CHAPTER 3. Refinance

Transcription

1 CHAPTER 3 Refinance 77

2 Concept Of Refinance Housing Finance by its nature is of huge magnitude and is generally of long term. Primary Housing Finance Institutions which are engaged in housing finance have ultimately limited resources and at some point of time these feel resource constraint because the repayment of loan and the payment of interest is spread over a long period of time and return by way of equated monthly installment is not of much amount so as to recoup the resources. In order to enable them to continue their lending operations to housing customers on continuing basis, refinance is provided by this apex housing finance institution, National Housing Bank, in sizeable proportion of their housing portfolio to provide liquidity. In this manner the Primary Lending Institutions are once again flush with funds and lending operations continue to progress. Thus, Refinance is a significant financial operation undertaken by National Housing Bank. Under scheme of refinancing, the primary lending institution can seek assistance from NHB against the housing finance portfolio it has with it. Refinancing is done as a percentage of total loaning. For example, if refinancing is done at the rate of 90 per cent, this means that against a loaning of Rs 100 crore by the primary lending institution, the apex organization can provide 78

3 Rs 90 crore as refinance facility. The collateral in possession of the primary lending institution becomes the collateral of the apex organization. Refinancing is beneficial to both the housing financing company as well as the refinancing agency. The later lends bulk of the resources in one business deal whereas the former is in a position to expand the volume of lending. It has to arrange only the margin finance. Further, the difference in the rate of interest between the amount charged by the ultimate borrowers and paid to the NHB becomes the profit of the primary lending institutions. It is indirect housing finance by National Housing Bank which enables Primary Lending Institutions to continue lending to housing sector on ongoing basis. Objective Of Refinance The objective of Refinancing by National Housing Bank to HFCs, is to convert the long term housing finance portfolio of HFCs into liquid funds for undertaking further lending operations. The objective of the scheme is to provide refinance assistance to Housing Finance Companies (HFCs) in respect of their direct 79

4 lending up to Rs.1 crore to individuals for purchase, construction, repair & up-gradation of housing unit. The financial assistance can be drawn by the HFCs in respect of loans already advanced by them as also towards their prospective disbursements. Eligibility Housing Finance Companies registered with National Housing Bank and fulfilling the following criteria will be eligible to avail refinance facility from the National Housing Bank Housing Finance Company should be registered with National Housing Bank to carry out housing finance activity in the country. Housing Finance Company should provide long-term finance for construction, purchase, repair, and up-gradation of dwelling units by home-seekers. Housing Finance Company should invest at least 75 per cent of capital employed by way of long term finance for housing. Housing Finance Company should have Net Owned Fund (NOF) of not less than Rs. 10 crore. 80

5 HFC should comply with the provisions of the National Housing Bank Act, 1987 and Housing Finance Companies (NHB) Directions, 2010.The Net Non Performing Assets (NNPA) of the HFC should not be more than 5 per cent of the Net Advances. NN Housing Finance Companies will have to attain the minimum stipulated rating to be eligible for financial assistance from NHB. For this purpose, NHB has developed an internal credit rating model to determine the eligibility for financial assistance for the housing finance companies. Terms Of Refinance The refinance can be repayable within a period of not less than 2 years and not exceeding 15 years. The housing finance companies have the option to choose the repayment period as per their requirement. Repayment of principal and payment of interest is on quarterly basis. The due dates of payment of interest and principal are informed to housing finance companies in the repayment schedule after each release of refinance. Prepayment Housing Finance Company, after availing of refinance from 81

6 National Housing Bank, may repay the whole or any part of the amount earlier than the due date by giving two months notice to NHB of its intention to effect such repayment before the due date. NHB will levy a prepayment charge as mentioned below, on such prepayments. TABLE 3.1 Prepayment levy Residual Maturity Less than 5 years 5 years and above Fixed Interest Rate 0.5% of amount to be prepaid 1% of amount to be prepaid Floating Interest Rate 0.5% of amount to be prepaid 0.5% of amount to be prepaid SOURCE: Annual Reports of National Housing Bank The prepayment levy, payable by housing finance companies to National Housing Bank, would be independent of the fact as to whether prepayment levy is being charged by HFCs from their borrowers or not. 82

