During the last 50 years of independence,
the Country has witnessed rapid and widespread urbanization. As a
consequence, a dynamic strategy of financing infrastructure has to be followed
to meet the investment needs of urban infrastructure. I feel that
availability of adequate and quality infrastructure is an effective instrument
of lubricating the engine of economic growth, improving competitive
efficiency and of the country. The increased urbanization has brought
along with it disproportionately higher demand for housing – be it for
upper market, middle market and for low-income category of population.
It is little appreciate in India
how important housing investment is to a modern economy. Housing’s
backward linkages i.e., the products that go into the production of housing
and the forward linkages i.e., the products that go into housing after
it is built, provide the main momentum of a modern economy. As the Indian
economy modernizes, similar consequences will follow. After the flush of
consumer demand is exhausted, sustained growth will depend on household
formation and housing because consumer durable growth is a function of
the growth of new homes beside of course rising disposable incomes. Unless
new houses are created, where the derived demand for consumer goods that
will be created is going to come form?
Funding the Housing
We need in next 5 years, 33 million
incremental housing i.e., more precisely 6.6 million per year as against
availability of 3 million houses at present. With successful reforms, very
successful improvement in infrastructure, with so many other right things
happening rightly, there will certainly be few more million added to the
above 33 millions. Although these figures make me philosophic, it will
at least give us an idea about the sheer enormous volume of the problem.
At the political level, the Common
Minimum Programme was very vocal about housing and it did not like to leave
this topic outside the programme. At the planning level, the monetary dimension
of the requirement is 115 lac crores of rupees and one third of it is available
from the formal sector and the planning sources. The economy has to find
out ways and means to organize the balance resources to succeed in its
reform process.
The cost of land as a proportion
to the total cost of a house in India is, compared to international standerds,
disproportionately high. Policies have to be framed which help in increasing
the supply of land for housing. A framework is needed which not only makes
the supply curve more elastic but also regulates the land use in tune with
the city's economic evolution. One of the biggest hindrances to increasing
the supply of adequate housing in the major cities of the country is the
severe mismatch between the demand and supply of land. Land acquisition
act is one which is time consuming and it takes years, even for the state
government, to acquire lands.
Urban lands (Ceilings and Regulations)
Act has outlived its objectives. Its main purpose was to increase supply
of land through redistribution and by preventing speculation on land. I
have been advocating complete dismantling of the ULCRA process. This has
generated more evil than it has done any good to the society. The national
press for some time is stimulating us with information that the government
is actively considering a complete overhaul of this law. I wish this comes
true.
The Transfer Property Act is one
law that has its central position with the housing finance companies. Of
the various type of mortgages that can be created under this act, equitable
mortgage is the one which has caught the fancy of all. The precise reason
is that there is no stamp cost involved in it. However, this mortgage becomes
a nightmare to the financier when it comes to foreclosure. I have always
thought that the equitable mortgage is neither equitable nor a mortgage.
It is the borrower who laughs all the way. He has the land with him, the
use of that and he has all the blessings of the Indian courts and delaying
judicial procedure with him. I see this area as one single factor restraining
a banker to take his credit decision. The main drawback of this type of
mortgage is that there is no provision of registration and as such there
is no public notice. In some state, stamp duty is also payable for such
mortgages. There are suggestions that the charge on the property may be
created by declaration and registered with the office of the registrar
so that, a public notice of the charge can be given on one hand and on
the other creation of the mortgage can be eased out.
Let me now talk about the near impossible
environment in the Foreclosure Laws.
The mortgage loans are long term
loans ranging normally between 10 to 20 years. Regular recovery of loans
from the borrower is a precondition for the economic viability of any housing
finance institution, and if default goes out of proportion, the whole system
relating to lending would fail. In order to ensure growth of Housing Finance
Institutions on sound lines, recycling of funds is a must and this is possible
only when the recoveries of outstanding mortgage due are prompt and regular.
Unfortunately, the existing law relating to foreclosure of mortgage in
our country is not only cumbersome, but also time consuming. It is, therefore,
high time that the existing law should be modified to provide provision
for speedy recovery in the case of default. This will not only put recovery
system in sound lines but will also act as a deterrent for willful defaulters.
Law is that which binds wrong and
creates leeway for the right and we are schooled to abide by the law. In
the housing finance sector, sometimes we need to reshuffle our ideas with
our experiences and define the right things again. That is why I am upto
all these discussions on the options that can be taken into account on
the legal side of the problems in this sector.
