Housing Finance

HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK
INTRODUCTION
The basic needs of mankind have been the food, shelter and
clothing. Keeping this in mind, lots of efforts have been made to provide
food through the poverty alleviation programmes since substantial
portion of the Indian population are still in the clutches of object poverty.
The poverty alleviation programmes both credit oriented and non-credit
oriented ones described in earlier Units would have thrown light on the
efforts taken in providing food for the poor which is primary among the
basic needs. However, it is an irony of life that a large section of the
population in India and other developing countries do not afford these
needs both in their quantitative as well as qualitative dimensions. In fact,
non-affordability of these facilities is a sine quo non of poverty. This Unit
highlights the need for housing and the efforts taken by the Government
in housing.
The responsibility to provide housing finance largely rested with
the Government of India till the mid-eighties. The setting up of the
National Housing Bank (NHB), a fully owned subsidiary of the Reserve
Bank of India (RBI) in 1988, as the apex institution, marked the
beginning of the emergence of housing finance as a fund-based financial
service in the country. It has grown in volume and depth with the entry of
a number of specialised financial institutions / companies in the public,
private and joint sectors, although it is at an early stage of development.
The implementation of housing finance policies presupposes
efficient institutional arrangements. Although there were a large number
of agencies providing direct finance to individuals for house construction,
there was no well established finance system till the mid-eighties in as
much as it had not been integrated with the main financial system of the
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country. The setting-up of the National Housing Bank (NHB), a fully

owned subsidiary of the Reserve Bank of India, as an apex institution was
the culmination of the fulfillment of a long overdue need of the housing
finance industry in India. The system has also been characterised by the
emergence of several specialised financial institutions that have
considerably strengthened the organisation of the housing finance system
in the country. At present, there are about 320 housing finance
companies, of which 26 are registered with the NHB and which account
for 98 per cent of the total housing loan disbursed.
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CENTRAL AND STATE GOVERNMENTS
Till the mid-eighties, the responsibility to provide housing finance

rested, by and large, with the government. The Central and state
Governments indirectly support the housing building effort. The Central
Government has introduced, from time to time, various social housing
schemes. The role of the Central Government visa-versa these schemes is
confined to laying down broad principles, providing necessary advice and
rendering financial assistance in the form of loans and subsidies to the
state governments and union territories. The Central Government has set
up the Housing and Urban Development Corporation (HUDCO) to
finance and undertake housing and urban development programmes,
development of land for satellite towns, besides setting up of a building
materials industry.
The Central Government provides equity support to the HUDCO
and guarantees the bonds issued by it Apart from this, both Central and
state Governments provide house building advances to their employees.
While the Central Government formulates housing schemes, the State
Governments are the actual implementing agencies.
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HOUSING PATTERN IN INDIA
It is a known fact that year after year more people are added to the
category of homeless as the population is on the increasing trend. The
weaker sections that constitute this group are handicapped in getting
shelter at affordable cost. Housing, as such, in any country depends or the
following factors:
- Demand factor - Growth in population, formation of households,

development of new townships, and increase in income.
- Supply factor - Availability of institutional credit, cost of construction,

availability of land and building materials, and fiscal and legal
provisions affecting building construction.
Though both the type of factors play their role equally, it is to be

understood that everyone wants to have a house constructed either
through own money or borrowed funds. But the growing population
makes it impossible to construct houses and satisfy this need for all the
people in desired proportions.
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The National Sample Survey 44th Round compiled data on the types of
dwellings in India. Some aspects of these data are presented in Table 1.
Table 1. Types of Dwellings in India
Types Percentage Distribution

Rural % Urban %
a. Independent houses 82.6 52.4
b. Flats 2.7 17.2
c. Chawls 3.0 10.8
d. Others 11.7 90.6
Total 100 100
From the above table it could be seen that the rural areas have more
independent houses compared to urban centers. However, there has been
some tendency to go in for flats also, trend of which is more perceptible in
urban areas. This pattern is due to the fact that while some space is
available for construction of small dwellings in rural areas, it is a critical
constraining factor in urban areas. This necessitates the urban house
aspirants to go in for flats. The NSS further observed that in rural India,
39.4% houses are kutcha houses, 34% semi-pucca and 27% pucca ones
while in urban areas the percentages for the above categories of houses
being 11, 18 and 71 respectively. This also shows that an urbanite is
interested to have a pucca house while a ruralite is prepared to live in a
house in whatsoever may be the type of construction. Again, the socio-
economic conditions of the ruralites do not permit them to go in for a big
permanent dwelling. Yet another observation made by the NSS indicates
that in the past three decades, there has been an increase in the pucca
houses in the rural areas on one hand and the kutcha houses are on a
declining trend in urban centers on the other.
Some trends and progress in housing in India over years as reported
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by the NSS are presents in Table 2:
Year No of house holds No of occupied addition Decades - house

during residential houses holds
R U T R U T R U T
1951 53.6 12.3 65.9 54.1 10.3 64.4 - - -
1961 68.9 15.6 84.5 65.1 13.8 78.9 1 3.3 18.6

5.0
1971 79.6 20.9 100.5 72.7 18.1 90.8 1 5.3 16.0
0.7
1981 94.1 29.3 123.4 88.7 28.0 116.7 1 8.4 22.9
4.5
R – Rural, U – Urban, T - Total
The conclusions that emerge from the table are as follows:
# On an average, about 90% of the total households have occupied

residential houses throughout the past.
# within this overall pattern the percentage of occupied residential

houses is more in rural areas as compared to urban centers.
# The number of households added during decades had shown

fluctuations in rural areas but there was a steady increase in urban centers.
The addition to the number of households was more during the

decade of 1971-81.
While indicating the relative growth of housing stock in the inter-

censor period, the NSS report analysed whether the growth in the housing
stock is commensurate with the growth in the population. The Table 3
seeks to provide an answer to the above issue.
Inter – census period Annual growth of the dwelling per 1000

increase in the population
6
Rural Urban Total
1951-61 3.4 5.2 3.3
1961-71 1.9 4.5 2.4
1971-81 3.4 7.9 4.0

• The growth of the dwellings per 1000 increase in population was
slow during the period 1961-71. It needs to be noted that during this
period, the total population growth was more than yester years. The
percentage increase in population during this decade was 24.8%
which was, in fact, the highest during the period under reference.
• The rate of addition of dwellings in relation to the population in rural
areas was lower as compared with the urban centers.
• The decade of 1971 -81, witnessed a large increase in the annual
growth of dwellings per - 1000 population and like the earlier
patterns, the increase was more in urban centers. It is interesting to
mention here that during this period, the increase in urban
population was as high as 50% which was almost three times of
18% experienced in rural area
• All these facts lead to the conclusion that the growth rate in housing
did not keep pace with the rate of growth in population in the entire
country. The extent of shortfall was more pronounced in rural areas.
The ultimate result has been the housing shortage in both rural and
urban areas. In 1971, the Banking Commission, headed by Shri. Bhabatosh
Datta submitted its report on the Non-Banking Financial Intermediaries.
This report, besides other aspects of banking systems, dealt at length with
the present and prospective housing finance and the need for a specialised
institution for housing. The Commission made the following
observations:
a. The house construction, as indicated earlier, depends on the demand
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and supply factors with the demand side including the population,
income etc. and the supply side covering institutions, policy etc.
The following are the three indicators for housing shortage:
The first indicator was provided by the proportion of pucca

dwellings to the total housing stock. According to an estimate, this
proportion in India was only 23% as compared to 96-99% in some of the
Western countries like USA, Canada and Japan. An idea of the over-
crowding in dwellings could be obtained from the fact that about 77% of
the total dwellings are of 1-2 room size, whereas in developed countries
only about 5% of the houses are in this category (Palvia, 1969).
The second indicator for the housing shortage was the

comparison between the number of dwellings and the number of
households. At the end of 1967, the report indicated that there were an
estimated 6.2 million urban pucca housing units for an estimated 18
million urban households. Thus there was only one pucca house for
every three households in urban areas. In rural areas, for an estimated
81.6 million households, the number of pucca housing units was only 12
million. The estimated rate of living constructions in India was around
two dwellings per 1000 population per annum as against 10 per 1000
population as recommended by the United Nations in developing
countries during the development decade of 1961-71.
The third indicator, according to this report, was the investment

in housing as proportion of the total investment in the public and
private sectors. The percentage of total investments allocated to the
housing sector had declined from 34% in the First Plan to 12% in Fourth
8
Plan.
The Table 4 giving the housing scenario will further indicate the
housing shortage in the past and the prospective housing shortage by
2001.
Housing shortage in India
Rural Urban Total
1 1991 2 1981 1991 2 1981 1991 2001
981 001 001
a. No. of house 94.1 113.5 137 29.3 45 69 123. 158. 206
holds 4 4
b Households 94.1 113.5 137 30.7 47.1 72.2 124. 160. 209
. adjusted for 7 8 6
congestion
c. Housing 88.7 106. 128 28 42.6 64.8 116.7 148. 193
stock 2 8
d Of which 77.8 92.9 112 23.7 36.7 56.7 101. 129. 168
. acceptable 5 6
e. Housing gap 16.3 20.6 25.5 7 10.4 15.5 23.3 31 41
The above table leads to the following inferences:
•A sizable number of people are without any house and every year more
and more people continue to be added to the category of homeless.
•The housing gap goes on increasing over years. This was indicated
earlier by the fact that the annual growth rate in number of dwellings for
every 1000 increase in population was very less leading to housing
shortage.
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•The housing gap was prominent in rural areas as compared to urban

