Housing finance came into India through the vision of a single Indian national Shri Hasmukhbhai Thakordas Parekh popularly known as Mr. H T Parekh – he was educated in the United Kingdom and had witnessed the commendable contribution of Halifax Building Society to the built environment of England in the early and mid-twentieth century. Halifax Building Society – was a save and loan micro banking institution which is now owned by the Lloyd Banking Group.
After demitting chairmanship of Industrial Credit & Investment Corporation of India Ltd (now ICICI Bank Ltd) in 1976, Mr H T Parekh started Housing Development Finance Corporation Ltd (HDFC Ltd.) in 1977 which was promoted by International Finance Corporation (IFC), Asian Development Bank (ADB), ICICI Ltd. and his royal highness the AGA Khan. You would be surprised that the regulator viz the National Housing Bank came into existence in 1987, almost a decade after the first housing finance company (HFC) was incorporated.
For almost a decade housing finance in India did not have pertinent regulations, a visionary addressed the demand and the supply sides without any regulatory assistance, utilizing his wisdom, experience, his conviction, and dream to make his motherland self-reliant. Today we call it ‘Aatmnirbhar’ !
From 1988 HFCs sprang up, in early days they were promoted by public sector banks and insurance companies, and later the private sector came in – today they are approximately 105; the contribution of the top 5 is approximately 80% of the HFC market share. All HFCs put together contribute approximately 40% of credit in the housing finance sector.
Housing is both labour and capital intensive – the heterogeneous regulations, as land and construction laws are state subject, make this business extremely ‘local’ flavor that is why even pan India brands of real estate players are far few though the organized sector is almost half a century old – job of a mortgage banker becomes equally tricky and local expertise is a must to have to satisfy the ever demanding customer of a free market economy. This is a significant reason that in a mature and crowded sector you would just recall few names of HFCs & Banks which are popular pan India.
Indian mortgage sector is operationally very rigorous as the Contract Act 1872 and Transfer of Property Act 1882 makes the delivery of service mandatory to be in physical form – digitization is possible for customer aggregation, underwriting and post-sales service, but the service delivery has to be in hard form.
Plumbing of credit on the supply side, popularly known as construction finance (CF) is as important as that on the demand side (Home Loan). Just imagine you want to buy a car, you also get a car loan but there is no car in any showroom because the manufacturers never got loans/ credit form the financial institutions!!! Hence the latest frenzy of research and rating agencies to spell doom for institutions which do make sure that the supply side gets adequate credit are doing a disfavor to an emerging economy which is desirous of being a USD 5 trillion economy by 2025.
Housing and housing finance are an engine of growth; it is the second-largest employment generator after agriculture and contributes approximately 9% of GDP with linkages to fourteen core sectors of the economy. Even neighboring economies like Thailand, Indonesia, etc have a much higher penetration – if we were to grow at a rapid pace this sector has to perform far better and mind you this is not a subsidized sector – we just need an enabling and stable environment to flourish.
Right from the inception of the sector, the HFCs played and torch bearer’s role, banks, with larger balance sheets and cheaper funds, were followers. The prime reason being two viz. a) Local nuances make the product/ service delivery extremely customized and b) the operational rigor that is required makes the product handling a specialized job, it is not a generalist’s cup of tea.
HFCs discovered a course on their own and set the practices of the game which the others followed – surely these highly specialized institutions post COVID-19 will come out with retooled operating models backed by highly skilled and motivated human capital to successfully address the next normal – in a far more efficient manner.
Their (HFCs) loan asset portfolios should perform better than their peer banks as all energies will be trained on a single product whereas the banks will have so many loan products especially the unsecured ones to concentrate on.