1

Competitive Dynamics of Indian Housing

Finance Industry

Ashwani Kumar Bhalla

Senior Lecturer SCD Government College

Ludhiana (Punjab) ashwanibhalla@gmail.com.

Dr. P.S. Gill Professor

Punjab School of Management Studies Punjabi University

Patiala.

Dr Parvinder Arora

Associate Professor Institute of Management Technology

Ghaziabad

parora@imt.edu

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Competitive Dynamics of Indian Housing Finance Industry

Abstract: The growth in housing and housing finance activities in recent years reflect the

buoyant state of the housing finance market in the country. The financing institutions

have come to see good value in funding this component of the economy. With a

growing number of players, the housing sector is becoming increasingly market-

driven. The affordability of housing loans clearly appears to have improved with fast

growing number of borrowers. The market has also witnessed change in lending

practices in certain segments to accommodate customer needs, as an offshoot of

increased competition and a buyers’ market. There seems to be high intensity of

competition among different players of the Housing finance industry. But this

competition needs to be measured to observe the efficiency of the provision of

housing finance services, the quality of housing finance products and the degree of

innovation in the sector, etc. The Present paper is an attempt to measure the level of

competition in Indian housing finance industry for the purpose of which Herfindahl

Hirschman Index (HHI) has been used as a tool for measuring the concentration.

Key Words: Housing Finance, Housing Finance Companies, Herfindahl Hirschman

Index.

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Competitive Dynamics of Indian Housing Finance Industry

Characteristics of Indian Housing finance Industry: In the post liberalization

era Indian housing finance industry has registered unprecedented Growth. Housing

finance in India has evolved in three distinct phases. The first phase occurred before

the 1970s when the government, through its various social schemes for public and

low-cost housing, was the sole provider of housing finance. Housing finance through

recognized institutions was relatively non-existent in India till 1971. There were few

takers for housing finance in the country. Hardly 10% of the houses were built or

purchased through institutional agencies and the rest 90% were dependent on

people’s own savings and borrowings from friends and relatives (padhiari et al.,

2001). According to the Indian National Statistical Survey’s (NSS) 44th round

survey, more than 80 per cent of housing finance comes from private savings, sale

of assets and non-formal sources of credit(Biswas Smita., 2003). Earlier it was

considered socially unviable to borrow funds. There’s been an evident shift in

perception and mindset in the Indian middle class over the last five to ten years,

thanks to the impact of liberalization and opening up of the Indian economy, a rise in

average income across households, and a palpable desire to own things ‘now’

Prashat Mahesh., 1998) . The most crucial aspect of this ‘shift’ in the consumer’s

mindset is perhaps explained by the fact that the young (or Generation Next) are

more in charge of their lives and eager and impatient to assume the world. It’s a

generation that is independent, self-reliant and nuclear in nature. And it is this

eagerness to succeed that has fuelled a drive to own what one desires the most: a

home, a car and a healthy lifestyle. Other drivers have been incentives from the

government to buy homes, improved quality of buildings and property services and a

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bouquet of financial options. Tax concessions, property price dips and lower interest

rates have also helped. But what’s helped more is the change in consumer’s mindset

over a ‘loan’ being a stigma, the extra freedom of making an informed choice, and

flexible, customized finance options coupled with mutual trust (Karnard Renu.,

2004).

In the second phase formal system of housing finance was originated in India in

1971 with the establishment of the Housing and Urban Development Corporation

Limited (HUDCO) in the public sector. HUDCO provided technical assistance to state-

sponsored undertakings, housing and urban development institutions, and the co-

operative sector. HUDCO was established at a time when the country was facing

problem of growing housing shortage and restricted availability of Bank credit to this

sector. Major objective of establishing HUDCO was to enhance the residential

housing stock by providing an avenue for housing finance on a systematic and

professional basis and to increase the flow of resources to this sector by integrating

the domestic housing sector with the capital market. However HUDCO’s role was

that of wholesaler which financed the public housing agencies rather than individual.

In 1977, the Industrial Credit and Investment Corporation of India (ICICI) took the

initiative and set up the Housing Development Finance Corporation (HDFC) in

collaboration with International Finance Corporation (IFC) and Agha Khan Fund.

HDFC was the first primary housing finance institution in the private sector at that

time. At that time, the business was looked at with great skepticism - no one so far

had experimented with retail housing finance in the country, there was no access to

long-term domestic resources nor was there a legal system to support foreclosure.

It's of course a whole different story that HDFC was successful and even the World

Bank has referred to HDFC as a model housing finance company for developing

countries (HDFC ., 2003).