centers. This might, be due to the reason that in rural areas still people are
inclined to go in for independent: houses whereas there is a trend towards
flats in urban centers. Besides the needs and likings of the rural people
regarding separate houses, it should also be remembered that the flat
system of houses which needs a multi-storied structure requires a special
infrastructure which is just not available in rural areas at present.
•The houses of acceptable conditions were almost 86% of the housing

stock in both the rural and urban areas.
•Each of the households had on average 5-6 members both in rural as

well as urban areas.
•The report also indicated that more number of persons lives in a room and
lack of privacy connotes the need to augment housing supply.
An analysis was made in various studies on the cause for the

housing shortage in developing countries like India. The conclusion
arrived at by studies has been that developing countries are giving low
priority to housing and this is again due to factors like large capital
resources required, high capital-output ratio and top priority given to
sectors like the agriculture, industries, power, communication etc. as
compared to housing. All these go to show that there is a need to give
priority to housing since it is the basic need for the mankind.
The growing rate of population needs more investment in the

housing sector. The importance of finance as a factor in house construction
may also be examined from the point of view of individual who wants to
own a house. Houses can not usually be built out of the current income of
the individual. It is estimated that in India, 4.9 years' income of an
unskilled labour is require to get 30 sq.m. House. It is also indicated that
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in an economy like ours, about 75% of house-buying involves loan finance

and over 5C% of all new and old houses are encumbered with debt. The
rate of interest charged also plays a role in housing finance. All these go
to indicate the need for housing finance and assistance for a common
Indian. How far our planning has taken care of the housing sector over
years is given in the succeeding paragraphs.
HOUSING AND FIVE YEAR PLANS
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Even though housing sector got a relatively low priority in the

allocation of public outlay in the five year plans, the sector is not
altogether neglected. In fact, over the years, housing has been recognised
as an important element in the poverty alleviation programmes. This
section highlights the treatment given to the housing in different Five
Year Plans.
The First Five Year Plan (1950-56) aimed at enhancing the housing
stock of minimum standards over next few years. It suggested reducing
the cost of construction of houses especially with regard to material and
labour by encouraging economical, architectural and structural designs.
The First Plan gave due consideration to the role of private sector to help
solving the problem of housing shortage. Two schemes viz., Subsidised
Industrial Housing Scheme (1952) and Low Income Group Housing
Scheme (1954) were introduced during this period.
The Second Five Year Plan (1956-61) continued its emphasis on

the Subsidised Industrial Housing and Low Income Group Housing
Schemes. Seven specific schemes were introduced during this period.
They are as follows:
• Plantation Labour Housing Scheme (1956)
• Slum Clearance and Improvement Scheme (1956)
• Village Housing Project Scheme (1957)
• Middle Income Group Housing Scheme (1959)
• Land Development and Assistance Scheme (1959)
• Rental Housing Scheme for State Government Employees (1959)
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• Jhuggee and Jhopri Removal Scheme (1960)
It should be noted that all the above mentioned schemes aimed at

improving the quality of housing for lower income category of
population.
The Third Five Year Plan (1961-66) aimed at land acquisition and
development as also an effective control on urban land. The Annual Plans
(1966-69) brought in the concept of "economically weaker sections". The
annual plans integrated this concept with the Subsidised Industrial
Housing Scheme which was in operation since the First plan. Up to 1970,
the bulk of funds were provided by the Government of India and Life
Insurance Corporation of India as loans and subsidies. The schemes of
housing have social objectives because they were meant for people
belonging to the SC/STs or to the specified classes of employees and
income groups. The extent of finance made available was usually 80% of
the cost of construction as maximum and this varied from scheme to
scheme. In case of Land Acquisition and Development Scheme, 100%
financial assistance as loan was given to Local Bodies / Urban Estate
Department.
The Fourth Five Year Plan (1969-74) emphasised the low cost
housing schemes in view of
(a) High cost of construction of the dwelling units
(b) Insufficient contribution by the private and Cooperative sectors to

meet the growing needs of houses for the poorer sections, and
(c) Deteriorating condition of older slums.
It was in April 1970, that the Housing and Urban Development
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Corporation (HUDCO) was started. Various State Governments started

Housing Boards funded through State budgetary allocation and the Slum
Clearance Schemes were initiated. The Housing Boards of the States
started issuing debentures on State Government Guarantee to which
institutions like the nationalised banks contributed. The Housing Boards are
essentially construction agencies and not funding agencies. This function
is to create and manage the housing stocks. It was during 1977, that the
Housing Development Finance Corporation (HDFC) was started for
housing finance. It was an important addition to this sector.
The Fifth Plan (1975-80) aimed at providing house sites to four

million landless labour and intensifying research on low cost housing
mainly through manufacture of low cost building materials. It decided to
enhance the financial assistance to the State Housing Board* and Local
Bodies. A scheme for improving the existing housing was also introduced
during the Fifth Plan. In 1974, the Minimum Needs Programme and in
1975, the Twenty Point Economic Programme were launched which
emphasised providing housing for the poor and housing construct through
wage employment.
The Sixth Plan (1980-85) attempted to use the public sector

resources in such a way that they yield optimum results and provide
maximum possible houses to absolutely shelter less people.
The Seventh Plan (1985-90) estimated the housing shortage at 24.7

million units. It called for establishment of proper and diversified
institutional credit for housing and construction to cater to the needs of
housing development. It also stressed the need to strengthen the HUDCO
and creation of new Cooperative Building Societies. The plan period added
a feather in the cap of housing by the establishment of National Housing
Bank in 1988. This gave a new direction to the decentralised housing
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finance system by promoting housing finance institutions and facilitating

proper cooperation amongst various agencies relating to housing.
The data in Table 5 indicate the relative share of housing in the

investment in the economy during the Plan periods.
Plans Total Investment in Investment in Percentage of
the plan (Rs. Crores ) Housing Housing to total
(Rs. Crores) Investment
First 3340 1150 34.2
Second 6750 1300 19.2
Third 10,400 1550 14.9
Fourth 22,635 2800 12.4
Fifth 47,561 4436 9.3
Sixth 1,56,000 19,491 12.5
Seventh 3,49,148 31,438 9.0
The conclusion that could be drawn from the above table is:
- The First Plan gave top priority to housing next to food since majority
of the population was poor.
- There have been fluctuations in percentage of housing investments to

the total investment in economy during different periods.
- There have been a decline in the investment in housing during VII Plan
which was disproportionate to the total investment in economy.
The Eighth Plan (1992-97) covered the strategy of creating an

enabling environment for housing activity by eliminating various
constraints and providing direct assistance to the disadvantaged groups
consisting of the rural and urban poor, self employed, physically
handicapped, widows and single women. It was during the 8th Plan, that
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the Shelter Up gradation Scheme under the Prime Minister's Integrated

Poverty Eradication Programme was initiated with a loan component of
Rs. 10000/- to be arranged from the HUDCO/any other financial
institution including Commercial Banks, subject to the condition that the
borrower holds the title to the land. This has a subsidy component too.
The 8th Plan outlay on housing has been Rs.20000 - 25000 cores. During
1995-96, the HUDCO sanctioned Rs.1967 cores as loans and actually
released Rs. 1229.5 cores. About 90% was spent on dwellings for the
weaker sections and low income groups.
The Ninth Plan Approach paper indicates that housing will be

given priority as one of the seven principles of development. The analysis
of the above facts on housing and investments during the plan periods
indicates the need for more funds for housing. Therefore, the role of
institutional finance for housing has assumed vital importance and many
agencies are drawn into the fold of housing finance.
NATIONAL HOUSING POLICY
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According to an estimate made by the Sub group of Urban

