CHAPTER 1 INTRODUCTION 1.1 Overview Housing is one of the fundamental demands for living. Access to acceptable housing is one of the elementary human needs as well as one of the keys to peace and happiness. In every country, resolving housing issues has political, social and economic significance. To solve housing issues, every country has formulated its own specific housing development program and developed its unique program operating mechanisms. Many countries have especially drawn up the development program of public housing to assist low and middle-income groups solve their particular housing-related issues. During the last one decade, Asia Pacific economies have made significant progress in developing private housing market and market based systems for financing home purchases. Government sponsored housing finance strategies have become more and more non-viable due to budget constraints. Post 1997, Asian financial crisis, the respective Governments in Asia stepped up their effort to improve the structure of the housing finance system. Many 1
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CHAPTER 1
INTRODUCTION
1.1 Overview
Housing is one of the fundamental demands for living. Access to
acceptable housing is one of the elementary human needs as well as one of the keys to
peace and happiness. In every country, resolving housing issues has political, social and
economic significance. To solve housing issues, every country has formulated its own
specific housing development program and developed its unique program operating
mechanisms.
Many countries have especially drawn up the development program of public housing
to assist low and middle-income groups solve their particular housing-related issues.
During the last one decade, Asia Pacific economies have made significant progress in
developing private housing market and market based systems for financing home
purchases. Government sponsored housing finance strategies have become more and
more non-viable due to budget constraints. Post 1997, Asian financial crisis, the
respective Governments in Asia stepped up their effort to improve the structure of the
housing finance system. Many countries even in other parts of the globe have
experienced the waves of financial liberalization and deregulation.
House prices have increased in most industrialised and emerging economics and in
many countries housing debt per capita and house prices have reached new all-time highs
(BIS, 2006).The key factors triggering the progressive growth on the demand side are
declining interest rates over a period of years, rapid increasing in income levels, tax
benefits extended to borrowers whereas from the supply side the emerging competition in
the housing finance sector between lenders, an increasing number of new entrants to the
housing finance market.
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1.2 Global Trends in Housing and Housing Finance Markets
Housing is an integral measure of a country’s development, and the way a society
housesits people is an important determinant of its development and progress (Parekh, D,
2006).Housing has traditionally been one of the most important assets for households in
Asia(Haibin Zhu, 2006). Now, let us have a look at the evolution and trends in housing
and housing finance markets in selected countries
Loans for Housing
Realising the necessity to provide houses and improve housing facilities in the
country, the nationalised banks have been asked to provide funds for housing since 1979.
Initially, they were expected to lend Rs.150 crores annually, but the target was raised to
Rs.300 crores for the year 1989-90. For the year 1990-91, individual nationalised banks
housing finance allocation was required to be computed at 1.5% of the incremental
deposits on March 1990, over the corresponding figure of March 1989.According to the
guidelines issued by the Reserve Bank, a bank’s assistance to the housing sector
(including rural areas) may be as follows:
1. 30% of the total housing finance allocation by way of direct assistance to
individuals or a group of borrowers etc., out of which at least half should be given as
direct housing loans in rural and semi-urban areas.
2. 30%of the allocation for landing to HUDCO, Housing Development Boards,
HDFC and other housing agencies for construction of house. The remaining 40% of the
assistance may be by way of subscription to the guaranteed bonds/ debentures of
HUDCO, and National Housing Bank.
3. The loan can be used for purchase of a house or flat, construction of a house or
tenement or for additions or extensions to an existing structure.
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1.3 Objectives
To provide long term finance for construction of houses for residential purposes or
finance or undertake housing and urban development programmes in the country.
To finance or undertake, wholly or partly, the setting up of new or satellite
town.
To subscribe to the debentures and bonds to be issued by the State Housing
(and or Urban Development) Boards, Improvement Trusts, Development
Authorities etc., specifically for the purpose of financing housing and urban
development programs.
To finance or undertake the setting up of industrial enterprises of building
material.
To administer the moneys received, from time to time, from the Government
of India and other sources as grants or otherwise for the purposes of financing or
undertaking housing and urban development programmes in the country.
To promote, establish, assist, collaborate and provide consultancy services
for the projects of designing and planning of works relating to Housing and Urban
Development programs in India and abroad.
1.4 Need for Housing Loan
Housing is one of the basic needs of mankind in terms of safety, security, self-
esteem, social status, cultural identity, satisfaction and achievement. It is fundamental
requirement both for human existence and settlement. Housing contributes effectively in
fixed capital formation as well as creation of productive employment. It plays an
important role in country’s economy, typically accounting for around 10 to 20 per cent of
total economic activity. It has been estimated that there are around 600 other industries
that have links to the housing markets. A stimulus to the demand for housing will have a
direct or indirect stimulatory impact on all of these industries.
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For every rupee invested in India, INR 0.78 is added to the gross domestic product.
