H R Khan: Enabling affordable housing for all - issues and challenges
Inaugural address by Shri H R Khan, Deputy Governor of the Reserve Bank of India, at the
International Conference on "Growth with stability in affordable housing markets", organized
by the National Housing Bank and the Asia Pacific Union for Housing Finance, New Delhi,
30 January 2012.
* * *
The speaker acknowledges the contribution of Shri M P Baliga, Shri S C Dhal and Shri Surajit Bose of the
Reserve Bank of India and the valuable comments of Shri R V Verma, Chairman, National Housing Bank.
It is a pleasure to address such a distinguished gathering of delegates at the international
conference and the well-known experts from the sector who have assembled here. It is my
pleasure to be here not only as a representative of the Reserve Bank of India but also as a
member of the Board of the National Housing Bank (NHB). Over the years, the Reserve
Bank and the NHB have committed to the cause of improving the condition of the Indian
housing sector considering that housing constitutes one of the four basic requirements for
human survival roti (food), kapada (clothing), makan (housing) and izzat (dignity). Our
experience shows that housing tends to serve as a catalyst for a change in socio-cultural
milieu and also aids in economic development. More importantly, housing lays the foundation
for a life of dignity. By investing in homes, people, in particular, the low-income groups,
accumulate equity that can then be used as collateral, making them more credit-worthy for
accessing finance through formal channels and also for generating income. Against this
background, addressing housing shortage and improving affordability remains an integral
part of our national policy towards poverty alleviation.
Dilemmas for the policy makers
The recent housing bubble in the US which in many ways contributed to global financial
market crisis is still fresh in the minds of all the stakeholders in the financial markets. The
housing crisis in the US has yet again proved that the mission of social objectives, if not
driven with regulatory caution, can lead to financial instability. Such events not only cause
severe structural damages to the financial system but also lead to further intensification of
the problem that the mission originally was seeking to overcome. Therefore, dilemma for
policy makers is to choose either a policy which aims at affordable houses for all without
compromising the stability of the financial sector or a policy which enables all to afford
houses with focus on inclusive growth for the people at large.
The mandate of Reserve Bank of India, whether stated explicitly or otherwise, is for
promotion of inclusive growth without undermining financial stability. The dilemma is all the
more significant in the context of housing sector initiatives as they involve framing policies on
affordability of housing and also harnessing and promoting markets so as to serve the entire
spectrum of customers, irrespective of their levels of income and the phase of business
cycle.
The extent of problem
Housing shortage has always been a major problem over the years in our country since
independence. Such shortage estimated as excess households over houses including
houseless households, congestion (number of married couples requiring separate house),
and replacement/ up-gradation of kutcha/ unserviceable kutcha houses and
obsolescence/ replacement of old houses, etc. had grown over the decades.
The Working Group on Rural Housing for the Eleventh Five Year Plan (2007-12), has
estimated the total housing shortage in rural areas at 47.43 million units at the end of 2012.
As per Government estimates, the total housing shortage in the urban areas, at the
beginning of the 11th Plan period was around 24.71 million units and is likely to go up to
26.53 million units by 2012. The urban situation is equally appalling with 99 per cent of the
housing shortage pertaining to the Economically Weaker Section (EWS) and Low Income
Group (LIG) categories. It is also of major concern that 90 per cent of the rural housing
shortage (approximately, 42.69 million units) are in respect of Below the Poverty Line (BPL)
categories.
According to a report of ICRA1, housing loans as a percentage of GDP have remained at
around 7 per cent, significantly lower than the levels achieved in most of the developed
countries. It indicates the extent of opportunity for deeper penetration of such market. With
improving demographics and economies of scale, the mortgage to GDP ratio is likely to
increase. The stakeholders, however, need to reckon with problems and impediments in the
process which may arise from changes in the economic cycle, uncertainties surrounding land
acquisition policies, changes in the policy framework and systemic risk that could arise out of
rapid credit expansion with lax due diligence standards.
Concept of affordability
"Affordability" as a concept is very generic and could have different meanings for different
people based on differences in income levels. Different countries have defined affordable
housing to present the economic potential of an individual buying a house. In developed
countries like the US and Canada, a commonly accepted guideline for affordable housing is
that the cost of housing should not exceed 30 per cent of the gross income of the household.
