceiling limit on housing loans to 80 per cent of the property value. This is intended to dissuade excessive borrowing for housing purposes. Till now, banks used to impose their own ceiling on housing loans, but there was no cap from the RBI side.
- 29. • An increase in the funds to be kept aside by banks as a cushion in case of defaults on loans made at teaser rates. It has increased the standard asset provisioning by banks for all such loans to 2 per cent from the earlier 0.4 per cent. • It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. The overall policy is designed to check the creation of pricing bubble in the market
- 30. Business Model
- 31. • Incorporated in 1977 • primary objective of meeting a social need - that of promoting home ownership by providing long-term finance to households for their housing needs • 1505 Employees as on 31st March 2010
- 32. Snapshots • Loan Book ` 97,967 Crores, 22% growth y-o-y • Deposits ` 23,081 crores, 19% growth y-o-y • Operating Income ` 11,338.28 Crores • EPS- ` 92.47 , 23% growth • ROE- 20%- Highest in Industry • Cost to Income Ratio- 72.59% Lowest • PAT 24.88% • Loan Turnover 0.12 times
- 33. Subsidiaries
- 34. Value Chain
- 36. Liquidity Cycle Inflows • EMI • CPs/ NCDs • Short Term Borrowings • Refinancing Outflows • Loans • Repayments of Borrowings • Operating Expenses
- 37. Process •Need Identification •CompetitionProduct Development •Direct and Indirect Selling •Cross SellingLoan Origination •Both borrower and asset are scrutinized •Different Documentation based on Occupation Due Diligence •After being satisfied, Loan deal is Signed •Terms/ Conditions of Loan AgreementClosure •Outflow of Funds Disbursement •Regulation and Control of property •Insurance/ maintenanceMonitoring •On Maturity, Collection of Loan/EMI •On default, Recovery of LoanCollection/Foreclosure
- 38. Process and Risks •Business Risk( Competition)- Acceptability •Compliance RiskProduct Development •Operational Risk •Competition; Pricing RiskLoan Origination •Underwriting Risk- Appraisal •Property and Person RelatedDue Diligence •Documentation Risk •Interest Rate RiskClosure •Liquidity Risk •Credit RiskDisbursement •Default Risk/ Delay Risk •Operational RiskMonitoring •Credit Risk •Default RiskCollection/ Foreclosure
- 39. • All Values in ` Crores • Data has been taken from – Companies Annual Report – CMIE Prowess – Capitaline – NHB and RBI
- 40. FDI 15% FIs/Banks 1% FII 59% Insurance Co. 9% MF/UTI 3% Non Promoter(Non Institutional) 13% Share Holding Pattern FDI Fis/Banks FII Insurance Co. MF/UTI Non Promoter(Non Institutional)
- 41. Sources of Funds Share Capital 0.26% Reserves Total 13% Non Convertible Debentures 30% Term Loans Institutions 2% Term Loans Banks 25% Unsecured Loans 30%
- 42. 0.26% 0.29% 0.61% 13.34% 13.25% 8.97% 29.70% 33.51% 24.59% 1.78% 2.86% 9.08% 25.43% 20.52% 29.51% 29.49% 29.56% 27.23% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2009 2005 Sources of Funds Unsecured Loans Term Loans Banks Term Loans Institutions Non Convertible Debentures Reserves Total Share Capital
- 43. Application of Funds Net Block 0.20% Investment s 10% Net Current Assets 2% Individuals 55% Bodies Corporate 32% Other 1% Loans
- 44. 0.20% 0.21% 0.76% 9.62% 10.82% 7.73% 2.30% 0.94% 2.53% 54.99% 56.72% 59.94% 31.50% 29.36% 27.58% 1.38% 1.96% 1.46% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2009 2005 Allocation of Funds Other Bodies Corporate Individuals Net Current Assets Investments Net Block
- 45. 147.19, 2% 84.59, 1% 7,063.08, 97% Expenditure Operating & Administration Expenses Miscellaneous Expenses Interest
- 46. Revenue Model Interest Income •Interest rates of 9-11.5% on home loans •Average 10.90% Processing Charges •Range of 0.5 to 1.5% depending upon the size •And 2 to 2.5% in case of Home equity loans and Top- ups Investment Income •Investments in SLR securities generate interest income •Yield for HDFC stood at 10.38% for FY 10 Redemption charges •Average 2% on early redemption /prepaid amount Referral Income •On Referring Clients to Subsidiaries
- 47. Other Income 0.20% Operating & Administration Expenses 2% Interest 63% Gross Profit 35% Operating Income 99.80% Income and Expenditure Other Income Operating & Administration Expenses Interest Gross Profit Average Interest rate on Deposits- 8.59% Average Yield on Loans- 10.90%
- 48. Other Income 0.21% Operating & Administration Expenses 2% Interest 68% Gross Profit 30% Operating Income 99.79% Income and Expenditure 2009 Other Income 0.20% Operating & Administration Expenses 2% Interest 63% Gross Profit 35% Operating Income 99.80% Income and Expenditure 2010
- 49. 0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 RsCrores Operating Income CAGR= 27% over 5 years 0.00 20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Rs.Crores Loans/Advances CAGR= 22% over 5 years
- 50. Financial Evaluation 0 2 4 6 8 10 12 14 16 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 ROCE HDFC Industry 0 5 10 15 20 25 30 35 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 RONW
- 51. Risk INTERNAL RISK FACTORS • Contingent Liabilities Risk • Foreign Exchange Risk • Legal/Regulatory Risk • Credit Risk • Operations Risk • Liquidity Risk • Interest Rate Risk • Any Time Exit Options on the Loans EXTERNAL RISK FACTORS • Regulatory changes • Risk of Competition • Sensitivity to the Economy and Extraneous Factors • Real Estate Prices Risk • Increasing Competition
