Time To Bank On Real Estate Sector For Funding
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Real estate financing in India has changed significantly over the past 50 years for both developers and customers. Real estate developers have seen the universe of funding agencies expanding from unorganised moneylenders to the entire gamut of funding sources, including loans from banks and housing finance institutions, private equity, public equity offerings, bonds, and debentures. Customers have seen the shift from own-resource funded home purchases to bank-funded mortgage finance. This shift has helped the real estate sector match the fast-growing customer demand on one hand, and has boosted the financial flexibility of developers to provide adequate real estate supply on the other.
Back in the 1960s, the real estate sector was largely unorganised and was perceived as a speculative and risky segment. Developers were funded mainly by moneylenders, who charged exorbitantly high interest rates of above 36 per cent. Customers largely funded home purchases through household savings, loans from friends and relatives, sale of property, ornaments, and subsidised housing loans extended by some private and public-sector employers. The banks did not provide mortgage finance to the retail customers until the late 1970s. In the 1970s, two key institutions were set up - the public-sector housing company, the Housing and Urban Development Corporation, in 1970, and the private sector housing finance company, Housing Development Finance Corporation, in 1977.
In the late 1980s, the Government of India (GoI) started recognizing the integral role of housing in the overall economic development of the country and undertook various policy measures to enhance the financing options of the sector. In 1988, the National Housing Bank (NHB) was set up to channel resources to housing finance. In the same year, GoI introduced the draft National Housing Policy, which was later adopted by the Parliament in 1994. Also, in the late 1980s, the government directed insurance companies, commercial banks, provident funds, the Unit Trust of India, and other agencies to invest part of their annual incremental resources in housing. The Reserve Bank of India guidelines of 1989 required commercial banks to set aside at least 1.5 percent of their incremental deposits for housing finance.
During 1980s and 1990s, housing finance institutions (HFIs) emerged as the key lenders in the real estate sector. The interest rates for loans closely followed the competitive activity on the housing financing front. While HFIs did not face significant competition from banks, interest rates remained highly stable and unchanged until the early 1990s; this was also due to the stability of the sources, namely insurance and NHB funds.
Further, interest rates continued to be regulated by NHB until as late as 1994. Even when HFIs were finally allowed to charge market linked rates in 1994, housing loans continued to be offered at fixed interest rates and any change in the cost of the deposits of HFIs was reflected in only new loans. The maximum tenure of home loans also remained under 15 years, as customer appetite for high tenure loans was also low. The fixed-interest-rate loans resulted in asset-liability mismatch for HFIs. This, along with competition from banks, led to the emergence of variable interest-rate home loans. Commercial banks started posing serious competition to HFIs 2001 onwards, and overtook HFI lending volumes in 2002-03. Bank loans for real estate developers increased sharply in between 2004-05 and 2009-10.
In 2002, the GoI permitted 100-per cent foreign direct investment in housing through integrated township development. However, this did not have the desired effect, as stringent conditions continued to restrict the flow of FDI in the real estate sector. Accordingly, to overcome these constraints, in 2005, GoI allowed automatic approval of FDI in real estate, subject to certain conditions related to minimum development area, minimum investment options, and timelines for the completion of projects.
content ET realty 21/05/2010
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Hi I am Ravi Chauhan I am working in (Bhardwaj Buildtech Pvt Ltd) Company in Delh
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