7 Security From Individual Beneficiaries The housing finance company generally obtains mortgage of property as security for the loan advanced by them. Wherever it is not possible, security of adequate value in the form of Life Insurance policies, promissory notes, shares and debentures, or such other security, as housing finance company may deem appropriate can be accepted to fully secure the loan. Charge should be properly created in favour of Housing finance company. Loan agreement, which is entered into between the HFC and its borrowers, shall have a provision to the effect that the borrowers shall have no objection to the housing finance company creating a charge, mortgage or other interest in that security in favour of National Housing Bank. The credit risk of the primary loan is fully taken by the HFC and the refinance sought from NHB is repayable irrespective of the primary loan account remaining regular or otherwise. Security For Refinance Refinance from National Housing Bank is generally to be secured by charge on the book debts of the housing finance company. 83

8 Additional security such as charge on immovable or movable properties, guarantee of promoter etc. may be stipulated at National termined on case-to-case basis.if at any time NHB is of the opinion that the security provided by the HFC has become inadequate to cover the outstanding refinance, it has the right to ask the concerned housing finance company to cover such deficiency. Procedure Application For Refinance Refinance in a particular year is released on the basis of the limit sanctioned to the housing finance company for the year which runs from July to June. A housing finance company, desirous of availing refinance, should submit to NHB its annual projections for sanction of refinance limit. NHB, on the basis of business projections and all other issues relevant to credit exposure will fix the refinance limits. A housing finance company, applying for refinance for the first time, has to submit a) Brief write-up on the promoter's along with the annual report of previous two years. b) Balance sheet and profit-loss 84

9 account of the HFC for previous three years. c) Detail of housing loans sanctioned and disbursed during the previous three years. On the basis of fulfillment of all above requirement, the NHB can sanction the refinance limit to the concerned housing finance company. After completion of all formalities, the housing finance company can start drawing funds from NHB. The amount of refinance released during one month is generally restricted to a maximum ceiling of 20 per cent of the refinance limit. The housing finance company is required to indicate the option of repayment period and fixed/floating rate of interest. The housing finance company is required to make payments to NHB promptly on due dates, irrespective of whether or not the amount is actually recovered by it from the borrowers. HFCs, availing refinance from NHB, shall furnish a certificate every year, confirming that the refinance outstanding from NHB does not exceed the total outstanding housing loans, in respect of which refinance has been obtained. In the eventuality of the outstanding refinance due by HFC to NHB exceeding the aggregate of all outstanding housing loans in respect of which refinance has been 85

10 availed by the HFCs i.e. adverse balance, HFCs would be required to repay refinance to NHB to the extent of adverse balance. Loan accounts for which refinance has been taken from NHB should be distinctly identifiable from the records of the HFC and the list of all such accounts should be available with the HFCs and continue to be maintained in their records. In the case of adverse balance arising due to pre-closure of loans in normal operations of lending and accelerated repayments, the same would get automatically included while computing the adverse balance and must be repaid to NHB. Such repayments due to adverse balance will not attract any levy. Borrowings From Institutions Other Than NHB In case the housing finance company borrows funds from banks or financial institutions other than NHB, it has to inform NHB about the same giving particulars about the security offered for such 86

11 Loans Eligible For Refinance By NHB All housing loans covered under the scheme of refinance should be Standard Assets as per the Housing Finance Companies (NHB) Directions, 2010 and should be unencumbered. Flagging Of Loans Financed By NHB Housing finance companies will be required to properly identify all loans for which financial assistance is obtained from NHB and maintain a list of all such loans. Individual housing loans once sanction of NHB as long as they are in the books of HFC and they should be distinctly identifiable. Appraisal And Follow-Up Of Housing Loan The housing finance companies are required to have proper systems and procedures for appraisal and follow-up of housing loans. There should be proper post-disbursement supervision and follow-up of housing loans to ensure end-use of funds as also timely 87

12 and regular repayment of the loans. Continuance of refinance facility from NHB is be subject to maintenance of satisfactory recovery performance by the eligible housing finance companies from the beneficiaries under various categories. NHB reserves the right to recall the refinance in the event of diversion of the relative funds for purposes other than housing. Rate Of Interest On Refinance And Its Relation With Prime Lending Rate (PLR) Prime Lending Rate is determined by a financial institution taking into consideration the cost involved in raising funds, cost of operations, minimal risk involved and the basic minimum margin safety in commercial operations. This is what is chargeable to its best customer where the probability of default is virtually non existent. So, prime lending rate is the minimum viable rate of interest chargeable by any financial institution to its best customer. Rate of interest is further loaded to cover the various risks involved in financial operations but Prime Lending Rate is the minimal interest. The cost of funds and costs of operations also keep changing from time to time as per market conditions so also the rate 88

