Housing finance, a paradigm shift

Housing is one of the basic necessities of man, and the capital required to construct a house is so large that only few individuals can raise it from their own savings. There is, therefore, a great need and scope for the development of arrangements for supplying loans or finance for the purpose of house construction. The housing finance sector was not given importance by the commercial banks till the recent past. The poor performance of the industrial and trading sector and other adverse economic environment in the recent past caused slackness in the demand of credit from banks by these sectors. This forced the banks to think of alternative and lucrative lending options such as housing finance.

Promotion of residential real estate sales through finance from commercial banks promotes savings and employment. Repayment of loan constitutes implied savings and individual with stable fixed income can capitalize their rental payments through the purchase of a dwelling unit. The borrower, when he pays the loan over time acquires or builds equity, which can be further used for investment purposes. Building construction constitutes a major trigger for activity in a wide cross section of industries from cement to electrical. It is also labour intensive in our economy and generates employment.

Shortage of dwelling units in the urban areas especially in the Kathmandu valley and lower cost of land compared to the price of few years back can create a lot of demand of housing finance. It is not only the lack of demand of credit in the other sector but also the good recovery and sound security which induced the banks to cut down the rate of interest in this sector and create a sound portfolio. It is a reflection of the competition that the rates of all the major players have gone down and it is converging. While competition ensures that no one overcharges on the interest rates, players will be differentiated on the parameter of service to be provided to the customers. The service may include shorter processing time, lesser documentation formalities, advice to the customers, etc.

For the price sensitive customers, the pricing of loans also matters. With interest rates of the commercial banks hitting rock bottom, some of the clients of finance companies are switching to lower interest rate options. Pulling of customers from finance companies by offering attractive interest rate options does tantamount to expanding the market and not creating any new national wealth.

We have seen an unbelievable interest rates offered by some finance companies in auto loan scheme. Such a reduction in the interest rate was possible as the companies used incentives from the auto dealers to offset part of the subsidised interest rate. Such a reduction in interest rate would be possible in the housing finance also if the property developers shares their margin with the financial institutions. The concept of housing apartments is getting popularity at a time when the land at the Kathmandu is getting increasingly scarce and as people have limited scope for developing private properties in prime locations. Besides, people these days do not have the time or the willingness to build their own homes. They would rather opt for ready-made homes equipped with all amenities.

There are different ways of structuring the installments of housing loan. Interest can be based on either monthly rest or annual rest. People might get confused with the anomalies of such interest rates. Annual rest would mean that the principal component of annual equated monthly installments are factored in only at the end of every year, while monthly rest would imply that the principal is lowered by the appropriate amount each month, resulting in lower interest costs. Interest rate applicable on the loan also could be either fixed or variable. Interest rate can also be offered on both the fixed and variable term. For example, a bank can offer a fixed rate regime for 2 year tenures, at the end of which the customer switches over automatically to a variable interest

The housing finance market is yet to see a considerable product innovation. In October 2000, Citibank in India introduced Home Credit Account. The new housing mortgage product allowed a customer to repay his loan faster by suing the interest earned on surplus cash in the salary account towards repayment of the loan amount. Since Citibank credited repayments on a daily diminishing balance, the scheme apparently made good sense, which is why it is popular; but the scope is obviously limited to high net-worth people with greater net disposable incomes. Standard Chartered Bank in India followed closely with a similar offering called the Smart Saver Scheme. This too offered one the flexibility of using spare cash to reduce the interest liability. The excess cash gets deposited in a Smart Saver account and the interest earned on this is adjusted against the equated monthly instalment (EMI) one has to pay out every month. One is even allowed to forego payments at year-end at the time of heavy tax outgo.

In the Indian context, we can see a lot of innovations in housing finance sector. There is the great online home loan mart. Popular home loan portal apnaloan.com and web-based auction site bazee.com, in league with Citibank, IDBI Bank, and Standard Chartered Bank, have offered what are called ‘reverse auctions’ for home loans. A customer will first indicate the EMI he can afford to pay over the tenure that suits his needs. The institutions are then asked to match the customer’s requirement or make the next-best offers. The product is obviously intended to be tailored exactly according to individual needs. And with so much on offer, customers are certainly not complaining. Nepalese people can expect such innovation in the days to come.

