K.K. Mudgil


Ever since the introduction of economic reforms in the country resulting in the deregulation of the 
financial sector, the State Level Financial Institutions have been consistently losing their  
traditional ground and finding it extremely difficult to compete with other financial intermediaries like commercial banks and all-India financial institutions in so far as financing of industrial enterprises in the States was concerned. The need for diversification in the business activities of SIDCs has been engaging the attention of COSIDICI for quite sometime. COSIDICI, being the apex body of State Level Financial Institutions, had been examining the prospects of introducing certain additional lines of activities to SIDCs to enable them to diversify their business operations          and thus survive the onslaught of the process of liberalization and financial sector reforms. The SIDCs were set up in the States in early sixties and have been functioning in the country for the last more than four decades.  Operating at the grass-roots level, these development finance institutions have played a significant role in the promotion of industrial activities, development of backward regions, generation of employment opportunities, besides creating industrial  infrastructure such as industrial estates, industrial parks and industrial townships in the respective 
States. As a long-term finance  provider, they have made substantial contribution in the country's effort to industrialize. However, in the wake of economic liberalization and financial sector reforms, the financial sector has undergone a sea-change making it difficult for DFIs to continue solely with their traditional role of long-term financing.  Recognizing the difficult situation they are in, the other DFIs (like IDBI, IFCI, ICICI, etc.) have made a  gradual move towards diversifying their portfolio into other related sectors like banking, investment banking, insurance, etc. with a clear 
move towards universal banking. Consequently, long-term loaning has become relatively less important. In view of the emerging business enviornment, the State Level Financial Institutions  
can no longer afford to remain away from the main stream. They must make conscious efforts to diversify their business portfolio in order that they may not entirely depend upon the traditional long-term lending operations. With the shrinking margins and non-availability of cheap resources, the cost of funds. of these institutions has been rising as compared to commercial banks and other financial institutions rendering their operations unviable. There is, therefore, an imperative need that State-level financial institutions take up some other lending activity and also undertake non-fund based operations. COSIDICI has suggested, after a great deal of thought, that SIDCs should take up housing finance activity by setting up housing finance subsidiaries. SIDCs have, by and large, appreciated this proposal and expressed their eagerness to step into this new activity. 
2. At the initiative taken by COSIDICI, a meeting of Chief Executives of SIDCs was arranged with Shri P.P. Vora, Chairman and Managing Director, National Housing Bank, to discuss about the feasibility and viability of setting up housing finance subsidiaries by SIDCs and the support provided by NHB in this direction. The meeting was held on April 24, 2001, in the National Housing Bank under the Chairmanship of Shri P.P. Vora, CMD. Before we discuss the role played by National Housing Bank in promoting housing finance business in the country, we consider it necessary to briefly comment on the housing scenario in the country, importance of housing in bringing about overall improvement in the life-style of the citizens, role played by housing construction in generating employment opportunities and stimulating growth of ancillary industries connected with housing such as steel, cement, hardware, electrical fittings, sanitary-ware, etc. etc.  

3. Housing Situation :  

Housing is one of basic human necessities. Besides, it is fundamental to people's physical, psychological , social and economic well-being. Whether in urban or rural settlements, shelter is the most viable expression of a country's ability to satisfy one of the most basic needs of its people. Besides being the basic necessity, housing plays a positive role in the economic development of the country and social development of its people. Housing construction is a labour-intensive activity, capable of absorbing large number of unskilled labour. Further, housing is linked to a variety of other industries, most of which are also labour-intensive. Investments in housing are investments in the development of human resources, the benefits of which accrue not only to groups and individuals, but also to the nation as a whole. The growing shortage of dwelling units, both in urban and rural areas, with its associated socio-economic imbalances, had assumed an alarming proportion, which could pose a potential threat to the socio-economic fabric of the nation. The total housing stock in the country was 148 million units in 1991 as compared with 116.7 million units in 1981. However, the usable housing stock was only 133.8 million units in 1991 and 101.5 million units in 1981. The usable housing stock rose by 31.9% during the period 1981-91. In comparison, the total number of households was 153.2 million in 1991 and 123.4 million in 1981. The number of households increased by 24% during 1981-91. It has been estimated by the National Building Organisation (NBO) of the Ministry of Urban Development, Govt. of India, that the usable housing stock will grow by 23% during the period 1991-2001, while the number of households will grow by 16.5% during the same period. Thus, the usable housing stock is estimated to be around 164 million and the number of households around 178 million by the year 2001. We will continue to face the problem of shortage of housing units in the country. The housing shortage was 23.3 million units in 1981 and it came down to 22.90 million in 1991. It is estimated that the shortage may come down to a level of 19.40 million units by the year 2001. During the last decade, the shortage of housing stock has been declining steadily as may be seen from the following table:- 

