Housing finance must be part of India's next economic reforms agenda

The next phase of India’s economic growth may not come from factories or farms alone but from homes. Almost 40 per cent of the workforce is in agriculture, contributing 18 per cent to gross domestic product (GDP). Housing accounts for 18 per cent of employment, making it the second-largest generator of jobs. It has deep linkages with more than 250 ancillary industries, creating powerful multiplier effects. Every investment in a housing unit generates 1.54 direct and indirect jobs and 4.05 induced jobs — much higher than employment multipliers in agriculture (0.8 and 1.2). 

Yet, housing has not got policy and credit attention commensurate with its potential. 

India’s six largest cities contribute nearly half to housing and mortgage volumes but lenders with scale shy away from deeper geographies. Non-banking financial companies (NBFCs) should step in but the odds are stacked against them. This engine needs to be kick-started by providing a level playing field to larger players. They need to keep a 100 per cent risk weighting on a relatively safe asset class, versus 35 per cent for banks and housing finance companies (HFCs). National Housing Bank refinance and government benefits are also not available to them. Mortgage guarantee master directions exclude NBFCs to avail of risk mitigation benefits via guarantees. Each of these needs to be revisited, at least for upper and middle-layer NBFCs. Currently, 15 NBFCs have a balance-sheet size of greater than ₹50,000 crore each. 

The government’s efforts for affordable housing are commendable but its enthusiasm is not matched by state-run banks. The average home loan ticket size of such lenders is more than ₹30 lakh. Private banks have attempted forays into affordable housing but with little success. This is because the cost and effort involved in legal due diligence and property valuations is substantial. As many as 9.4 million people are affected by land disputes and projects worth nearly ₹26 trillion are stuck due to unclear titles. Digitisation of land records requires the same urgency and attention. Land records need to be digitised and integrated with Geographic Information System mapping and Unique Land Parcel Integration. 

Prohibitive land prices in cities are pushing housing demand to peri-urban areas and zones earmarked for agriculture. Development occurs ahead of formal rezoning and infrastructure development, leading to construction activity that may not conform to town planning regulations in entirety. As a result, credit flow is tightened as lenders tend to price higher for the risk or avoid such asset categories altogether. 

Lenders also need to do their bit in order to drive housing growth. The average loan-to-value (LTV) ratio is a mere 65 per cent, compelling homebuyers to rely on other expensive borrowing sources for interiors and registration. In a growing economy, the average LTV should be 80 per cent or more. The regulator demonstrated intent by permitting 90 per cent LTV for loans up to ₹30 lakh. Despite this, less than 8 per cent of loan originations have an LTV greater than 80 per cent. The average homebuyer age has, therefore, stagnated at 38-39 for several years. 

Credit bureaus play an important role in making the financial services ecosystem more responsible. Curiously, even in a relatively safe asset class like mortgages, more than 75 per cent of lending is still to “prime” borrowers (bureau scores of 730 and above). The likelihood of a “near-prime” borrower (bureau score 650-700) getting a loan approval is just 40 per cent.

Housing and mortgages continue to outpace GDP growth rates. However, housing finance to GDP ratio at 11-12 per cent is much lower than comparable economies. A few high-impact measures can catapult this to 20 per cent in a short time-span. If India is serious about inclusive, job-rich growth, housing finance reform must move to the centre of the economic agenda.

 

The writer is MD & CEO, India Mortgage Guarantee Corporation. This column has been edited for space