China card

Government negotiators are chosen after careful analysis. Most important is to see whether they have the right talent. Talent to find out where the problem lies. And talent to find out how things can be sorted out. It sounds so simple here. But those who have been at the helm of affairs have admitted to having a harrowing time while conducting negotiation or seeking concessions.

Of course, conducting negotiations is evolving as a fine art. We have experts on a number of issues. But, of course, it is a different thing that while they become millionaires in no time problems remain where they were. So much so that there are books on negotiations and conflict resolution just as there are books on recipe from around the world.

I once talked to a negotiator. He had travelled to a number of countries including India, Pakistan, Germany, England, USA and, of course, China. He was in a way a frequent flyer. Renewal of treaties and agreements formed part of his demarche. However, towards the fag end of his glorious career, he was involved in prospecting for enhanced market for the Nepalese exports.

In a way, he was already a darling of the members of the business and manufacturing chambers here because he had grown proficient on issues like trade and foreign direct investment.

But fun issuing out of flying on jaunts ends here for most negotiators. He lamented about the immense homework one has to do before taking up challenges like negotiating for some concessions in trade and investment. So much so that one cannot afford to think of anything else than what one has to take up with counterparts. One has to go to sleep on tranquillisers while others enjoy themselves and make fun of you.

He had been to China on a number of occasions. It’s a beautiful country going both by the yardstick of ancient history and culture. Just as they are proud of glorious past going back to millennia, they stand entitled to be proud of what they have achieved in modern times. This is what one who had been there and come back with bitter memories confided.

Of course, the bitter memories have to do with the way Chinese bureaucrats are trained in the fine art of negotiation. The Nepalese team was driven to the venue of the bilateral meeting and everything appeared as expected until the things started appearing unpredictable indeed.

Nepalese side had moved a proposal on certain issues, which he would not disclose for personal reasons. In fact, there is no end to learning and Chinese can assuredly be said to be eminently qualified to perfect the arts ranging from pottery to politics to negotiations. No one learned this in a hard way than who faced them across the table. One can say in the corridor.

The way the Chinese negotiators deal with foreign counterparts is highly quintessential indeed. The Nepalese team had suggested something following initial suggestions from the other side of the table. But things ended there. Their hosts got up from their seats, which the Nepalese team could not comprehend initially. After a while, one of them came out and saw couple of them ambling in the corridor in a pensive mood. He soon came back to earth and realised that this was the way Chinese negotiators worked out the solution. Nepalese team had to yield to what they suggested. This, he said, is China card in negotiations.

A self-fulfilling prophecy ?

In January, American President George W Bush declared that Iraq, Iran and North Korea constituted "an axis of evil" which, by proceeding to develop weapons of mass destruction, posed a "growing danger" to the world and needed, thereby, to be contained.

Axis of evil

Although Bush’s declaration was frowned upon as naïve and unnecessarily confrontational in many capitals, the world has more or less resigned itself to the idea that America may soon lead a small coalition of countries in a military campaign against Iraq.

When the American president first made his startling pronouncement many critics around the world questioned, among other things, how the three disparate states, two of whom had fought a nearly ten-year long war not too long ago, could all be lumped together. Iraq is a secular Arab state, Iran non-Arab but dominated by mullahs and North Korea is an austere Stalinist state largely poor and self-isolated, far away from Iran and Iraq.

While such criticism still continues to be heard occasionally, recent events have, willy-nilly, placed them in the same slot.

The US still maintains that Iraqi President Saddam Hussein is hiding weapons of mass destruction. And, as US Secretary of State Colin Powell stated not long ago, "it remains our policy to change the regime until such time as the regime changes itself." Even more recently, he publicly stated that Iraq’s 12,000-page dossier failed to comply, in toto, with the provisions of UN Security Council resolution 1441 as far as fully accounting for chemical and biological agents missing when inspectors left Iraq more than four years ago.

North Korea

Recently, too, North Korea’s mass destruction weapons programmes have been much in the news. Earlier this month, Pyongyong announced that it was restarting nuclear facilities frozen under a 1994 deal with Washington, blaming Bush’s hard-line for its policy change.

