NBFC

The Major Challenges Faced by Housing Finance Company in India

Housing Finance is a broad topic, the idea of which can differ across continents, regions & countries, mainly in terms of the areas it covers. For instance, what is understood by the term housing finance in a developed country may be very different from what is understood by the term in a developing country.  Housing finance brings together complex & multi-sector issues that are driven by constantly changing local features, such as a country’s legal environment or culture, economic makeup, regulatory environment, our political system. The drive of a housing finance system is to offer the funds which home-based purchasers require to acquire their homes. This is a simple objective, & the number of ways in which it can be achieved is limited. However, this basic ease, in a number of countries, mainly as a result of government action, very complex housing finance systems have been developed. However, the vital feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.

The Housing Finance Company is an additional form of Non-Banking Financial Company (NBFC) which is involved in the principal business of financing of acquisition or construction of houses that comprises the development of plots of lands for the construction of new houses.

General Problems of Housing Finance Sector in India

Housing finance is relatively a new idea in the finance sector of India. It is developed rapidly during the last two decades due to the enthusiastic interest of the Government of India to cut-short the housing problem of the country.  Some of the general problems of Housing Finance Sector are as under:

• Government Policies for Housing Finance Sector

In the present circumstance, the Government of India is trying to play the role of facilitator by offering a number of housing schemes for different sections of the society, but due to poor administrative control & lack of strong will-power most of the schemes are squeezed only up to the primary levels & are never attained its ultimate objectives.

• Role Of Housing Finance Regulatory Authority

The word Regulation refers to the specific constraints in the natural growth of a sector & the Regulatory Body is considered as a group of people who always indulge in search of the ways which could create checks & balances to hinder the unplanned & improper growth of the related area.

• Development of Fundamental Infrastructure for Housing & Technological Innovations

Housing is primarily an urban phenomenon. It needs some basic infrastructural facilities like roads development, electricity & water supply, proper drainage system, etc. to grow. Most of these facilities depend upon Government efforts & interest. However, the technical inventions in the part of housing construction also support & promote the housing market in the country through the cut down the cost of construction up to a reasonable level.

Both of these factors affect the housing finance market of the country directly. It is a noble symbol that the Central & the State Governments of India are concerned enough about housing schemes frequently. But due to the unstable political environment, like the other areas, most of the housing schemes are limited up to paperwork or within its primary stage. The elementary infra-structural amenities for housing development are not available in most of the areas of the country. Thus the constant efforts are done from the side of Indian Government but these are not enough to give a boost to the housing industry. The higher income group of society is depending on the private Company for infra-structural development of residential areas by paying more amounts. What about the middle or lower income group? They are obligatory to live in non-authorized & non-developed zones where housing finance facilities are generally not provided by housing finance companies.

• Distribution of National Capital among Population

The distribution of national capital among the population of the country affects the housing finance sector directly. If the capital of the nation is distributed among the population in a rational manner, the most of the population of the country will be in a position to dream for their own houses & the chances of growth of the housing finance sector of the country will remain higher.

• Non-Availability of Funds

Financing in any area depends on the availability of funds for the purpose. Housing finance is a long-term investment, which requires plenty of funds. One of the main problems of the housing finance sector of India is non-availability of long-term capital for investment. Conventionally, the funds for the housing sector have originated from the individuals themselves by way of their own savings or from the financial institutions that are primarily engaged in the intermediation process of channelizing funds from the savers to the borrowers. But, the funds so organized through the formal sector financial institutions remain much lower than what is required to tackle the problems of housing finance in India

• Higher Cost of Acquisition of Land

It needs not to be mentioned that in the present time the supply of l& is perfectly inelastic for a country. The availability of l& in adequate quantity at the right place & at an affordable price by the individual is more important for the housing finance sector. The inelastic supply of suitable l& results in a spurious increase in the cost of real estate. Besides, the very high stamp duty payable at the time of purchase of property also causes an increase in the cost of l& significantly. It gets priced out many potential housing finance customers in owning a house.

• Static Culture of the Society

Among Indian society, housing is a lifetime dream of an individual & a newly employed person cannot even imagine for his own house due to his social & cultural backgrounds. Although this attitude of society is changing from the last decade due to the development of nuclear families tax rebate on housing loans. Secondly, the debt is considered as an evil in Indian society & the concept of ‘Deficit Financing’ is not appreciated by the masses. This type of thinking discourages a person to avail the facility of housing finance & ultimately hurts the housing finance market of the country remarkably. Although this concept is now changing, which is evident from the fact that the average age of borrower is around 40 years. The joint family culture of Indian society also legs the housing finance market to some extent.