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Although commercial banks were the largest mobilizer of savings in the country,

traditionally banks were rather reluctant to lend for housing, as they preferred

financing working capital needs of industry. In January 1977 the Reserve Bank of

India set up a working Group on the role of Banking System in providing finance for

housing schemes. The Working group was asked to examine the role of the banking

system in housing finance. The group in its report submitted in January 1978,

recommended that the commercial banks may be asked to earmark certain amount

every year, for housing sector which may vary, depending upon the resources of

banks and the absorptive capacity of the sector. The group has also recommended

the bulk of the bank’s housing finance should be routed through intermediaries. It

was also recommended that it may be left to the concerned bank to decide about the

proportions of direct and indirect finance.

Based on the recommendations of the working group in May 1979 Reserve Bank of

India (RBI) issued detailed guidelines to Scheduled Commercial Banks (SCBs) for

housing finance (Government of India., 1996). Initially it was desired that the

banking system should provide housing finance to the extent of Rs. 75 crore per

annum, which was only 0.5% of total advances of the commercial banks at the end

of December 1978. Banks were also given freedom to decide about the proportion of

housing finance to be finance directly or indirectly. In June 1981 the limit was

enhanced to Rs. 100 Crore per annum, which constituted approximately 0.43% of

the total advances of all SCBs at the end of 1980. In October 1982 RBI further

enhanced the quantum of funds for housing sector to Rs. 150 Crore. In March, 1988

the limit was enhanced to 225 Crore which was further enhanced to Rs 300 Crore by

the end of 1989.

The government of India established a high level group in 1986 to address the

housing problem in the country. The group recommended that a network of

specialized housing finance institutions be created to mobilize additional savings and

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provide financing for housing construction. Two types of institutions were envisaged

as belonging to this network: local-level institutions, which would mobilize household

savings and provide home loans, and regional Housing Development Finance

Corporation-type institutions with wider territorial jurisdictions, which would mobilize

household savings and provide housing finance to middle-and higher income groups

(Garg Yogendra Kumar., 2002).

In 1987, the insurance act was amended to allow the Life Insurance Corporation of

India (LIC) and General Insurance Corporation of India (GIC) to directly issue

mortgage loans (Mishra., 1997). Till 1988, HDFC was the only formal housing finance

company operating in India as it is after 1988, that banks and insurance companies

entered into this sector.

The governmental efforts towards the development of a sound regulatory mechanism

for housing finance in India can be traced back to 1987 when the government came

out with a National Housing policy. A revised version was tabled in Parliament in

1992 and adopted by both houses of Parliament in August 1994. This document

forms the nucleus of the policy framework for the housing sector. It envisages the

removal of the legal and regulatory constraints on the creation of a secondary

market in housing loans.

As per one of the directions of the above policy, the National Housing bank Act was

enacted by Parliament in 1987. The Bank has been mandated to establish a network

of housing finance outlets across the vast span of the nation to serve different

income and social groups in different region. One of the fundamental ideas behind

the inception of NHB in 1988 as the apex institution for the housing finance sector of

the country was to facilitate development of a sound, healthy and sustainable

housing finance system(National Housing Bank., 2000). After start of the

liberalization process in India government has taken so many measures to promote

housing finance from the formal sector and share the task of providing of housing

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finance with the private sector. Linking with global scenario the policies of

government of India has started-showing shift in approach towards housing finance.

In the post liberalization era housing finance industry has registered unprecedented

Growth. The Value of total residential mortgage debt moved up from USD 1.84 billion

in 1994 to USD 12.26 billion in 2004, which is registered a growth of 21%

Compounded Annual Growth rate (CAGR). Industry has recorded robust growth in

the last 5 years, clocking an annual growth rate of about 40% between financial year

1999 and financial year 2004. Residential mortgage debt as a percentage of GDP

was a mere 0.58% in 1994 which has moved up to 2.21% in financial year 2004, still

miniscule when compared to about 45% in the European Union, 70% in the US, 38%

in Taiwan, 26% in Malaysia, 18% in Thailand, 14% in South Korea, 6% in China and

upwards of 30% in East Asian economies (Business World., 2004). This aspect shows

the further growth of housing finance in future. As per the ICRA Limited ( Formerly

Investment Information and Credit Rating Agency of India Limited) reports, in the

last five years housing finance industry has shown unprecedented growth as

compared to other counterparts. In the year 1999-2000 housing finance growth

rates was registered with 44.4%, which has reached to 77.6% in the year 2003-04.

The main factors driving this growth are: 1. Fiscal concessions, 2. Encouraging

regulations to extend by regulating agencies, 3. Declining interest rates in different

years and has come down to 7.65% from 17.00%, 4. Increase in products offerings,

5. Rapid construction, increasing supply and stable/declining property prices, 6.

Steady increase in urbanization levels, 7. Increase in disposable income for large

sections of the population (ICRA Rating Feature., 2003). 8. Aggressive lending by

banks to the housing sector due to lower credit off takes by the corporate sector,

attractive spread and lower non-performing assets, lower risk weightage and higher

risk adjusted profitability( BSE., 2003).

