Workshop on Housing Finance, Mongolia Experience with Low Income Housing – Pro Poor Housing Finance Initiatives Workshop on Housing Finance, Mongolia June 28, 2011

Housing: Tool for Social & Financial Inclusion Housing not only serves as a place of shelter but a platform through which a plethora of essential utilities and services could be accessed. Housing has a direct impact on an individual’s employment and income generating capabilities. Impact is in terms of improved habitat, living, educational, social and cultural standards leading to human capital formation and boosting productivity. Improved productivity leads to enhanced income, saving and repayment potentials on sustainable lines.

Housing Deficiency – Recent Trends Estimated Housing Shortage during 2007-12 Urban Areas 26.53 million units (24.71 million units in beginning of 2007) Rural Areas 47.43 million units Total (All India) 73.96 million units In Urban Areas, more than 99% of the total housing shortage i.e. 24.71 million units (beginning of 2007) pertains to EWS/LIG households. (As per MH&UPA, GOI) In Rural Areas, more than 90% of the total housing shortage i.e. 47.43 million units pertain to BPL Households. (As per Working Group Report on Rural Housing, MORD, GOI) Average Per annum Funds Requirements during 2007-12 = INR 1,20,00 crores Buoyant growth of India’s housing finance sector (CAGR of 21% during 2003-11) has not been inclusive from the perspective of the poor/weaker sections. Poor/slum dwellers lack access to institutional sources of finance. Depend on informal sources which are inadequate and expensive. Growing population and increasing urbanization trends have exacerbated pressure on available land resources and demand for housing. Need to develop a new financial structure as also Policy and Regulatory Framework for the provision of Affordable Housing on sustainable lines to the poor/EWS.

Housing Finance Market Financial Market NHB HFCs Banks MFIs Fiscal and Credit Policy Support Capital Market Financial Sector Informal Sector Affordability Real Sector Housing Market Land & Construction Infrastructure Public Agencies Private Developers 4 4

Banks and HFCs – Performance Indicators Housing Finance Companies Outstanding housing loans of HFCs at the end of March, 2010, registering a growth of 20.79 per cent year-on-year. Rural lending has increased from 13.87% during 2007-08 to 16.25% during 2009-10. Housing loans above INR 1 million accounted for 76.66 per cent of the total housing loans disbursed during 2009-10. Scheduled Commercial Banks Outstanding housing loans of Scheduled Commercial Banks growing at approximately 20 per cent on a year-on-year basis. As at end of March, 2009, a majority of bank lending towards housing (around 67 per cent in terms of number of a/c’s) was in the credit category of Rs. 25,000 to Rs. 5 lakhs. Share of bank lending towards housing in rural areas has come down from 10.27 per cent in March 2005 to 7.13 per cent in March 2009.

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

Issues in Low Income Financing Cannot contract debts on terms of the financial market Unstable income and cash flows High risk & high cost-to-service customers Need for long-term and low cost funds Role of Government & Financing Institutions in Market Environment Role of NGOs/MFIs as Intermediaries Role of Multi lateral Institutions

Affordability Concerns Real Sector Issues Land supply Cost of land Infrastructure provision Construction & Delivery Construction agencies including Public Agencies Financial Sector Issues Trends in financial market Supply of funds Cost of funds Project finance Individual loans – eligibility Lending institutions and role of NGOs/MFIs

Issues in Pro-Poor Housing Finance Supply-side constraints: Inadequate supply of dwelling units under EWS/LIG schemes of the Government. Virtually no supply/initiatives from private developers. Affordability gap: There is a significant gap between borrower repayment capacity vis-à-vis the price of the dwelling unit. Limited access of the poor to sources of institutional funding. Apprehension of loan delinquency have made institutional lenders wary of lending to the poor/weaker sections.

Government Initiatives Initial adoption of a two-pronged approach to pro-poor housing development comprising of (i) sites and services program and (ii) permanent housing program. Under sites and services program, basic infrastructure facilities like drinking water, internal roads, drainage, etc. were provided to develop layouts and also help the beneficiaries by providing construction assistance for building shelters. Provision of housing and housing finance at subsidized interest rate. Special schemes for the EWS/LIG segments introduced in each of the five year plans. National Housing and Habitat Policy 2007 focus on EWS/LIG segments. Emphasis on Public Private Partnership focusing on housing for poor/EWS. Policies and Task forces for Affordable Housing.

Policies & Measures National Urban Housing & Habitat Policy (NUHHP), 2007 Implemented by Ministry of Housing and Urban Poverty Alleviation, it is focused on resolving habitat related issues through a regional planning approach. “Affordable Housing for All” on Sustainable lines. Facilitating accessibility of land for housing to Poor/EWS/LIG through earmarking and subsidization. Encouraging larger flow of funds for housing to poor/EWS/LIG through fiscal concessions. Encourage formulation and implementation of UHHPs by the States focusing on poor/EWS/LIG housing and encourage appropriate amendments in State/Municipal laws.