13 of interest charged by National Housing Bank to Primary Lending Institutions. Rate Of Interest Financial assistance under the Refinance scheme is provided either at fixed or floating rates of interest. The HFC would have the option to choose either floating or fixed interest rate depending on their requirement. The interest rate charged to HFC will be as prevailing on the date of disbursement and will depend on the internal credit rating assigned to it by NHB, slab of housing loans and repayment period sought under refinance. In case of refinance extended at fixed rates of interest, NHB has the option to revise the rates on outstanding loans on completion of 3 years. In the case of upward revision, housing finance companies will have the option to either continue with the outstanding balance on the revised rates or to prepay the same without any prepayment levy. However, in case of downward revision, if the HFC so desires, they would be allowed to prepay the amount only on payments of applicable prepayment levy. Refinance facility is provided by NHB under its different 89

14 schemes. These include Regular Scheme, Rural Housing Fund (RHF), Golden Jubilee Rural Housing Refinance Scheme (GJRHRS) and Special Refinance Fund (SRF). Rural Housing Fund The Rural Housing Fund was created in the Union Budget for the year operation in the rural housing sector by tapping the resources of Scheduled Commercial Banks to the extent of shortfall in their priority sector lending. The allocation for the year was Rs.2000 crore. Further the allocation for was also Rs.2000 crore. The allocation for was also Rs.2000 crore. A total amount of Rs crore has been received by the Bank under the Fund, and the Bank has deployed the full amount towards refinance for rural housing for the target groups. Most of the lending under the Rural Housing Fund has been for housing loans of less than 5 lakh which shows that the Fund has been utilized for its intended purpose. With the advent of the Rural Housing Fund at competitive rates, many institutions viz. Housing Finance Companies, Regional Rural Banks (RRBs) etc. have entered into the rural housing 90

15 landscape, thereby resulting in better geographical distribution and increased penetration of housing loans among the underprivileged segments of the society. Further, the success of RHF has also introduced a fair amount of understanding of the characteristics and contours of the rural housing finance market, enabling the various players to design better and more targeted products for the rural populace. Special Refinance Facility From Reserve Bank Of India Whereas NHB extends refinance facility to Primary Lending Institutions, it in turn avails refinance facility from Reserve Bank of India under RBI Act, It avails refinance facility to meet the short term liquidity requirements. A refinance facility of Rs.4000 crore was available to NHB till March The facility was fully utilized by NHB and the amount has since been repaid to RBI. Another special refinance facility of Rs crore was extended to NHB by RBI during and this was also available till March This amount has been fully utilized by NHB. Analyses Of The Growth Trend Of Refinancing National Housing Bank was established in 1988 and it is now more 91

16 than two decades old. It is providing finance to the primary lending institutions viz. Commercial Banks, Housing Finance Companies in the public and private sector, Co-operative Banks. National Housing Bank is providing finance by means of Refinancing, Equity Participation, Guarantee, Project Finance and Securitization. Refinance is the most significant financial product of the Bank. During the period covered under the current study, National Housing Bank has granted refinance as under:- TABLE 3.2 Trend Of Refinance Released (In Rupee Crores) Year Refinance % INCREASE over the last year SOURCE: Annual Reports of NHB 92

17 Graph 3.1A Trend Of Refinance Released Refinance

18 Graph 3.1B 200 % Increase Over The Last Year % INCREASE over the last year

19 A cursory glance on the figures itself show that National Housing Bank has risen from height to height year after year in providing refinance to the Primary Lending Institutions. During the period of study, as we notice from the above chart, there is per cent increase in the year over previous year from Rs.758 Crores to 842 Crores. Looking to the staggering figure of Rs Crores in the year it looks a very modest figure but it is very clear that credit cannot be created out of thin. It requires a base. National Housing Bank has been gaining strength and has been broadening its base. Except the years and , which have been tumultuous years, the refinance operations of the Bank have always shown strong and positive increase year after year. A y-o-y analyses shows that National Housing Bank has achieved growth of in over the year In the next financial year it has shown a growth of per cent. The Bank has shown a very modest increase of 1.68 per cent in the year over previous year. In the year the Bank has shown an impressive growth of per cent over In the next year it has shown a good performance and shown a growth rate of per cent. The year has witnessed a growth of per cent 95

