Panel 5: The Politics and Economics of Land and Housing (March 24, 2011) R. V. Verma National Housing Bank India The 21 st Century Indian City -Developing an Agenda for Urbanization in India March 23-25, 2011

2 Steady growth Served by specialised HFCs & Commercial Banks - synergies Proactive and Risk based Regulation Conservative lending practices; Originate to hold NPAs well contained Shift from high-end market to Affordable housing Market segmentation – diversified risk Broad based stakeholding – induces stability Indian Mortgage Market

Fiscal and Credit Policy Support Financial Market Housing Market Affordability Banks Financial Sector Capital Market Real Sector Public Agencies Private Developers MFIs Housing Finance Market 3 HFCs Land & Construction Infrastructure Informal Sector NHB

4 Outstanding Housing Loans

5 Trends in Housing Finance Disbursals (INR in billion)

Housing Loans outstanding 7.9% of GDP Supportive Regulatory/Fiscal Policies Financial Deepening Supply Responses: Demand Driven Main beneficiaries - salaried class, professionals and tax payers Challenge for Low Income Housing – “Accessibility” and “Affordability” 6 Trends in Housing Finance

7 Financial Sector and Capital Markets - Development Interest rates deregulation Growing Disintermediation Shift towards Market Oriented Resource Mobilisaiton Level Playing Environment Market Determined Cost Bearing on  Affordability  Availability  Accessibility Financial Environment

Rapid growth in housing sector has bypassed Low- Income Households Demand Identification Risk Perception Price Rise, Interest Rates - Impact on Low Income Housing Market/Subsidy based Approach 8 Issues in Low Income Housing

Limited access to housing credits Cannot contract debts on terms of the financial market Unstable income and unstable cash flows High risk & high cost - to - service customers Role of Guarantee/Risk Fund Role of Government & Financing Institutions in Market Environment Leveraging effect of Subsidy 9 Issues in Financing

Competing Demand on Land and Finance Land supply is constrained:  Land availability  Land use rules Efficient use of Land Title and Tenure Finance Flow Constrained  Stability  Growth  Risk Perception Need for ‘Integrated Approach ’ 10 Supply Constraints

Real Sector Land Supply Cost of Land Land market functioning Infrastructure provision Construction & Delivery Role of Public & Private Sector Role of Incentives Subsidized Housing Credit Subsidized House Prices Financial Sector Project Finance Individual Loans Supply of Funds Cost of Funds Whether market based solution? 11 Affordability Issues

Supply Side Land Acquisition Infrastructure Provision Sale of Land Housing Construction Housing Sale Role of Public Agencies/ Developers Credit Delivery Demand Side Purchase Price Income Level Affordability Loan eligibility Subsidy component Risk Mitigation Role of NGOs/MFIs Demand Aggregation Ensuring access to housing with infrastructure at affordable prices 12 In Other Words

Formal sector accounts for only 25% of the total investments in housing; skewed distribution of credit Affordability and security; perceived higher risk Financial assistance through informal sector at nascent stage Subsidized housing programmes: limitations Targeting and sustainability of such programmes 13 Challenges

Market’s limitations / Subsidy Limitation Private Capital and Public Objective Formal & informal sectors compartmentalized Demand aggregation, demand registration, intermediation and risk mitigation Incentives for Savings Policy Reforms 14 Challenges

Not enough supply at lower prices. Impact of lowering prices on the stock of housing, the flow of housing and housing finance Price – Supply relationship. Profit on Value or Volume Profitability to excite the suppliers/builders. Price/cost structure Demand sensitive to price but supply not forthcoming Measures to convert the investor’s market into consumer’s market 15 Where is the Disconnect?

Partnership Approach : Public/Private/Community Innovative instruments for benefit of All Incentives for Low Income Housing Credit Demand led Incentives for Low Income Housing Construction 16 Search for Synergies

Central Government State/Local Governments Financial Institutions PUBLIC PRIVATE Partnership Real Sector Financial Sector Formal Sector Informal Sector Facilitator & Enabler Policy & Programmes Policy & Programmes Instns & Products Affordable Housing for All and Financial Inclusion –Mutually Consistent Themes 17 Sector Profile – Wide Stakeholding

18 Government Support  Liquidity  Pricing  Risk Mitigation  Targeting - Low Income Housing Guarantee Fund / Subsidy  Subsidy support to EWS/LIG housing  Leverage institutional finance Institutional Support

GOVERNMENT INTERVENTION The Government could consider enabling legal and regulatory reforms and create an enabling environment  through efficient functioning of the land market  Streamlining of all approval processes  provision of efficient infrastructure  e-governance viz. introducing electronic record for land and bringing in more transparency in the record of land and houses 19 Policy Issues

20 Specialized Institutions vs. Universal Institutions Augmenting funds for the sector Resource Mobilization & Deployment Facilitating the growth of Secondary market Lending Discipline & Quality of Assets Tapping Overseas Market – Lendings & Investments Growth of Housing Finance Sector

21 Housing Policy at National & Regional level Integrated with Financial Sector Fiscal & Financial Sector Policy Institution-Building & Product Innovation (Supply & Demand Side) Deregulation with closer Supervision (Finance & Construction Sector ) Flow of Funds & Efficient Housing Market Policy Reforms

22 Identify subsidy-based and market-based segments and nature of interventions Complementarities Ensure adequate and sustained funding for both segments Ensure adequate supply of land and housing for both segments Market-based approach and state/local level policy interventions Market Segments

De-risk the segment through suitable risk mitigants both in the financial segment and the real sector segment (demand and supply side) Develop a role for the government in low income housing, consistent with the market orientation of the rest of the segments (without conflicting) Develop securitisation for funding Revisit the fiscal and credit regime to ensure that housing gets its fair share of financing from the system Develop policies so that housing is able to compete fairly with other sectors for funds 23 Policy Prescriptions

24 State Govt./ Builders Banks/ HFCs/ MFIs Borrowers Enabling Fiscal and Credit Policy Enabling Land Policy for Construction Subsidy/ Guarantee Fund/ Credit Enhancement Land Tenure First / Second Loss Facility SPV Project Individual Loans Construction Finance Specialized Funding Agency Institutional Stakeholders

No Broad-brush Approach Need for Segmented Intervention Role of State Governments & Public Agencies Supportive Fiscal & Credit Policy Market/Subsidy based Approach Developing innovative products and institutional mechanism 25 Summing Up

Identify land for construction Liberalize construction finance for low income housing Project approach and economies of scale Price determination – a critical consideration Develop mechanism for Demand Registration Tap Savings potential – building borrowers’ equity Actively involve supply side agencies, private and public 26 Summing Up

Widening stakeholders’ base Broadening Institutional infrastructure Securitisation through Government support Risk Mitigation Vehicle Funding Source and Delivery Channels Construction and Finance Delivery 27 Going Forward

28 Affordable House Price Affordable Credit State Govt./Municipal Bodies to provide land and infrastructure Public/Private builders to construct Pricing & Credit critical Credit Risk Mitigation Credit Guarantee Fund INCLUSIVE GROWTH WITH STABILITY Conclusion

Thank You