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RESPONSIBLE HOUSING LENDING:

BRICKS FOR THE BUCKS

THE INDIAN EXPERIENCE

RENU SUD KARNADJOINT MANAGING DIRECTOR

HOUSING DEVELOPMENT FINANCE CORPORATION LTD - India

RESPONSIBLE DEVELOPMENT FINANCE

FRANKFURT FORUM 2008FEBRUARY 22, 2008

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High demand growth driven by: Improved Affordability

Rising disposable income

Lower interest rates

Tax incentives (interest and principal repaymentsdeductible)

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

Key players: Banks and Housing Finance Companies

Housing Finance in India

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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

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Housing Finance for Low Income Clients Following its 10th year of operations, HDFC created a Shelter

Assistance Reserve wherein a portion of profits are transferredeach year for participating and supporting social initiatives

In 1989, HDFC accessed low-cost funds from KfW to expandlending operations to economically weaker section (EWS)households.

HDFC partners with NGOs having grass-root level involvementto 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

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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 inproliferation of slums/squatters.

Archaic land policies

Supply side restrictions have led to land price distortionse.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

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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 forestablishing Mortgage Guarantee Companies

Central government is providing funds to states for urban

renewal and infrastructure development. Funds are releasedbased 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 venturecapitalists, banks, corporates.

Global players expected to invest US$ 3 billion in microfinance in India by 2010

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Reaching the Bottom of the Pyramid

Need to stipulate that all new housing projects should have afixed 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 AffordableHousing for All