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Competitive Dynamics in Housing finance: Back in the nineties, getting a good

house was easy, but finding finance was tough (Outlook Money., 2003). . Today, the

reverse is true. There seems to be 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 National Housing Bank (NHB) and National Bank for

Agricultural and Rural Development (NABARD). Presently there are 343 Housing

finance companies (HFCs) working in the business of housing finance. Now almost all

the banks in India including SBI and associates, Nationalized banks, Indian private

banks and Foreign banks has entered in the field of housing finance and by the end

of March 2005, the retail portfolio of banks shows 50.43% share in the housing

finance (National Housing Bank., 2005). At present there are 92000 housing co-

operatives at the base level with a membership of about 65 lakh all over the country

represented by 26 apex co-operative housing federations at the state/union territory

level (National Housing Bank., 2005). The performance of the HFCs in recent years

has been overshadowed by the competing banking sector with aggressive lending

abilities, the relatively high cost of funds, higher regulatory capital requirement and

lower degree of penetration in terms of geographical presence and market segments

of the HFCs (National Housing Bank., 2004). 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 Housing finance Companies

(HFCs) to provide home loans to more and more customers. These HFCs are

adopting aggressive strategies like tele-marketing, engaging direct sales agents,

conducting exhibitions and loan melas besides offering softer terms of repayment,

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enhanced quantum of loans, taking over the loans of other banks/HFCs, shifting of

loans from fixed rates to floating rates and vice versa. Now the financers are more

willing to finance the entire house even the furnishings. Few years ago, the word

mela in India meant a village fair, a place where artisans displayed and sold their

wares to villages. Today, India’s 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 (Indian Brand Equity Foundation., 2004). The biggest

reason for the surge in home loans is because of supply side economics. “Banks are

flush with funds, and they find it attractive to lend in the mortgage market( Douglas

et al., 2001). Historically, this segment had a very low rate of non-performing assets

— below one per cent— and that is an added attraction’’. Banks and financial

institutions have brought sea changes in their strategies and there is a clear shift

from sellers’ market to buyers’ market. It is also worth noting here that development

banks such as Industrial Development Bank of India (IDBI) and Industrial Finance

Corporation of India (IFCI), whose task was to lend to industry for projects, are in

terminal decline. Industrial Credit and Investment 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 Housing Finance

Companies are offering attractive loans schemes with so many lucrative add-ons to

the customers. Main features of these loans schemes are consumer flexibility,

adjustable rate plans, lower processing fees, low Equated Monthly Installment (EMI),

lower margin money, no pre-payment penalty, etc. Many of the players of housing

finance have offered some add-ons with their loan plans 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, water proofing,

roofing, painting, plumbing and electrical work, tiling, flooring, and grilling etc. In

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order to increase the market share, the lending institutions are competing with each

other by offering very attractive terms to customers in the form of lower rate of

interest, liberal collateral requirements, longer repayment period or a very high loan

to value (LTV) ratio which at times goes up to or even beyond 100% of the value of

the house including the cost of land. In recent years, the lending institutions 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 have also become common tactics of market acquisition

(National Housing Bank., 2003). The acute competition has made the possible

“Housing Finance at door step” with the customers having a wide variety to choose

from.

The above all shows that there seems to be high intensity of competition among

different players of the Housing finance industry. But this competition needs to be

measured to observe its intensity to understand the competitive dynamics of housing

finance to make it more consumers friendly and favourable to industry as well. As in

other industries, the degree of competition in the housing finance sector can matter

for the efficiency of the production of housing finance services, the quality of housing

finance products and the degree of innovation in the sector Claessens et al., 2004).

There are number of techniques which are generally used to measure the

competitive dynamics of the firms in the industry. The techniques which are widely

used by the researchers to measure the competition in the banking and financial

services sector include: Breshanan and Lau ( A. Prasad et al., 2005), Panzar and

Rosse (Barbara Casu., 2004) , the m-bank concentration ratio adopted by Sarkar

and Bhaumik and the Herfindahl Index adopted by Juan-Ramon and others (Classens

et al., 2004).

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However, few studies concerning the competition in housing finance industry are

available and these just point out certain indications of competition in housing

finance stakeholders. As far as Indian context is concerned there is no detailed

study, which has specifically dealt with the competition factor in the housing finance

as such, though studies concerning the competition in banking sector are available.