Affordable housing and low-cost housing are often interchangeably used but are quite
different from each other. Low-cost housing is generally meant for the Economically Weaker
Sections (EWS) categories and comprises bare minimum housing facilities while affordable
housing is mostly meant for the Low Income Groups (LIG) and the Middle Income Groups
(MIG).
Defining affordable housing in India is a difficult task given that for every square kilometer of
the country the dynamics of the market are different. Keeping in mind that the housing
shortages affect mostly the EWS and LIG, and the younger group of urban-urban migrants
changing cities in search of better prospects, affordable houses, for the purpose of such
schemes, are taken as houses ranging from about 300 square feet (super built up area) for
EWS, 500 square feet for LIG and 600 to 1200 square feet for MIG, at costs that permit
repayment of home loans in monthly installments not exceeding 30 per cent to 40 per cent of
the monthly income of the buyer.
A major issue involving the affordable low cost housing is the quality of housing. As per the
2001 census data, only 51.62 per cent of Indian households stay in pucca (concrete) houses.
As on end-June 2009, 55 per cent of the rural households and 92 per cent of the urban
households lived in pucca structures (Table I).
Table I
Distribution of households with respect to Kutcha (non-concrete)
& Pucca (concrete) categories
The Challenges in India - reasons for low affordability
Although India has been registering a fast paced growth during the first decade of the
21st century there is still a significant population below the poverty line (BPL), irrespective of
the parameters defining the line. This requires economic and social support to get above the
poverty line. The levels of unemployment also remain significantly high, thereby rendering
housing unaffordable to many. It is also important to reckon the fact that even today there is
a large population which remains financially excluded from the formal banking/financial
systems and, in the process, is deprived of access to housing finance.
Rural housing
The vulnerabilities to the rural housing sector are often thought to be limited to the delivery
system for housing materials, services and finance. The sector, however, is deeply affected
by infrastructure deficit - roads, electricity supply, drinking water and sanitation. The housing
finance which played a key role in the urban housing revolution, if I may say so, is rather
conspicuous by its absence in the rural setting. To aggravate the situation further, there is a
real paucity of common or non-agricultural land for meeting the housing needs of the poor;
whatever little is available is pre empted by the demands from other sectors. The lack of
vibrancy in the market for village properties and the marked volatility in agricultural incomes
combine to dampen the prospects of this nebulous sector.
Challenges from urban migration
The other challenge emanates from the economic condition of our rural areas which leads to
migration of population. The number of people in urban cities and towns has gone up
substantially primarily as a by-product of demographic explosion and poverty induced
rural-urban migration. This situation has resulted in tremendous pressure on urban
infrastructure and consequent increase in the number of homeless people living on the
streets. As per the 2001 census, the total urban homeless population was 0.78 million, which
would be much more currently given the inadequate availability of affordable/low cost
housing. As per the 2001 census, the country's urban land mass (2.4 per cent of total land
mass) housed approximately 28 per cent of the population, excluding people who live on the
streets (Chart I).
If we look deeper into the extent of availability of basic amenities, the position is all the more
disturbing. As per the Report of Housing Condition & Amenities in India (2009), 65 per cent
of rural and 11 per cent of urban households do not have adequate sanitation facilities.
34 per cent of the rural and 4 per cent of the urban households did not have the facility of
electricity. Only 18 per cent of the rural households had all the three facilities (drinking water
within premises, sanitation & electricity) whereas in urban areas, all the three facilities were
available to 68 per cent households.
Constraints to housing sector
Any sector is likely to be influenced by both demand and supply constraints. On the demand
side, mainly income levels of the people, overall cyclical condition of the economy and
affordability of housing play the most important role and availability of land, finance at
reasonable price, infrastructure, legal and regulatory framework are some of the major
constraints from the supply side.