Ministry on the "Magnitude of Housing Problem", about 64.4 million new
houses will be needed by 2001. The total funding to create so many units
is estimated to be around Rs 2,35,000 crores based on the price index of
1985. This being a herculean task, it needs the cooperation of Centre and
the States and the private sector to increase the availability of houses at
affordable rates. For this purpose, a comprehensive policy on housing
was felt essential. Hence the Comprehensive National Housing Policy
prepared by the Ministry of Urban Development was placed before the
Parliament in 1988 and was discussed subsequently in 1990 at the Home
Ministers Conference. The objectives of the National Housing Policy
(NHP) are as follows:
•To assist all people and in particular the homeless and inadequately
housed and vulnerable sections, to secure for themselves affordable
shelter through access to developed land, building materials, finance and
technology;
•To create an enabling environment for housing activity by eliminating

constraints and by developing an efficient system for delivery of housing
inputs;
•To expand infrastructural facilities in rural and urban areas in order to

improve the environment of human settlement, increase the access of
poorer households to basic services and to increase the supply of
developed land for housing;
•To undertake, within the overall context of policies for poverty

alleviation and employment, steps for improving the housing
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situation of the poorest sections and vulnerable groups by direct

initiative and financial support of the state;
•To help mobilise resources and facilitate expansion of investment

in housing in order to meet the needs of housing construction and
up-gradation and augmentation of infrastructure, and
• To promote a more equal distribution of land and houses in
urban and rural areas and to curb speculation in land and housing in
consonance with the macro-economic policies for efficient and
equitable growth.
To achieve these objectives, the Government should take

initiatives for directing the activities of public agencies towards
increasing the supply of serviced land for various groups and
essential purposes directing towards poorer sections. The weakness of
the NHP has been that it did not set any time bound targets owing to
resources constraints.
In order to achieve the NHP, the following steps were taken.
• Setting up of an apex institution - National Housing Bank (NHB)

as a subsidiary of Reserve Bank of India under the NHB Act,
1987.
• Floating of specialised housing finance subsidiaries by the

Scheduled Commercial. Banks.
• Large flow of credit through the Housing and Urban Development

Corporation (HUDCO).
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• Emergence of LIC as an important contributor of housing

Finance.
• Financing for housing through Government Schemes.
Involving the private sector in housing finance

For the past decade, the Government of India attempted to
strengthen the housing sector by introducing various loan schemes for the
rural and urban population. The first attempt in this regard was the
National Housing Policy (NHP), which was introduced in 1988.
However, the growing realization of the insufficiency of public funds to
meet the demands for financial schemes in the housing sector is evident
in the aims of the 2007 policy. Innovative financial instruments that will
spur the flow of funds from the private sector is one of the focal points of
this policy. Until now, most financial companies were reluctant to lend to
low-income groups because the small amounts do not justify the costs.
Profit is the overarching goal, and these institutions try to efficient in the
mobilisation, disbursement and recovery of funds. Finance companies are
able to mobilize funds from shareholders and investors by offering
competitive rates of interests. These funds will be disbursed to those who
are deemed eligible, after assessment of application forms and personal
interviews. There are difficulties in assessing credit risks and a lack of
clarity on recoveries, land title and possession. These problems have led
to a scenario where the popular perception was that the requirements of
low-income housing were incompatible with formal housing finance.
Whereas today, in low-cost housing, the government is the sole financier,

the Ministry of Urban Development is exploring a new financial
architecture that will make loans for low-cost houses affordable for both
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the lenders and borrowers. Despite the frenetic pace of growth in housing
finance over the past 5 years in India, mortgage penetration as a
percentage of GDP continues to remain low, at 4 percent. This means that
there are considerable growth opportunities in housing finance. This is
further corroborated by the fact that despite the impressive rate of growth
in the housing finance sector in the recent period, financing through the
organised sector continues to account for only 25 percent of the total
housing investment in India.
The lending criteria set out by formal financiers are more appropriate to
the life style of the middle-level income group. To obtain a housing loan,
a combination of conventional (assets that can be mortgaged) and non-
conventional collateral such as peer pressure is required. Lack of
mortgage insurance is also a reason why the private formal sector
bypasses the low-income segment.
DEVELOPMENT OF HOUSING FINANCE IN INDIA
The early development of housing finance in India is a result of the
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housing policies implemented by the government. In the first Five Year

Plan (1951-56), housing was introduced into the policy framework at the
national level. Affordability was emphasized, and government support
through subsidies and loans were deemed necessary. This plan in fact
became the benchmark for subsequent Five Year Plans for the next two
decades.
The second plan (1956-61) strengthened the schemes of the first

plan by expanding coverage, and gave rise to State Housing Boards that
still remain in existence. Despite these efforts, by the fourth plan (1969-
74), the government was faced with the dual problem of a rapidly
growing population and a slow growing housing stock. For the first time,
the government decided to encourage private and co-operative housing
schemes by providing financial assistance. However, the majority of
activity still remained within the public sector. The government also
recognized the need to provide housing finance to low-income groups
and thus set up the Housing and Urban Development Corporation
(HUDCO) in 1970. HUDCOs mandate was to provide such groups with
loans below peak interest rates and with longer repayment periods.
It was during the fifth plan (1974-79) that as a completely private

sector initiative, in 1977, the first retail housing finance company,
Housing Development Finance Corporation (HDFC) was set up, seeking
to provide financial assistance to individuals, groups, co-operative
societies and companies for staff housing.
During the Sixth Plan period, other housing finance companies also
entered the market. Towards the mid and late 1980s a few housing
finance companies were set up either as private limited companies (e.g.
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Dewan Housing Finance Limited) or as a joint venture with partnership

from the state government (e.g. Gujarat Rural Housing Finance
Corporation) or bank sponsored housing finance companies (e.g. Can Fin
Homes, SBI Home Finance, PNB Housing Finance). Even state owned
insurance companies like the Life Insurance Corporation and the General
Insurance Corporation of India set up housing finance arms. The seventh
plan period saw the UN Global Shelter Strategy, of which India
subscribed to, being passed in the UN General Assembly in 1988. This
gave the impetus to the drafting of a National Housing Policy for the first
time. Another major reform that took place at the time was the founding
of the National Housing Bank (NHB) in 1988. The NHB was founded to
promote and regulate housing finance companies and to mobilize
additional resources for housing.
The National Housing Bank (NHB) was established in July 1988

under an act of Parliament viz. the National Housing Bank Act, 1987. The
act empowers the National Housing Bank to first, issue directions to
housing finance institutions to ensure their growth on sound lines.
Secondly, make loans and advances or render financial assistance to
scheduled banks and housing finance institutions or to any such authority
established by or under any central, state or provincial act and engaged in
slum improvement. It may also formulate schemes for the purpose of
mobilisation of resources and extension of credit for housing.
Public housing finance corporations have schemes that encourage

beneficiaries to invest their own money in their dwellings, but do not
offer opportunities for beneficiaries to deposit savings. The beneficiaries
are granted larger housing loans, than what may be available from
informal sources. To make housing loans affordable for the urban poor,
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direct subsidies are given for construction cost (e.g. the VAMBAY
scheme) and/or indirect subsidies on interest rates are provided. The latter
could be in the form of the interest differential subsidy amounts being
remitted directly in the HFC loan accounts of the borrowers, so as to
bring down their loan liability. These loans are characterised by
conventional mortgage lending, have a longer-term tenor and repayments
are in equal monthly installments (EMIs).
The eighth plan recommended that reforms be made on both, the

financial and legal aspects to allow the mortgage market to develop
further. It laid special emphasis on government incentives to enhance the
flow of credit to the housing sector through housing finance institutions.
Both the ninth (1997-2002) and tenth (2003-2007) plan recommended
further reforms to enable the government to play its role as a facilitator
and encourage the development of the mortgage market. Emphasis was
particularly laid on market friendly reforms for improving both taxes and
infrastructure to help increase investments into housing. The ninth and
tenth five-year plans are also characterised by the aggressive entry of
commercial banks into housing finance.
HOUSING FINANCE: INSTITUTIONS, SCHEMES &

SUPPORT
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COMMERCIAL BANKS
The trend of commercial banks lending to individuals for housing

emerged in the wake of the report of the working group on the Role of
Banking System in Providing Finance for Housing Schemes. (R C Shah
Working Group, the RBI, 1978). They have been lending to the housing
sector based on annual credit allocations made by the RBI. In terms of the
RBI guidelines, scheduled commercial banks are required to allocate 1.5
per cent of their incremental deposits for disbursing as housing finance
every year. Of this allocation, 20 per cent has to be by way of direct
housing loans of which again at least half, that is, 10 per cent of the
allocation has to be in rural and semi-urban areas. Another 30 per cent
could be for indirect lending by way of term loans to housing finance
institutions (HFIs), housing finance companies (HFCs) and public
housing agencies for the acquisition and development of land and to
private builders for construction. The balance 50 per cent is for
subscription to the HUDCO, and the NHB bonds.
HOUSING FINANCE THROUGH COMMERCIAL BANKS
The Reserve Bank of India has brought the Commercial Banks too
under the fold of housing finance which did not exist prior to 1979. The
basic question that needs to be debated is as to why the commercial banks
are interested in extending loans for the housing facilities particularly to
the poorer sections of the society. In general it is believed that the
residential house is a non-productive asset. It does not generate any
income by itself so as to make the loan self liquidating. The question is to
be understood in the larger developmental context. The investment
decision and the activity pattern of any family are influenced to a large
extent by the location and type of residential accommodation. The
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banker's relationship with the prospective borrowers for a productive

activity is of long term nature and the banker has to communicate with
the borrower before the loan disbursement and more so during the post
loan period. The settled borrower, therefore, is a lesser risk for the banker.
The reasonable housing facility is one of the facilitating factors for the
borrower to take up and maintain a productive enterprise. The housing
finance for the poor people, therefore, is capable of creating a better
production environment. All these factors have induced the policy makers
in India to include the housing loan for the poor in the priority sector
lending.
The RBI in its priority sector lending guidelines clearly stated that
1.5% of the Bank's incremental deposit as at the end of the previous
financial year should be earmarked for housing and ensures that the bank
finance for housing flows to the needy segments of the society. The
finance will be in terms of both direct and indirect mode. Thirty per cent
of the total allocation for housing should be by way of direct finance and
of which half should be extended as direct housing loans in rural and
semi urban areas. Further 30% will be utilized by way of term loans to
housing finance companies, housing boards and other public housing
agencies. The balance 40% of the allocation for housing should be
provided in the form of subscription to guaranteed bonds and debentures
of the National Housing Bank and HUDCO only.
The "housing finance'' by the banks is granted for the following types of
construction:
•Residential houses to be constructed by public housing agencies like the
25
HUDCO, Housing Boards, local bodies, individuals, Cooperative

