housing finance fmg18y

8/8/2019 Housing Finance FMG18Y

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Business Model of HousingFinance Company in India


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Madhu91029 Shivi91051 Radhika91041 Sweta91059

Members

Group 4


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Housing Industry

From 28%(300 m) the Urban Population toincrease to 40% (600 m) by 2030

70% of New jobs to be created in Cities*

Young people aspire to be come homeowners

Change in Socio Culture of Society

* as per McKinsey Global Industry research


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: -Source NHB Residex data


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:Source NHB andIndiaStat


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Housing Finance

Housing finance connotes finance for

meeting the various needs relating to

housing


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Understanding HousingLoan
http://f/Term5/Assignments/MoFS/Housing%20Bank


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Housing Loan

Term:

Security:

Primary:

Secondary:

Purpose:

Interest Rate:

L o n g

H o u se

/G u a ra n te e

C o lla te ra l/ /N e w H o m e E x p a n sio nE q u ity

/La n d Pu rch a se A cq u isitio n o f

H ou se , ,Fixe d Flo a tin gTeaser


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Mortgage Vs Lien


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Importance of Housingfinance


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Housing Finance system inIndia

R e a so n s fo r a h ig h a n n u a l g ro w th in th is

:sector

D e m a n d

A ffo rd a b ility

C o m p e titio n

P o licy

S e cu ritiza tio n

U rb a n iza tio n

N u cle a r fa m ilie s g ro w in g

T a x in ce n tiv e s


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In d u stry stru ctu re


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O U S IN G F IN A N C E S Y S Y T E M ININ D IA


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Players

National Ho sing Bank


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National Housing Bank(NHB)

Set-up in 1988 as the Apex level institution forhousing.

To promote housing finance institutions both atlocal and regional levels

NHB is wholly owned by Reserve Bank of India

Ensures a sound and healthy housing financesystem through effective regulation andsupervision of housing finance institutions.


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Functions

Promotion function

Regulatory function

Financing function


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Promotion function

With the setting up of NHB, there have beensustained efforts at creating and supporting anew set of specialized institutions to serve asdedicated centers for housing credit.


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Regulatory function

The requirement of regulation emanates from theneed for a credible and stable housing financesystem.

It has come out with guidelines for approvingHFCs for financial assistance and forparticipating in their equity.

It has also issued the Housing Finance Companies(HFC) Directions and guidelines for prudentialnorms for income recognition, assetsclassification etc.


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Financing function

To provide financial assistance to various banksand housing finance institutions.

The principal focus of NHBs programs is togenerate large scale involvement of variousprimary lending institutions to serve asdedicated outlets for assistance to the housingsector.

The refinance assistance provided by NHB toHFCs has enabled them to increase theiroperations and cover a larger section of the

population.


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Critical Success Factorfor HFCs

Cost of Funds

Low Margins, High Volume

Management of NPAs

Product features

Distribution reach


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For Starting

To commence on business, every HFC set-up as a company should

o Obtain a certificate of registration from theNHB and

o Have the net owned funds of Rs 25 lakh or

such other higher amounts as may bespecified by NHB from time to time.


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Capital adequacy

Every housing finance company shall maintain aminimum capital ratio consisting of Tier-I and

Tier-II capital which shall not be less than 12%of its aggregate risk weighted assets and of risk

adjusted value of off balance sheet items.

The total Tier-II capital, at any point of time, shallnot exceed 100% of Tier-I capital.


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Public deposits

Any HFC having net owned fund of Rs. 25 lacs ormore cannot accept or renew an amountexceeding five times of its NOF

No HFC can have maximum deposits, inclusive ofpublic deposits, exceeding 16 times its NOF

A HFC can accept or renew public deposit for a

minimum period of 12 months and a maximumof 36 months from the date of acceptance orrenewal.