Constraints of land availability
Amongst the four constraints, land bears particular relevance in the Indian context. The
continuous tussle between agriculture and industry in a country with a vast segment
employed in agriculture and with a policy attempting to boost the manufacturing sector has
its undesired effects on sectors like housing. But the required policy support to the housing
sector cannot be ignored since construction has direct linkages with the manufacturing sector
and any boost in this sector is likely to boost the manufacturing sector as well. On the other
hand, with growth in the rural sector, demand for low-cost and affordable housing is expected
to increase. The recent bill on Land Acquisition and Rehabilitation & Resettlement has
proposed to fix the compensation for rural and urban land at four and two times the market
value respectively. It also stipulates a specified period for the completion of projects. Many
feel that the law is likely to increase prices of land and property and also further constrain
land availability. If this happens, it may increase the proportion of land cost in the total cost.
As mentioned earlier, urban land mass is under severe constraint to meet the housing
requirement of the country's urban population which is growing rapidly. This implies that the
vision of "Affordable Housing for All" will require acquisition/supply of large land parcels on a
regular basis. At the same time, we need to ensure proper development of the housing
sector; otherwise we may be seeing increasing number of slums and unauthorised
settlements.
Financial constraints
Another important constraint that has been existent all along for the housing sector is finance
for the developers as well as finance for the households, particularly for the low
cost/affordable housing category. The current financing mechanism prevalent in the country
mostly targets middle and high income sections of the society while the households falling
under low income and economically weaker sections category find it difficult to secure formal
housing finance. Commercial banks and traditional means of housing finance typically do not
serve low-income groups, whose income may vary with crop seasons or is below the "viable"
threshold to ensure repayment or those who cannot provide collateral for loans. In India, as
mentioned earlier, the mortgage to GDP ratio is estimated at around 7 per cent. This
contrasts with mortgage to GDP ratio of over 51 per cent in USA. However, even if one were
to benchmark with more comparable counterparts, the ratio ranges between 15 and 20 per
cent for South East Asian countries. The penetration level of mortgages is miniscule when
compared with the shortage of housing units. This problem is more acute for low income
families seeking affordable houses.
Need for long-term debt market
Housing constitutes a long term asset for a large segment of population in rural and urban
areas. As debt markets are not very deep, access to long-term funding for housing finance
institutions is difficult. Most banks use their shortterm funds from deposits and deploy these
funds in long-term housing loans, thereby creating an asset liability mismatch. Reserve Bank
of India has cautioned banks of the dangers of borrowing short and lending long. To mitigate
such problem, in some countries, banks have been permitted to float long-term mortgage
bonds to match their mortgage assets. To tackle the interest rate risks, most assets and
liabilities are on a floating rate basis. In India, there has been a long-standing demand to
allow pension and provident funds to invest in housing finance. These funds are suppliers of
long-term capital. They typically have a low risk tolerance but do crave for diversification. The
mutuality of interest is strong between homeowners and long-term institutional investors.
Going forward, to tide over the paucity of funds, it is imperative to develop the secondary
mortgage market. Securitisation ensures recycling of funds. While some countries in South
Asia have issued mortgage-backed securities, most transactions are sporadic and ad-hoc.
Rigidities in the legal framework, high stamp duties and lack of uniformity in underwriting
norms are recognized as some of the hindrances in the development of mortgage market. Of
course, regulatory concerns for unbridled securitization and massive growth in home loan
portfolio with very lax underwriting standards which caused considerable damage to the
financial markets, particularly in the context of the advance economies like the US, have to
be kept in view. Drawing upon the lessons from imprudent securitization of mortgages which
contributed to a larger extent to the recent global financial crisis, Reserve Bank of India is
reviewing the regulatory framework for securitization in India. It is expected that the market
for residential mortgage backed securities (RMBS) will develop on safe and sound lines
under the new regulatory framework.
Loan products
A housing loan is inherently different from any other retail loan. This is because a house is
probably the single largest investment a person makes in his/her lifetime. It has been noticed
that a customer seeking a housing loan does not just require finance - they may also need
ancillary services like loan counselling or legal advice to ensure the title of the property is
clear or technical advice to ensure that the structural aspects of the property are in order. It is
these add-on services that distinguish the good quality of services from not so good. The
typical mortgage borrower of South Asian countries, including India belongs to the upper or
middle class, is of an average age of 35-40 years, usually a first time home buyer and by
and large a salaried employee.