Societies or employers, priority being given for economically weaker
sections, low and middle income groups.
•Educational, health, social, cultural other institutions/centers which are

part of housing project and which are necessary for the development of
settlements or townships.
•Shopping Complexes, markets and such other centers catering to the day-
to-day needs of the residents of housing colonies and forming part of a
housing project.
•Construction meant for improving the condition of the slum areas for
which credit is extended directly to the slum dwellers on the guarantee of
the Government or indirectly to them through the State Government.
•To bodies constituted for undertaking repairs and for individuals either
singly or collectively, in buildings owned or occupied backed by security
or guarantee.
There is no ceiling on housing finance for housing construction.

Banks may consider additional finance as per their terms and conditions
too. Housing finance is extended to persons affected by natural calamities
for house repairs / constructions also. For regular housing finance, the
repayment period is fixed at not exceeding 15 years (including a
moratorium, at the option of the beneficiary, till the completion of
construction or 18 months from the disbursement of the loan, whichever
is earlier) with graduated installments.
Some of Government sponsored schemes like the Differential Rate

of Interest have the component for housing for the weaker sections. In
the DRI scheme, housing finance can be given to an individuals
belonging to SC/ST up to Rs.5000/- which is besides the normal
26
assistance. In schemes like the PIUPEP, Shelter Up-gradation Scheme

with a loan component of Rs. 10000/- is arranged through HUDCO/any
other financial institution and a subsidy of Rs.2500/- per unit was given.
Under the Nehru Rozgar Yojana, the Government provides a subsidy of
Rs.1000/- per household for up-gradation of housing of urban poor along
with a loan from the HUDCO. In the Jawahar Rozgar Yojana, a non-credit
linked programme, less than one of its components viz., Indira Awaas
Yojana, emphasis has been laid on housing finance. During 1996-97, a
sum of Rs.1194 crores was allotted under the Indira Awaas Yojana. The
Indira Awaas Yojana provides houses for the poverty sticken people and
those belonging to SC/ST and freed bonded labour in rural areas. During
1995-96, about 8.64 lakh houses were constructed and till October, 1996,
2.82 lakh houses were constructed and 3, 56 lakh houses were under
progress against which Rs.424.78 crores was spent.
The banks extend loans to the housing finance institutions as

indirect advance. These are term loans given taking into consideration the
institution's debt-equity ratio, track record, recovery performance and
other relevant factors. The term loans are given to HUDCO, HDFC and
Housing Finance Companies promoted/sponsored by the commercial
banks. Banks extend loans to the State Housing Boards and other public
agencies for housing also. In view of the need to increase the availability
of land and housing sites for increasing the housing stock, the banks are
extending finance to the public agencies for acquits ion and development
of land, provided, that it is a part of the complete project for
infrastructural development.
A major development in the area of housing in recent years has

been the entry of the commercial banks by establishing subsidiaries either
on their own or in collaboration with other financial institutions including
27
HUDCO and HDFC which have done pioneering work in the fie»d of
housing finance. The public sector banks like the State Bank of India,
Canara Bank, Punjab National Bank, Indian Bank, Bank of Baroda and
Central Bank of India from the public sector and Vysya Bank limited
from the private side have started separate subsidiaries for housing
finance. The amount of public deposits which the housing companies can
raise under the Housing Companies (NHB) Directions, 1989, is equal to
10 times of their Net Owned Funds. With the emergence of housing
subsidiaries together with the apex institution- National Housing Bank, the
housing finance scenario has taken a new turn.
HOUSING FINANCE THROUGH OTHER INSTITUTIONS

Some specific Organizations are extending housing finance as
described below:
LIFE INSURANCE CORPORATION OF INDIA
The LIC of India is the oldest organizations connected with

housing finance. It gives long term credit for housing. It makes available
every year certain amount to Central Government for financing certain
specified housing schemes of various State Governments. The
Government of India makes allocation to different states out of the said
amount. The LIC also advances to the Apex Cooperative Housing
Finance Societies on guarantee from the State Governments and those
societies in turn make advance to the Primary Cooperative Housing
Finance Societies for house construction, in addition, the LIC has "Own
Your House" scheme for its policy holders against mortgage of
immovable property. It also finances for approved parties for construction
of housing/commercial/office complexes, to public limited companies for
the purchase of houses for their employees. The LIC spent Rs.1570
28
crores during Seventh Plan towards housing.
HOUSING AND URBAN DEVELOPMENT CORPORATION

(HUDCO)
Established as a Government of India undertaking in 1970, the

chief objective of HUDCO is to finance housing and urban development
particularly for the poorer sections of the society. It provides finance for
the schemes formed by the State Housing Boards, State Finance Societies
in the urban and rural areas and Improvement Trusts. HUDCO's loan
schemes are on soft terms, the repayment period extending up to 22 years
and interest rate ranging from 4% to 15% per annum.
HOUSING REFINANCE
The National Housing Bank extends refinance to the Commercial

Banks on the housing finance extended by them. The rate of interest
charged by the NHB to the banks on the refinance is linked to the purpose
of loan and the geographic regions. For instance, the refinance rate o
interest for acquisition or construction of new units in rural areas ranges
from 10 to 15% and 11. to 15 per cent in urban areas. The corresponding
rate for the loans for the up-gradation in run areas is 10% while it is 11 to
13.5 per cent in urban areas. However, except in up-gradation i rural areas
where there is a ceiling for charging interest from bank to borrower, for
others, the banks are free to fix the rates of interest. The refinance provided
by the NHB up to March, 1995 was of the order of Rs.2254.04 crores.
Considering the Golden Jubilee of Indian Independence, a Golden
Jubilee Rural He Refinance Scheme has been introduced by the NHB. The
objective of the scheme is to provide refinance to the institutions that
finance for housing in rural areas which would facilitate the ruralites for
access to housing credit to build modest new house or to improve or add to
29
the old dwelling. This scheme is applicable to Scheduled Commercial

Banks, State Cooperative Bank, Regional Rural Banks, State Cooperative
Agriculture and Rural Development Banks, Cooperative Housing Finance
Societies and Housing Finance Companies. The NHB will be extending
100% refinance under the scheme. The aggregate amount of assistance
from the NHB will in no case exceed the aggregate amount of
outstanding housing loans from the primary lending institutions to the
borrowers (excluding overdues).
Scope
Refinance would be provided only in respect of direct lending to

individuals/groups of individuals (formal or informal, including
cooperative housing societies). Overdue loans/bought over loans from
any other HFCs banks, loans given for acquisition of old housing
units/second sale would, however, not be eligible for refinance under the
scheme.
Eligibility Criteria
(i) Only such HFCs that conform to the 'Guidelines for Extending
Refinance Support to Housing Finance Companies', as amended
from time to time, and which have been approved by the NHB
(discussed earlier) for the purposes of refinance support are
eligible to avail refinance from the NHB,
(ii) Overdue housing loans of the HFCs, including those covered under
the NHB refinance, should not exceed 10 per cent of the total
housing demand (including overdues) for the preceding twelve
months. The level of overdues should be assessed, taking into
account only the amounts overdue for over three months,
30
(iii) The percentage of net non-performing assets should not exceed

risk weighted assets by more that 5 per cent.
Period of Refinance
Refinance from NHB to HFCs would be repayable during a period

not exceed 15 years, based on the weighted average period of housing
loans (WAPOL) in respect of which refinance is claimed.
Security for Refinance
Refinance from the NHB would be secured by charge on the book

debts of the HFC. Additional security such as charge on immovable
properties/movable properties, guarantee of promoters, additional
margins and so on may be stipulated at the NHB's discretion. If at any
time the NHB is of the opinion that the security provided by the HFC has
become inadequate to cover the outstanding refinance, it may advise the
HFC to provide and furnish to the satisfaction of the NHB, such
additional security as may be acceptable to the NHB to cover such
deficiency. The NHB may get the loan accounts and associated
documents verified, either by its own officers or a firm of chartered
accounts appointed by it for the purpose, with respect to the loans
included in a particular refinance application. It may, at its discretion,
recover the cost of such verification from the concerned HFC.
Procedure
Application for Annual Refinance Limit
The refinance operations of the NHB are centralised at New Delhi.