20 over the last financial year, an achievement of the level of Rs.8062 Crores over Rs.3253 Crores in the year Bank has registered an all time high growth rate of per cent in the year during the period of this study. The refinance operations of the Bank have decelerated in the years and and shown a negative trend of refinance. It has registered negative growth rate (-) per cent and (-) 2.34 per cent in these years. Bank has registered an impressive growth rate of per cent during the year by providing refinance of the order of Rs.8587 Crores the highest ever during the period of this study. The upward trend has been maintained next year ( ) as well when the amount disbursed was Rs.10884; registering an increase of per cent over the year However, the disbursement under refinance felt to Rs crore meaning thereby a negative growth of per cent. The year was a year of achievement for refinancing operation. The amount of refinance jumped to Rs crore registering an increase of per cent over the previous year. This amount of refinance is the highest during the period of study. 96

21 Allocation Of Refinancing Facility Among Different Institutions National Housing Bank has been providing refinance facility to all the public and private sector institutions engaged in housing finance. Broadly all the Public and Private Sector Banks, Co-operative Sector Bank, Micro Finance institutions and Housing Finance Companies registered with it have been receiving the refinance facility. The institution wise analysis of refinance disbursement will help us to understand which category of institutions is actively participating in the scheme of refinance. Data are available for three categories namely Housing Finance Companies, Scheduled Commercial Banks and Co-operative Institutions. 97

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23 Graph 3.2 Institution Wise Refinance Disbursement HFC 8000 Bank Cooprative Institution 6000 Gujrat Earthquake Scheme 4000 Total

24 The table 3.3 explains the performance of Refinance window over the year to to different primary lending institutions. The institution wise deployment of the funds through Refinance window explains that banks are the major beneficiaries of the refinance facility. During the year , 72 per cent refinance facility was provided to the banks and remaining 28 per cent refinance facility was extended to housing finance companies. Similar trend has also been observed in the year , where 56 per cent refinance assistance was extended to banks and 41 per cent refinance was provided to HFCs. Remaining 3 per cent refinance facility was given to the cooperative sector institutions. The role of banks vis-à-vis HFCs is less in the year to Thereafter, banks have overtaken the HFCs till the year In the year , the banks lagged behind the cooperative sector and HFCs in availing refinance from NHB. The share of cooperative sector institutions stood at Rs crores which is highest one compared to any other year. Of the total refinance extended by NHB in , cooperative sector institutions grabbed 85 per cent share. Rest 14 per cent went to HFCs and only 1 per cent went to banks. The performance of the institutions participating in the 100

25 refinance programme is not smooth and even. In one year ( ) cooperative institutions grab 85 per cent of the total refinance facility where as in another year ( ), these are absent. Similarly is the case with the banks. The lack of consistency is not a healthy trend. During the year , refinance disbursements touched the highest ever figure of crore, registering an increase of more than 44 per cent over the disbursements of crore made in the year Out of the total disbursements, crore were refinance scheme viz. the Golden Jubilee Rural Housing Refinance Scheme (GJRHRS) and the Rural Housing Fund (RHF), together constituting per cent of the total disbursements. Golden Jubilee Rural Housing Refinance Scheme Refinance is also extended to banks and housing finance companies Housing Refinance Scheme. The data on number of dwelling units constructed under GJRHRS and amount released are given in the following table

26 Table 3.4 Golden Jubilee Rural Housing Finance Scheme Year Target Achievement Amount Disbursed N.A N.A N.A N.A Total Source: Annual Reports of National Housing Bank from different years 102

