Indian Mortgage Industry

The Indian mortgage industry is a saga of great opportunities, tremendous growth

and wonderful returns over a period of time. The sector has witnessed a significant
double digit growth of almost 30% over last 3 years though the same is expected to
be lower at 20% during 2007-08 due to rising interest rates and a slight correction
expected in the property market especially in B and C segment markets and
centres. According to a study conducted by CRISIL, India, the slower growth reflects
the impact of rising property prices and interest rates. The interest rates have
touched almost 12% floating and more than 13% fixed, highest since the year 2003
and 2004.

The study also shows that the increase in property rates coupled with higher
interest costs have resulted in the negative impact on the affordability index which
measures the ratio of rates of property to the net annual income of borrowers or
purchasers of the property, the index is still at 5.2, which favors well comparable to
other developing nations. The changing profile of the buyers in the Indian property
scenario is also changing for a positive. The average age of Indian property buyers
and borrowers is reducing. This means a longer repayment period and consequently
an ability to borrow a higher amount of home loan. With increasing disposable
income, and a trend of double income families gaining ground, the scene was never
so good for the sector.

Various mortgage and housing loan companies are offering attractive packages to
borrowers to enable them to buy properties. The growth is seen not only in A class
cities and metropolitans but also at smaller cities and towns. The documentation
procedure is also streamlined and is hassle free to a great extent. While it is
possible that the Indian mortgage sector may see some correction in the shorter to
medium time range because of the dream run witnessed during last 5 years or so,
the scene looks bright for long term investors and those who are planning to buy
property for personal use. The rental incomes are also increasing and offer good
returns for those who want to purchase the property for investment purposes.

Types of Mortgage in the Indian industry

The types of mortgage that are accepted in the Indian mortgage industry for the
facilitation of mortgage loan are varied. Until recently, the Indian mortgage market
was under the unorganized sector. The Government of India liberal economic policy
in the late 1990s the facilitated the entry of foreign institutional investors (FIIs) and
foreign direct investment (FII) in the Indian market. The Indian markets which were
previously closed to such investments registered tremendous economical growth
across all industry sectors.

In the last 15 years, the growth of the manufacturing industry in India propelled the
growth of infrastructure industry in India. Furthermore, with the growth of
infrastructure industry in India, the Indian mortgage loan industry witnessed
tremendous growth. Today, the organized mortgage loan sector of India is
registering astronomical growth and it is estimated to be US$ 18 billion industry.
The Indian mortgage loan industry is consistently registering 20-50 % growth on a
year-on-year basis, from the year 2000 onwards.

Huge real estate requirements in India and their subsequent development have
fueled its growth. The mortgage industry of India could break open from its age old
image of being housing mortgage facilitator only. Today, the types of mortgage that
are being accepted as collateral are varied and not confined to residential property
only. The types of mortgage accepted as collateral security for facilitating mortgage
loans in India are as follows –

Amusement parks

Bowling centers

Casinos

Auto care centers

Auto dealerships

Car washes

Parking garage

Truck terminal

Conveniences stores

Distribution centers

Fitness centers

Franchises

Funeral homes

Gas stations

Golf courses

Malls

Retail (anchored, single tenant, unanchored)

Mobile home arks

Movie theaters
Resort

Restaurants

Hotels

Motels

Hospitals

Medical clinics

Medical offices

Nursing homes

Rehabilitation facilities

Skilled nursing facility

Special purpose property

Child care centers

Independent living facilities

Mixed use properties

Single family

Offices (multi-tenant, single tenant)

Warehouse

Industrial parks

Industrial buildings

Land developments

Mini warehouses

Office buildings

Outlet centers

Educational institutions

Training institutions
The following types of rates are prevalent in the Indian mortgage market -

Fixed Mortgage Rate - in this case the rate of interest remains fixed throughout the
loan term. The mortgage rates do not vary according to market conditions. In other
words, the rate of interest is pre-fixed during the process of borrowing and it
generally varies between 12.5% and 25 %.

Flexible Mortgage Rate - is one in which the interest rate varies according to market
movements. This type of interest rate is called 'adjusting' or 'floating' rates. The risk
factor is high in this type of interest rates.

Some of the well-known mortgage-financing companies offering various types of

mortgage in India are as follows

LIC Housing Finance

HDFC

ICICI Home Finance

SBI Housing Finance

UCO Bank

State Bank of India

State Bank of Mysore

Allahabad Bank

United Bank of India

United Commercial Bank of India

Bank of Baroda

Kotak Mahindra Bank

Citi Bank

HSBC

Standard Chartered Bank

Nobody can challenge the reasons behind the retail chase. In March 2007, the retail
portfolio of the Indian banking sector was about Rs4.5 trillion, around 10% India’s
gross domestic product (GDP). Mortgages, growing more than 40% in the last three
years, are just 6% of India’s GDP. The comparative figures in other countries are
much higher. A recent presentation made by Housing Development Finance Corp.
Ltd (HDFC) to its foreign investors says that in Denmark, mortgages or home loans
are 94% of the country’s GDP, in the UK, 80%, and in the US, 71%. Among the Asian
economies, it’s 50% in Hong Kong, 37% in Taiwan, 36% in Singapore, 26% in
Malaysia and 16% in Thailand. In China, home loans account for about 11% of the
GDP

If one excludes home loans and focuses on other retail products such as credit card,
personal loans and so on, the scope of expanding the market in India is enormous,
too. For instance, in France, retail loans account for 62% of the economy and in
Spain, 20%. In the emerging markets, this figure varies between 12% and 19%.