Refinance, in a particular year, is released on the basis of the refinance
limit sanctioned to the HFC for the year (July to June). Any HFC
approved for the purpose of refinance should submit to the NHB its
31
annual projections for sanction of refinance limit, in the prescribed annual

credit review format, together
Other Terms and Conditions
Separate Books Separate and proper books of accounts, registers and
so on should be maintained branch-wise by the HFC with respect to
housing loans for which refinance has been extended by the NHB and
these should be kept up-to-date. The list of loan accounts along with
necessary details, in terms of the NHB's refinance, should be readily
available with the respective branches.
Life Span of Dwelling Units
Since the repayment period should not exceed the life span of the
house/unit financed out of the housing loan, it should be ensured that the
construction is pucca/semi-pucca, with a life span of not less than 30
years.
Post-disbursal Discipline
There should be proper post-disbursement supervision and follow-

up of housing loans to ensure proper end use of funds as also timely and
regular repayment of the loans. It should conduct its business with due
diligence and efficiency and have due regard to these principles in the
conduct of its business.
Maintenance of Recovery
Performance Continuance of refinance facility under the scheme

would be subject to maintenance of satisfactory a recovery performance
by the HFC, from the beneficiaries.
Recall of Refinance
32
The NHB reserves the right to recall the refinance in the event of
diversion of the relative funds for purposes other than housing or for
suppression of any material information by the borrowing bank.
NHB's Right to Modify the Scheme
The NHB may modify the clauses of the Refinance Scheme in

respect of all HFCs, or in respect of any one HFC, depending on its
performance. Such modifications are being brought out in the form of
circulars/letters, from time to time, and have become part of the scheme.
NHB's Right to Call for Information
The NHB may call for any information or returns from the HFC
availing of refinance, in respect of housing loans and refinance
sanctioned under this scheme. It would also have the right to collect such
information directly from the HFC's constituents, its lenders, auditors,
credit rating agencies and so on.
Insisting on Deposits from Borrowers
The HFCs availing of refinance from the NHB should not insist
that borrowers place part of the housing loans disbursed to them in
deposit accounts or retain the entire proceeds disbursed as deposits or
insist on deposits as a precondition for sanctioning housing loans.
Borrowings from Institutions other than the NHB
In case the HFC borrows funds from banks/financial institutions

other than the NHB, it should inform the NHB about the same, giving
particulars about the security offered for such borrowings and obtain a 'no
objection' from the NHB. They are required to follow the necessary
procedures and furnish details of their borrowings.
33
Compliance with HFCs (NHB) Directions, Guidelines on Prudential

Norms
The HFC (NHB) Directions, 2001, as amended from time to time,
prudential norms for income recognition, accounting standards,
provisioning for bad and doubtful debts, capital adequacy and
concentration of credit/
investments, 2001 and guidelines for refinance support to HFCs, as
amended from time to time, should be deemed to be a part of this
refinance scheme.
NATIONAL HOUSING BANK (NHB)
34
The National Housing Bank (NHB) was established on 9th July

1988 under an Act of the Parliament viz. the National Housing Bank
Act, 1987 to function as a principal agency to promote Housing
Finance Institutions and to provide financial and other support to such
institutions. The Act, inter alia, empowers NHB to:
• Issue directions to housing finance institutions to ensure their
growth on sound lines
• Make loans and advances and render any other form of
financial assistance to scheduled banks and housing finance
institutions or to any authority established by or under any Central,
State or Provincial Act and engaged in slum improvement and
• Formulate schemes for the purpose of mobilisation of
resources and extension of credit for housing
Management
The general superintendence, direction and management of the

affairs and business of the.NHB are vested in its Board of Directors,
which exercises all powers and executes all acts and things on its behalf.
Subject to the provisions of the NHB Act, the Board, while discharging
its functions, has to act on business principles, with due regard to public
interest. In general, (a) the Chairman, if he is a whole-time Director or if
he is holding offices both as a Chairman and a Managing Director
(CMD) or (b) the MD, if the Chairman is not whole-time director or is
absent, can also exercise these powers of the Board. The MD has to
follow, in the discharge of his powers and functions, all directions given
by the Chairman. In the discharge of its functions, the NHB is to be
guided by the directions given in writing by the Government in
consultation with the RBI, or by the RBI in matters of policy involving
public interest.
35
The Board of Directors of the NHB consists of

(i) a Chairman and a Managing Director (CMD),
(ii) two Directors from amongst experts in the field of housing,
architecture, engineering, sociology, finance, law, management
and corporate planning, or in any other field, special knowledge of
which is considered useful to the NHB,
(iii) two Directors who are persons with experience in the working of
institutions involved in providing finance for housing or engaged
in housing development or have experience in the working of
financial institutions/banks,
(iv) two Directors elected by shareholders other than the
RBI/Government/other institutions owned/controlled by
Government,
(v) two Directors from out of the RBI Directors,
(vi) three Directors from amongst Central Government officials and
(vii) Two Directors from amongst State Governments' officials. The
CMD an other Directors, excepting the RBI's Directors and those
elected by the shareholders, are appointed by the Government in
consultation with the RBI. The RBI nominates its Directors on the
NHB.
BUSINESS ACTIVITIES
NHB, as the Apex level financial institution for the housing sector
in the country, performs the following roles:
(a) Promotion and Development:
36
NHB operates as a multifunctional Development Finance

Institution (DFI) for the housing sector. The Bank's policies are directed
towards promotion and development of housing finance institutions.
NHB has framed guidelines for HFCs with a view to promoting their
development on sound and healthy lines. The guidelines are reviewed and
modified from time to time in the light of developments in the financial
and housing sectors. All HFCs registered with the National Housing Bank
u/s 29A of the National Housing Bank Act, 1987 and inter alia having
minimum net owned funds of Rs.10.0 crores are eligible for refinance
support. It has also contributed to the equity capital of five HFCs. NHB
has a dedicated Training Division which organises regular training
programmes in areas relating to housing and housing finance for
development of management capabilities of officials working in the
sector. NHB's promotional endeavors are also directed towards capacity
building for the housing finance system besides enlarging the credit
absorption capacity.
(b) Regulation and Supervision:
NHB exercises regulatory and supervisory authority over the HFCs

in the matter of acceptance of deposits by them pursuant to the powers
vested in it under the Act. As per the amendments to certain provisions of
the Act, which came into effect from June 12, 2000, NHB is vested with
powers to grant Certificate of Registration to companies for
commencing/carrying on the business of a housing finance institution.
Besides, NHB regulates the deposit acceptance activities in accordance
with the Housing Finance Companies (NHB) Directions, 2001, amended
from time to time, in the matter of ceiling on borrowings (including
37
public deposits, rate of interest, period, liquid assets, etc). NHB has also
issued Directions on prudential norms in regard to capital adequacy, asset
classification, concentration of credit, income recognition, provisioning
for bad and doubtful debts etc. NHB supervises the working of HFCs
through on-site inspection and off-site surveillance.
(c) Financing:
NHB raises resources for the housing sector towards increasing

new housing stock and provides refinance to a large set of retail lending
institutions. These include scheduled commercial banks, scheduled state
cooperative banks, scheduled urban cooperative banks, specialised
housing finance institutions, apex co-operative housing finance societies
and agriculture and rural development banks. Refinance is provided by
NHB under various schemes, which are formulated taking into account,
several aspects of the National Housing Policy, the constraints facing the
sector etc. NHB has also a window for direct lending to Public Agencies
such as, State Level Housing Boards and Area Development Authorities
for large scale integrated housing projects and slum redevelopment
projects.
NHB is also operating a special window for extending financial

assistance to the people affected by natural calamities viz. earthquake,
cyclone etc.
(d) Resources of NHB
NHB raises resources from diversified sources, both domestic and

external by issuing Bonds/ debentures, borrowing from RBI and financial
institutions/organisations etc. Under the Act, NHB is authorised to issue
38
and sell Bonds with or without the guarantee of the Central Government
for the purpose of carrying on its functions.
(e) Rural Housing:
NHB launched the "Swarna Jayanti Rural Housing Finance

Scheme" to mark the golden jubilee of India's Independence. The Scheme
seeks to provide improved access to housing loans to borrowers for
construction/acquisition/ up-gradation of a house in rural areas of the
country.
(f) Recent Initiatives
Securitisation of mortgage loans of the retail lending institutions

facilitates for channelising household savings into the housing sector is
seen as a potentially viable market oriented alternative. Support to
Mortgage backed securitisation is a major policy initiative of the
Government as manifested in its National Housing and Habitat Policy
announced in 1998. This policy emphasises NHB's lead role in mortgage-
backed securitisation and development of a secondary mortgage market
in the country. As the apex body in housing finance sector in India, NHB
has been playing a lead role in the sector in matters relating to policy
environment as also operational mechanism for the development of a
secondary mortgage market in India.
In order to resolve the twin problems of affordability and

accessibility affecting the growth of the housing finance business and the
prospect of home ownership, NHB has been entrusted with the
responsibility of launching a Mortgage Credit Guarantee Scheme for
protecting the lenders against default.
39
HFCs Promotion and Development
The principal mandate of the Bank is to promote housing finance

institutions to improve/strengthen the credit delivery network for housing
finance in the country. The Bank has played a facilitator role in this
regard instead of itself opening such dedicated housing finance
institutions. For this purpose, NHB has issued the Model Memorandum
and Articles of Association. NHB has also issued guidelines for
participating in the equity of housing finance companies. All housing
finance companies registered with NHB u/s 29A of the National Housing
Bank Act, 1987 and scheduled commercial/co-operative banks are
eligible for refinance support subject to terms and conditions as laid down
under the respective refinance schemes.
As a part of its promotional role NHB has also formulated a scheme for
guaranteeing the bonds to be issued by the housing finance companies.
Considering the need for trained personnel for the sector NHB has
designed and conducted various training programmes.
CASE STUDY
Of inflation and interest rates

