Over the
ages, shelter has remained as one of the most basic and important needs of
human beings. People’s housing needs have increased manifold in recent times as
the population grows, the middle class expands and younger generations choose
to move into nuclear family units, or move near the increasingly popular
regional work hubs. However, with high costs of construction materials, high
capital costs and increasing complexity of the legal and technical paperwork
needed, accessibility and affordability of house ownership continues to remain
a challenge.
Housing
finance acts as a bridge to provide financing and open up the housing market to
aspiring house owners. In recent times, specialist housing finance companies
(HFCs) targeting the low-income/financially-excluded household segment have
emerged as a key player to meet the demands of the newly bankable population
who do not have credit history in conventional terms, and are often not served
by banks and mainstream Housing Finance Companies. The lending model and
operational processes of these specialist HFCs- which we will refer to as
Affordable Housing Finance Companies (AHFCs) – are the subject of this post.
Housing
Finance Sector Review: The Environment for AHFCs and HFCs
There are
several players in the housing finance space, such as Scheduled Commercial
Banks (SCBs), Housing Finance Companies (HFCs), Affordable Housing Finance Companies (AHFCs), Financial
Institutions (FIs), Regional Rural Banks (RRBs), Scheduled Cooperative Banks,
Agriculture and Rural Development Banks, State Level Apex Cooperative Housing
Society and development organizations like MFIs or SHGs. However the most
significant contribution comes from SCBs and HFCs (including AHFCs).1
As of 28
November 2013, there are 18 HFCs which have been granted Certificate of
Registration2 (CoR) with permission to accept public deposits including 6 HFCs
that are required to obtain prior written permission from National Housing Bank
(NHB) before accepting any public deposits. 39 HFCs were granted CoR without
permission to accept public deposits. 5 applications for grant of CoR are still
under process.
HFCs
typically offer three products – housing loan, home improvement loan and Loan
against Property. As of March 31, 2012, the percentage of housing loan to total
loans offered by HFCs was about 74%3. The general product bifurcation of
disbursement for housing in FY 2011-12 by HFCs is given below which clearly
depicts the high demand for loans below 25 lakhs. Reduction to Housing Finance:
The Affordable Housing Finance Company
To enable
continuous and uninterrupted disbursements of loans to eligible borrowers,
AHFCs must have continuous, diverse, and reliable sources of funding.
Currently, these sources are limited to raising equity from private sources,
bank funds, private placement of debt, and for a handful of AHFCs (such as Gruh
Finance, Saral Home Finance), public deposits with or without prior written
permission. For the larger universe of AHFCs, however, the lack of access to
capital markets and public deposits compels AHFCs to rely heavily on bank
funding, in the form of both long- and short-term loans.
This mixed composition
of liabilities, when combined with the largely long-term nature of assets – the
housing loan portfolio – to the tune of 86.7% of assets having a tenure above 7
years4, requires AHFCs to manage the risk of asset-liability duration
mismatches including risk of refinancing short-term debt at higher interest
rates. Hence, Asset Liability Management (ALM) becomes a key challenge to HFCs
that are highly leveraged and rely predominantly on bank funding.
The
regulatory authority and apex financial institution for HFCs, the NHB provides
refinance assistance to eligible HFCs against their existing housing loans.
Such a refinance scheme would be very beneficial for AHFCs and would help them
in managing their ALM mismatches. NHB carried out refinancing to the tune of Rs
17,500 crore5 in the year ended June 2013 and expects to disburse Rs 20,000
crore under the refinance window.
[Source: http://www.ifmr.co.in/blog/2013/12/10/introduction-to-housing-finance-the-affordable-housing-finance-company-ahfc-lending-model-part-1/]
