Housing finance refers to the process of providing financial assistance to individuals or organizations to purchase or construct a home or other type of housing unit. Housing finance can take many forms, including mortgages, home loans, and construction loans, among others.
In most cases, housing finance is provided by financial institutions such as banks, credit unions, and other lending institutions. These institutions typically require borrowers to meet certain eligibility criteria, such as having a good credit score and a stable source of income. Borrowers may also be required to provide a down payment and meet certain other conditions, such as obtaining mortgage insurance.
According to Wallace F. Smith “Housing finance is a factor of production quite distinct from labour, materials and risk-taking.”
Housing finance can be an important component of the housing market, as it enables individuals and organizations to purchase or construct housing units that they may not be able to afford otherwise. Housing finance can also play a role in promoting economic development and growth, by creating jobs and generating economic activity related to construction and home ownership.
The price of other factors involved in housing construction need to be paid mostly in cash at time they are used. In housing sector finance serves the following vital purposes.
Finance is needed for:
(a) Purchase and development of house-sites, purchase of building materials and actual building a house;
(b) Meeting the annual charges consisting of the upkeep and maintenance expenses including rehabilitation of kutcha houses, taxes, interest and amortization charges on capital; and
(c) Covering risks involved in long term housing investment.
Most of the developed economies invest, on an average, 5% of their annual GNP (Gross national product) on housing . India spends about 2 to 3% of its GNP on housing, which is a very low level of investment compared to that of other developing countries.
Generally, the existing housing finance system in India consists of two components, one is formal sector, and another the informal sector.
The formal sector : includes the budgetary allocations of central and state governments, assistance from financial institutions like the Life Insurance Corporation (LIC), GIC, UTI, NHB, Housing Development Finance Corporation, (HDFC), commercial Banks, cooperative housing finance societies, and so on.
The informal sector : on the other hand, contributes to the housing finance system through various sources. These include liquidation of personal assets such as savings in cash and kind, land and agricultural property, borrowings from friends, relatives and from informal money lenders or credit unions
Housing finance can be classified in these categories:
- Period wise classification: the most important classification according to the period or duration of credit may falls in to these categories viz.
- Short-term loan (6 to 18 month)
- Medium-term loan (2-5 years)
- Long-term loan (5-25 years)
- Purpose wise classification-:
- Credit for construction/extension
- Credit for plot purchase
- Credit for maintenance of House
- Credit for Housing expenditure/renovation
- Credit for purchasing flat/individual house
- Security wise classification
- Secured:
- Secured against mortgage of land
- Secured against some tangible property of debtor as- bond, insurance policies etc.
- Unsecured: The unsecured loans are generally offered on the personal security of the borrower. It is advance on the promissory or personal notes of the borrower with or without another’s guarantee.
- Secured:
- Credit wise classification-
- (i) Institutional credit
- (ii) Non institutional credit
Role of financial institutions in housing
Roles of the financial institutions in the provision of housing are :
- Upgrading and improvement of informal homes
- Creation of job for participants in housing projects
- Finance of companies engaged in the manufacturing/production of building materials
- Increase in sale of building materials
- Significant growth of real estate sector
- Improvement of urban area
- Finance of research aimed at improving housing patterns and standard
Risk involved in housing finance
- Risks in analysis of the security: The valuation of the house property is quite laborious and full of uncertainties and so full of risk and hence, lenders hesitate to lend. With the result, housing finance tends to develop at a very low pace.
- Risks in affirmation of borrower’s legal position: Another phase of analysis of the security behind housing loan is the determination of the legal position of the debtor (borrower).
- Risks in tracing evidence of title of ownership: Before lending against the security of house, the lender must make certain that full ownership of the house is actually on the name of the borrower, and he also must make sure that no other claims to the property are outstanding.
Housing Finance Agencies :
National Housing Bank (NHB)
The National Housing Bank was established in 1988 and it was set up as a subsidiary to RBI to augment the flow of institutional finance to the housing sector and promote and regulate housing finance institutions
Objectives of NHB are
- To promote a sound, healthy, viable and efficient housing finance system to cater to all segments of the population.
- To support housing finance institutions through financing and capacity building measures.
- To catalyze flow of funds to all regions and incomes groups.
- To develop market infrastructure for sound growth of housing finance system.
- To ensure expansion and stability in the housing finance market.