Housing Shortage (Estimated) in million 

1997 13.6 7.6 21.2
1998 13.4 7.4 20.8
1999 13.2 7.2 20.4
2000 13.2 6.9 20.1
2001 12.8 6.6 19.4
While the growth rate in dwellings continues to be relatively lower in the rural areas, it has been showing increasing trend in the urban areas thereby indicating greater tendencies of urbanization. The period has also been witnessing an increased influx of population from the rural to urban areas leading to unorganized settlements due to which there has been a tremendous pressure on the infrastructure and services available in the urban areas. The declining trend of housing shortage is more pronounced in the urban areas than in the rural areas, indicative of the need to step up efforts to augment housing stock in rural areas.  

4. Housing Finance : 
The requirement of funds to clear the backlog as well as to provide housing for the ever-increasing number of households is quite enormous. For instance, the Eighth Five Year Plan had envisaged an investment of Rs 97,530 crores in housing. The formal sector institutions were expected to contribute Rs 25,000 crores of this amount. The Ninth Five Year Plan envisages an outlay of  
Rs 1,50,000 crores. The share of formal sector financial instititons is envisaged at Rs 52,000 crores. Among the formal sector institutions, the share of the housing finance companies was  
Rs 5,000 cores during the Eighth Plan and they are expected to contribute Rs 9,500 crores during the Ninth Plan period. The funds requirement for meeting the housing shortage in the country is, therefore, immense. The existing players may not be sufficient if we have to increase the share of the foraml sector's contributin in the total investmnet envisaged. There was, therefore, an imperative need that more and more specialised institutions enter the field of housing finance 
business to lend for housing.  
Lending for housing is considered to be safer than lending for other assets.  This is mainly because of the psychological attachment an average Indian has to his own house. A majority of the population has to sacrifice a lot to own a house. Having acquired the house, they would not like to default in repayment of the housing loan. This is demonstrated by the fact that in the housing finance sector to-day the proportion of non-performing assets in the individual segment is very low (less than 2%) as compared to the other sectors. The Government has also amended the National Housing Bank Act recently to create a simpler system of recovery in cases of wilful defaults. 
5. Prospects of  housing finance business by SIDCs :  
Housing finance business has gained great prominence during the past decade. A number of housing finance companies have been set up in the country, both in the public and private sectors. The Govt. of India have set up the National Housing Bank to provide refinance to the housing 
finance companies and also to develop and regulate the housing finance intermediaries on sound and healthy lines. Most of the commercial banks have also set up their housing finance subsidiaries. Although a large number of housing finance companies have been set up in the country, their 
operations are, by and large, confined to metropolitan and urban centres.  Their out-reach and penetration in the rural, backward and semi-urban areas of the country has been quite     insignificant. The demand for housing loan emerging from such areas has mostly remained unfulfilled. The SIDCs are having strong base in the States and are very well-equipped with the necessary staff and infrastructural facilities and functioning through the network of their regional offices and branch offices. Since SIDC's are owned and managed by the State Governments, they are more people-friendly in the States and enjoy greater credibility. They are, therefore, most suited to take up this new activity of housing finance. As has been mentioned in preceding 
paragraphs, the shortage of housing in the country, as a whole, in rural areas in particular, is enormous. Notwithstanding a large number of players operating in the country for dispensing housing credit, there is a great scope for more and more specialized institutions to step into the field for catering to the housing finance requirements of people in the semi-urban and rural areas. The untouched market of housing finance in semi-urban and rural areas of the States is entirely available to SIDCs as housing finance companies are generally reluctant to go to those areas. Since SIDCs enjoy the patronage and support of the State Governments, they can provide housing finance to State Government employees, employees of schools and colleges, besides their own industrial establishments. SIDCs could also promote their own housing projects for which credit will be available from National Housing Bank directly in terms of the recent amendment to NHB Act. In short, there is tremendous scope for SIDCs to enter the housing finance business by setting up their own subsidiary. 