- 52. Risk Mitigation • Stringent Credit Norms • Regular monitoring of the maturity profiles • Long term forward contracts, principal only swaps, full currency swaps and currency options
- 53. Marketing • 279 Outlets • Complimented by wholly owned distribution company, HDFC Sales Private Limited (HSPL). • Covers 90 Locations • Distribution Channel on Sources Loans, No role in credit, technical, legal… • Organizes fairs • Through Subsidiaries
- 54. Products • Home Improvement Loan • Home Extension Loan • Land Acquisition • Top-Up Loan • Property Valuation • Property Identification/Advisory • Senior Citizen's Deposits • Cumulative Deposits • Non-cumulative Deposits • Monthly Income Plan • Systematic Savings Plan (SSP)
- 55. Performance Indicator 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 Rs.inCrore Loan Approvals/Sanctions Loan Disbursements Housing Loan Outstanding CAGR- 25% over 5 years Source : India Stat, Annual Report of HDFC CAGR- 22% over 5 years
- 56. Competition • L I C Housing Finance Ltd. • Dewan Housing Finance Corpn. Ltd. • Deutsche Postbank Home Finance Ltd. • G I C Housing Finance Ltd. • I D B I Homefinance Ltd. • ICICI Bank • State Bank of India • Canara Bank • Punjab National Bank • IDBI Bank • Standard Chartered Bank • Hongkong & Shanghai Bank
- 57. Commercial Bank Vs HFC •Banks: RBI •HFCs: NHBRegulation •Banks: 9% •HFCs: 12%Capital Adequacy •Banks: Can Accept All Deposits And Insured •HFCs: Only Time Deposits, No InsuranceDeposits •Banks: 25% •HFCs: 12%SLR •Banks: Deduction for NPAs under Sec 36(1) of IT Act •HFCs: No deductionTax • Banks: `300 Crores • HFCs: ` 25 lacsCapital
- 58. Market Share of SCBs ICICI Bank 22% State Bank of India 18% IDBI Bank 4%Punjab National Bank 3% Axis Bank 3% Canara Bank 3% Bank of Baroda 3% Union Bank of India 3% Central Bank of India 3% Others 38% Credit to Housing by SCBs
- 60. Primary Mortgage Market • The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction • Mortgage brokers, mortgage bankers, credit unions and banks are all participants in the primary mortgage market
- 61. Secondary Mortgage Market • The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators (securitizers) and investors
- 62. Securitization in Secondary Market Borrowers • Borrow from bank(Mortgage Originators) • Pay interest and principal to mortgage holder Banks • Mortgage Originators • Sell Mortgages to Aggregators Fannie Mae & Freddie Mac • Mortgage Aggregators • Receive interest and principal on mortgages from borrowers • Securitize and sell mortgages (MBS) Investors • Hedge Funds, Pension Funds, Foreign central banks etc. buy MBS • Receive interest thereon
- 63. Benefits of the Secondary Market Borrowers • Increased home affordability Banks • Increased liquidity • Transfer of Default risk Fannie Mae & Freddie Mac • Charge security premium (fee)from investors Investors • Full repayment of MBS is guaranteed
- 64. Downfall of Fannie Mae and Freddie Mac • Rapid growth in purchases of risky but profitable subprime loans • Utilised implicit government backing to borrow at will, but without adequate capital to protect them from unexpected losses • Played down the dangers posed by an inflated housing market • Did not raise enough new capital to weather the storm as the housing slump expanded • Over‐estimated the power and accuracy of their computer systems and mathematical formulae to compensate for new more complex products
- 66. Mortgage Guarantee • a mortgage guarantee company (MGC)By • a credit institutionTo • repayment of an outstanding housing loan and interest accruedFor • the guaranteed amountUp to • a housing loan turns into a NPAWhen
- 67. Tri-partite Guarantee Contract-Purchased by the lender and paid for by the borrower Mortgage Guarantee Company (Surety) Borrower (Principal Debtor) Credit Institution
- 68. 1. Banks and HFCs pay the MGC a premium (fee) for buying mortgage guarantee for every loan they advance 2. The banks/HFCs pass on the cost to borrowers, just like mortgage insurance premiums 3. The premium will depend on factors such as borrower's profile, income proof, credit history and security available 4. The premium amount collected from thousands of loans by MGC will be pooled into a corpus fund 5. When a loan goes bad, the bank/HFC will invoke mortgage guarantee and MGC will pay the outstanding debt to the bank/HFC from the corpus fund Modus Operandi of MGC
- 69. Insurance vs Mortgage Guarantee Credit Insurance • Bi-partite contract • Business credit insurance • Regulated by IRDA • Max FDI is 26% Mortgage Guarantee • Tri-partite contract • Consumer credit insurance • Regulated by RBI • Max FDI is 49%
- 70. Due Diligence in Mortgage Guarantee Validity of security on guaranteed amount Credit worthiness of the borrower Title to the property and marketability of the property Use of land verified by creditor Permission from authorities for construction of house
- 71. Benefits of Mortgage Guarantee • Make housing more accessible to qualified younger buyers • Increase accessibility to mortgage loans in underserved regions and communities • Increase accessibility to mortgage loans for entrepreneurs and the self-employed
- 72. Benefits of Mortgage Guarantee • MGC act as credit investigator for credit institutions • Stimulate the housing resale market because easier finance available to home buyers • Encourage lenders to bring yields lower on loans that have a mortgage guarantee • Provide loans with lesser down payments to deserving borrowers
- 73. Presented By: Shivi Agarwal Radhika Gupta Sweta Agarwal Madhusudan Partani FMG 18A 91051 91041 91059 91029