As much is suggested in a statement by the state-run news agency KCNA that goes, thus: "Whether (North Korea) will refreeze its nuclear facilities or not depends entirely on the attitude of the United States." It may be recalled that under a pact signed between North Korea and the United States in 1994, the latter promised to deliver 500,000 tonnes of heavy oil in exchange for a freeze on its plutonium production.

Western officials believe North Korea built one or two plutonium-based nuclear bombs before it froze its nuclear facilities in 1994 – and could quickly create enough plutonium for several more bombs if the programme resumes.

Complicating matters was an incident in the Arabian Sea where the Spanish navy intercepted a vessel with a cargo of 15 Scud missiles manufactured in North Korea bound for Yemen. Subsequently, the US military took charge of the ship carrying the deadly cargo which, following high level diplomacy between the United States and Yemen, was allowed to be shipped to its scheduled destination.

A Pyongyang official condemned the seizure of the Scud missile shipment and explained: "The DPRK has already clarified that it is not only producing missiles to defend itself from the US’s constant military threat but exporting them to earn foreign currency." The US, for its part, says that North Korea is the world’s No 1 proliferator of missile technology and is therefore a threat to global stability.

Predictably, the North Korean decision to reactivate its nuclear facilities has produced the intended impact in the region and beyond. The US, South Korea, China, Russia and the European Union have all called on North Korea to give up its nuclear programme but Pyongyang has given no sign that it will comply. While Tokyo said that it wished to restart stalled talks with Pyongyang, it also indicated that it planned to work together with Seoul and Washington on a joint solution to the problem.

Experts in the region speculate that Pyongyang’s decision to start a deadly game of chicken is to force the world to meet its energy needs. It demanded to the International Atomic Energy Agency (IAEA) that it remove seals and monitoring cameras from all its nuclear facilities. Subsequently, it confirmed that it has begun to unilaterally remove surveillance equipment at its nuclear facilities saying that the IAEA did not respond to its request to remove the devices. The significance of these moves lies in the fact that, without the IAEA, there would be no one to check and verify North Korea’s nuclear programme.

Iran

Coincidentally, Iran too hit the world headlines recently on the nuclear weapons development front, following a disclosure by the US State Department that two sites within Iran were being used for secretly building a nuclear weapons programme. After satellite images of two Iranian nuclear facilities were aired, the White House said that it had strong suspicions that Iran was trying to conceal its aspirations to produce nuclear weapons.

State Department spokesman, Richard Boucher, stated: "Circumstances of these particular sites are actually fairly interesting and lead to the conclusion that this nuclear programme is not peaceful and it is certainly not transparent…Iran clearly intended to harden and bury that facility, that facility was probably never intended by Iran to be a declared component of the peaceful programme."

Boucher went on to add that the US looked forward to a report by the IAEA vis-à-vis those new sites. Iran, for its part, invited the IAEA to inspect them, maintaining that "these two centres are aimed at producing necessary fuel for nuclear power plants" that will supply electricity to the country.

Here, two additional pieces of information are germane: one is that Iran is oil-rich and should not, therefore, be dependent on nuclear power to produce electricity; the second is that, as Israel has claimed, Teheran will have nuclear weapons by 2005.

What is most engrossing, though, is that the United States will probably deal with the three cases differently. While a military campaign against Iraq clearly seems to be in the offing, she is unlikely to take the same path in the case of Iran and North Korea.

With North Korea, the fact that Pyongyang already has a few nukes, while neither Teheran nor Baghdad does, is a material factor, especially since it is assumed that such weapons could strike not only South Korea but also Japan. Another consideration is that North Korea – unlike Iraq and Iran – apparently desires to be in the good graces of the United States for meeting its own needs. Furthermore, there is an emergent consensus towards the de-nuclearisation of the Korean peninsula among the US, South Korea, Japan, China and Russia, the last two being of particular importance to North Korea.

With Iran, Washington will probably continue to closely monitor developments through the IAEA, satellite surveillance and other means if, or when, it can be conclusively established that Teheran is going on stream for a full-scale nuclear weapons programme.

For the present, however, as John Wolfstahl of the Washington-based Carnegie Endowment for International Peace has said, Bush’s "axis of evil" categorisation might have become a self-fulfilling prophecy. While they were proliferating before they were called the Axis of Evil, calling them by that name may have accelerated their programmes. Perhaps he is correct.