6. Government as a Facilitator :  
The Govt. of India has been according highest priority to the housing sector in recent years. This has been reflected in the Union Budget for the years 1999-2000 and 2000-2001 when a number of fiscal incentives and other measures were announced both for the providers and borrowers in the housing business system. The recent thrust given by the Government to the housing and housing finance sector and the various fiscal concessions offered by the Government to the people had the desired effect and the demand for housing has picked up significantly. The following fiscal incentives have been provided by the Government :-  
(a) The provision of deduction of interest on account of borrowered capital in the acquisition or construction of a house for self-occupation available under Section 24 (1) (vi) of the Income Tax Act, 1961, has been increased from Rs. 75,000/- to Rs. 1,50,000/-;  

(b) Ceiling on the amount eligible for rebate on the repayment of principal of housing loan has  
     been increased to Rs.20,000/- from the earlier level of Rs.10,000/-;  

(c) 40% depreciation has been allowed on new dwelling units purchased by the Corporate Sector  
     for its employees;  

(d) Exemption from income-tax under section 54(6) in respect of long-term capital gains 
     arising from the transfer of capital assets and investments in the manner prescribed is now  
     available to an assessee even if he already owns a house.  

Besides, the Union Budget includes several measures in respect of rural housing. A goal of providing 25 lakh dwelling units has been fixed. These incentives and support measures undertaken by NHB will go a long way in reducing the cost of housing loans and serve as an impetus to the housing industry. 
7. Meeting with CMD, National Housing Bank :  
COSIDICI had received very positive response from SIDCs for taking up the housing finance activity and setting up a separate subsidiary for the purpose. With a view to discussing the prospects of housing finance business in the States, viability of setting up housing finance subsidiary, support available from NHB, etc., a meeting of Chief Executives of SIDCs was arranged by COSIDICI with Shri P.P. Vora, CMD, National Housing Bank, on 24th April, 2001. Chief Executives/Senior Executives from 8 SIDCs, viz., SIPCOT, Haryana SIDC, J&K SIDC KSIIDC, PICUP, RIICO and SICOM, had participated in the meeting. The CMD NHB, Shri P.P. Vora, during the course of his long address to the participants, highlighted the viability of the housing finance business and the tremendous scope for enlarging the housing finance outlets in the country to meet the growing demand for housing finance. He indicated that Govt. of India have accorded the highest priority to providing housing in the rural areas of the country and the National Housing Bank have formulated a special scheme `Golden Jubilee Rural Housing Scheme to provide refinance facilities to the housing finance companies at comparatively low rate of interest for giving housing loans in the rural areas. Shri Vora emphasized the need for more and more specialized institutions to take up housing finance business, particularly in the urban, semi-urban and rural areas of the States and in this context he outlined the role which State Level Financial Institutions like SIDCs could play in dispensing housing loans to these areas. Shri Vora explained at length the various functions of the National Housing Bank which, inter-alia, included providing refinance to the approved housing finance companies and also participate in the equity of housing finance companies to the extent of Rs. one crore or 10% of the paid up capital. Apart from providing financial assistance to housing finance companies, the National Housing Bank performs regulatory functions to regulate the functioning of housing finance companies relating to their deposit acceptance activities under the NHB Act. During the course of discussion, a number of doubts were raised by the Chief Executives relating to viability of the housing finance business in the States and availability of resources for setting up these subsidiaries. Shri Vora clearly stated that in view of the emerging market environment resulting from ongoing financial sector reforms, the housing finance subsidiary should be set up at least with a minimum equity of Rs.20 crores and added that the resources could be supplemented by borrowing from commercial banks, mobilising public deposits, floating bonds and debentures and refinance from National Housing Bank. Shri Vora underscored the point that housing finance is a long-term lending activity and invariably the resources available are for short term. This could result into mis-match of assets and liabilities which needs to be managed effectively. In conclusion, Shri Vora welcomed the entry of SIDCs in the housing finance arena and assured the Chief Executives of SIDCs that NHB would provide all possible help and assistance to them in setting up the housing finance subsidiary.