Policies & Measures Bharat Nirman Programme 5 lakh houses to be built in rural areas per year. Rural infrastructure to be developed. Indira Awas Yojana Cash subsidy scheme for rural BPL families. Funding by Centre and State in the ratio of 75:25. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) Integrated housing and slum development programme. Basic Services to the urban poor. Two Million Housing Programme Finance for 20 lakh additional houses. 13 lakh units to be financed in rural areas and 7 lakh in urban areas per year. Rajiv Awas Yojana Slum eradication program involving accordance of title rights to slum dwellers. Centre initiative with support from states. Interest Subsidy Scheme for housing the Urban Poor The Scheme provides for interest subsidy of five per cent per annum on the loan amount for the economically weaker section and lower income group in the urban areas for acquisition/construction of houses

Focus on Affordable Housing Realizing the magnitude of housing shortage and the importance of housing in stimulating economic growth, the Govt. and RBI are directing their focus towards affordable housing and financial inclusion aimed at the EWS/LIG segments. National Urban Housing and Habitat Policy was announced in the year 2007 with the initial corpus from the Government, to serve the underserved segments. Launch of the Affordable Housing in Partnership Scheme under the Jawaharlal Nehru National Urban Renewal Mission. To strengthen the recovery mechanism, the SARFAESI Act, 2002 was enacted and Housing Finance Institutions included in the eligible list of institutions. Foreign Direct Investments (FDIs) allowed up to 100 percent under the automatic route in townships, built-up infrastructure and construction development projects to catalyze investment in a vital infrastructural sector of the economy. Launch of the Interest Subsidy Scheme for Housing the Urban Poor (ISHUP) by the Government of India for the EWS and LIG segments.

Affordable Housing Affordable housing is a combination of the following three elements; Affordable Land and infrastructure Affordable building design, technology, materials and labour etc. Affordable housing finance “Affordability” A relative term Depends on an individual’s income/capacity to ‘afford’ the above elements In India, however, the term ‘affordable housing’ is often confused with low income housing, which is a different concept. ‘Affordable Housing’ does not necessarily translate into poor/low quality housing.

Affordable Housing The NUHHP, 2007 does not define “affordability” with respect to housing. The Government had set up a task force to look into various aspects of affordable housing. According to the Report of the Task Force, affordability may be defined as follows: Parameter EWS/LIG MIG Size 300 – 600 sq ft carpet area Not exceeding 1,200 sq ft carpet area Cost Not exceeding 4 times household gross annual income Not exceeding 5 times EMI/Rent Not exceeding 30% of gross monthly income Not exceeding 40% of

Recommendations of Task Force Affordable land Simplification of land approval procedures for development and conversion. All Land related information to be put in the public domain. Affordable Technology Need to encourage the innovation and implementation of cost effective housing materials/technology through subsidy/incentives. The concept of core housing needs to be considered in smaller towns as it is cost-effective. Affordable Housing Finance Allocation of additional budgetary resources. Incentivizing investment flows into the housing sector. Need for creating a resource pool.

Challenges & Key Issues Developing innovative financial instruments for increasing supply of affordable housing finance to Economically Weaker Sections (EWS) and Low Income Groups (LIG). Examining the framework of Regional Planning and Master Planning with a view to enhance the supply of developed land and recommend legislative measures for accelerating the supply of housing units to the urban poor. Formulation of measures for the promotion of low cost building technologies and materials for bringing down housing costs. Formulation of policies for increasing the supply of rental housing stock. Need for an integrated strategy for in-situ slum up-gradation for improving the quality of habitat with the provision of income generating options.

ROLE OF NHB

Initiatives of NHB 100% refinance support to scheduled commercial banks, HFCs and co-operative sector institutions. Launch of special scheme for the poor such as the Refinance Scheme for Top-Up Loan to beneficiaries under Indira Awas Yojana. Launch of Productive Housing in Rural Areas (PHIRA). Announcement of equity support guidelines for setting up HFCs catering to the LIG/EWS segments. Project finance assistance to public agencies, public-private partnerships joint ventures, NGOs, MFIs etc. Special Funds & Schemes – Slum Improvement, Rural Housing Fund, Golden Jubilee Rural Housing Finance Scheme Flow of Funds into the Construction Industry (Affordable Housing): The scheme proposes the Refinance of Construction (project) Finance for Affordable Housing to the Primary Lending Institutions (PLIs) with special focus on Tier II and Tier III cities through various intermediaries. Catalyze market based institutional finance for the low and moderate income households.