Jerome Fahrer and Thomos Roling ( Jerome et al., 1992) studied the competition in

housing finance market in Australia. They used Herfindahl index of concentration in

the market and estimated a model of conjectural variations to examine the reactions

of each bank to changes in the value of loans made by other banks. Renu.S. Karned

outlined that housing finance system in India facing intense competition and it

buyer’s oriented market and HFCs are following aggressive pricing strategies

(Karnard Renu., 2004). Harish Biyani, G. Krishnan talked about whether housing

finance institutions are ethically and morally correct in promoting risky products

without providing the consumers with adequate information ( Harish et al., 2004).

The study revealed that banks and HFCs are luring customers by cutting down their

interest rates and aggressively selling their products with floating interest rates.

Different studies have used Herfindahl index to measure the concentration in the

financial services industry. Sayuri Shirai has used the Herfindahl Index adopted by

Juan-Ramon and others to assess the extent of concentration in the banking sector.

Ingo Walter Aneel Keswani and David Stolin undertook a cross sector analysis for

mutual fund performance persistence and competition.

Objectives, Data and Methodology:

Objectives: The Present paper is an attempt:

1. To Measure the level of competition in Indian housing finance industry.

2. To Measure the level of competition amongst Housing finance companies.

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3. To Understand H index and observe its trend to measure concentration level

to analyse competitive dynamics in the housing finance industry through

market share of players in Housing finance disbursements or assets base. .

Data and Methodology:

For the purpose of study data from the 1996-97 to 2004-05 has been used to

measure the competition level among major players. Inter Competition and

concentration level in 10 top HFCs has also been measured. The companies for

analysis has been selected from the list of companies approved by the National

Housing bank (NHB) under section 29 A of the NHB Act and which have been given

permission to accept public deposits and also been listed with recognized stock

exchange. Those companies has been selected which has a national character and

working from more than ten years These companies has largest number of branch

network in India. For measuring the inter-competition among selected companies’

data for five year i.e. 2001-02 to 2005-06 has been taken.

The most important way of observing competition among the different players is to

observe the degree of seller’s concentration in the market which plays a dominant

role in determining the behaviour of a firm in the market (Barthwal., 1996). If the

market is concentrated in the hands of few firms or players then it reflect low level of

competition and some times stage of monopoly. On the contrary if the market is

divided into different players equally or in small fractions then it leads high level of

competition. We have used Herfindahl- Hirshman index popularly known as

Herfindahl Index as a measure of the size of group of players in relationship to the

industry and an indicator of the amount of competition. It is an economic concept

but widely applied in competition law and antitrust (Brown et al., 1988). When

assessing market concentration, guidance can be found in the Herfindahl Index,

which sums up the squares of the individual market shares of all competitors. With

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an HHI below 1000, the market concentration can be characterized as low, between

1000 and 1800 as moderate, and above 1800 as high (EEA ., 2002). The Herfindahl

index is a far more precise tool for measuring concentration. It is obtained by

squaring the market-share of each of the players, and then adding up those squares.

The formula for this index is: H = (%S1)2 + (%S2)2 + (%S3)2 +….(%Sn)2 Here %S

stands for the percentages of the market owned by each of the larger companies, so

that %S1 is the percentage owned by the largest company, %S2 by the second, and

so on. Here n stands for the total number of firms you are counting. The Herfindahl

index gives added weight to the biggest companies. The higher the index, the more

concentration and (within limits) the less open market competition. A monopoly, for

example, would have an Herfindahl index of S12 or 1002, or 10,000. By definition,

that's the maximum score. By contrast, an industry with 100 competitors that each

has 1% of the market would have a score of 12 + 12 + 12+ ...12 or a total of 100.

Now that we've seen the limits, a more typical situation might be a duopoly. If each

of the two firms has a market shares of 50%, the Herfindahl index would be (50)2 +

502 =2500 + 2500 = 5000. With two firms that have of 75% and 25% respectively,

the H index would be: (75)2+ (25)2 = 5,625 + 625 = 6,250

The Herfindahl index takes into account the relative size and distribution of the firms

in a market The Herfindahl Index is the prevalent economic index which measures

the centralization of any organizational system using two parameters: inequality

among firms, and the number of firms in the industry.

The Herfindahl index increases both as the number of firms in the market decreases

and as the disparity in size between those firms increases. Decreases in the

Herfindahl index generally indicate a loss of pricing power and an increase in

competition, whereas increases imply the opposite.We are applying Herfindahl Index

in our study by two ways. Firstly to calculate the concentration level amongst the

14

players on the basis of their market share in total disbursements of housing finance

and secondaly to calculate Herfindahl index among 10 leading Housing finance

companies on market share and assets values seprately. The main virtue of the

Herfindahl is its simplicity. But it has two unfortunate shortcomings. It relies on

defining correctly the industry or market for which the degree of competitiveness is

open to question. This is rarely simple and can be a matter of fierce debate. Even

when the scope of the market is clear, the relation between the Herfindahl and

market power is not. When there is a CONTESTABLE MARKET, even a firm with a

Herfindahl of 10,000 (the classic definition of a monopoly) may behave as if it was in

a perfectly competitive market.