Housing Finance Sector a step in Varying the needs of the Customer

40 years ago, the average first-time homebuyer in India was in his late 50’s. This is because, as part of retirement planning, the person was using his savings & provident fund money to buy a house. It was considered to be an integral part of ‘after retirement’ planning. More recently, things have changed & today, the average home buyer is in his 30’s, with a significant proportion in mid-to-late ’20s. What are the reasons & implications of this dramatic demographic shift?

This shift can be largely attributed to higher disposable incomes, easy access to finance, higher returns from real estate investments & indeed a change in the consumer mindset. With rapid globalization & a boom in the services sector, salaries in cities have risen, resulting in higher disposable incomes. The cultural shift from joint families to nuclear families in cities has also contributed to the demand for more houses. Working couples today, place a much higher aspirational value on owning a well built, safe & comfortable house. Sensing an opportunity, the banks & financial service companies stepped in, offering home finance at more affordable rates. As the returns from investment in a residential property started yielding good returns, it made a lot of sense to invest early in buying a home. Moreover, by financing a house at an early age, the consumer was able to have longer repayment tenure – leading to lower monthly repayments or the ability to borrow more.

What does the change mean for the housing finance industry? With the average age of home buyer coming down, there has also been a natural shift in the way people buy homes & more importantly, the way people approach housing finance. The total housing credit outstanding^[1] in India crossed INR 11.9 trillion, clocking an annualized 18% growth in the first 9 months of FY2016. There has been a renewed emphasis on housing loans by the banks, which control 63% of the overall housing finance market as a number of new (Non-Banking Finance Companies) NBFCs & (Housing Finance Companies) HFCs have entered the market. In a more competitive environment, the service providers are trying to impress the young, tech-savvy consumer.

India had 1 billion mobile subscriptions in 2015, set to reach 1.4 billion by 2021. Mobile traffic is expected to grow annually at 55% & in 2021, 99% of the region’s mobile traffic will be from data. Interestingly, 77% of smartphone users, aged 15-24 years, access internet on mobile every day & 30% of the smartphone users access their banking websites via their smartphones. India has the youngest population of mobile banking users across the globe at a median age of 30 & Indian customers demonstrate the highest likelihood of changing banks driven by the availability of better mobile banking services. This generation is clearly used to accessing information at their fingertips, anytime, anywhere; in the most convenient way. Obviously, this has insightful implications for home finance & it is evident that the traditional way of physically visiting a bank or an NBFC is fast changing.

Today’s digital natives expect banks & financial institutions to offer personalized products, fast & user-friendly loan services, delivered in an experience similar to that offered in industries such as travel, hotel, retail & entertainment. & they expect them to be digital, they don’t expect to fill in lots of complex paper-based forms. Housing finance companies need to change their strategy, enhance their product offerings, streamline processes & deliver an end-to-end customer experience. The trend now is to move away from lengthy, paper-based application forms to web/mobile-based forms & digitized Know Your Customer (KYC)^[2] documents. With speed & trust on top of customers’ agendas, financial institutions need to use capabilities such as workflow-based automated processing, comprehensive credit scorecards (incorporating non-traditional data sources), analytics-based decision making & self-servicing for the effective partnership. There is a need to leverage the vast data available for digital customers to serve them better. The potential of housing finance now extends well beyond the tier 1 cities in India, which means that scalability, agility & digital connectivity are key business needs. As competition rises & margins decline, it is crucial that infrastructure & operational costs are kept to an absolute minimum. Adopting a cloud approach may well be the best way to cater to these requirements.  It has now become critical for banks & NBFCs in housing finance to adapt to changing customer behaviors & expectations. There are many examples globally where organizations have transformed successfully to be future-ready.

Technology can be an enabler but a successful transformation requires a change in an end to end business processes & more importantly a forward-looking customer-centric mindset. Housing finance is rapidly changing & it is imperative that service providers keep pace if they do not want to be left out.

The Union Budget for the Financial Year 2018 kept its emphasis on the agenda ‘Housing for All’ by the year 2022 with 39 % higher allocations via Financial Year 2017 under the Pradhan Mantri Awas Yojana^[3] (PMAY). While growth in the prime home loan segment could witness moderation, affordable housing segment is likely to grow at a faster pace than industry with efforts being made to report the supply, demand & affordability issues, said by the group head of financial sector ratings ICRA. However, stated that post-demonetization, the delinquencies in the affordable housing and self-employed segments may increase as borrowers’ rely on cash transactions & said that the gross NPAs for HFCs is likely to remain range-bound between 0.9 percent and 1.3 percent over the medium term.