Most loan products are fairly standardised - plain vanilla home loan products, loans for home
improvement and extension, land loans, loans for non-residential premises and the newer
breed of loans include home equity and topup/ personal loans. Against the backdrop of lower
interest rates seen across the region, most home loans are on floating rate loans. In India,
the floating rate of some banks and housing finance institutions is benchmarked to prime
lending rate. It has been noticed that several customers opt for floating rate loans without
understanding the inherent risks involved. Even most of the existing fixed rate loans have
been converted into floating rates. To tide over the dilemma of whether to opt for a fixed or
floating rate loan, blended options are being offered wherein the customer can hedge part of
the interest rate risk by opting for a combination of fixed and floating rates. The major issue,
however, is that most individual borrowers find it difficult to manage the interest rate risk
under pure or semi floating interest rate regime. Hence, there is greater need for fixed
interest rate loan products for individual borrowers. Coming to currency risk, fortunately,
home loan borrowers in the Asia-Pacific region and India, in particular, are not exposed to
exchange rate risks as borrowings are in domestic currency. Another area of product
innovation could be deposit linked home loan products. This would be very useful for low
income groups as they can build equity and establish payment capability track record for
availing of home loans.
Legal constraints
A major feature of the Indian urbanization process is its non-uniform geographical spread.
While smaller cities and towns are fast emerging as centre of demand, the pressure on
existing four metros remains enormous. A crucial factor behind this tendency is the barrier for
major players in real estate in tapping the vast land potential in rural areas reinforced by poor
enforcement of laws against encroachment of public lands as well as lack of clear titles to
private lands causing an artificial scarcity of land in rural areas. Another major issue is
absence of large scale digitization of land records and the easy access to such records for
checking titles/encumbrances.
The dynamics between rural and urban housing demand is also different with housing in rural
India still largely for own use rather than for sale and resale. A possible reason for this,
among other things, could be the problem of transferring ownership rights. As we reach limits
to urbanization in metros, rural areas should increasingly come under the focus of real estate
development and we would require strong legal framework to prevent the bottlenecks.
Role and responsibilities of stakeholders
Given the dimensions of the problem and various constraints that affect a viable and
sustainable solution, well-coordinated and concerted effort on the part of all the stakeholders,
including the private sector, is required. This will ensure that all segments of the population
genuinely aspiring to own a house are effectively catered to without of course compromising
on financial stability and ecological balance. Efforts of regulators and
government/ government bodies to tackle this colossal housing shortage will have limited
impact until and unless the private sector joins hands to meet the challenge.
Commercial banks and HFCs
The Indian banking sector has an expansive reach and is well geared to serve all segments
of the society, including the underprivileged. The banking sector has been actively involved
in lending to the housing sector with an outstanding of Rs. 3786 billion as on December 30,
2011, which is an increase of Rs. 410.10 billion (12.10 per cent) over the previous
corresponding year. The housing loan portfolios of HFCs registered a growth of
21.71 per cent during 2010-11. This was comparatively higher than 15 per cent growth
reported by commercial banks (Tables II & III).
Table II
Comparative position of housing sector credit
by commercial banks and HFCs
Table III
Outstanding housing loans of HFCs2
The housing loan portfolio of any financial institution is a product of two variables - number
of accounts and loan outstanding per borrower. It has been observed that there has been a
noticeable slowdown in the growth of the portfolio (Tables IV & V). One plausible reason is
that post-crisis, banks have realised that while the demand for housing loans is tremendous,
there is no substitute for prudent lending policies. This probably explains the slowdown in the
growth rate of number of accounts. Another reason which has affected the demand has been
the rising prices of property and prevalence of relatively high rate of interest in the context of
high inflation rates.
Table IV
Outstanding gross bank credit3
Table V
Growth rate of number of accounts and outstanding
amounts in the housing sector portfolio of commercial banks
It is encouraging to note that the share of HFCs in the Indian housing market has been
exhibiting a rising trend. Looking ahead, HFCs are likely to gain sufficient experience in the
sector and would be able to maintain their market share on the strength of their focused
approach, targeting of special customer segments and relatively superior customer service.
This in a way would pave for constructive competitive environment as traditional lenders like
banks would need to tap their extensive network and broad customer base more effectively
and at the same time maintain the priority sector lending targets.
