Housing loans in India are offered both, by banks as well as housing finance companies (HFCs). HDFC, the first HFC, was set up in 1977. The National Housing Bank (NHB) was established in 1987 to provide an impetus to the housing finance industry. The charter of the NHB was to regulate and supervise HFCs and promote capacity building in the sector.
Despite debate on the differences between banks and HFCs and the need to have a separate regulatory regime for the latter, there is compelling rationale for dedicated housing finance companies.HFCs are governed by the NHB while banks are regulated by the RBI. The NHB is a sub-regulator of the RBI, specifically created for overseeing HFCs. All the regulatory changes seen on home loans have emanated from the NHB and have later been replicated by the RBI. These include the abolishing of prepayment penalty, cap on loan-to-value ratio, risk weights and provisioning requirements. Thus, both banks as well as HFCs are governed by exactly the same set of regulations, albeit by different regulators. However, there is a move to consolidate the regulatory function with RBI.
The ratio of housing loans to GDP in India stands at seven per cent – among the lowest in the world. Most purchases of homes are still from savings, as opposed to taking loans. The shortfall of dwelling units has been growing every year and is currently estimated at 25 million units. Bridging this gap entails the creation of the quantum of housing that currently exists in Mumbai, Delhi, Kolkata and Chennai put together. An issue of this dimension requires the creation of dedicated institutions which are focused on addressing the shortfall.
This is the rationale behind the creation of the NHB and the housing finance industry. Banks serve customers in their catchment area by offering them a wide variety of financial products, while HFCs are focused on creating housing. This specialisation enables them to achieve economies of scale. Consequently, in the last few years, HFCs have been gaining on banks. According to a leading credit rating agency, disbursals of home loans are projected to grow by 19 per cent in the next financial year. HFCs are expected to grow by 24 per cent, while banks will grow by 14 per cent. This trend, expected to continue over the next five years, makes HFCs an key part of the Indian financial system.
(The author is Executive Vice-President, Edelweiss Housing Finance Ltd.)