Unless the government penalises speculators and tightens further the
regulations on futures trading, buoyancy in prices is likely to persist.
40
The Headquarters of the Reserve Bank of India in Mumbai.
With inflation as measured by the wholesale price index inching

towards 7 per cent and that measured by the consumer price indices
ruling even higher, the government and the Reserve Bank of India have
decided to sit up and take note. Exports of some essential commodities
have been restrained and the prices of petrol and diesel reduced. The cash
reserve ratio is to be hiked in stages to impound the equivalent of
Rs.14,000 crores of loanable funds. None of these steps has as yet been
effective in curbing inflation. Even if they impact prices with a lag, they
are likely to be neutralised by speculation, facilitated by excess liquidity
and a liberalised futures market. Unless the government penalises
speculators and tightens further the regulations on futures trading,
buoyancy in prices is likely to persist.
An obvious consequence of inflation that is of serious concern is its

impact on the real earnings of the common man, especially since the price
increase is sharper in the case of essential commodities. But a less
discussed fallout could be on interest rates as banks are forced to raise
deposit rates to neutralise the effects of inflation and keep depositors
happy.
41
Since interest rates have already been rising, the latest increase
could take them close to levels that prevailed during the much-maligned,
pre-reform years of `financial repression'. This would in turn necessitate
an increase in lending rates, which would have adverse consequences for
growth.
One of the successes of financial sector reform, according to the

government and RBI, is the reduction in nominal interest rates when
compared with the pre-reform period. These low rates have not only
shored up corporate profits but also encouraged the debt-financed
spending spree, which is an important driver of India's high growth.
Retail lending and housing finance have been growing at a pace that has
forced RBI to warn banks repeatedly against overexposure in these
markets. The danger is that a quick and sharp rise in interest rates may
not just correct such overexposure but dampen debt-financed consumer
spending and housing construction and spoil the party for a government
that prides itself on having moved the country onto a higher growth
trajectory. This effect on demand and growth would be more severe if
rising rates precipitate widespread default of floating rate debt payments.
The evidence shows that even before inflation raised its head
interest rates had been on the rise. Part of the reason was that banks were
being forced to raise deposit rates to attract depositors and were pushed
into raising lending rates to cover the higher cost of funds. Deposit rates
have to be hiked because savers now earn better returns on instruments
such as mutual funds and unit-linked insurance. Those better returns are
drawing savings away from traditional investments such as deposits at a
time when banks are finding new opportunities to lend in the housing and
consumer finance market. To cater to this demand, banks were competing
with one another and with other financial businesses to offer better
42
deposit rates since they were confident of finding people willing to

borrow even when lending rates were raised to cover the higher cost of
funds.
This has created a situation where banks have a special interest in

this year's Budget. Normally, so long as the Budget is `growth-oriented' in
the sense that it is likely to keep growth going or spur it on, banks should
be happy. A booming economy should spell booming business for the
banks. But at the moment banks are finding it difficult to keep their
traditional business going without raising interest rates to mobilise more
deposits. Since this would require raising lending rates as well, it may
prove contrary. Higher interest rates in the retail and housing finance
markets may curb credit demand. Banks today get a significant share of
their income from other areas into which they are diversifying. But
lending based on deposits is what banks still know to do best.
They would, therefore, like a situation where they can continue

with business as usual without raising rates. But for that the differences in
rates of return in different financial markets must not widen.
Unfortunately, the government has been privileging the equity market at
the expense of banks. By relaxing regulations and norms that apply to
both domestic and foreign investors in the stock market, it has
encouraged a flow of funds into that market, which has resulted in a
prolonged boom not warranted by fundamentals. With returns on stock
market investments placed at close to 50 per cent, the security of bank
deposits appears to be a small recompense for the much lower returns
they offer.
In addition, the government has been spurring the market by

encouraging new investors such as those in charge of government pension
43
funds to move into the market and privileging financial savings in forms
other than bank deposits through its tax policies. Tax benefits given on
equity investments, such as the abolition of the long-term capital gains
tax on investments in the stock market and the decision not to tax
dividends in the hands of the recipient, have all discouraged savings in
bank deposits and encouraged investments in other kinds of financial
assets. This is why there are demands being made that the coming Budget
must `level the playing field' for the banks. That would save them from
pushing interest rates to higher levels.
This pressure on the banks notwithstanding, the recent hike in rates

would not have happened if RBI were not also keen on higher rates. The
central bank's call for moving up interest rates is driven by a completely
different motivation: its concern with overheating in the economy,
reflected in rising inflation.
Though RBI had chosen to focus more attention on growth and

exchange rate management during the years of moderate inflation, in the
final analysis, like all conservative central banks, it is inflation that
constitutes its primary concern.
INFLATION CONTROL
RBI has only two levers to control inflation: curbing credit

expansion and raising interest rates. Curbing credit growth is a problem
because RBI has recently been buying up dollars flowing into the
economy in order to prevent an appreciation of the rupee. And in recent
44
months that inflow of foreign exchange has been unrelenting. The rupees
RBI outlays to buy up these dollars are contributing to an increase in
liquidity and money supply.
To limit further credit creation on the basis of this increase in

liquidity, it has recently chosen to raise the cash reserve ratio to be
maintained by banks and expects to pre-empt around Rs.14,000 crores of
loanable funds. But this only increases the desire of banks to increase
their deposit intake so as to maintain credit growth, contributing further
to their tendency to hike interest rates.
This has made the task of the central bank easier when it comes to
the second of the levers it has at hand to curb inflation: raising interest
rates. Not surprisingly what the central bank has done is to signal its
desire to keep interest rates rising by raising the Repo Rate to 7.50 per
cent from 7.25 per cent. This has created a rift between the central bank
and the Finance Ministry. The latter, enamoured by the high growth the
economy is recording, is against raising interest rates since that could
slow down growth. It has, in fact, tried to pressure public sector banks not
to raise interest rates on housing loans. But faced with little option in
protecting their profits, banks are unwilling to oblige. Many public sector
banks have indeed hiked their prime lending and housing finance rates.
The Finance Ministry cannot make the banks pay the cost of its
honeymoon with the stock market.
This raises the question as to which is better for the economy and
the common man: higher or lower interest rates. In principle, higher
interest rates benefit the rentier classes at the expense of those involved in
productive activity.
45
Higher rates, therefore, are not good for a developing economy. In

post-reform India, this feature of high interest rates is worsened by the
fact that growth has come to depend heavily on debt. Higher interest rates
are adverse for entrepreneurs not only because as investors they are hit by
the higher cost of capital, they could also be hit by the fact that expensive
credit can curtail the growth in demand for their products.
This is a fact that is forgotten when low interest rates are

principally seen as reducing the return on deposits by individuals in the
banking system. These individuals are also income earners who could
benefit from a growing economy, unless they are retired senior citizens
depending on interest rates from fixed deposits for their income. This
should influence the Finance Minister not just to focus on inflation but
actually to consider the case of the banks and level the playing field
between the deposit market and the market for other kinds of financial
assets so that they can keep deposit and lending rates down. As is the case
currently, the concerns of senior citizens can be dealt with separately.
But such a move would go contrary to the Finance Ministry's

recent tendency to adopt measures aimed at sustaining the irrational
boom in the stock market. It would require a change in the mindset that
believes that a rising Sensex is a more potent indicator of the success of
reform than low interest rates. If not, the growth rates it proudly reports
could be the casualty.
FORMS
APPLICATION FOR CERTIFICATE OF REGISTRATION (COR) OF
HOUSING FINANCE COMPANIES
By Registered Post
From: [Name and address of the Registered Office in BLOCK LETTERS)
46
To
The General Manager,
Department of Regulation & Supervision,
National Housing Bank,
India Habitat Centre, Core 5 A, Lodhi Road,
NEW DELHI -110 003.
Dear Sir,
THE NATIONAL HOUSING BANK ACT, 1987 -

APPLICATION FOR CERTIFICATE OF REGISTRATION TO COMMENCE
THE BUSINESS OF A HOUSING FINANCE INSTITUTION
We make this application in terms of Section 29A of the captioned Act for issue of a Certificate
of Registration (COR). The required documents/information as per the instructions are
enclosed.
2. We are desirous of commencing the business of a housing finance company. We,

therefore, request you to issue the necessary Certificate of Registration under Section 29A of
the said Act to enable our company to commence the business of a housing finance
institution.
3. We declare that to the best of our knowledge and belief the information furnished in the
statements enclosed is true, correct and complete.
Yours faithfully,
[Name and Designation]
Common Seal of the Company
Date:
Place:
Encl: 1. Certified copy of the Memorandum & Articles of Association
2. Particulars of identification- as Annexure-1

