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| Kathmandu, Wednesday December 25, 2002 Paush 10, 2059. |
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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.
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