At present HFC cannot pay more than 12.5%


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Asset classification

Standard assets: an asset in respect of which,no default in repayment of principal or paymentof interest is perceived

Sub-standard assets: an asset, which has been

classified as non-performing asset for a periodnot exceeding twelve months

Doubtful assets: an asset which remains a sub-standard asset for a period exceeding twelve

months. Loss assets: an asset that has not been written

off by the housing finance company and anasset which is adversely affected by a potentialthreat of non recoverability


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Provision

Sub-standard Assets: A general provision of10% of total outstanding should be made incase of it.

Loss Assets:The entire assets shall be writtenoff. If the assets are permitted to remain in thebooks for any reason, 100% of the outstandingshould be provided for.


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Doubtful Assets

100% provision to the extent to which the advance isnot covered by the realizable value of the securityto which the housing finance company has a validrecourse.

In addition, depending upon the period for which theasset has remained doubtful, provision shall be

made on the following basis:eriod for which the assetas been considered asdoubtful

% ge of Provision

Up to 1 year 20

-1 3 years 30

Over 3 years 50

RBI Mid t R i


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RBI Mid-term ReviewHighlights pertaining to

Housing Sector The RBI in its mid-term review policy, released on

2nd November, 2010 made the norms for

housing loans more stringent to curb theexcessive borrowing that has pushed propertyprices in most metros to levels seen before theglobal financial meltdown and even beyond.

Among the steps mandated by the RBI are:


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Increase in the risk weight of high-value

loans of Rs 75 lakh and above to 125 per cent.Increasing the risk weight means banks willhave to keep more money aside against highvalue loans.

Bringing down the ceiling limit on housingloans to 80 per cent of the property value.

This is intended to dissuade excessive

borrowing for housing purposes. Till now, banksused to impose their own ceiling on housingloans, but there was no cap from the RBI side.


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An increase in the funds to be kept aside bybanks as a cushion in case of defaults on loans

made at teaser rates. It has increased thestandard asset provisioning by banks for allsuch loans to 2 per cent from the earlier 0.4 percent.

It has been observed that many banks at the timeof initial loan appraisal do not take into accountthe repaying capacity of the borrower at normal

lending rates.

The overall policy is designed to check the creationof pricing bubble in the market


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Business Model

R e v e n ue

E x p e n se s P R O F ITSM a rk e tin g

Processe s

O p e ra tio ns


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Incorporated in 1977

primary objective of meeting a socialneed - that ofpromoting home

ownership by providing long-termfinance to households for theirhousing needs

1505 Employees as on 31st March2010


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Snapshots

Loan Book` 97,967 Crores, 22%growth y-o-y

Deposits ` 23,081 crores, 19% growth

y-o-y Operating Income ` 11,338.28 Crores

EPS- ` 92.47 , 23% growth

ROE- 20%- Highest in Industry

Cost to Income Ratio- 72.59% Lowest

PAT 24.88%

Loan Turnover 0.12 times


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Subsidiaries


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Value Chain


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Liquidity Cycle


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Process


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Process and Risks


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All Values in ` Crores

Data has been taken from

Companies Annual Report

CMIE Prowess

Capitaline

NHB and RBI


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Sources of Funds


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Application of Funds


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Revenue Model


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v e r a g en t e r e s t

a t e o n-e p o s i t s

. %5 9v e r a g ei e l d o n-o a n s

. %0 9 0


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= %A G R 2 7 o v e r 5y e a r s


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Financial Evaluation


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Risk

INTERNAL RISKFACTORS

Contingent Liabilities

Risk Foreign Exchange

Risk

Legal/RegulatoryRisk

Credit Risk

Operations Risk

Liquidity Risk

Interest Rate Risk

An Time Exit

EXTERNAL RISKFACTORS

Regulatory changes

Risk of Competition

Sensitivity to theEconomy andExtraneous Factors

Real Estate PricesRisk

IncreasingCompetition


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Risk Mitigation

Stringent Credit Norms

Regular monitoring of the maturity profiles

Long term forward contracts, principal only

swaps, full currency swaps and currencyoptions


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Marketing

279 Outlets

Complimented by wholly owneddistribution company, HDFC Sales

Private Limited (HSPL). Covers 90 Locations

Distribution Channel on Sources Loans, Norole in credit, technical, legal

Organizes fairs

Through Subsidiaries


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Products

HomeImprovementLoan

Home ExtensionLoan

Land Acquisition

Top-Up Loan

Property Valuation

PropertyIdentification/Adv

isory

Senior Citizen'sDeposits

Cumulative

Deposits Non-cumulative

Deposits

Monthly Income

Plan

Systematic SavingsPlan (SSP)


