Home Loans Have Huge Growth Potential

Deepak Parekh, Former Chairman, HDFC

Against the uncertain global backdrop, India has increasingly been in the spotlight for being amongst the fastest growing major economies.  India is not immune to global disruptions, so some slowdown in growth is inevitable.  But since India is a domestic, consumption-based economy, the economy is less dependent with the global economy compared to say, countries that rely heavily on exports. I have been on record many times in the recent past stating that India has never been in a stronger position than it is today.  As a country, we are fortunate to see more tailwinds than headwinds.  What is working well for India is the fact that we have political stability.

I strongly believe that the runway for mortgage finance in the country is immense. The mortgage to GDP ratio in India at 11percent is still very low — even compared to our peers like China, Malaysia, Singapore and significantly lower than much of the western world where mortgage to GDP ratio is upwards of 60 to 90 percent.  Urbanisation in India is an irreversible trend. Currently 32 percent of the population reside in cities and this is expected to be 40 percent by 2030.

Recent estimates forecast that the Indian real estate market is likely to touch USD 1 trillion by 2030. India still has a huge housing shortage estimated at over 29 million units.  The government has been supporting housing, especially through its Pradhan Mantri Awas Yojana(PMAY) .The Credit Linked Subsidy Scheme (CLSS) is a game changer, especially for the economically weaker sections and low income groups.

To my mind, this scheme  is one of the best executed subsidy schemes. It is designed well to ensure there were no leaky buckets in the transfer of the interest subsidy and that it was given only to the intended beneficiary.  As the loan  is given by the housing finance company or bank, the beneficiaries are assessed carefully and the subsidy comes to the qualifying beneficiary only after the disbursement was made. This ensured that sufficient checks and balances were in place.

While one recognizes that fiscal support cannot be without hard timelines, given the shortage of housing in the country, I am a strong advocate that the CLSS component at least for the lower income groups should continue for a few more years. Even the concessional stamp duty rates that were offered by a few states during the pandemic had given a strong boost to the housing sector.  This shows that a few concessions go a long way in helping improve home affordability.

I believe the definitions of economically weaker sections and low-income groups or even the loan and property amounts used to qualify for priority sector housing loans need to be periodically revised to reflect changing market realities.   Here it is important to recognize that it is the primary responsibility of a lender to ensure that a customer is not over extended while taking a home loan.

The more important driving point is that a home loan is generally for a long tenor and over this period, there will be both, upward and downward interest rate cycles. India is lucky that its mortgages are not underwater like parts of the western world where the mortgage loan in itself is higher than the value of the property.

Market cycles will come and go and one has to look at the long-term.  Two third of India’s population is below the age of 35 years. This is the cohort that are future home buyers.  In equal measure, with the government’s focus on making India a global manufacturing hub and with the development of industrial corridors, the opportunities for real estate development have increased manifold.

As a country if we look to increase homeownership or deepen retail credit markets in a responsible manner, it is important we keep the experiences of several other countries in mind and ensure our households do not get excessively overleveraged.  The share of household savings needs to increase from current levels because this is what will drive future consumption and investments. When individuals are encouraged to save early in life, it becomes significantly easier to put in their share of equity contribution for a house. The average age of a home loan borrower in India is still quite high at around 35 to 39 years.  Adequate savings is also the buffer when times are adverse.

And finally, some advice to developers from tier II and tier III cities. The Indian real estate market needs a lot more of affordable and mid-income housing stock. In the recent period, there has been a larger proportion of the incremental stock of housing towards the upper and luxury segments. The demand for affordable housing is immense.   And so is the demand potential for home loans.