NHB’s Strategy for Financial Inclusion CUSTOMIZED FINANCIAL PRODUCT INTERVENTION: RURAL HOUSING: Supplementing Government Schemes Productive Housing in Rural Areas Financing SHGs - Partnership Approach - NGOs/MFIs/Sec.25 Rural Housing Development Fund URBAN HOUSING: Supplementing Govt. Schemes e.g. JNNURM Financing SHGs – Partnership Approach - NGOs/MFIs/Sec.25 Slum Redevelopment and Up-gradation Integrated Township Development Projects (PPP projects)

Housing Microfinance : NHB’s ROLE Focus – Low and Moderate Income Housing Micro Finance (HMF) Integrated Habitat Approach Productive, Income Generating Housing Savings-induced Housing Incremental Housing Water and Sanitation, Women oriented Partnership approach – MFIs, Community Based Institutions Finance, Co-finance, Capacity building, Portfolio Securitization, Equity support to Rural HFCs 21

HMF: Risks and Mitigants Affordability of Borrowers Viability of MFIs Limited access to medium and long term funds Insecure land tenure Requirement of high element of savings Difficulty in obtaining Group Guarantee Mitigants: Proper selection of clients – Seasoned clients Flexible funding mechanisms Insistence on Standard Corporate Governance of MFIs Need for co-ordination between formal credit institutions to mitigate geographical concentration risks Capacity building – Training, Research and Development Use of information technology & Micro insurance

NHB’s Initiative NHB has experience in HMF on pan India basis. Leading Micro Finance institutions across the country are partnering with NHB for rolling out HMF programmes for their members. Financial support is provided on self sustainable lines. Composite loan products are being promoted to improve the viability of the programme by helping in increasing income of beneficiary. Separate Water and Sanitation component in the housing has been included to improve penetration of sanitation facilities. 23

NHB’s Partnership with UN Habitat NHB and UN Habitat have signed Agreement of Cooperation for collaborating in the field of water and sanitation in India. Delivery of credit to targeted segments at relatively low interest rates for water and sanitation facilities is envisaged through the Micro Finance Institutions and Urban local Bodies. Typical HMF loan under this programme to have two parts Housing loan for construction / repairs / upgradation / incremental housing (at competitive rates) - with NHB funds Loan for water and sanitation facilities (at subsidized rates) - with UN Habitat support 24

NHB’s FINANCIAL ASSISTANCE TO HMF (Rs. in Crore) Sanctions Disbursements Houses Rural 40.35 28.41 13337 Urban 52.37 12.93 10918 Total 92.72 41.34 24255 Madurai, TN Mumbai, Maha Warangal, AP 25

Market Infrastructure NHB’s MARKET DEVELOPMENT ENDEAVOURS TOWARDS CREATION OF APPROPRIATE FINANCIAL ARCHITECTURE Risk Mitigation Mortgage Credit Guarantee Title Indemnity Credit Guarantee Fund Securitization: Creation of Secondary Mortgage Market Liquidity and Credit Enhancement Other Measures Capacity building – Training, Research and Development A Specialized HMF Corporation Equity Support Facilitating Regulations 26

NHB - Monitor Group Study on Low Income Urban Housing Housing situation for lower income segment in urban India is quite poor. Initial data from pilot projects reveals that it may be commercially viable to build housing for a large number of households ~20 million households in the Rs 5,000-Rs 11,000 household income range. The pilot projects were aimed to showcase and test the new idea. Until June 2009, three projects and close to 5,000 units have been launched in Ahmedabad and Mumbai. The units were priced between Rs 3 lakh and 8 lakh in sizes ranging from 231 square feet carpet area to ~ 400 sq ft carpet area. All three projects launched were very well received. The successful pilots have also spurred the interest of players from outside the real estate industry including an entrepreneur with a proven track record of running successful business ventures. As new players emerge in low income housing segment, the NHB continues to play an important role in promoting market based solution for the low income housing.

POLICIES & STRATEGIES FOR PRO-POOR HOUSING

For Governments Transparency in identification of beneficiaries under Govt. sponsored Schemes. Land be provided by Govt. free of cost/at affordable rates . Complete waiver of stamp duties/registration charges on plot/house/flats for EWS/LIG sections. Restriction on resale/transfer of Land/House/Flat allotted to Poor/EWS for at least 10 years. Customized housing cum Saving linked/insurance linked/income generating loan products be introduced.

For Institutions Regulators, Apex Housing Banks Setting up of a Risk Fund to cover housing loans to be given to Poor/EWS Premium on such risk covers be borne by the Govt. National Shelter Fund be set up for providing lesser cost refinances to FIs for such loans. Risk Weight on housing loans to poor/EWS should carry lesser weight. The time limit for recognizing such loans as NPAs should be increased. Fixing of sub-targets within the ceiling of priority sector lending for poor/EWS.

For Institutions Public Agencies Financial Institutions Public Agencies should be strengthened and encouraged to acquire land and build houses/flats for Poor/EWS . Financial Institutions Income from housing loan financed to poor/EWS be exempt from income tax and/or FIs be allowed to tap funds from multinational agencies Risk Mitigants be introduced to cover smaller loans without any cost to FIs

For Institutions Public Private Partnerships/Builders Encouraging housing projects with “High Volume –Low Margin” concept for poor/EWS. Conversion/Development charges or any other cess/charges levied by Govt. be waived for such projects. Additional FSI equal to Poor/EWS housing projects be allowed in other housing projects. No VAT/taxes on the building material used for Poor/EWS housing projects.

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