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Performance Indicator

: ,Source India Stat Annual Report of H

- %AGR 22 over 5 years


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Competition

L I C HousingFinance Ltd.

Dewan Housing

Finance Corpn.Ltd.

Deutsche PostbankHome Finance

Ltd. G I C Housing

Finance Ltd.

I D B I

ICICI Bank

State Bank of India

Canara Bank

Punjab NationalBank

IDBI Bank

Standard CharteredBank

Hongkong &Shanghai Bank


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Commercial Bank Vs HFC


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Market Share of SCBs

H i S it M k t P iH i S it M k t P i


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:Housing Security Market Primary a:Housing Security Market Primary an


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Primary Mortgage Market

The market where borrowers andmortgage originators cometogether to negotiate terms and

effectuate mortgage transaction

Mortgage brokers, mortgage

bankers, credit unions and banksare all participants in the primarymortgage market


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Secondary Mortgage Market

The market where mortgage loansand servicing rights are bought andsold between mortgage originators,

mortgage aggregators(securitizers) and investors

Securitization in Secondary


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Securitization in SecondaryMarket

Benefits of the Secondary


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Benefits of the SecondaryMarket

Downfall of Fannie Mae and


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Downfall of Fannie Mae andFreddie Mac

Rapid growth in purchases ofrisky but profitablesubprime loans

Utilised implicit government backing to borrow at will,but without adequate capital to protect them from

unexpected losses

Played down the dangers posed by an inflated housingmarket

Did not raise enough new capital to weather the stormas the housing slump expanded

Overestimated the power and accuracy of theircomputer systems and mathematical formulae tocompensate for new more complex products


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Mortgage Guarantee

Tri-partite Guarantee Contract-Purchasedb th l d d id f b th b


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by the lender and paid for by the borrower

d O di f GC


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1. Banks and HFCs pay the MGC a premium (fee) for buyingmortgage guarantee for every loan they advance

2.3. The banks/HFCs pass on the cost to borrowers, just like

mortgage insurance premiums

4.5. The premium will depend on factors such as borrower's

profile, income proof, credit history and securityavailable

6.7.The premium amount collected from thousands of loans by

MGC will be pooled into a corpus fund

8.9. When a loan goes bad, the bank/HFC will invoke mortgage

Modus Operandi of MGC

Insurance vs Mortgage


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Insurance vs MortgageGuarantee

Credit Insurance

Bi-partite contract

Business creditinsurance

Regulated by IRDA

Max FDI is 26%

Mortgage Guarantee

Tri-partite contract

Consumer creditinsurance

Regulated by RBI

Max FDI is 49%

Due Diligence in Mortgage


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Due Diligence in MortgageGuarantee

Benefits of Mortgage


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Benefits of MortgageGuarantee

Make housing more accessible toqualified younger buyers

Increase accessibility to mortgageloans in underserved regions andcommunities

Increase accessibility to mortgageloans for entrepreneurs and the

self-employed

Benefits of Mortgage


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Benefits of MortgageGuarantee

MGC act as credit investigator for creditinstitutions

Stimulate the housing resale marketbecause easier finance available to home

buyers

Encourage lenders to bring yields lower onloans that have a mortgage guarantee

Provide loans with lesser down payments todeservin borrowers


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:Presented By

Shivi AgarwalRadhika Gupta

Sweta AgarwalMadhusudan Partani

91051910419105991029

housing finance fmg18y

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