Housing Finance FMG18Y

Business Model of Housing
Finance Company in India

Members
Madhu Shivi Radhika Sweta

91029 91051 91041 91059
Group 4
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

Source: NHB- Residex data
Source: NHB and
IndiaStat
Housing Finance
Housing finance connotes finance for
meeting the various needs relating to
housing
Understanding Housing
Loan
Housing Loan
• Term:Lo n g
• Security:
H o u se
– Primary:
– Secondary:G u a ra n te e /
• Purpose:N e wCHoolmlaete / Era
xp l a n sio n /
E q u ity
• Interest La
Rate:
n dFiPuxerch
d a, se
Fl/oA cq
a tiun
isigti,o n of
H o u se
Te a se r
Mortgage Vs Lien
Importance of Housing
finance
Housing Finance system in
India
R e a so n s fo r a h ig h a n n u a lg ro w th in th is
se cto r:
¡ D em and
¡ A ffo rd a b ility
¡ C o m p e titio n
¡ P o licy
¡ S e cu ritiza tio n
¡ U rb a n iza tio n
¡ N u cle a r fa m ilie s g ro w in g
¡ T a x in ce n tive s
In d u stry stru ctu re
H O U S IN G F IN A N C E S Y S Y T E M IN
IN D IA
Players
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.

Functions
• Promotion function

• Regulatory function

• Financing function

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.
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.

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.
Critical Success Factor
for HFCs
• Cost of Funds
• Low Margins, High Volume
• Management of NPAs
• Product features
• Distribution reach

For Starting
• To commence on business, every HFC set-
up as a company should

o Obtain a certificate of registration from the

NHB and

o Have the net owned funds of Rs 25 lakh or

such other higher amounts as may be
specified by NHB from time to time.

Capital adequacy
• Every housing finance company shall maintain a
minimum capital ratio consisting of Tier-I and
Tier-II capital which shall not be less than 12%
of its aggregate risk weighted assets and of risk
adjusted value of off balance sheet items.

• The total Tier-II capital, at any point of time, shall

not exceed 100% of Tier-I capital.

Public deposits
• Any HFC having net owned fund of Rs. 25 lacs or
more cannot accept or renew an amount
exceeding five times of its NOF

• No HFC can have maximum deposits, inclusive of

public deposits, exceeding 16 times its NOF

• A HFC can accept or renew public deposit for a

minimum period of 12 months and a maximum
of 36 months from the date of acceptance or
renewal.

• At present HFC cannot pay more than 12.5%

Asset classification
• Standard assets: an asset in respect of which,
no default in repayment of principal or payment
of interest is perceived
• Sub-standard assets: an asset, which has been
classified as non-performing asset for a period
not exceeding twelve months
• Doubtful assets: an asset which remains a sub-
standard asset for a period exceeding twelve
months.
• Loss assets: an asset that has not been written
off by the housing finance company and an
asset which is adversely affected by a potential
threat of non recoverability
Provision
• Sub-standard Assets: A general provision of
10% of total outstanding should be made in
case of it.

• Loss Assets: The entire assets shall be written

off. If the assets are permitted to remain in the
books for any reason, 100% of the outstanding
should be provided for.
•

Doubtful Assets
• 100% provision to the extent to which the advance is
not covered by the realizable value of the security
to which the housing finance company has a valid
recourse.
• In addition, depending upon the period for which the
asset has remained doubtful, provision shall be
made
Period foronwhich
the following basis:
the asset % age of Provision
has been considered as
doubtful
Up to 1 year 20
1 - 3 years 30
Over 3 years 50
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:


• 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.