Indeed, retail is the biggest banking opportunity in India, provided the banks are
able to get the pricing correct and can ramp up the volume quickly. In its first year
of operations, Deutsche Bank has made a loss of Rs100 crore. HSBC’s India head
Naina Lal Kidwai says retail business can make money only after a certain volume is
built. HSBC has a larger portfolio than the new entrant Deutsche Bank, but even so,
it has to grow in volume to make profits in the retail business. So, Barclays will take
even longer to make money. Even banks that have built up a substantial retail book
are believed to be facing some strain. In their over aggressiveness to build the retail
book, these banks have probably lent at a rate that is unsustainable or
compromised on the quality of borrowers. An international brokerage has put the
percentage of non-performing loans in the personal loan segment of a large Indian
bank at 7%, credit cards at 9%, mortgages at 1.3%, and other retail loans at 5.22%.
These figures are not available in the public domain.

HDFC Bank managing director Aditya Puri says his bank is not seeing any strain in
the retail loan segment. This is because HDFC Bank, according to him, never woos
“marginal” customers who will feel pressure to pay when the loan rates go up. ICICI
Bank executive director P. Vaidyanathan says the pricing of loans and the volume
help the bank to always maintain the margin. He won’t be worried if the non-
performing assets in personal loans go up by a few basis points as this is a high
margin business and, with the rise in volume, the bank will always make enough
money since the operational costs do not go up. Retail loans account for more than
50% of the balance sheets of both ICICI Bank and HDFC Bank. And HDFC Ltd
managing director Keki Mistry says the extent of NPAs at India’s oldest mortgage
player is negligible.

All these observations are valid. In fact, India’s mortgage market is unique in many
ways. First, the loan to value ratio is always modest. And since most home buyers
end up paying a certain amount in cash, the actual loan to value ratio is even lower
than is officially known. For instance, if a consumer is showing the price of the flat
that she is buying as Rs50 lakh, she may have paid another Rs10 lakh or so in cash
to the builder. So, when she takes a home loan of Rs40 lakh (80% of the value of
the property), she is actually putting in 33% of her own equity (Rs20 lakh of Rs60
lakh), and not 20%. After taking possession of the flat, she normally spends more
money to do it up and that again raises her equity in the property. So, a bank can
always recover its money by selling the property in the event of a default.

Secondly, unlike in the US, no Indian bank or pure mortgage player offers the
interest-only payment option to consumers. In the US, where mortgages account for
more than 70% of GDP, interest-only payment is a very popular product. Here the
consumers pay only interest for the first few years. So, in case of a default, the bank
may end up booking losses even after taking over the property and selling it, in
case the price of the property has gone down. In the Indian context, part of the
equated monthly instalments (EMIs) that a home loan borrower pays always goes
towards payment of the principal amount. With the passing of each year (normally,
home loans can have maturity between five and 20 years), the principal component
goes down, making it easier for banks to recover their money in case of a default.

Two other factors that contribute to the robustness of the Indian mortgage market
is the rising income level and lowering of average age of home loan consumers. In
1995, the average price of a property was 22 times the annual income of a home
buyer. Now, it is 5.1 times. And the average age of a borrower has come down from
43 in 2000 to 35-36 now. Despite this, we are not particularly in the comfort zone in
the mortgage market. The subprime debacle will not hit us, but the Indian market
has other worries. More about this next week.

The Indian mortgage market has many positive indicators compared to markets in
the West. In India, the borrower contributes a higher share of his own funds (24-
46% of house value) at the time of purchasing a house. The loan instalments too
eat away a smaller portion of the borrowers’ income.

The instalment to income ratio-ranged between 34% and 40%, in India is lower than
some countries in the West. This is based on an analysis by rating agency Fitch of
the home loan asset pool that it rates. According to Fitch, the instalment to income
ratio has been stable over several years.

This is because borrowers’ income has kept pace with rise in property prices. The
extent of second houses purchased is also limited and most borrowers stick to their
repurchase schedules. The figures computed by Fitch based on the asset pool that it
rates implies that on an average, the borrower funds up to 30% of the house value
through his own capital This among other things increases the borrower’s
willingness to repay.

Some bankers say the black money component is also high in the Indian realty
market, resulting in higher borrower equity. Another notable factor is that
delinquencies have remained range-bound in the last 33 months, according to
residential mortgage index launched by the ratings firm. The index which tracks
home loans that have not repaid for over 90 days, has moved in a narrow range
between 0.90% and 1.07%.
Reverse mortgage mart to triple to $113 bn by 2015: Study - The reverse mortgage
market is expected to grow owing to the rapid growth in the senior citizen
population, driven by lower fertility rates, improved healthcare and better nutrition

The market for reverse mortgage services, under which senior citizens can pledge
their property for a steady income, will have a potential of $113 billion in India by
2015, nearly triple of the about $39 billion now, according to a report on ‘Reverse
Mortgage Market: Early Days for India’ released by global consultancy firm, Celent.

The reverse mortgage market potential, calculated by the number of senior citizens,
establish that the current market size for the product is three million households
and would grow to six million by 2015.

The report points out that the home equity available is $39 billion and is expected
to grow to $113 billion by 2015, which would be a significant opportunity for
lenders.

The reverse mortgage market is expected to grow owing to the rapid growth in the
senior citizen population, driven by lower fertility rates, improved healthcare and
better nutrition.

The Indian government is now employing innovative strategies towards change and
it has begun introducing financial instruments aimed at the senior population.

In the Budget proposals for 2008-09, the Finance Minister announced that the
reverse mortgage would not amount to transfer and the stream of revenue received
by the senior citizen would not be income.

The senior citizen population is estimated to become 117 million by 2015, growing
from the current 87 million. “There is great potential for this market,a but it requires
the building of an ecosystem that would make the product more viable for lenders
in an Indian context