Home Loans
Evolution of Housing Finance Industry in India
As an industry, housing finance had its roots in India way back in 1977 with the establishment of the first housing finance company, Housing Development Finance Corporation Ltd. (HDFC). Subsequently, the National Housing Bank was set up by RBI as its subsidiary in 1987 for the purpose of regulating and providing refinance support to housing finance companies. Presently, about 350 housing finance companies (HFCs) operate in the country, out of which only 30 have been approved by the NHB for providing refinance. According to an estimate, the HFCs approved by NHB account for over 95% of the assets of all the HFCs in the industry. The commercial banks were late entrants to the India housing finance industry. Prior to 1998, commercial banks were not allowed to provide housing loans directly to retail clients. They were allowed to provide housing loans only through special RBI schemes, NHB/ HUDCO bonds or through their subsidiaries. This had prompted a few banks like SBI, Bank of Baroda and Corporation Bank etc. to set up their own housing finance subsidiaries.
Even though RBI allowed commercial banks to directly enter in to the housing loan business thereafter, commercial banks became aggressive in this segment of retail finance w.e.f. 2000 onwards. The private banks were the first to capitalize on the opportunity, followed by the foreign and public sector banks. Today, commercial banks account for a majority share of housing finance disbursements, which were earlier dominated by the HFCs. In fact, housing finance subsidiaries of commercial banks are now gradually merging with their parents, on account of the fact that these subsidiaries, left to themselves, have not been able to face the competition in this highly competitive scenario.
The Indian housing industry is however, dominated by the unorganized sector, comprising of small builders and contractors, accounting for over 70% of the housing units constructed. The organized sector comprises of large builders and government or government- affiliated entities. There are two broad categories of borrowers in the housing finance market: retail borrowers and non- retail borrowers. Retail borrowers comprise salaried individuals and non- salaried individuals such as self- employed professional or private businessmen. Non- retail borrowers consist of corporate entities that borrow either for funding staff housing projects or office premises, and builders who borrow for funding construction activity.
Housing loan and the Priority sector
Till very recently, bank loans for housing up to Rs.10 lakh in the rural and semi-urban areas only were eligible for being considered as priority sector. Subsequently, in its mid- term credit policy for 2004-05. RBI raised the priority sector limit of housing finance to Rs. 20 lakh from Rs. 10 Lakh without any restrictions on the geographical area. However, there is a growing opinion that housing finance should no longer be accorded a priority sector status. In fact, an internal committee of the RBI had recommended for the removal of priority sector status to home loans up to Rs. 20 lakh. This group was set up with an objective to review the concept, segments and other related issues of priority sector lending. The report of the internal committee reiterates the concern voiced by RBI from time to time that banks are excessively exposed to home loans. This, in turn, is resulting in deceleration of the much needed credit flow to other priority sector areas like Small Scale Industries, Exports, Education and others. Expectedly, however, the Indian Bank Association (IBA) has opposed this move, According to IBA, housing is a critical need that requires a priority sector status. The exposure of most foreign and private banks in the housing loan segment is quite large as they do not have enough networks to extend loans to other priority sector areas.
Eligible activities for housing finance
Banks usually provide housing loans for the following purposes:
1. Purchase, construction of new house/ flat.
2. Purchase of land for construction of house.
3. Improvement/ extension of existing house/ flat.
4. Undertaking repairs/furnishing/ renovation of the house/ flat etc.
5. Takeover of loans availed for housing activity from other banks/ HFCs at higher rates of interest.
Reserve Bank of India has issued separate sets of guidelines for urban cooperative banks and other banks for undertaking direct loans in the housing loan segment. RBI has advised that besides the above, banks may also provide housing loans to individuals for the following purposes:
For purchase of a plot- the lending bank has to obtain a declaration from the borrower that he intends to construct a house on the plot within a period of two years from the date of availing bank finance for purchasing the plot.
For purchasing an old house where the applicant is presently residing as a tenant.
For loans for buying/ constructing a second house to a person who is already owning a house in the town/ village where he resides. The second house should also be meant for self-occupation by the same person.
Bank finance may also be extended for purchases of a house by a borrower who proposes to let it out on rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.
Other Conditions
Through RBI has prescribed the following conditions specifically applicable for the PUCs (Primary Urban Cooperatives) providing housing loans, these may serve as benchmark for other lending banks as well.
1. RBI has stipulated a maximum period of 15 years including moratorium or repayment holiday. The installments may be fixed in standard EMIs or in gradually increasing form. However, the repayment on account of principal & interest together should not exceed 30% of the borrowers’ income.
2. The builders/ contractors generally require huge funds, take advance payments from the prospective buyers or from those on whose behalf construction is undertaken and, therefore, they may not usually require bank finance in the normal circumstances. Any financial assistance extended to them by primary (urban) co-operative banks may therefore runs the risk of dual financing. RBI has accordingly advised these banks to refrain from sanctioning loans and advances to this category of borrowers.
3. These banks may also extend need-based credit up to a maximum of Rs. 1.00 lakh in rural and semi-urban areas and Rs.2.00 lakh in urban areas to the owner of a house/ flat only for repairs, additions, alterations, etc., irrespective of whether the house/ flat is occupied by the owner or by a tenant. They may obtain collateral security to their satisfaction.