In order to remain competitive, both commercial banks and the HFCs need to realize that a
customer seeking a housing loan does not just require finance - they also need ancillary
services and hand-holding like loan counseling, legal advice, etc. Selling a loan product is a
small step in the process of making affordability of housing a reality; bigger leaps by way of
encouraging deeper financial inclusion coupled with financial literacy is the need of the hour.
Re-engineering of the existing business models is extremely essential given the fact that a
large number of the targeted and potential customers are possibly financially excluded.
Assessment of the customers and their credit requirement can be achieved more effectively
by adopting a field based approach, such as, using surrogates, triangulation and building up
knowledge about the customer. Banks and HFCs have to provide innovative products to the
sector and work in close collaboration with the other stakeholders in the industry. They also
need to adopt different appraisal and risk management methods for low ticket housing loans.
Micro Finance Institutions (MFIs)
In the wake of micro-finance revolution in India, housing micro-finance has assumed a lot of
importance and has potential of having notable impact on the stakeholders engaged in the
mission for affordable housing. Microfinance has the potential to enable small borrowers to
start planning for a house and arranging requisite resource for it. At the same time, these
institutions can have an impact on the household decision making, portfolio diversification of
lenders, expansion of housing sector and growth of the local economy as a whole.
Microfinance for housing is believed to progressively upgrade poor families' homes. Such
upgradation would include improving existing rooms, adding a room, or installing water or
electricity. Based on their credit history microfinance for housing should be designed for the
low-income households who wish to expand or improve their dwellings or build a home in
incremental steps, relying on small loans raised over a period of time. It has to be a
sustainable approach suited to the needs of the low-income market.
MFIs are considered to be the next best alternative for financing the EWS and LIG category.
MFIs, however, face challenges which prevent them from extending housing loans. The
challenges are primarily due to the longer period of housing loans (typically between five to
seven years minimum, if not more) as against usual micro loans of one to two years duration
and due to the larger amount of loan compared to usual micro loans extended by MFIs.
Typically, a house, particularly in the urban areas, will be about '1 lakh, whereas when MFIs
extend livelihood finance, between ' 10,000 to ' 35,000. If they have to lend to a significant
number of people, the amount to be loaned has to increase substantially. This can lead to
problem for MFIs. Another problem with the MFIs is of availability of finance and ensuring
regular collection of larger installments from the borrowers. Recognising the importance of
community-based financial institutions as delivery mechanisms for housing finance to the
financially excluded, the NHB has initiated a housing microfinance programme by way of
financial assistance to the MFIs. The programme is based on an integrated habitat and
partnership approach with customised product intervention aimed at supplementing various
other financial sector interventions.
Private sector stakeholders
Today, technological innovations have transformed the conventional style of trade and
commerce. There are numerous examples which reflect that with adoption of technology, the
end-product can be highly improvised and made affordable to all segments of customers.
Some of the best examples would be the rapid technological innovation in the mobile
telephone industry, marketing innovation in consumer non-durable sector, etc. It is high time
that the real estate sector also invests resources for more research and development to
enable construction of environment friendly, low cost houses. It is important to realize that
the terrain of our country, climatic conditions of regions, economic conditions of people and
the intensity of the problem changes as we traverse across the country. A search for one
technology fits all would not be viable and practically feasible.
One model which could be considered and developed is the hub and spoke model for
enhancing rural housing construction. The "hub" of the service could be located in a
district/taluka headquarters and the services into rural/interior areas are provided by local
rural centres i.e. the "spokes". The hubs will be the centre, say, for pre-fabrication of
semi-finished structures for housing and skilled labour and will provide men & material to the
spokes. This will ensure scale of economies in technologically innovative and homogenous
low cost housing to the rural centres.
National Housing Bank (NHB)
NHB was setup with an objective of channelizing long-term finance to individual households,
thereby proving the much needed impetus to the housing sector. NHB acts as a principal
agency to promote housing finance institutions both at local and regional levels and also
provides financial and other support to such institutions. The year 2010-11 has been an
important year for the NHB as it had crossed Rs. 120 billion loan disbursements, of which
approximately 50 per cent was for rural housing, during the financial year. Since inception,
NHB has been supporting the housing finance companies and during the year 2010-11, over
50 such companies had a portfolio of over Rs. 1100 billion4. One of its flagship projects is the
Golden Jubilee Rural Housing Finance Scheme which aims at the rural households. The
scheme offers a platform for easier access to housing finance to enable an individual in the
rural area to either build a house or improve the existing house5. The initial success of the
scheme can be gauged from the fact that over 3 million dwelling units have been financed.