For the purpose of measuring the competition in Housing finance segment, Market

share of different players in the total Housing loan disbursements or Total assets can

be taken as base to compute the index. In our study we have used both the basis to

compute concentration level in Housing finance companies to measure the stage of

their competitiveness. In case of major players of Housing finance like banks,

Housing finance companies (HFC’s) and Apex Co-operative Housing Federations

(ACHFs) share of Housing loan disbursements has been taken as base rather than

assets base because banks may be using their assets for purposes other than

housing finance business.

Analysis and Results:

The level of concentration and Competition among the major players of Housing

finance like Banks, Housing Finance Companies (HFC’s) and Apex Co-operative

Housing Federations(ACHFs) can be studied from the table:1 shown below, which

shows the disbursements of these players over the years along with percentage of

their share in total disbursements shown in brackets. By using these percentages of

share in the total disbursements Herfindahl index has been computed.

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Table: 1 Market share of different Housing finance players in disbursements of Housing loans and Herfindahl index.

YEAR BANKS HFCs

ACHFs TOTAL HERFINDAHL

INDEX

1996-97 1805.62

(26.76)

4627.74

(68.58)

314.72

(4.66)

6748.08 5440.74

1997-98 1454.77

(16.96)

5767.55

(76.17)

519.57

(6.87)

7570.12 6137.45

1998-99 3951.99

(32.73)

7454.27

(61.73)

665.88

(15.54)

12075.14 4912.71

1999-00 3597.40

(25.49)

9812.03

(69.53)

700.86

(4.98)

14110.29 5510.20

2000-01 5531.11

(29.12)

12637.85

(66.29)

867.72

(14.59)

19063.68 5264.20

2001-02 8566.41

(35.97)

14614.44

(61.25)

677.58

(2.8)

23858.43 5049.40

2002-03 23553.37

(56.04)

17832.01

(42.43)

641.48

(1.47)

42026.86 4943.52

2003-04 32816.39

(60.43)

20862.23

(38.41)

623.08

(1.26)

54301.7 5129.55

2004-05 50398.00

(65.60)

26000.00

(33.8)

421.10

(0.6)

76819.10

5449.99

2005-06 27411

(31.72)

58623

(67.83)

388

(0.45)

86422 5607.58

(Data Source: Data has been compiled from the annual reports of National Housing Bank and Reserve Bank of India. Figures in Parenthesis indicate percentages) Amount in Rs. Crores

16

Figure:1

Market share of different Housing finance players in disbursements of Housing loans and

Herfindahl index

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Year

Ho

usin

g L

oan

s d

isb

urs

em

en

ts a

nd

Herf

ind

ah

l in

dex

BANKS

HFCs

ACHFCs

TOTAL

HERFIDHL INDEX

BANKS 1805.62 1454.77 3951.99 3597.4 5531.11 8566.41 23553.4 32816.4 50398

HFCs 4627.74 5767.55 7454.27 9812.03 12637.9 14614.4 17832 20862.2 26000

ACHFCs 314.72 519.57 665.88 700.86 867.72 677.58 641.48 623.08 421.1

TOTAL 6748.08 7570.12 12075.1 14110.3 19063.7 23858.4 42026.9 54301.7 76819.1

HERFIDHL INDEX 5440.74 6137.45 4912.71 5510.2 5264.2 5049.4 4943.52 5129.55 5449.99

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

If we look at the value of Herfindahl index in the above table initially this value

increases in 1997-98 but after that it start decreasing and in the year 2003-04 this

value comes down to 5129.55 which indicates some increase in the competition

among players of housing finance in the market. But it is too high as per the

standards of this measure. As far as the degree of competition among different

players is concerned the increase in the competition is not much encouraging this

because of lowering of the share of Housing finance companies as major players of

housing finance. In 1997-98, 387 Housing finance companies were doing the

business which comes down to 343 in 2003-04. Similarly their share in the total

disbursements has also come down to 38.41% in 2003-04 from 68.58% in 1996-97.