3. Particulars of Chairman/MD/Directors/CEO etc.- as Annexure-2
4. Financials for the last three years- as Annexure-3 [if applicable]
5. Board Resolution specifically approving the submission of the application and its
content- as Annexure-3
6. Return on Prudential Norms for the latest period as Annexure-5 [if applicable]
INSTRUCTIONS FOR FILLING UP THE APPLICATION
GENERAL
1. Application should be made in the prescribed form only. Wherever space is

insufficient, information may be furnished in separate sheet/s, duly indicating the
cross reference.
47
2. Application along with enclosures duly completed should be submitted in duplicate, to

The General Manager, Department of regulation & Supervision, National Housing
Bank, Core 5A, India Habitat Centre, Lodhi Road, New Delhi-110 003.
3. A photo-copy of the application as submitted may be retained with the company for its
reference and record.
4. Application should be signed by any of the following officials authorised by the Board
of Directors of the company in this behalf (viz., Chairman, Managing Director, Chief
Executive Officer, Company Secretary, A whole time Director).
5. Application should bear the common seal of the company.
6. An acknowledgment for having submitted the application should be obtained.
7. The particulars/information to be furnished in Annexure-IV of the application should
be based on figures as disclosed in the latest annual audited balance-sheet of the
company.
ANNEXURE-I
1. S. No. (8) In case the company has changed its name earlier, a list of all the earlier
names of the company and date/s of change together with the names of Chief
Executive Officer and Chairman at the time of change of name should be furnished.
2. S.No.8 (a) in Annexure I is applicable to those companies which was incorporated
with the main object clause other than housing finance and subsequently switched
over to housing finance as a principal business and still valid as on the date of
submission of the application form.
3. S. No. 8 (b) If the company has ever defaulted in timely repayment of deposit and
payment of interest, a list of all such pending cases and the action taken in respect of
each case should be furnished. The company should also submit a list containing the
details of all the court cases pending against it, including those pending in consumer
forum, pertaining to its deposit acceptance activities.
ANNEXURE-IV
La test return relating to prudential norms, as certified by the Auditors to be enclosed. The
format should be as given in the Housing Finance Companies (NHB) Directions, 2001
(Format available on Bank's website: nhb.org.in
ANNEXURE-1
PARTICULARS OF IDENTIFICATION
(To be filled in BLOCK LETTERS)
48
Company Code-------------
(To be filled by NHB)
1. Name of the Company
2. Date of incorporation:
3. Date of commencement of business
-(if applicable)
4. State in which the company is registered
5. Full Address of the registered Office with
Phone Number (with STD code), Fax Number
and Email address
6. Full Address of Corporate/Administrative
Office with Phone Number (with STD code),
Fax Number and Email address
7. Status: (strike out whichever is not (a) Public Limited Company
applicable)
(b) Private Limited Company
(c) Deemed public
(d) Government company
(e) Other (to be specified)

8. Whether the company is transacting the
principal business of housing finance- (if Yes/No
applicable)
If yes-
(a) the date of commencement of such

business
Yes/No
(b) Whether the company has defaulted in the
repayment of principal and/or payment of
interest of deposits
9. No. of branches/ offices
(To be furnished State-wise)
10. Number of employees (Organisation chart
Head Office/Branch to be furnished
separately)
11. Name and address of Statutory Auditors
with Membership No, Telephone number,
Mobile Number and Email address
12. Name(s) & Address(es) of bankers with
Telephone/Fax Numbers
13. Particulars of Bank A/c: Type of account/
credit facility enjoyed
49
14. Names and addresses of the non-banking

financial institutions with which the company
has links in any manner
15. Name and Designation of CEO/Authorised
official with Telephone, Mobile, Fax numbers
and Email Address
Common Seal of the Company
Signature of the Authorised Official:

Name:
Designation:
Date:
Place:
ANNEXURE-2
INFORMATION ABOUT THE PROMOTERS, CHAIRMAN, MANAGING DIRECTOR,

DIRECTORS AND THE CHIEF EXECUTIVE OFFICER OF THE COMPANY.
(SEPARATE FORM FOR EACH FUNCTIONARY)
Name of the Company: __________________
PERSONAL DETAILS OF PROMOTERS, CHAIRMAN,

I MANAGING DIRECTOR, DIRECTORS AND THE CHIEF
EXECUTIVE OFFICER OF THE COMPANY
a. Full name
b. Date of Birth
c. Educational Qualifications
d. Relevant Background and Experience
e. Permanent Address
f. Present Address
g. E-mail Address / Telephone Number
h. (a) Permanent Account Number under the Income Tax Act
and name and address of Income Tax Circle
(b) Director Identification Number (DIN*)
* It is an unique Identification Number allotted to an

individual who is an existing director of a company or
intends to be appointed as director of a company pursuant
to section 266A & 266B of the Companies Act, 1956 (as
amended vide Act No 23 of 2006)
i. Relevant knowledge and experience
j. Any other information relevant to Directorship of the HFC
II RELEVANT RELATIONSHIPS OF DIRECTOR
50
a. List of Relatives if any who are connected with the HFC

(Refer Section 6 and Schedule 1A of the Companies Act,
1956)
b. List of entities if any in which he/she is considered as being
interested (Refer Section 299(3)(a) and Section 300 of the
Companies Act, 1956)
c. List of entities in which he/she is considered as holding
*substantial interest.
d. Name of HFC in which he/she is or has been a member of
the board (giving details of period during which such office
was held)
e. Fund and non-fund facilities, if any, presently availed of by
him/her and/or by entities listed in II (b) and (c) above from
the HFC.
f. Cases, if any, where the director or entities listed in II (b)
and (c) above are in default or have been in default in the
last five years in respect of credit facilities obtained from the
HFC or any other HFC.
III RECORDS OF PROFESSIONAL ACHIEVEMENTS
a. Professional achievements relevant
PROCEEDINGS, IF ANY, AGAINST THE PROMOTERS,

IV CHAIRMAN, MANAGING DIRECTOR, DIRECTORS AND
THE CHIEF EXECUTIVE OFFICER OF THE COMPANY
a. If the director is a member of a professional

association/body, details of disciplinary action, if any,
pending or commenced or resulting in conviction in the past
against him/her or whether he/she has been banned from
entry of at any profession/ occupation at any time.
b. Whether associated as Promoter, Chairman, MD, Director
with any HFC, NBFC including a Residuary Non- Banking
Financial Company which has been prohibited from
ccepting deposits/prosecuted by RBI/NHB
If yes, the name/s of the company/ies

c. Details of prosecution, if any, pending or commenced or
resulting in conviction in the past against the director and/or
against any of the entities listed in II (b) and (c) above for
violation of economic laws and regulations
d. Details of criminal prosecution, if any, pending or
commenced or resulting in conviction in the last five years
against the director
e. Whether the director attracts any of the disqualifications
envisaged under Section 274 of the Company's Act 1956?
Has the director or any of the entities at II (b) and (c) above
been subject to any investigation at the instance of
f. Government department or agency?
51
g. Has the director at any time been found guilty of violation of

rules/regulations/ legislative requirements by customs/
excise /income tax/foreign exchange /other revenue
authorities, if so give particulars
h. Whether the director at any time come to the adverse notice
of a regulator such as SEBI, IRDA, DCA.
ANY OTHER EXPLANATION / INFORMATION IN
REGARD TO ITEMS I TO III AND OTHER INFORMATION
V
CONSIDERED RELEVANT FOR JUDGING FIT AND
PROPER
UNDERTAKING:
I confirm that the above information is to the best of my knowledge and belief true and
complete. I undertake to keep the NHB fully informed, as soon as possible, of all events which
take place subsequent to the information provided above.
Place: Signature of Authorised Signatory
Designation:
Date
*‘Substantial interest' means holding of beneficial interest by an individual or his/her spouse

or minor child, whether singly or taken together in shares of a company/capital of a firm, the
amount paid up on which exceeds 10% of the paid up capital of the company or total capital
subscribed by all the partners of a partnership firm.
ANNEXURE-3
Name of the Company: __________________________________
SUMMARY OF FINANCIAL POSITION AND OTHER INFORMATION

Amount-Rs lakhs
S. No A. FINANCIAL POSITION 31/03/ 31/03/ 31/03/
1 Paid up Capital
2 Reserves and Surplus
Net Owned Fund [as per return on Prudential
3
Norms]
4 Secured Loans
5 Unsecured Loans
(i) Public deposits
(ii) Other deposits/borrowings
52
(iii) Aggregate Deposits