Since independence, growth in the Indian population has aggravated the problem of
housing for Indian citizens. According to the population census of 2001, out of the total
population 1027 million about 742 million live in rural areas and 285 million live in
urban areas. Urban population is accounted as 27.8% to the total population whereas it
was 25.7% under 1991 census. So there is rise of 2.1% in the urbanization of Indian
population. This has also brought along with it disproportionately higher demand for
housing be it for upper class, middle class and for low income category of population.
Despite the growth of housing markets in India, for example, the current housing
shortage was estimated to be over 22 million dwelling units between 2002 and 2007. The
provision of finance for the purchase of residential housing is, or should be, an important
part of any society’s financial structure. Compared to a household’s average income, the
purchase of a housing unit is a large investment – in many cases it is in fact a household’s
biggest lifetime investment.
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CHAPTER 2
HOUSING LOAN: A CHANGED SCENARIO
2.1 Housing Loan: A Changed Scenario
Traditionally in India, most people used to depend on their savings while considering
buying a home. Provident fund and gratuity amounts received after retirement were the
major sources of finance for employed or retired people looking for owning houses.
However, with the emergence of housing finance as a major business in the country, an
increasingly large number of people are going in for home loans. Earlier it was
considered socially unviable to borrow funds. There’s been an evident shift in perception
and mind set in the Indian middle class over the last 5 to 10 years, thanks to the impact of
liberalization and opening up of the Indian economy, a rise in the average income across
households, and a palpable desire to own things now.
The present generation is more ambitious than the previous ones cannot be disrupted.
Perhaps, it is that ambition which drives young people to buy a house, here is sea change
in the Indian families. Indians are shifting from joint family concept to nuclear family
concept. Incomes of families are rising and their purchasing capacities as well as loan
repaying capacities are going up. Earlier a large number of borrowers used to be in their
late 30’s or early 40’s but today greater numbers of borrowers are in their mid 30’s. This
change eventually brings more demand for housing finance. These projections suggest
that demographic growth in India’s large cities will be high, partly due to population
growth and partly due to immigration. These are some of the indications that signal
bright future of housing finance industry which is currently facing tough times due to the
ongoing economic recession.
The major focus of government policies until 1970 was on agriculture and industry
and housing was not the priority sector. In the 1970’s, a network of housing boards at
state level was incorporated with the Housing Urban Development Corporation 5
(HUDCO) acting as an apex body, providing finance and technical support to these
boards. After the initiation of the liberalization process in India, the government has
taken number of measures to promote housing from the formal sector and share the task
of providing housing finance with the private sector.
Incorporation of National Housing Bank (NHB) in the year 1987 as the controlling body
to formalize housing finance was one of the remarkable steps in this direction. Housing
finance has emerged as a growth sector these days expected to grow at a phenomenal
39% PA. As per the estimates of NHB housing finance market was 45000 crores during
the year 2003-04 and had reached at more than 80,000 crores till the end of 2006. Banks
and financial institutions have brought sea changes in their strategies and there is clear
shift from seller’s market to buyer’s market. Liberal tax incentives by the government
coupled with low and competitive interest rates has made this sector a high growth
sector.
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2.2 Documentation Required
Applying for a Housing Loan: While submitting the application form for a home loan, lenders ask for documents to
establish the applicant’s income.
This is backed up by a proof like copies of last three year’s INCOME TAX returns
(along with the copies of computation of income/annual accounts, if any), Form 16 or
Form 16A, last three month's salary slips of the applicant, copies of the last 6 month's
statements of all active bank accounts in which applicant’s salary or business income
details are reflected, etc.
For self-employed people, if the income has increased dramatically in the past year, it is
advisable that the applicant should have his/her explanation ready as to why they think
this is a permanent increase in their income, rather than just a one-time aberration which
may decrease in near future. The reason for this is that if the lender is convinced with the
applicant’s explanation, then the loan eligibility can be considered in relation to the latest
income rather than considering the much lower average income.
For salaried employees, if the income has increased since the last financial year as
shown in their latest salary slips, such increased salary is taken into account for loan
eligibility purposes.
2.3 Applicant’s Bank Statements
Level of activity: In case of self-employed people, this gives a good idea about the
extent of his or her business activities.
Average bank balance: A look at the average bank balances maintained in a savings
bank account speaks a lot about the spending or saving habits of an individual.7
Cheque returns: A small charge debited by the applicant’s bank in the statement
indicates that a cheque issued by him or her was returned by the bank. Too many of such
returns can have a negative impact on a loan sanction
Cheque bounces: If cheques deposited by the applicants are returned by the issuer's
bank, they will be visible in the bank statement. All Banks have specific norms as to how
many such returns are acceptable in a period of 1 year.
Periodic payments: The existence of periodic payments to other finance companies
or bank etc indicates an existing liability and the applicant will need’s to provide full
details of these liabilities to the lender.
Age proof: Applicant’s age proof have to be submitted such as school leaving