Similarly Co-operative sector share has also come down to 1.26% in 2003-04 from

4.66% in 1996-97. The trends in the market are making banking sector more

powerful because of their large network and potentiality in working. The value of

Herfindahl index shown in the table also indicates the high level of concentration

17

because in all the years the value is more than 1800 which mean high level of

concentration. Banks have still monopoly as far as their total market share in

disbursements is concerned. Similarly A survey conducted by the FICCI on 47

banks and housing finance companies has revealed that banks have overtaken house

finance companies (HFCs) in the home loan market. The main reasons behind this

are the largest network of banks and their reach to the every part of the country

which other players are lacking (National Housing Bank., 2005).

Concentration level among the major housing finance companies can also be studied

from the table 2 shown below, which shows the disbursements of top 10 Housing

finance companies registered with National Housing Bank (NHB) as per section 29 A

of the NHB act and are eligible to accept public deposits. Figures in the brackets

show the percentage share in the total disbursements of these companies.

Table: 2 Housing Loans disbursements by HFC’s, their percentage share and

Herfindahl index.

(Amounts in Rs. Crore) Name of the

Company/Year

2001-02 2002-03 2003-04 2004-05 2005-06

Housing and Urban Development Corporation Ltd

4661

(29.34)

8180

(35.09)

6136

(24.471)

5921

(19.867)

3766.52

11.443)

Housing Development and Finance Corporation Ltd

7616.56

(47.94)

9950.87

(42.68)

12696.82

(50.637)

16206.75

54.380)

20679.20

(62.829)

GIC Housing Finance Ltd

225.19

(1.417)

295.59

(1.268)

448.81

(1.789)

659.23

(2.221)

372.82

(1.132) LIC Housing Finance Ltd

1962.82

(12.355)

3190.83

(13.68)

4103.81

(16.366)

4650.42

(15.604)

4670.09

(14.189) Can fin Home Finance Ltd

354.19

(2.229)

366.32

(1.571)

394.86

(1.574)

456.61

(1.532)

653.95

(1.986) PNB Housing Finance

Ltd 267.62

(1.684)

255.65

(1.096)

284.71

(1.135)

297.83

(0.999)

393.02

(1.194) IDBI Home Finance Ltd.

224

(1.410)

279

(1.196)

190

0.757)

542

(1.818)

732

(2.224) Gruh Finance Ltd 188.80

(1.188)

202.16

(0.867)

218.13

0.869)

299.83

(1.006)

360.17

(1.094) Dewan Housing Finance Limited

203.04

(1.278)

418.65

(1.796)

468.54

(1.868)

633.76

(2.126)

1110.30

(3.373) DHFL Vyasya Housing finance Limited

183.28

(1.153)

170.61

(0.731)

132.39

(0.528)

134.89

(0.452)

175.25

(0.53 Total 15886.50 23309.68 25074.07 29802.32 32913.32 Herfindahl Index 3328.22 3252.53 3442.93 3612.773 4304.270

18

(Figures in brackets shows the Percentage share in total assets) (Figures has been taken from the CMIE data base and annual reports of the companies) (Average Herfindahl index of 5 years turn out to be 3588.144)

Figure: 2

Housing Finance disbursements by selected HFC's and Herfindahl Index

0

5000

10000

15000

20000

25000

30000

35000

2001-02 2002-03 2003-04 2004-05 2005-06

Year

Dis

bu

rs

em

en

ts a

nd

he

rfi

nd

ah

l in

de

x

Total Disbursements

Herfindahl Index

Figure 2 depicts the position of Total disbursements and Herfindahl index over the

years. Contrary to the results shown in the table 1 among the different players of

housing finance, competition among the housing finance companies is on the reverse

trend because H is showing the increasing trend during the last five years in the

table 2. This shows that three major players HDFC, HUDCO and LICHF are enjoying

the major share of housing finance business. This is because of their national

character. Other housing finance companies are either working regionally or their

reach is limited. The value of H also shows the high level of concentration and HDFC

19

is representing as the major player in the formal system of housing finance among

housing finance companies.

Table: 3 Assets base of Housing Finance Companies and Herfindahl Index

(Amounts in Rs. Crore)

(Figures in brackets shows the Percentage share in total assets) (Figures has been taken from the CMIE data base and annual reports of the companies) Average HHI of 5 years turn out to be 3342.255

Figure: 3

Name of the

Company/Year

2001-02 2002-03 2003-04 2004-05 2005-06

Housing and Urban Development Corporation Ltd

20068.08

(36.681)

24132.5

(36.602)

26908.3

(34.824)

26187

(29.261)

26496

(25.081)

Housing

Development and Finance Corporation Ltd

22932.13

(41.915)

28022.74

(42.502)

33910.2

(43.885)

42586

(47.584)

53459

(50.603)

GIC Housing Finance Ltd

784.17

(1.433)

918.18

(1.39)

1185.28

(1.534)

1642.2

(1.835)

1176.5

(1.113)

LIC Housing Finance Ltd

7230.42

(13.216)