27 Graph 3.3A Golden Jubilee Rural Housing Finance Scheme Targets And Achievement Of Dwelling Units Target Achievement

28 Graph 3.3B Golden Jubilee Rural Housing Finance Scheme Amount Disbursed Amount Disbursed

29 The table given above explains the performance of Golden Jubilee Rural Housing Finance Scheme (GJRHFS), The scheme was Independence. As such, data are available since the beginning of the scheme. Under the scheme, target is fixed in terms of numbers of dwelling units to be constructed in a year. The data reveals that the targets have been stepped up progressively. In , 50,000 dwelling units were to be constructed under the scheme and slowly and steadily the targets have been raised. For example for the year , the target was fixed at 3,75,000 units. The target for the year also has been fixed at 3,75,000 units. Against the targets set, achievements can be analysed. The figure on the dwelling units constructed, show that if the achievements have fallen short of the targets in certain years, the gap are minor. During the first four years, the scheme has performed well as the achievements are greater than the targets. However during the next two years i.e and , the targets have not been achieved. Thereafter, during the next two years i.e and , one finds that achievements are more than the targets set. During the next three years, the performance has fallen short of the target. The year was the worst year for the scheme as only 74 per cent of the target was achieved. In the year , the achievement exceeded the targets whereas in the year , achievement fell short of the target. 105

30 The overall position of the scheme is that 94 per cent of the targets have been completed under the scheme. Against a target of dwelling units units were constructed. Coming to the amount disbursed under the scheme, it is observed that the amount disbursed under the scheme has progressively increased over the period under study except the year where it has fallen to Rs crore against Rs crore during the previous year, registering a fall of 4.9 per cent. The highest ever amount disbursed under the scheme was Rs in the year which was 50 per cent high compared to the previous year. Not only the increase in disbursement was significant, the increase in the number of dwelling units is also significant. During the year , units were constructed whereas in the year , units were constructed. This represents an increase of 50 per cent over the previous year. Hence year was the year of best performance of GJRHFS. Refinance Scheme For Victims Of Orissa Cyclone This refinance scheme was introduced in for scheduled commercial banks in respect of their lending to individuals for housing in cyclone affected areas in Orissa under a special 106

31 dispensation and Rs. 100 crore was earmarked (Rs. 75 crore under the General Fund and Rs. 25 crore under the Special Fund) for the purpose. Allocation under the General Fund as well as Special Fund was fully utilized in the extended period when the ceiling on loan amount to an individual borrower was increased from Rs. 30,000 to Rs. 60,000. Refinance For Affordable Housing Realizing the urgent need to cater to the requirements of the deprived sections of society, National Housing Bank has introduced a new Refinance Scheme for financing affordable housing. National Housing Bank under the Scheme is extending support to the housing activities with special focus on Tier II and Tier III cities through various intermediaries by way of refinance. Slum redevelopment in metros are also being covered under the Scheme in addition to industrial worker housing, working women hostels and old age homes, housing projects finance under the JNNURM or any other similar Central Government/State Government Scheme such as natural disaster affected housing. The Scheme incorporates certain key restrictions on unit cost, unit area, land price etc. to ensure that refinance is not used for middle and low income housing. 107

32 Special Scheme Of Refinancing For Housing In Tsunami Affected Areas In order to encourage construction of new houses/flats and major repairs of damaged houses in the areas affected by the Tsunami, National Housing Bank launched a refinance scheme to assist the victims in reconstruction and rehabilitation. Primary Lending Institution like House Finance Companies and Scheduled Commercial Bank availed funds from National Housing Bank under the scheme for loans sanctioned on or after January 01, 2005 to the victims of the Tsunami. Characteristic Features Of The Scheme: Banks and HFCs were eligible for the scheme. Refinance was available at concessional rate of interest of 5.00 per cent per annum. However it was made obligatory on the banks and housing finance companies that they cannot change interest at more than 6.50 percent from the ultimate borrower. Refinance repayable with in a period of not exceeding 15 years including the period of moratorium, if any. 108

33 The HFCs/Banks could extend a moratorium period of two years to the ultimate borrower on repayment of principal. A similar moratorium could be extended by NHB to the HFCs/Banks if same facility is being extended to the ultimate borrowers. Risk Mitigation Measures Adopted By National Housing Bank Financial Institutions are exposed to various risks. Normally the risk can be perceived as under: - Operational Risk With the introduction of the Liberalized Refinance Scheme (LRS) in March 2003, National Housing Bank has developed a system of internal credit rating for different categories of Primary Lending Institutions and also adopted the policy of risk based pricing and rating-linked exposure limits. The system was fine tuned by introducing granularity in the method used for assessing the Primary Lending Institutions in respect of risk and pricing of funds lent. 109