• 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


Business Model
R even u P ro ce s
e se s
Exp en s O p e ra tio n
es s
P R O F IT
S
M a rk e ti
ng
• 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
•
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
Subsidiaries
Value Chain
Liquidity Cycle
Process
Process and Risks
• All Values in ` Crores
• Data has been taken from
– Companies Annual Report
– CMIE Prowess
– Capitaline
– NHB and RBI
Sources of Funds
Application of Funds
Revenue Model
Average
Interest
rate on
Deposits -
Average 8 . 59 %
Yield on
Loans -
10 . 90 %
CAGR = 27 % over 5
years
Financial Evaluation
Risk
 INTERNAL RISK  EXTERNAL RISK
FACTORS FACTORS
•

• Contingent Liabilities • Regulatory changes

Risk
• Foreign Exchange • Risk of Competition
Risk • Sensitivity to the
• Legal/Regulatory Economy and
Risk Extraneous Factors
• Credit Risk • Real Estate Prices
Risk
• Operations Risk • Increasing
• Liquidity Risk Competition
• Interest Rate Risk
• Any Time Exit
Risk Mitigation
• Stringent Credit Norms
• Regular monitoring of the maturity profiles
• Long term forward contracts, principal only
swaps, full currency swaps and currency
options
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
•
Products
• Home • Senior Citizen's
Improvement Deposits
Loan • Cumulative
• Home Extension Deposits
Loan • Non-cumulative
• Land Acquisition Deposits
• Top-Up Loan • Monthly Income
• Property Valuation Plan
• Property • Systematic Savings
Identification/Adv Plan (SSP)
isory 
Performance Indicator
CAGR - 22 % over 5 years
Source : India Stat, Annual Report of HD

Competition
• L I C Housing • ICICI Bank
Finance Ltd. • State Bank of India
• Dewan Housing • Canara Bank
Finance Corpn.
• Punjab National
Ltd.
Bank
• Deutsche Postbank
• IDBI Bank
Home Finance
Ltd. • Standard Chartered
Bank
• G I C Housing
Finance Ltd. • Hongkong &
Shanghai Bank
• IDBI
Commercial Bank Vs HFC
Market Share of SCBs
Housing Security Market : Primary and
an
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
•
Secondary Mortgage Market
• The market where mortgage loans
and servicing rights are bought and
sold between mortgage originators,
mortgage aggregators
(securitizers) and investors
•
Securitization in Secondary
Market
Benefits of the Secondary
Market
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
Mortgage Guarantee
Tri-partite Guarantee Contract-Purchased
by the lender and paid for by the borrower
Modus Operandi of MGC
1. Banks and HFCs pay the MGC a premium (fee) for buying
mortgage guarantee for every loan they advance
2.
3. The banks/HFCs pass on the cost to borrowers, just like
mortgage insurance premiums
4.
5. The premium will depend on factors such as borrower's
profile, income proof, credit history and security
available
6.
7. The premium amount collected from thousands of loans by
MGC will be pooled into a corpus fund
8.
9. When a loan goes bad, the bank/HFC will invoke mortgage
Insurance vs Mortgage
Guarantee
Credit Insurance
 Mortgage Guarantee

• Bi-partite contract • Tri-partite contract

• •
• Business credit • Consumer credit
insurance insurance
• •
• Regulated by IRDA • Regulated by RBI
• •
• Max FDI is 26% • Max FDI is 49%
Due Diligence in Mortgage
Guarantee
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
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
Presented By:
Shivi Agarwal
91051
Radhika Gupta
91041
Sweta Agarwal
91059
Madhusudan91029
Partani
FMG 18A

Housing Finance FMG18Y

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Housing Finance FMG18Y

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Business Model of Housing

Finance Company in India

Madhu Shivi Radhika Sweta

• To promote housing finance institutions both at

• NHB is wholly owned by Reserve Bank of India

• Ensures a sound and healthy housing finance

• It has come out with guidelines for approving

• It has also issued the Housing Finance Companies

• The principal focus of NHB’s programs is to

• The refinance assistance provided by NHB to

o Obtain a certificate of registration from the

o Have the net owned funds of Rs 25 lakh or

• The total Tier-II capital, at any point of time, shall

• No HFC can have maximum deposits, inclusive of

• A HFC can accept or renew public deposit for a

• At present HFC cannot pay more than 12.5%

• Loss Assets: The entire assets shall be written

• Among the steps mandated by the RBI are:

• Bringing down the ceiling limit on housing

• It has been observed that many banks at the time

of pricing bubble in the market

• Contingent Liabilities • Regulatory changes

CAGR - 22 % over 5 years

Source : India Stat, Annual Report of HD

• Bi-partite contract • Tri-partite contract

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