How do you make projects in low cost housing, a social necessity, also viable and attractive to large private companies? If cities sold land at cheap rates and then partnered with private entities, the results could be a win-winâ€”especially given NHBâ€™s eagerness to finance both the institutions as well as the dwellers. RV Verma, who took over last September as Chairman and Managing Director, National Housing Bank, a wholly owned subsidiary of RBI, in conversation with Shashidhar Nanjundaiah, explains.
How is NHB enabling refinancing of projects?
We have a window of project finance where we encourage or incentivise construction agencies mostly in the public housing agencies, i.e, the housing boards and the development authorities who have a clear role in providing or constructing for the low income and moderate income housing. They have a definite role and they should be restored that role. We have tried enough with the private sector, and discovered that it does not find the low cost housing segment attractive.
So you see this partnership almost like a viability gap funding (VGF) through subsidised land.
Yes, the land would be a component. We create an environment to promote such housing finance up to Rs 5 lakh that could result in a unit cost of about Rs 6.5 lakh. This is the kind of affordability level for the segment.
We have tried to promote a few projects in partnership with public agencies and private sector builders. Public agencies have moved away from construction, and we find a vacuum in that area. This would entail policy dialogues with the Ministry of Housing and, based on the National Housing Policy, to reconvert these public agencies from being mere facilitators to builders in social segments such as low cost housing. Instead of auctioning off public land to private builders, the public agencies should become partners in the project. For private parties, it becomes financially more viable since land is acquired at substantially cheaper than market rates. Combining the two types of agencies is like a typical SPV approach. When we tried this, the problem was in scaling up the project from a pilot or demo to a larger level.
How does NHB support urban local bodies (ULBs) in this endeavour?
Our bank provides funding for their projects to the extent of 100 per cent. They bring in their land and the project cost may also include acquisition of land.
Why have ULBs been pulling out of housing projects?
When their construction activity was reviewed, it was felt that they didnâ€™t have the professional skills that the professional private sector can bring in. While it was meant to be a reform measure to boost efficiency, a large part of the private funding and involvement has been unfortunately in the top end of the market.
Does NHB provide research, advisory and project management services?
We have a number of promotional measures such as the Residential Price Index (Residex), which we announce on a quarterly basis for 15 cities so far. Within these cities the locations are selected in a manner that it truly becomes a representative index for that city.
Such indices at the retail are normally fraught with distortions. Each lender would appraise the value according to perceptions. The Residex gives a more formal benchmark and a uniform benchmark across the lending industry.
Do you think that the real estate industry would benefit from this index if it was made more available to consumers?
The market is a major user of Residex and once we have captured data across more number of cities that can be used by the market including developers, property buyers, brokers, financiers and local government authorities including policymakers of stamp duty, etc. We expect Residex to bring in more transparency in the behaviour of the prices of residential units. With that a reformed benchmark will induce more stability and transparency in the real estate market. This should be of benefit to all concerned.
The real estate market is the most volatile in terms of pricing. Can your index take care of the fluctuations to a certain extent? Can you see that happening?
When there is no benchmark trend price, speculation becomes rife, leading to price distortion. In that way, the index brings in stability and being able to give that stable trend helps it to reduce speculation which in a way brings in more stable pricing. We expect that over a period of time, once we have established this for more number of cities and our database also becomes wider, it will become even more representative of the real market conditions.
Low cost housing comes also with long financingâ€”and therefore refinancingâ€”tenures. Does this create a problem?
Yes, our business model is refinancing and we live in a mortgage-averse country. If we do that we suffer asset liability mismatch, which we would like to hold our books for a while. So we are financing the housing finance companies and commercial banks against the individual loans but at the same time we also encourage and incentivise them to do more of low income housing and rural housing. Clearly our concern for loans to become more affordable to this segment there has to be long term loans which can go up to 15-20 years. We are exploring long term funding with the World Bank, ADB and other agencies. We are en route establishing a channel or access for long term funds to through the securitisation route.
How do you see the role of NHB in the market place as a regulator, or more of a facilitator like IIFCL?
I see our new roles to be mortgage guarantee, credit enhancement facility and securitisation. We have a regulatory role to play for the housing finance companies and issue various prudential and regulatory directions for their healthy growth. We have about 55 housing finance companies who have to obtain registration from us which is the main licence to operate or conduct a retail business of housing finance. NHBs role apart form refinancing is now emerging to be a catalyst of various processes in the housing finance market which would include introduction of risk mitigation such as mortgage guarantee. We are already working towards setting up a mortgage guarantee company together with IFC and ADB, and another technical partner who I canâ€™t name right now. So it is at a fairly advanced stage of mortgage guarantee company, a backstop for all lending in the industry by banks and housing finance companies. The purpose of the support it is going to provide is by being a default guarantee company. So it will enhance this scope of lending to all segments of the population by banks and the HFCs. It will also bring in more discipline and standardisation in the origination of loans by the institutions which will make the housing finance sector more robust and obtainable.
The other area where NHB is moving towards is as a credit enhancer. For example we can provide credit enhancement to the housing finance companyâ€™s bonds which are floating in the market today. So we can come in as credit enhancement for those bonds and scale them up to a AAA rated bond, which would mean cost saving for these institutions. So that is also an area which we would be exploring in this coming one year.
We have already been gradually migrating from our current format of refinance to a more market oriented and industry driven value which we will be bringing to the market. Our perception of the whole thing is that itâ€™s a market driven environment while the case for subsidy for lowest income households is still valid. We act as a nodal agency for a couple of government programmes in terms of disbursing the subsidy, designing the product, etc. We have acted in close partnership with the Ministry of Housing in designing and implementing interest subsidy schemes.
Do you think the deterrent in financing is the tenure?
No not really. It is the mechanics at the ground level, the branch managers are there, the EWS LIG certification by the authorities to be done, so it should be the chemistry at that level and not the mathematics. Mathematics is in support of it but we are trying to develop chemistry by engaging the banks, ULBs and state level nodal agencies.
Can the subsidies be invoked in the case of SPVs and in case of private participation?
No. For the private sector, housing finance companies can. They can access this and if the private sector housing finance companies which have been approved as an eligible institution to administer this, they are eligible to withdraw the subsidy and other is the 1 per cent interest subvention scheme. The five per cent is for EWC and LIG as defined by the central government for income up to Rs 10,000 per month.
What is the limit of the loan in that case?
There is no limit but there are indicative limits. The interest subsidy at 5 per cent is available only on Rs 1 lakh for a period of 15 or 20 years. We need to have the right mix of institutions and the products to be able to deliver that. Commercial banks have lot of depth and public institutions have depth and reach across the entire country and commercial banks are in the best position to do that. They have also been used to implement government sponsored programs. Rural housing is another area where we are already funding. There we are getting funds from the banking sector by way of short fall in the priority sector. This is the third year we have achieved about Rs 2,000 crore, and the absorption capacity is very high in the rural housing market.
What would be the absorption capacity?
Right now if you take in terms of funds for rural housing, it is less than 10 per cent of the total funding going to the housing society sector. Less than 10 per cent is going into the rural areas. The market is huge but there are certain downsides to that and that is in terms of land tackling. The capacity of the people, the borrowers, their income criteria, etc, are the certain concerns that the lending institutions have had. But we have been providing funds for them at a lower rate of interest because we are getting a lower rate of interest through this allocation. So that is an incentive for them to cover their risk. That is how we feel, that if we have low cost long term funds it can be used as an incentive for the LIs to serve that big market.
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