34 Credit Risk National Housing Bank has introduced off site surveillance of its clients. The clients are required to submit prescribed returns periodically. The System has been strengthened by revising and rationalizing the returns for various categories of Primary Lending Institutions. In case of a few categories of Primary Lending Institutions involving relative greater degrees of risk, the off-site system is supplemented by on-site scrutiny of underlying housing loan assets. The mechanism has helped in checking the financials of the clients as also maintaining quality of assets. Interest Rate Risk National Housing Bank is making refinance operations at Fixed Rate of Interest as well as Floating Rate of Interest. The cost of funds is changing from time to time as per conditions in the market. In case, finance is granted at fixed rates of interest and later the cost of funds goes high, the Bank is likely to suffer losses and this may jeopardize the viability of the institution. Therefore, the lending policies are framed keeping in view the interest of the institution. Capital Gains borrowing, are at fixed rates of interest. Therefore, the Bank is 110

35 making bulk of financing at fixed rates of the interest for flow of income with a large measure of certainty. This minimizes the interest rate risk. The floating rates are reviewed on a dynamic basis. The Bank has the option to reset the coupon rates after tenure of 3 years in respect of refinance released under fixed rate having tenure of more than 3 years. Asset Liability Mismatch Housing Finance Companies have borrowed for an average tenure of about 6 years with quarterly repayments, thereby bringing down the weighted average period of loan (WAPOL) to 3 years. Banks on the other had have generally borrowed for 3 year tenure with bullet repayment. Hence, the WAPOL for all the releases made during the year is around 3.06 years. Since the major source of funds for National Housing Bank has been its Capital Gains Bonds having 3 year maturity, the lending is in line with the incremental borrowings, Securitization A Step Towards Risk Dispersal The Indian housing finance market has grown significantly during the years covered by this study. Fiscal incentives for 111

36 investment in housing for households have been responsible for it. During the current Financial Year housing loan borrowers can avail an exemption limit of Rs under section 24A of Income Tax Act, If one had taken the housing loan before 1 March, 1999 the maximum limit of Rs is reduced to Rs Further, RBI has been liberal enough for treatment of housing finance as Priority Sector lending by Banks. These two are the main factors contributing to growth in this market. However, a large part of the industry portfolio has been acquired in the present low-interest rate scenario and during the period when economic conditions have been relatively stable. The key to further growth in the Indian housing finance market, as elsewhere in the world, is the ability of housing finance firms (including banks) to trade their portfolio. Securitization has been one of the most important risk-sharing arrangements in the housing finance market, the world over. It has been proved that securitization can help lower the cost of credit, broaden the pool of investors and borrowers and lessen the variability in availability of capital for the housing finance firms. Success in the development of the securitization market depends on the ability to understand the behavior of underlying mortgage assets under varied economic conditions for different market segments. The knowledge of the borrower, property and loan 112

37 characteristics is critical to understand the nature of risk associated with the packages of securitized assets. Towards this end, National Housing Bank conducted a study of the credit and prepayment characteristics for a sample of housing loan portfolios across different geographical markets. The objective was to identify relevant tools in respect of pricing of securitized assets and determine factor, which would contribute in the choice of credit enhancement instruments. In addition, the study was expected to facilitate product design, credit analysis processes and pricing decisions by housing finance institutions. The study has covered the Delay Risk, Default Risk and Prepayment Risk. It has also studied relationship between default rate and loan to cost ratio. The study findings shall be used for policy inputs for the development of housing finance market in India as well as for making strategic and operation choices by Housing Finance Companies and Banks in the market. It could also be used for making portfolio choices, risk based pricing decision, product design choices, design of risk management process and determining the amount of economic capital required for a given portfolio by the Primary Lending Institutions. 113

38 Acceptance Of Public Deposits By Housing Finance Companies- Minimum Investment Grade Rating Compulsory With effect from September 20, 2006, no housing finance company can accept or renew public deposits unless the housing finance company obtains a minimum investment grade rating for its fixed deposits from any one of the approved rating agencies like: CRISIL, ICRA Ltd, CARE & FITCH Ratings India Private Ltd. Creation Of Floating Charge All the housing finance companies, holding public deposits are required to create floating charge on the assets invested by them. This has been in order to protect the interest of depositors with HFC. Further the HFC which accepts or holds deposits from the public, are also required to create a floating charge on the statutory liquid assets maintained in terms of Sub-sections (1) and (2) of Section 29 B of the National Housing Bank Act, 1987 as may be prescribed by NHB from time to time. MINIMUM NET OWNED FUND (NOF) OF Rs.10 Crore National Housing Bank has specified the minimum Net Owned 114