8640.41

(13.105)

10582

(13.70)

12856

(14.365)

15757

(14.915)

Can fin Home Finance Ltd

1162.89

(2.125)

1129.95

(1.714)

1203

(1.556)

1401

(1.565)

1814.1

(1.717)

PNB Housing Finance Ltd

593.64

(1.085)

725.15

(1.099)

862.52

(1.116)

972.01

(1.086)

1205.7

(1.141)

IDBI Home Finance Ltd

265.488

(0.486)

457.348

(0.694)

504.323

(0.652)

948.6

(1.059)

1710.3

(1.618) Gruh Finance Ltd 583.3

(1.066)

657.51

(0.997)

680.6

(0.881)

954.42

(1.066)

1226.6

(1.161)

Dewan Housing Finance Limited

885.44

(1.619)

1046.76

(1.587)

1283.74

(1.661)

1797.5

(2.008)

2585.9

(2.447)

D H F L Vyasya Housing Finance Limited.

204.19

(0.373)

201.44

(0.305)

149.34

(0.193)

150.31

(0.168)

210.93

(0.199)

Total Assets of 10 HFC’s

54709.748 65931.997 77269.3 89495.04 105645

(Herfindahl Index) 3288.987 3328.094 3336.246 3340.180 3427.77

20

Assets Base of HFCs and Herfindahl index

0

20000

40000

60000

80000

100000

120000

Year

To

tal A

ssets

an

d H

erfi

nd

ah

l in

dex

Total Assets of 10 HFC’s HHI

Total Assets of 10 HFC’s 54709.748 65931.997 77269.3 89495.04 105645

HHI 3288.987 3328.094 3336.246 3340.18 3427.77

2001-02 2002-03 2003-04 2004-05 2005-06

In the table 3, Herfindahl index is calculated on the basis of total assets of 10

leading Housing finance companies (HFCs). The Herfindahl index of table 3 also

shows the increasing trend and average index comes out to be 3342.255 which are

also rated as very high displaying increasing concentration and decreasing

competitiveness. This all shows the inequality among the different players and the

number of players in the industry.

The above fact is verified if we give a cursory look at the number of Housing Finance

Companies in India in the last 7 years. The Number of companies have not

increased so far and many of the companies which were originally established for

housing finance business vanishes because of the change in the scenario of housing

21

finance in India i.e. stiff regulations, entry of banks and other players in market. The

entry of banking institutions has compelled the housing finance companies to

reinvent their areas of core competence. The phenomenon has brought into

significant qualitative change in the fabric of housing finance system in India. As a

result of aggressive competition from banks and gradual softening of rate of interest,

the HFCs are compelled to operate on a basis of comparatively thinner spread. Stiff

competition in housing finance market has made the functioning of many of small

player unviable. Specialized housing finance companies promoted by commercial

banks like those of state bank of India (SBI Housing Finance Ltd.,), Andhra Bank

(Andhra Bank Housing Ltd.,),Vijya Bank (Vijya Bank housing Ltd), Indian Bank (Ind

bank housing finance Ltd), were liquidated and their assets were taken over by the

respective parent banks. Similarly, Vysya Bank housing finance Ltd has been

acquired by a bigger HFC viz. Dewan Housing finance Corporate Limited. These

consolidations in housing finance market point to the fact that functioning of small

HFCs is very much under pressure. Many small private HFCs without strong parent

backing are gradually losing market share in the medium to log term. HFCs have

higher cost of funds as compared with banks as they depend on priority sector sub-

PLR loans from banks, fixed deposits, NHB refinance and in some cases low cost

loans from multilateral agencies. Most private HFCs (excluding HDFC) do not enjoy

the highest investment grade ratings by credit rating agencies, which further

increase their cost of funds. As a result, HFCs, in general, either have lower spread

as compared with a bank or are not able to match rates with banks. In the face of a

fierce competition and desperation for survival, these HFCs resort to sub-standard

appraisal norms at the origination of loans (National Housing Bank., 2003). Thus, in

future, there is a serious possibility of degradation in asset quality of the small and

medium sized HFCs if they are not able to price their home loan products

competitively. Barring the Housing Finance Companies that are approved by the

22

National Housing Bank others are not showing the sign of progress. The prime-

withholding factor for the HFCs happens to be ‘the cost of funds’. Being institutional

borrowers, they are at a disadvantage as compared to banking entities, which have

access to low cost deposits. The minimum capital adequacy ratio for banks is 9% as

against 12% for HFCs. The Securitization Act, which brought a welcome relief to

banking entities, does not apply to HFCs. Also, over the years, the HFCs have

witnessed a decline in their average yields (Outlook Arena., 2004). It is expected

that if this trend continuous then coming years may witness many mergers and

consolidations in this segment of financial institutions which would eventually

determine the future of HFCs.