Role of NHB
- Promotion and Development
- Regulation and Supervision
- Finance
- Resources of NHB
- Rural Housing
- Recent Initiatives
Role of National Housing Bank (NHB):
- Augmenting Resources for the housing sector
- Leveraging the liquidity
- Support specialized institutions to serve as dedicated centers for housing credit
- Fill the credit gaps suffered by low income households by strengthening linkages between formal and informal sector.
- Strengthening linkages between formal and informal sector institutions – Financing MFIs
The Housing and Urban Development Corporation (HUDCO)
HUDCO as a major public sector agency has significant role in channeling funds to the State Housing Boards, development authorities, Improvement Trusts, and Co-operative societies, etc.
- Providing long term finance for construction of houses and urban development programs in the country .
- Finance or undertake, wholly or partly, the setting up of the new or satellite towns.
- Subscribe to the debentures and bonds to be issued by the State Housing Urban Development Boards, Improvement Trusts, Development Authorities etc. specifically for the purpose of financing housing and urban development programs.
- Finance or undertake the setting up of industrial enterprises of building material.
- Administers the money received, from time to time, from the Government of India and other sources as grant or otherwise for the purposes of financing or undertaking housing and urban development programs in the country, and promote, establish, assist, collaborate and provide consultancy services for the projects of designing and planning of works relating to Housing and Urban Development programs in India and abroad.
- Undertakes business of Venture Capital Fund in Housing and Urban Development Sectors facilitating Innovations in these sectors and invest in and/or subscribe to the units/shares etc. of Venture Capital Funds promoted by Government/Government Agencies in the above areas.
- Set up HUDCO’s own Mutual Fund for the purpose of Housing and Urban Development programs and/or invest in Mutual Funds, promoted by the Government/Government Agencies for the above purpose.
The Life Insurance Corporation (LIC)
The Life Insurance Corporation of India was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalised the private insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state owned Life Insurance Corporation.
LIC are playing a very important role as catalysts..
Cooperatives Housing Societies
A two-tier structure is existed in the field of cooperative housing. At grass toot level thee are primary cooperatives housing societies and at the state level the apex cooperative housing federations which provide funds to the primary housing cooperative in their respective jurisdiction.
The primary societies – the primary cooperatives can briefly be classified into following 4 groups; 1.Tenant ownership housing societies 2.Tenant co-partnership housing societies. 3.House mortgage societies 4.House construction or house building societies.
These housing cooperatives have collective ownership of houses together with common facilities and services. They encourage members to save, collect capital requirement, assist members in mobilizing necessary financial and other resources, build houses at reduced costs and promote healthy community living by creating an improved socio-economic environment.
Apex cooperative housing federations (ACHFs):
The performance of housing cooperatives is highly influenced by the quantum of funds available to them.
In all 25 ACHFs are functioning at the State/Union Territory level out of which 23 are members of NCHF (National Cooperative Housing Federation of India). About 29000 housing cooperatives are affiliated to the ACHFs.
The housing units generated through Housing Cooperatives mostly cater to the needs of middle and high income groups in cities and lower income groups in rural areas. The main constraint faced by Cooperative Housing Movement was allotment of serviced land for construction of housing units by the Primary Cooperatives.
Grameen Bank Model
Muhammad Yunus first conceptualised the Grameen Bank -originally Bank of the Poor – system in Bangladesh in 1976. Believing that credit is a human right, and disagreeing with conventional banking systems that exclude the poor from receiving this right on the assumption that they will not repay loans, he created a methodology and institution centred around the unique circumstances and needs of the poorest of the poor
Micro Banking is an initiative for banking services to the poor and economically marginalized people who otherwise don’t have access to the banks. It is characterized by small size of loans and small saving mobilization among the low income groups. Micro finance is emerging as an effective and popular means in the struggle against poverty.
The Self Help Group (SHG) system is mainly found in India, where it is used by both MFIs (Micro Finance Institute) and banks
However, housing finance can also be a source of risk, particularly if lending standards are not properly enforced or if borrowers take on more debt than they can realistically manage. This can lead to default and foreclosure, which can have negative impacts on both individual borrowers and the wider economy. To mitigate these risks, financial institutions and governments often implement regulations and policies aimed at promoting responsible lending and borrowing practices in the housing market.
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