39 Fund condition for HFCS. It has been raised from Rs.2 crore to Rs.10 crore with effect from June 18, Hence only financially sound companies will operate in the market. Control On Unauthorized Constructions Court of Delhi regarding unauthorized construction, Misuse of Properties and Encroachment on Public Land has issued certain direction for immediate compliance by Banks/Financial Institutions. This will minimize the risk of default. Information System While working towards all round development of the housing sector, NHB shares the concern of RBI on the issue of a price bubble and overheating in the housing finance market. The USA housing finance market has suffered a great loss on account of overheating of the property prices in USA and as a result of that the problem of subprime security arised. The Government of USA came to rescue of the banking system of USA. India has to take precaution that this does not happen in our country. Currently, due to lack of reliable information on the housing finance sector, it is difficult to undertake 115

40 an empirical analysis of the correct conditions in the housing market. Formation of sound and reliable data base of information pertaining to the housing finance sector could assist in developing policy choices in regard to the housing market. NHB has identified this as one of the priority areas for its developmental initiatives and has been working towards building a comprehensive information system which will collect information on various aspects from all players in the housing finance industry, process the same and share it for the benefit of the market players. Consumer Education & Protection Consumer education and protection is one of the key focus to be adopted by the HFCs apart from making investment grade rating mandatory for the deposit taking HFCs. As part of this promotion measure, NHB also addresses complaints received from individuals against HFCs. The complaints mainly pertain to deposits accepted by the HFCs and loans extended by them. Fraud Management Cell 116

41 information from HFCs regarding frauds committed on housing information from HFCs regarding frauds committed on housing loans. Towards this objective, the Bank regularly issued circulars indicating the causative factors and suggestive remedial action. All HFCs have been advised to take necessary safeguards and exercise adequate controls to avoid occurrence fraudulent transactions. Increase In Risk Weight Of HFCs The risk weight on exposure of Housing Finance companies to individual housing loan secured by mortgage of immovable property, which are classified as standard assets were modified in July, Housing loans to individuals upto Rs.20 lacs secured by Mortgage of immovable property, which are classified as standard assets will carry a risk weight of 50 and Housing Loans to individual above Rs.20 lacs secured by mortgage of immovable property, which are classified as standard assets will carry a risk weight of

42 Exposure To Capital Market And Crossholding Of Equity By HFCs With effect from November 30, 2007, NHB has issued directions to all the registered HFCs regarding their exposure to the Capital Market and also crossholding of equity by one HFC in another HFC. Conclusion Extending financial support through refinance facility is an important method of National Housing Bank to enhance the resources of housing finance institutions. Refinance facility is extended to primary lending institutions under Regular Scheme, Special Refinance Scheme, Rural Housing Fund (RHF) and Golden Jubilee Rural Housing Finance Scheme (GJRHFS). Over a period of time, the NHB has developed prudent norms which are followed by HFCs and Scheduled Commercial Banks to avail refinance facility from the NHB. The study reveals that HFCs and the banks have availed major share of refinance extended by NHB. The performance of banks and HFCs in the scheme is not consistent. In some of the years banks have performed well whereas in other years, the HFCs have done well. 118

43 The growth trend of the refinance shows encouraging results. The annual amount of refinance has grown at a fast speed. The amount of refinance in the year was Rs.1008 crores and this increased to Rs crore in , representing a more than tenfold increase. The National Housing Bank has evolved different risk mitigation measures over a period of time in order to ensure that the housing finance market grows on sound footing and the risk of fraud and failures are minimized. These measures are exhaustive and logical and in tune with the need of time and the impact of these measures are clearly visible on the housing finance market in India. One can be sure that sub- prime securities crisis as it happened in the US market, will not occur in India. National Housing Bank is taking conscious decisions to avoid multiple risks in lending operations not only at its own level but at the level of Primary Lending Institutions. National Housing Bank continues to have nil NPA position with 100 per cent collection efficiency owing to its pragmatic policies and improvements from time to time with changing scenario in the housing sector. 119