To APPLY FOR HOME LOAN
As an industry, housing finance had its roots in India way back in 1977 with the establishment of the first housing finance company, Housing Development Finance Corporation Ltd. (HDFC). Subsequently, the National Housing Bank was set up by RBI as its subsidiary in 1987 for the purpose of regulating and providing refinance support to housing finance companies. Presently, about 350 housing finance companies (HFCs) operate in the country, out of which only 30 have been approved by the NHB for providing refinance. According to an estimate, the HFCs approved by NHB account for over 95% of the assets of all the HFCs in the industry. The commercial banks were late entrants to the India housing finance industry. Prior to 1998, commercial banks were not allowed to provide housing loans directly to retail clients. They were allowed to provide housing loans only through special RBI schemes, NHB/ HUDCO bonds or through their subsidiaries. This had prompted a few banks like SBI, Bank of Baroda and Corporation Bank etc. to set up their own housing finance subsidiaries.
Even though RBI allowed commercial banks to directly enter in to the housing loan business thereafter, commercial banks became aggressive in this segment of retail finance w.e.f. 2000 onwards. The private banks were the first to capitalize on the opportunity, followed by the foreign and public sector banks. Today, commercial banks account for a majority share of housing finance disbursements, which were earlier dominated by the HFCs. In fact, housing finance subsidiaries of commercial banks are now gradually merging with their parents, on account of the fact that these subsidiaries, left to themselves, have not been able to face the competition in this highly competitive scenario.
The Indian housing industry is however, dominated by the unorganized sector, comprising of small builders and contractors, accounting for over 70% of the housing units constructed. The organized sector comprises of large builders and government or government- affiliated entities. There are two broad categories of borrowers in the housing finance market: retail borrowers and non- retail borrowers. Retail borrowers comprise salaried individuals and non- salaried individuals such as self- employed professional or private businessmen. Non- retail borrowers consist of corporate entities that borrow either for funding staff housing projects or office premises, and builders who borrow for funding construction activity.
Housing loan and the Priority sector
Till very recently, bank loans for housing up to Rs.10 lakh in the rural and semi-urban areas only were eligible for being considered as priority sector. Subsequently, in its mid- term credit policy for 2004-05. RBI raised the priority sector limit of housing finance to Rs. 20 lakh from Rs. 10 Lakh without any restrictions on the geographical area. However, there is a growing opinion that housing finance should no longer be accorded a priority sector status. In fact, an internal committee of the RBI had recommended for the removal of priority sector status to home loans up to Rs. 20 lakh. This group was set up with an objective to review the concept, segments and other related issues of priority sector lending. The report of the internal committee reiterates the concern voiced by RBI from time to time that banks are excessively exposed to home loans. This, in turn, is resulting in deceleration of the much needed credit flow to other priority sector areas like Small Scale Industries, Exports, Education and others. Expectedly, however, the Indian Bank Association (IBA) has opposed this move, According to IBA, housing is a critical need that requires a priority sector status. The exposure of most foreign and private banks in the housing loan segment is quite large as they do not have enough networks to extend loans to other priority sector areas.
Eligible activities for housing finance
Banks usually provide housing loans for the following purposes:
1. Purchase, construction of new house/ flat.
2. Purchase of land for construction of house.
3. Improvement/ extension of existing house/ flat.
4. Undertaking repairs/furnishing/ renovation of the house/ flat etc.
5. Takeover of loans availed for housing activity from other banks/ HFCs at higher rates of interest.
Reserve Bank of India has issued separate sets of guidelines for urban cooperative banks and other banks for undertaking direct loans in the housing loan segment. RBI has advised that besides the above, banks may also provide housing loans to individuals for the following purposes:
For purchase of a plot- the lending bank has to obtain a declaration from the borrower that he intends to construct a house on the plot within a period of two years from the date of availing bank finance for purchasing the plot.
For purchasing an old house where the applicant is presently residing as a tenant.
For loans for buying/ constructing a second house to a person who is already owning a house in the town/ village where he resides. The second house should also be meant for self-occupation by the same person.
Bank finance may also be extended for purchases of a house by a borrower who proposes to let it out on rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.
Other Conditions
Through RBI has prescribed the following conditions specifically applicable for the PUCs (Primary Urban Cooperatives) providing housing loans, these may serve as benchmark for other lending banks as well.
1. RBI has stipulated a maximum period of 15 years including moratorium or repayment holiday. The installments may be fixed in standard EMIs or in gradually increasing form. However, the repayment on account of principal & interest together should not exceed 30% of the borrowers’ income.
2. The builders/ contractors generally require huge funds, take advance payments from the prospective buyers or from those on whose behalf construction is undertaken and, therefore, they may not usually require bank finance in the normal circumstances. Any financial assistance extended to them by primary (urban) co-operative banks may therefore runs the risk of dual financing. RBI has accordingly advised these banks to refrain from sanctioning loans and advances to this category of borrowers.
3. These banks may also extend need-based credit up to a maximum of Rs. 1.00 lakh in rural and semi-urban areas and Rs.2.00 lakh in urban areas to the owner of a house/ flat only for repairs, additions, alterations, etc., irrespective of whether the house/ flat is occupied by the owner or by a tenant. They may obtain collateral security to their satisfaction.
To APPLY FOR HOME LOAN
Apply http://www.moneimatters.com/
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