Let us now put a glance on the Indian
Stamp Act 1899 and Registration Act 1908.
The stamp duty and registration
charges for the conveyance in most of the state is quite exorbitant. It
ranges between 5 and 15 percent. Similarly, the Municipal Taxes and other
taxes are also substancial and all these factors dissuade an investor in
housing sector. The basic issue, therefore, is that of rationalisation
of stamp duty and registration charges.
Next, i would like to pick up Apartment
Ownership Act.I have dwelt on urbanisation. That will bring into our mind
the sprawling apartments in our cities and urban areas. This is one contribution
by our science and technology to the society. Unfortunately, there is no
suitable regulations framed yet. I, as a participant of these games, find
mtself awkwardly place dwhen i find that the Apartment Ownership Act is
still a nonstarter in most of the states. I shall strongly advocate that
there is a need for having a comprehensive loook on that legislation to
ensure that the flat owners enjoy heritable and transferable rights.
Another area where investors are
afraid of putting money due to the provisions of Rent Control Act. I am
referring to construction of rental apartments as we see in any developed
country. No one seems to be interested in this section of housing as the
investors knows about likely chances of dispossessing the property in the
hands of tanents.
Finally, it is important for us
to work out recommendations for fiscal and othre related requirements for
developing a healthy housing market in the country. It is known that compared
to many other countries, fiscal incentives available in India are most
limited. some of these incentives which earlier ewre available have now
been withdrawn. These are expected to have an adverse impact on the housing
sector.
Management of Funds
The day to day challenge is the
liability management. The normal scenario of composition of the liability
side of a housing finance institution is public deposit, institutional
debts, refinance form the regular and its own capital base. That the capital
base has generally remained weak is amply demonstrated by the fact that
most institutions are struggling with its capital adequacy ratio. We have
to remember that the fodder for the Housing Finanace Corporation(HFC) is
long term funds. The deployments by its very nature are long term generally
for 10 to 20 years. there is hardly any market for such a long liability.
So, by compulsion the HFC borrows short for meeting its long term needs
are thereby unwittingly gets into the mismatch trap. Now how severe the
mismatch is anly related to the prevalent money market. Matching of the
maturities is dream of any financing institutions. Only hardle is that
it is just not possible. Then what one attempts to do is to do near matching.
The public deposits are generally
for a period of three to five years although the laws permit it for seven
years. The period of deposit for which the public would like to place its
fund is its interest rate expectations. Paradoxically, even in a falling
interest quoted for a longer maturity is higher which should have been
reserve. But we are brought up with this culture.
In order to overcome such a situation,
Mortgage Backed Securities(MBS) are being sold in secondary markets abroad,
specially in the west. In India, however, MBS is still to see the light
of the day due to substantial stamp duty on remortgage, absense of foreclosure
laws and other legal impediments. National Bank is still struggling with
a pilot project of this nature for the last few years.
One of the major constraints for
the housing finance companies is the high cost of funds. Public deposits
cost, bank funding and also National Housing bank refinance rates are substancially
high. Housing sector can not absorb this high cost without passing it onto
brrrowers and also have a reasonable spread to survive. This has put a
constraint on the increased volume of operations of HFCs. I have been advocating
without success to declare ‘housing’ as infrastructure. This will help
HFCs to raise relatively cheaper funds which is in turn will help people
to borrow t build or buy their shelter.
I order to provide housing credit
at affordable terms t the needy population, innovate need based saving
instruments along with fiscal incentives have to be identified for mobilization
of cost efficient sources of savings. The household’s saving which still
do not adequately flow into the organized sector and particularly the housing
sector, mainly comprising of informal sector households and the rural and
urban poor has to be trapped effectively and efficaciously.
Similarly, the credit for housing
is also restricted in the informal sector due to legal and institutional
impediments. There is a well-recognized need to expand the scope of informal
sector in terms of mobilization of untapped households savings and
enhancement of credit for housing by devising innovative credit and saving
instruments and appropriate institutional linkages.
