Housing Finance

The Indian Housing Finance industry started off a being solely a government undertaking
providing service during the 1970s and has since progressed into to a very competitive sector
with private players playing a major role in the sector.
The housing finance revolution in India can be divided into five distinct phases:
Phase I Before 1970 Government Domination
Phase II 1970 1980 HUDCO and HDFC establishes
Phase III 1980 1990 Establishment of NHB
Phase IV 1990 2000 Liberalization of Interest Rate
Phase V 2000 to present High Growth
Phase I Before 1970 Government Domination
Prior to 1970, the government was the sole provider of any house building support. It
implemented various schemes for public housing through state housing boards, which
allocated land and houses to individuals based on the principles of social equity.
Phase II 1970 1980 HUDCO and HDFC established
Development The second phase starts with the establishment of the public housing company,
Housing and Urban Development Corporation (HUDCO). Its mandate was to improve the
housing conditions of the low income groups (LIG) and the economically weaker sections
(EWS) of society, by providing long-term finance for house construction and related projects.
It introduced ceiling costs and revised financing pattern where in a differential interest rates
regime corresponding to various income groups like EWS, LIG, MIG and HIG was adopted.
Cooperative housing was introduced by providing financial assistance to co-operative
societies. It also started funding urban development schemes, for instance water supply/urban
infrastructure schemes were financed at 8.5% with 12 years repayment period.
Impact- The differential interest rates regimes provided economically disadvantaged sections
with a suitable mechanism to get funds to build houses. Penetration of the housing finance

schemes increased as a result. The urban development schemes also got an impetus with the
availability of funds for use.
Development Another important private player, Housing Development Finance Company (HDFC) was
established in 1977.
Impact- HDFC pioneered in individual lending, based on market principles. It serviced retail
customers and provided competitive interest rates for various housing schemes. As it
expanded across India, it brought the middle income group under the umbrella of housing
schemes as attractive terms were offered on the loans.
Phase III 1980 1990 Establishment of NHB
Development The third phase covers the decade of 1980s, which is marked by the establishment of the
countrys housing finance regulator - National Housing Bank in 1987. It was established as a
wholly owned subsidiary of Reserve Bank of India (RBI), through an Act of Parliament. It is
the apex financial institution for housing. It was established with the objective to operate as a
principal agency to promote housing finance institutions both at local and regional levels and
to provide financial and other support incidental to such institutions. It registers, regulates
and supervises Housing Finance Companies (HFC) and keeps surveillance through On-site &
Off-site mechanisms and co-ordinates with other regulators.
Impact- With the establishment of a nodal agency to regulate the growing housing finance
sector, the process of establishing housing finance companies became easier. This lead to an
increase in institutions in the housing finance sector, and thus the penetration of the housing
finance schemes increased at both local and regional levels. Regulations put in place by the
NHB also put into place an appropriate structure for housing finance companies.
Development The government also put in place regulations regarding priority lending, which allowed banks
to allocate 1.5% of their incremental deposits to housing. The government also directed
various other agencies like insurance companies and mutual funds to invest part of their funds
in housing sector. Two of the largest insurance companies of India, LIC and GIC started
supporting the sector both directly through their newly established housing finance

companies and indirectly by investing a proportion their net accretions in socially oriented
schemes.
Impact With the new regulations put in place regarding the priority sector lending, there
was a significant rise in funds available for housing schemes. Housing companies had easier
access to these funds with the regulations put in place by NHB, and the attractive rates helped
the growth of the housing finance sector.
Development The fourth phase is the era after liberalization and is characterized by dramatic changes in
pricing of loans. Before 1994, the pricing of home loans were regulated by the NHB based on
a differential rates charged according to the size of the loan. This policy was amended in
1994 and providers were free to charge market rates for the loans above ` 25,000. The fourth
phase saw a dominance of fixed interest rates, but variable rate offers started emerging at the
end of the decade.
Impact
Housing finance companies, together with traditional development finance institutions began
raising their own funds through public deposits and introduction of innovative instruments
such as deep discount bonds. With the liberalization in the pricing of loans, housing finance
companies started focusing on increasing their profits though schemes which were directed
towards their more profitable segments. As the profits increased, the companies were able to
expand in regions which were unviable under the previous regulations. This laid the
foundations for the high growth stage for the housing fianc companies. The liberalisation
period also saw a rise in the per capital income of the country. This increase in the income
levels was reflected in the growth of the housing finance. As information penetration
increased, floating rates emerged as an attractive option over the fixed rate mechanism.
Development The fifth Phase of rapid growth in the sector started after the millennium. There was an
emergence of three distinct groups of housing fianc companies- specialized housing finance
companies, housing finance companies established as a subsidiary of some commercial banks
and housing finance companies set up by insurance companies. The first group of companies
raised their funds from the markets through public deposits. The second group of companies
rely on their parent banks for the funds, while the insurance companies provide the funds for
their subsidiaries. Home loan disbursements rapidly grew during the first few years of this

phase. The lower interest rate regime, rising disposable incomes, stable property prices and
fiscal incentives made housing finance an attractive business.
Impact
The impact of the reforms in the liberalization period started having its full impact as the
growth rate of the housing finance companies increased manifold. Cheaper availability of
funds and an easier business environment helped the housing finance sector enter the high
growth period.