RESPONSIBLE HOUSING LENDING:
BRICKS FOR THE BUCKS
THE INDIAN EXPERIENCE
RENU SUD KARNAD
JOINT MANAGING DIRECTOR
HOUSING DEVELOPMENT FINANCE CORPORATION LTD - India
RESPONSIBLE DEVELOPMENT FINANCE
FRANKFURT FORUM 2008
FEBRUARY 22, 2008
Housing Finance in India
• High demand growth driven by:
– Improved Affordability
• Rising disposable income
• Lower interest rates
• Tax incentives (interest and principal repayments
deductible)
– Increasing Urbanisation
• Currently 28% of Indian population is urban
– Favorable Demographics
• Median Indian age is 25 years
• Rapid rise in new households
• Acute housing shortage estimated at 24.7 million units
• Low mortgage penetration 2
• Key players: Banks and Housing Finance Companies
Lending Operations of HDFC
• Incorporated in 1977 as the first specialised mortgage company
in India
• Cumulative Loan Disbursements : US$ 35.9 bn
• Cumulative Housing Units Financed : 3 million
• Loan Characteristics (for HDFC)
– Average Loan Size : Rs 1.25 mn (approx US$ 31,700)
– Average Loan to Value : 63% (at origination)
– Average Loan Term : 13 years
– Primary Security : Mortgage of property financed
– Customer Profile : Typically first time home buyers
: Average age - mid 30s
: Middle-class, salaried employees
3
Housing Finance for Low Income Clients
• Following its 10th year of operations, HDFC created a ‘Shelter
Assistance Reserve’ wherein a portion of profits are transferred
each year for participating and supporting social initiatives
• In 1989, HDFC accessed low-cost funds from KfW to expand
lending operations to economically weaker section (EWS)
households.
• HDFC partners with NGOs having grass-root level involvement
to identify families with genuine needs.
• This collaboration has enabled HDFC to:
– construct quality houses at lower costs (without contractors)
– demonstrate high recovery rates
– offer small sized loans for repairs & upgradation
– emphasis on ‘self-help’ approach where the borrowers
contribute locally available building material and labour
• Focus is on providing housing + income generating activity 4
Challenges of Low Income Housing
• Rapid urbanisation has created jobs in cities leading to
migration from rural areas. But adequate housing
facilities/infrastructure have not been provided resulting in
proliferation of slums/squatters.
• Archaic land policies
• Supply side restrictions have led to land price distortions
e.g. restrictions on FSI, development control regulations
• Lack of a developed rental market
• Lack of clarity on land titles
• Financial inclusion still a challenge - low formal sector
financial penetration with strong presence of the
moneylender, charging usurious interest rates
• Subsidised/free housing – political hot potato 5
Recent Initiatives
• Repeal of Urban Land Ceiling and Regulation Act (ULCRA)
in most states
• Credit Bureau information building up
• The Reserve Bank of India has put out guidelines for
establishing Mortgage Guarantee Companies
• Central government is providing funds to states for urban
renewal and infrastructure development. Funds are released
based on reforms implemented at the state level.
• Efforts being made to redevelop slum settlements. Eg.
Dharavi
• Recognition that the micro finance sector is profitable.
– Attracting huge capital, both debt and equity from venture
capitalists, banks, corporates.
– Global players expected to invest US$ 3 billion in micro
finance in India by 2010 6
Reaching the Bottom of the Pyramid
• Need to stipulate that all new housing projects should have a
fixed percentage allotted for low income housing
• Integrate delivery of services - water supply and sanitation,
health care, education and access to livelihood
• Policy initiatives to increase the supply of land
• Incentivise developers to build rental accommodation or low
cost housing
• Encourage public private partnerships for low income housing
• Standardise norms for low cost, ecological construction
materials
• Initiatives to lower cost to the end consumer such as reduced
stamp duty
• Government has set up a high level task force on “Affordable
Housing for All” 7
