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Low-cost housing: Want cheaper funds,and more

Addressing the shortage of housing in the country poses a significant challenge.

Written by George Mathew |
May 11, 2013 8:52:32 am

Addressing the shortage of housing in the country poses a significant challenge owing to the sheer numbers involved in enabling a sizeable population own a home.

The Union housing ministry’s technical group on the estimation of housing shortage has projected the total shortage of dwelling units in urban areas to be around 1.87 crore and the shortfall in rural housing at 4.36 crore. The huge population dwelling in the slums,characterised by sub-standard housing amid squalor,stands at 9.49 crore,a disturbing statistic.

The biggest challenge facing the planners,institutions and the government is availability of funds at reasonable interest rates for the construction of housing,with the necessary safeguards to preserve financial stability.

The Reserve Bank of India (RBI) estimates that most of the housing shortage is for the economically weaker sections (at 56 per cent) and low income groups ( at 39 per cent). These two classes of home aspirants find it tough to raise funds. “The money required to meet the housing needs is humongous. We need to take a multidimensional approach in raising funds and ensuring adequate number of quality and affordable houses,” said RV Verma,chairman and managing director,National Housing Bank.

It was against this background that the RBI last year allowed developers of affordable housing projects and slum rehabilitation packages,and housing finance companies to raise funds through external commercial borrowings (ECBs). “Mobilising funds from abroad at a low cost is a good option. The limit of $1 billion ECBs in 2012-13 was exhausted. There is a need to review this limit. The eligibility conditions to raise funds through ECBs are under review. The government and the RBI are working on it,” said Verma.

ECB is a popular instrument that facilitates access to foreign money by Indian corporations and public sector undertakings. With domestic interest rates remaining high,Indian companies are increasingly availing of the ECB route,raising funds at lower cost from the overseas markets.

Interest rates in the US and Europe are around one per cent. The all-in-cost ceiling for ECBs with average maturity of three and up to five years is six months Libor (a benchmark rate in the London money market),which works out to anywhere between 3-4 per cent lower than the base rates of Indian banks. But the actual interest rate would depend upon the lenders’ assessment of the borrowers,economic viability of projects,expected returns and the credit rating of the borrower.

The RBI had said the funds raised so must not be used for the acquisition of land and the developer wishing to raise funds through foreign exchange loans must have a proven track record,five years experience in undertaking residential projects and must have not defaulted in any of the previous financial commitments. Further,the project must be free from any litigation. The RBI also defined affordable housing project as a project,which has 60 per cent of permissible floor-space-index (FSI) for units having maximum carpet area of up to 60 square meters (around 645 square feet).

“After the review of ECB norms,more housing finance companies (HFCs) will be able to raise money from abroad. There were three proposals from HFCs and one from NHB last year,” said a government official involved in finalising the new ECB norms.

Housing finance companies with a minimum paid-up capital of Rs 50 crore and net owned funds of at least Rs 300 crore over the last three years are eligible to borrow through ECBs. The HFC must not borrow through ECB exceeding 16 times its net owned funds and must have net non-performing assets within 2.5 per cent of net advances,the RBI said. “Some of these norms are set to be relaxed. The overall ECB limit could go up to $ 2-3 billion a year,” the official said.

A report by real estate consultancy Knight Frank says that institutional finance to the sector has witnessed a slowdown. “Bank credit to the sector has slowed down on account of increased risk perception translating to higher provisioning and increased cost of funds. In the last two years,the growth in banks’ credit exposure to the real estate industry has come down from 19.08 per cent in November 2010 to 5.29 per cent in November 2012. Foreign investment in the sector has also witnessed a downtrend; the share of real estate has declined from 9 per cent in FY’12 to 5 per cent in FY’13 (until October) in the total inflows in the country,” the report said.

Verma says mobilising funds is only one part of solving the housing problem. There are hurdles like supply of good quality houses,land clearance,availability of land and pricing of the house. The Union Cabinet recently approved the establishment of the Credit Risk Guarantee Fund Trust for low income housing with an initial corpus of Rs 1,200 crore. The Trust will guarantee the housing loans made by the lending institutions to new or existing individual low income group borrowers.

Lalit Kumar Jain,chairman,Confederation of Real Estate Developers’ Associations of India (CREDAI),said developers have been campaigning for streamlining the approval processes across the country and the negative weightage to the realty sector in order to provide affordable housing.

“In fact,the Centre should issue guidelines to states regarding online approvals and single window system,” said Jain and pointed out that states like Punjab,which have implemented the single window system are doing very well. “This will help check corruption to a large extent and the money saved would definitely benefit the buyer,” added Jain.

While the housing shortage is huge and rising,the number of dwelling units sanctioned under Jawaharlal Nehru National Urban Renewal Mission in the 7-year mission period was just 16 lakh. Research undertaken by Knight Frank Research shows that by 2031,about 60 crore Indians will reside in urban areas,an increase of over 20 crore in a short timeframe of 20 years. This change in the socio-economic landscape will have a bearing on several things,housing being the foremost. This underlines the importance of more credit flow to the sector at affordable rates.


* ECB norms for developers and HFCs under review; eligibility conditions to be relaxed,enabling more players to access cheaper foreign money

* As on March 2012,outstanding housing loans by banks and housing finance companies was Rs 6,20,000 crore,of which about two-thirds were accounted for by banks,says the Reserve Bank of India

* The total shortage of dwelling units in urban areas in 2012 to be around 18.78 million and the shortfall in rural housing at 43.67 million

* In the last two years,the growth in banks’ credit exposure to the real estate industry has come down from 19.08 per cent in November 2010 to 5.29 per cent in November 2012.

* The ratio of total outstanding home loans to to the GDP is very low at 8-10 per cent in India whereas it remained 14 per cent in China,17-18 per cent in Taiwan and Philippines,75 per cent in the US and the UK.

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