Housing Finance Industry2

Housing Finance Industry 1) Threat for a new Entrant The following are the providers of housing finance in India,
in one form or another: 1) Commercial Banks: It is the largest mobiliser of savings and also in respect of coverage. Their role has traditionally been limited to providing the working capital needs of business, industry and commerce. Hence, they have not been very active participants in the housing finance market. Another reason for the same is that they are funded by short- term resources which cannot be profitably employed in long term lendings. 2) Cooperative Banks: Deploy funds from a common pool of resources to provide for various needs of its members. In Indian Scenario, a lot of reluctance has been noticed by these cooperative banks to provide loans for housing finance. Our analysis states the major reason for the high risk and illiquidity in giving housing loans from common corpus. 3) Regional Rural Banks: They have not been very active in housing finance sector because of the large amounts and low creditworthiness involved leading to illiquidity and losses. 4) Agriculture and Rural Development Banks: the major function of these banks is not the provision of housing finance. 5) Housing Finance Companies: These are companies with principal objectives of lending for housing finance. However, the noticeable aspect our research has revealed is that there are only about 20 companies accounting for greater than 90% of total housing loans provided. 6) Cooperative housing finance societies: These are specialized institutions established and subsidized by NHB (National Housing Bank) to cater to the housing needs of the masses. Thus the housing finance market competition in India can be summarized as follows:Organization Providing Commercial Bank Cooperative bank Regional Rural Banks Agriculture and Rural Development Banks Housing Finance Companies Cooperative housing finance societies Threat Medium Low Low Low High High
2) Intersegment Rivalry Back in the 1990s, getting a good house was easy, but finding finance was tough. Today, the scene has totally changes and the reverse is true. There seems to be a housing finance boom in the country because of the increasing number of players in the field. Presently there are four types of major players in the field of housing finance which are competing with each other namely: housing finance companies (HFCs), banks, cooperative housing finance societies, refinancing institutions like the National Housing Bank (NHB), National Bank for agriculture and Rural Development (NABARD).
Presently there are around 343 housing finance companies (HFCs) working in the business of housing finance. Almost all the banks in India including the State Bank of India (SBI) and its associates, nationalized banks, Indian private banks, and foreign banks have entered the field including the State Bank of India (SBI) and its associates, nationalized banks, Indian private banks and foreign banks have entered the field of housing finance and by the end of march 2005, the retail portfolio of bank showed 50.43 per cent share in the housing finance. At present there are around 92,000 housing cooperatives at the base level with a membership of about more than 65 lakh all over the country represented by 26 apex cooperative housing federations at the State/Union territory level. The performance of HFCs in recent years has been overshadowed by the competing banking sector with aggressive lending abilities, the relative high cost of funds, higher regulatory capital requirement, and lower degree of penetration in terms of geographical presence and market segments of the HFCs. A large network and access to low-cost retail deposits have helped them to offer home loan products at competitive rates giving stiff competition to the housing finance business by the HFCs. There is aggressive campaign on the part of banks and HFCs to provide home loans to more and more customer. These HFCs are adopting aggressive strategies like tele-marketing, engaging direct sales agents, conducting exhibitions and loan melas, besides offering softer terms of repayment, enhanced quantum of loans, taking over the loans of other banks/HFC, shifting of loans from fixed rates to floating rates and vice versa. Now the financiers are more willing to finance the entire house, even including the furnishing. A few years ago, the word mela in India meant a village fair, a place where artisans displayed and sold their wares to villagers. Today, Indias consumer banks and property developers in urban and suburban India use the same word to sell and finance dreams. In the past years, home loan melas have been sponsored by a dozen Indian banks and have been held in every major Indian city. The biggest reason for the surge in home loans is the supply side economics. Banks are flush with funds, and they find it attractive to lend in the mortgage market. Historically, this segment had a very low rate of non-performing assets less than 1% and that is an added attraction. It is also worth noting here that development banks such as industrial Development Bank of India (IDBI) and Industrial Corporation of India(ICICI) has merged with its own banking arm, and has become a bank, plugging consumer loans(including housing) rather than industrial finance. Banks and HFCs are offering attractive loan schemes with so many lucrative addons to the customer. The main features of these loan schemes are consumer flexibility, adjustable rate plans, lower processing fees, low equated monthly installment (EMI), lower margin money, no prepayment penalty etc. Many of the players of housing finance have offered some add-ons with their loan places such as life insurance, credit card and consumer loans. Some of the players have offered tailor-made loan schemes for repair, renovation, extension, conversion, improvement, waterproofing, roofing, painting, plumbing and electrical work, tiling, flooring and grilling, etc. In order to increase the market share, lending institutions are competing with each other by offering very attractive terms to customer in the form of lower rate of interest, liberal collateral requirements, longer repayment period, or a very high loan to value ratio which at times goes up to or even beyond 100 per cent of the value of the house including the cost of land. In recent years, lending institution also introduced floating-rate products, besides the fixed-rate ones, with the option available to the borrower for conversion against a nominal payment. Besides, the speedier
processing and disbursement, efficient advisory services, waiver or reductions in associated up-front fees has also become common tactic of market acquisition. Acute competition has made housing finance at doorstep possible with customers having a wide variety to choose from which it shows that there is high intensity of competition among different players of the housing finance industry.

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Housing Finance Industry 1) Threat for a new Entrant The following are the providers of housing finance in India,

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