6 Loan Funds [4+5(i)+(ii)]
7 Total Funds Employed(3+6)
Towards :
8 Housing Loans[outstanding and % of total assets]
9 Other Loans
10 Fixed Assets
11 Investments
(i) Govt. guaranteed Bonds
(ii) Quoted shares
(iii) Un-quoted shares
12 Current Assets, Loans & Advances
13 LESS : Current Liabilities & Provisions
14 Net Current Assets(12-13)
15 TOTAL
B. WORKING RESULTS
16 Income
17 Expenditure
18 Profit Before Tax(16-17)
19 Provision for Tax
20 Profit After Tax(18-19)
21 (a) Amount transferred to Reserve Fund
(b) Amount available for appropriation
C. OTHER INFORMATION
22 Dividend (%)
23 Earning Per Share
24 Price-Earning Ratio
25 Housing Loans actually disbursed
26 Percentage of over-dues (3 months and above)
27 Admin. Cost-% to outstanding loans
28 IMPORTANT RATIOS:
a] Liquidity Ratio :
Current Ratio
b] Debt Equity Ratio:
Loan Funds to Owned Fund
I) Interest Coverage Ratio [times][PBIT/Interest]
(ii) Return on Equity(PAT*100/Interest)
53
(iii) Return on Total Assets[PAT*100/Total Assets]

d] Capital Adequacy Ratio (%)
29 Non-performing assets (Amt. and % to total assets)
30 Asset quality:
(a) Standard
(b) Sub-standard
(c) Doubtful
(d) Loss assets
31 Income not recognised
32 Provision made for NPAs
33 Liquid assets maintained and shortfall, if any:
(i) April-June
(ii) July-September
(iii) October-December
(iv) January-March
34 Position of submission of returns (date):
(a) Annual Return
(b) Annual Report/Audited Balance Sheet
(c) Auditors' Certificate
(d) Advertisement or statement in lieu of
advertisement
(e) Half yearly return on prudential norms:
(i) April-September
(ii) October-March
(f) Quarterly return on liquid assets:
(i) April-June
(ii) July-September
(iii) October-December
(iv) January-March
35 Credit rating and validity date
Notes:
i. Position of rectification of deficiencies outstanding, if any, pointed out by NHB [Item-

wise position] to be given in a separate sheet.
ii. Annual reports along with audited balance sheet and profit and loss account for the
three years should be enclosed.
iii. Present shareholding pattern of the company to be furnished separately.
54
SIGNATURE OF THE AUTHORISED SIGNATORY

DESIGNATION:
Date:
CONCLUSION
The past studies have indicated that any point of time there has
been housing shortage in India and it grows at an alarming proportion to
the population is increasing year after year, lots of efforts are being made
to provide housing finance to the poor who represent the majority of
those facing housing problems .the NHP was the first efforts in this
direction .besides that ,several other organizations like the LIC of India,
HUDCO, HDFC are also involved to a greater extention to housing
finance. All those efforts, it is hoped would reduce the housing shortage
in India to a greater extend.
55
BIBLIOGRAPHY
1. Financial services
3rd edition - M. Y. Khan
2. Practical banking advances
UBS publisher’s ltd
3. Report of the study group on non-banking financial institutions and

company.
4. Report on trends and progress of housing in India.
5. The Indian financial system - vasant desai
WEBSITE VISITED
1. www.nhb.org.in
2. www.google.com
3. www.business-standard.com
4. www.unece.org
56
5. www.hinduonnet.com
57
National Housing Bank
The National Housing Bank has been set up under the National Housing
Bank Act of 1987, which was passed on 9th July, 1988. It is wholly owned by the Reserve
bank of India and was established to encourage housing- finance institutions and provide
them with financial support.
The National Housing Bank also provides several other channels of support for housing-
finance institutions, by dint of the authority invested by the National Housing Bank Act. For
example, the National Housing Bank can give directions to the housing finance institutions to
ensure that their growth takes along appropriate tracks. Besides, the National Housing Bank
also makes advances and gives loans to scheduled banks and formulates schemes that lead
to the proper use of resources for housing projects.
The various objectives of the National housing bank are:
• To encourage healthy system for housing finance and which meets the needs of all
the segments of the society
• To encourage housing finance institutions
• To gather resources and distribute them for housing projects
• To make affordable the credit taken for housing
The places where National housing bank have offices are:
• Head office in New Delhi

• Regional office in Hyderabad
• Regional office in Mumbai
The National Bank for Housing gives registration certification to companies so that they
can carry out the business of financing houses. The National Housing Bank also has a
training division, besides its lending operations. This division trains officials who are working
in the housing finance and housing areas in order to improve their management capabilities.
The National housing bank has helped enormously in the growth of the housing sector in
India. It needs to work in close coordination with the Reserve Bank of India and the Indian
government to ensure the upkeep and feasibility of housing projects in India
58
National Housing Bank studies risk in the Indian

housing finance market
The National Housing Bank has undertaken a study to understand the nature of risks endemic
to the Indian primary housing finance market, in particular default risk and prepayment risk.
The sample size for the study of Credit Risks was over 6,50,000 housing loans sanctioned
from January 1988 to October 2004.
The salient findings of the study are:
Geography: Loans originated in the West have higher default risk, followed by the
Southern,Northern and the Eastern Region.
Origination Period: While default risk for earlier period loans is observed to rise only during
the later years of loan age, the loans during the recent period show an increase in probability
of default during the earlier years of loan age.
Loan Amount: Smaller loans have higher risk of default during the later years of loan age.
Loan term: Loans with term between 5 to 15 years carry higher risk as compared to the
Below 5 years and the Above 15 year loans.
Co-obligant: Presence of co-obligant significantly mitigates the risk of default except in the
Northern region.
Borrower profession: Self employed borrowers carry higher risk, except in recent loans.
Loan Purpose: Loans for new dwelling units higher risk compared to the loans for old
dwellings.
The Study observes a significant difference in default rate as the Loan to Cost Ratio
increases, except in the largest LCR Category.
A negative relationship between interest rate difference (defined as a reduction in interest

rate) and the probability of prepayment is observed, i.e., a decline in interest rate of 1%
reduces the probability of prepayment by about 30-40% and the probability is observed to
increase over time. (National Housing Bank)
59

Housing Finance

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Housing Finance

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HOUSING FINANCE WITH REFERENCE TO NATIONAL HOUSING BANK

country. The setting-up of the National Housing Bank (NHB), a fully

CENTRAL AND STATE GOVERNMENTS

Till the mid-eighties, the responsibility to provide housing finance

HOUSING PATTERN IN INDIA

- Demand factor - Growth in population, formation of households,

- Supply factor - Availability of institutional credit, cost of construction,

Though both the type of factors play their role equally, it is to be

Table 1. Types of Dwellings in India

Types Percentage Distribution

Some trends and progress in housing in India over years as reported

by the NSS are presents in Table 2:

Year No of house holds No of occupied addition Decades - house

1951 53.6 12.3 65.9 54.1 10.3 64.4 - - -

1961 68.9 15.6 84.5 65.1 13.8 78.9 1 3.3 18.6

# On an average, about 90% of the total households have occupied

# within this overall pattern the percentage of occupied residential

# The number of households added during decades had shown

The addition to the number of households was more during the

While indicating the relative growth of housing stock in the inter-

Inter – census period Annual growth of the dwelling per 1000

Rural Urban Total

1951-61 3.4 5.2 3.3

1961-71 1.9 4.5 2.4

1971-81 3.4 7.9 4.0

a. The house construction, as indicated earlier, depends on the demand

The following are the three indicators for housing shortage:

The first indicator was provided by the proportion of pucca

The second indicator for the housing shortage was the

The third indicator, according to this report, was the investment

The above table leads to the following inferences:

•The housing gap was prominent in rural areas as compared to urban

•The houses of acceptable conditions were almost 86% of the housing

•Each of the households had on average 5-6 members both in rural as

An analysis was made in various studies on the cause for the

The growing rate of population needs more investment in the

in an economy like ours, about 75% of house-buying involves loan finance

HOUSING AND FIVE YEAR PLANS

Even though housing sector got a relatively low priority in the

The Second Five Year Plan (1956-61) continued its emphasis on

They are as follows:

• Plantation Labour Housing Scheme (1956)

• Slum Clearance and Improvement Scheme (1956)

• Village Housing Project Scheme (1957)

• Middle Income Group Housing Scheme (1959)

• Land Development and Assistance Scheme (1959)

• Rental Housing Scheme for State Government Employees (1959)

• Jhuggee and Jhopri Removal Scheme (1960)

It should be noted that all the above mentioned schemes aimed at

(a) High cost of construction of the dwelling units

(b) Insufficient contribution by the private and Cooperative sectors to

(c) Deteriorating condition of older slums.

It was in April 1970, that the Housing and Urban Development

Corporation (HUDCO) was started. Various State Governments started

The Fifth Plan (1975-80) aimed at providing house sites to four

The Sixth Plan (1980-85) attempted to use the public sector

The Seventh Plan (1985-90) estimated the housing shortage at 24.7

finance system by promoting housing finance institutions and facilitating

The data in Table 5 indicate the relative share of housing in the

- There have been fluctuations in percentage of housing investments to

The Eighth Plan (1992-97) covered the strategy of creating an

the Shelter Up gradation Scheme under the Prime Minister's Integrated

The Ninth Plan Approach paper indicates that housing will be