As per National Housing Bank (NHB)
guidelines, 75% of total activities of a Housing Finance Company have to
be confined to long term finance for housing purposes and the rest 25%
may be undertaken for non-housing purposes. But “housing” defined for residential
purpose excludes a very large area of housing activity which are for commercial
purposes and a HFC is restricted to undertake these ventures under the
25% norm,. Thus, the profitable area of lending is severely restricted
because of the regulatory guidelines. Financing for construction of Hotels
for students of working women are not considered as housing activities
under NHB norms though people reside there.
In India , we do not have the system
of variable Interest Rate Mortgage (VRM) because of two reasons –firstly
, there is an index figure to decide PLR of housing finance companies and
secondly . we do not have electronic fund transfer system with banks so
that changes in EMIs with the change in interest rate is immediately taken
care of .
To summarize, the major problems
confronting the housing sector are:
-
Housing attracts high stamp duties
varying between 5 to 20% of the purchase value and duties are also levied
on the subsequent purchases of the same property
-
Deduction audible form tax in respect
of interest payment for housing is limited only upto Rs 10.000 per year.
-
Capital gains tax is applicable for
housing
-
No workable foreclosure laws have
emerged after a decade of active lobbying
-
The deposits of housing finance institution
are subject to tax deduction at source from interest on deposit over 10,000per
year which means income on a deposit of around Rs. 80,,000 only I tax free
which is too low in today’s scenario.
-
There are interest ceilings that
housing finance institutions can offer for their resource out of line with
market realities.
-
HFC have to pay interest tax earning
on SLR securities, while banks are exempted from such tax
-
Housing has not been declared as
a part of ‘infrastructure’ unlike power , road , communication
-
investors are not interested to construct
rental apartment buildings in India because of provision in Rent Control
Act though there is a demand for it
All of these suggest that policy makers
need to take a very close and hard nosed look at the policy environment
surrounding the housing and construction sector as thee have a major role
to play in the revival of infrastructure investments so necessary for economic
growth in future.
The adoption of National Housing
Policy by the Parliament in 1994 was a landmark step in promoting housing
development in the country,. The policy in its endeavor to reduce houslessness
and to provide minimum basic housing activities , envisages a major shift
in the Government’s role towards being a facilitator rather than a provider.
The policy framework also includes technological, financial, and institutional
aspect. The policy, apart from recommending several schemes for the unprivileged
masses , aims to provide stimulus and support for housing on an expanded
scale though enhanced flow of credit from institutional agencies.
It would be interesting to have
a quick glance into the housing finance industry in western world. In the
US, the savings and loan associations suffered severe shocks in late 1970s
an early 1980s as a result of being ill prepared for the advent of a more
open, competitive and less controlled financial system. A regime of fixed
mortgage interest rates, designed to work in more stable times, proved
to be devastating gin as inflationary and more volatile world. In fact,
there had to be a major restructuring of the housing finance industry.
The housing finance industry in the United Kingdom, on the other hand,
experienced an unprecedented boom in the late 1980s followed by an equally
devastating slump in the early nineties. They had the advantage of variable
mortgage interest rates. In the changed economic scenario, the distinction
between classes of financial institutions is disappearing. Institute will
have to transform themselves according to strategic visions. We can no
longer rely on a global arena with any certainty with respect to who will
do what – institutions defined by specialized asset classes – but
we can be certain that the services needed in the market place will indeed
get done more efficiency than ever before.
In India – we are having an economy
in transition. They undergoing reforms are likely to put India in a competitive
fiscal and monetary in Asia with the next few years. Existing financial
institutions and banks are likely to realign themselves to market oriented
money and capital markets making it difficult for managers to hide behind
prescribed rules and procedures and begin to make decisions which have
their risk/return tradeoffs.
We aim to provide an environment
in the land and housing markets such that the affordability ratio for housing
defined as the average house price divided by a average urban income be
brought down. This in effect means that the average household would be
able to buy a home which is commensurate with his/her income with the help
of housing finance whose availability hopefully will continue to expand
in the country. This is possible so long as we are open to more sensible
land and regulatory policies which reflect ground realities being unleashed
by the reform process.
Lastly, I would like to put an impression
into the minds of all who are concerned and who can do good to the housing
finance industry about the fact that housing should be declared as a ‘Infrastructural
Sector’ and clearly defined housing investment strategy but be explicitly
built into not only long term economic strategy but be tackled incrementally
in annual plans as well. At the same time, I recommend an ongoing national
debate in informed for a for creating an enabling environment in housing
and removing supply constraints to housing before we enter the 21st century. |