Widely connected branch network and feasibility of the banks to tap rural segment of

the population has made possible for the banks to concentrate of housing finance

segment and most of the banks are now concentrating of this sector. If we look at

the retail portfolio of the banks by March 2006, then it is evident that banks have

47.67% in the housing finance of the total retail portfolio in the consumer loans

segment (RBI., 2006).

Table: 4

Retail Portfolio of Banks

(Amount in Rs. Crore)

Items Amount

outstanding as

at the end of

March’ 04

Amount

Outstanding as at

the end of

Marrch’05

Amount

outstanding at

the end of

March’ 2006

Housing Loans 89449 (47.3) 134653 (50.43) 179116 (47.67)

Consumer

Durables

6256 (3.3) 3810 (1.43) 4469 (1.19)

Credit Card

receivables

6167 (3.3) 8405 (3.15) 12434 (3.31)

Other Personal

loans

87170 (46.1) (120120 (44.49) 179720 (47.83)

Total retail Loans 189041 (100) 266988 (100) 375739 (100)

Total Loans and

Advances

839092 1105725 1473723

Source: Reports on Trend and Progress of Banking in India -2003-04, 2004-

05 and 2005-06. Figures in parenthesis indicate percentage.

23

The reason for banks interest in the housing finance segment is lower level of NPA of

1.4% as against 4% in Consumer durable loan segment. 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( National Housing Bank., 2005). Another aspect of this growing concentration

is reversal trend of interest rate hike. Because of power of few players on the market

share, banks and leading HFC’s are not hesitating to raise the interest rates. Till

2006 interest rates were on the falling trend but now it is on increasing trend. Every

major bank and big housing finance company has started increasing the interest

rates after every quarter to six months from 25 point basis to 50 point basis. Partly it

is because of RBI alarming guidelines and partly because of the market forces.

Floating rates have been continuously rising and have increased by three to four

percentage points over the past 18 months to 11.5-12%.

Conclusion: The results of the study show that the main business of housing finance

in India is concentrated around few players like banks and major housing finance

companies. The Herfindahl index as an indicator of market concentration is showing

increasing trend in both the basis i.e. on the basis of Market share of players in

disbursement of loans and assets base. It shows that decreasing competitive ability

of small players. The small Housing finance companies are loosing battle to the

bigger players. Small players in the sector are facing threat from the banks to

capture their share because of their wider network and reach. Growing concentration

of major share of housing loans disbursements in the hands of larger banks and

giant housing finance companies has forced the small housing finance institutions to

identify the challenging areas in this field to capture the future market and ensure

their remarkable place. The most important aspect regarding the competitive

dynamics in housing finance is the indicators which shows that Banks, HFC’s and

other players are luring the customers to get the housing finance. It is not mainly

24

because of the stiff competition but because of the change in the attitude of the

Indian people regarding the loan phenomenon and to bring them into formal system

of housing finance. In India still 60% of the Indian households approach informal

sources of financiers to borrow funds, which mean an untapped market of housing

finance (Analysts. 2001). Housing finance institutions particularly Housing Finance

Companies (HFC’s) has to spread out geographically while ensuring consistency in

the processing and service standards to compete with banking sector. The

institutional performance of these institutions has been influenced by more than just

customer demand. Stricter NPA norms, rising interest rates and stiff competition in

mobilizing low cost deposits, have all affected the supply side factors, which in turn

has influenced the performance of these institutions in terms of volume and

competitiveness (National Housing Bank., 2005).

Healthy competitiveness in the field of housing finance is must for the customer’s

benefits. Here Government, National Housing bank and other regulatory and

financing agencies must come on the rescue of small housing finance agencies to

build their base by providing adequate re-finance to cover their supply side. Here the

role of National Housing Bank is very important. Presently the re-finance pattern of

National Housing bank is in favour of banks. In 2004-05 NHB provided Rs. 2060.95

crores to the HFC’s as compared to 1845.86 Crores in 2003-04 but refinance to the

banks was5404.09 Crores in 2004-05 as compared to 1275.50 Crores in 2003-04.

NHB has to increase the amount of refinance to Housing finance companies to make

them competent to compete with banks.

Similarly it must be ensured that fruits of competition are passed on to the

customers. Housing finance institutions has to offer more sophisticated and tailor

made housing finance products to suit customer needs. Differentiate and diversified

housing finance products will become the factor to make a housing finance institution

a market leader. The future prospects of this newly recognized industry are

25

undoubtedly bright. Going by the rate of growth of Indian population and its housing

needs, the formal sector of financing is bound to witness huge loan disbursements

that were not witnessed in the past.

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