NHB is also playing a significant role in creating market infrastructure for housing finance and
has made efforts in plugging the demand supply gaps, particularly for the low and moderate
income households in urban and rural areas. It had led initiative in developing the secondary
mortgage market and the standards for securitisation market in the country. The Bank is also
leading the initiative for setting up a Government-sponsored Credit Guarantee Trust Fund for
low income housing in close collaboration with the Ministry of Housing, Govt of India, and for
setting up a Mortgage Guarantee Company in partnership with other International Financial
Institutions.
Government/Government bodies
The Government policies have remained geared towards alleviating poverty with a host of
direct intervention programmes. The early eighties was the period of shift in the policy
orientation from the exclusive focus on nutrition based approach towards poverty to cover
broader perspectives of providing affordable housing to all. The Scheme of Affordable
Housing in Partnership promotes various types of public-private partnerships - of the
government sector with the private sector, the cooperative sector, the financial services
sector, the state para-statals, urban local bodies, etc. It has the potential to provide a major
stimulus to economic activities through affordable housing for creation of employment,
especially for the construction workers and other urban poor who are likely to be amongst the
most vulnerable groups in during the economic downturns.
Government bodies can consider single window clearance mechanism for the purpose of
further simplifying the approval processes for low cost affordable housing along with
reconsideration of the taxation policies. The public agencies and the state and local
governments should work to bring efficiency in land market, approval processes, provision of
efficient infrastructure and e-governance viz. introducing electronic record for land and
bringing in more transparency in the record of land and houses, etc. It will add good value if
the financing agencies can also connect into these developments and together drive the
reforms at the state and local levels. In order to meet the enormous needs of the housing
sector, short cuts through the subsidy approach are no longer sustainable over the long
period. As subsidy based approach cannot be stretched beyond a point, a more viable and
sustainable strategy has to be evolved. There is, therefore, a need for having a market
oriented mechanism to meet the challenge of the affordable housing sector.
State Governments
In the entire process for creating an enabling environment for affordable housing, the role of
State Government is extremely critical. State Governments may contemplate forging
Public-Private Partnerships to ensure a fair return on investment to the private land
owners/developers through guided development and availability of serviced sites for
allotment to low income families at affordable prices. Incentives and provision of
infrastructure can induce private sector entrepreneurs to invest in housing including that for
the poor. It can consider measures to control the spiralling increase of land prices and curb
speculative activities for developing land and also check unregulated and environmentally
damaging land development activities. Another aspect which may be considered is the
promotion of high density housing in selected areas in cities through appropriate
amendments to zoning and land use regulations. This may obviate the necessity of costly
land acquisition and avoid high infrastructure costs. State Governments may also revisit the
current provision of tenancy rights and promote rental housing by creating a balance
between the interests of the landowner and the tenant. This will pave the way for supply of
rental housing at affordable rents and act as an incentive for people to build houses for
themselves and for others.
Reserve Bank of India
The supportive policy of the Reserve Bank of India and enabling fiscal regime has together
contributed to the growth and expansion in the housing market. As regulators of the banking
system, it is, however, important for the Reserve Bank of India to remain cautious against
imprudent practices for short term gains. The current focus of its regulations is to ensure
orderly growth of housing loan portfolios of banks. The policy orientation of the Reserve
Bank, simply put, is to ensure and promote inclusive growth without adversely impacting the
equilibrium of financial stability. Reserve Bank remains supportive of initiatives of the
stakeholders as long as the programmes of affordable houses for all do not lead to structural
damages to the financial eco-system.
Along with the Government, SEBI, Reserve Bank' s endeavors have been to develop a deep
and vibrant debt market including for mortgage securities in a calibrated manner so as to
ease financing pressures on the banks and also to provide an alternate avenue for raising
long term resources. Reserve Bank has permitted investments by banks in mortgage backed
securities subject to