1
Competitive Dynamics of Indian Housing
Finance Industry
Ashwani Kumar Bhalla
Senior Lecturer SCD Government College
Ludhiana (Punjab) [email protected].
Dr. P.S. Gill Professor
Punjab School of Management Studies Punjabi University
Patiala.
Dr Parvinder Arora
Associate Professor Institute of Management Technology
Ghaziabad
2
Competitive Dynamics of Indian Housing Finance Industry
Abstract: The growth in housing and housing finance activities in recent years reflect the
buoyant state of the housing finance market in the country. The financing institutions
have come to see good value in funding this component of the economy. With a
growing number of players, the housing sector is becoming increasingly market-
driven. The affordability of housing loans clearly appears to have improved with fast
growing number of borrowers. The market has also witnessed change in lending
practices in certain segments to accommodate customer needs, as an offshoot of
increased competition and a buyers’ market. There seems to be high intensity of
competition among different players of the Housing finance industry. But this
competition needs to be measured to observe the efficiency of the provision of
housing finance services, the quality of housing finance products and the degree of
innovation in the sector, etc. The Present paper is an attempt to measure the level of
competition in Indian housing finance industry for the purpose of which Herfindahl
Hirschman Index (HHI) has been used as a tool for measuring the concentration.
Key Words: Housing Finance, Housing Finance Companies, Herfindahl Hirschman
Index.
3
Competitive Dynamics of Indian Housing Finance Industry
Characteristics of Indian Housing finance Industry: In the post liberalization
era Indian housing finance industry has registered unprecedented Growth. Housing
finance in India has evolved in three distinct phases. The first phase occurred before
the 1970s when the government, through its various social schemes for public and
low-cost housing, was the sole provider of housing finance. Housing finance through
recognized institutions was relatively non-existent in India till 1971. There were few
takers for housing finance in the country. Hardly 10% of the houses were built or
purchased through institutional agencies and the rest 90% were dependent on
people’s own savings and borrowings from friends and relatives (padhiari et al.,
2001). According to the Indian National Statistical Survey’s (NSS) 44th round
survey, more than 80 per cent of housing finance comes from private savings, sale
of assets and non-formal sources of credit(Biswas Smita., 2003). Earlier it was
considered socially unviable to borrow funds. There’s been an evident shift in
perception and mindset in the Indian middle class over the last five to ten years,
thanks to the impact of liberalization and opening up of the Indian economy, a rise in
average income across households, and a palpable desire to own things ‘now’
Prashat Mahesh., 1998) . The most crucial aspect of this ‘shift’ in the consumer’s
mindset is perhaps explained by the fact that the young (or Generation Next) are
more in charge of their lives and eager and impatient to assume the world. It’s a
generation that is independent, self-reliant and nuclear in nature. And it is this
eagerness to succeed that has fuelled a drive to own what one desires the most: a
home, a car and a healthy lifestyle. Other drivers have been incentives from the
government to buy homes, improved quality of buildings and property services and a
4
bouquet of financial options. Tax concessions, property price dips and lower interest
rates have also helped. But what’s helped more is the change in consumer’s mindset
over a ‘loan’ being a stigma, the extra freedom of making an informed choice, and
flexible, customized finance options coupled with mutual trust (Karnard Renu.,
2004).
In the second phase formal system of housing finance was originated in India in
1971 with the establishment of the Housing and Urban Development Corporation
Limited (HUDCO) in the public sector. HUDCO provided technical assistance to state-
sponsored undertakings, housing and urban development institutions, and the co-
operative sector. HUDCO was established at a time when the country was facing
problem of growing housing shortage and restricted availability of Bank credit to this
sector. Major objective of establishing HUDCO was to enhance the residential
housing stock by providing an avenue for housing finance on a systematic and
professional basis and to increase the flow of resources to this sector by integrating
the domestic housing sector with the capital market. However HUDCO’s role was
that of wholesaler which financed the public housing agencies rather than individual.
In 1977, the Industrial Credit and Investment Corporation of India (ICICI) took the
initiative and set up the Housing Development Finance Corporation (HDFC) in
collaboration with International Finance Corporation (IFC) and Agha Khan Fund.
HDFC was the first primary housing finance institution in the private sector at that
time. At that time, the business was looked at with great skepticism - no one so far
had experimented with retail housing finance in the country, there was no access to
long-term domestic resources nor was there a legal system to support foreclosure.
It's of course a whole different story that HDFC was successful and even the World
Bank has referred to HDFC as a model housing finance company for developing
countries (HDFC ., 2003).
5
Although commercial banks were the largest mobilizer of savings in the country,
traditionally banks were rather reluctant to lend for housing, as they preferred
financing working capital needs of industry. In January 1977 the Reserve Bank of
India set up a working Group on the role of Banking System in providing finance for
housing schemes. The Working group was asked to examine the role of the banking
system in housing finance. The group in its report submitted in January 1978,
recommended that the commercial banks may be asked to earmark certain amount
every year, for housing sector which may vary, depending upon the resources of
banks and the absorptive capacity of the sector. The group has also recommended
the bulk of the bank’s housing finance should be routed through intermediaries. It
was also recommended that it may be left to the concerned bank to decide about the
proportions of direct and indirect finance.
Based on the recommendations of the working group in May 1979 Reserve Bank of
India (RBI) issued detailed guidelines to Scheduled Commercial Banks (SCBs) for
housing finance (Government of India., 1996). Initially it was desired that the
banking system should provide housing finance to the extent of Rs. 75 crore per
annum, which was only 0.5% of total advances of the commercial banks at the end
of December 1978. Banks were also given freedom to decide about the proportion of
housing finance to be finance directly or indirectly. In June 1981 the limit was
enhanced to Rs. 100 Crore per annum, which constituted approximately 0.43% of
the total advances of all SCBs at the end of 1980. In October 1982 RBI further
enhanced the quantum of funds for housing sector to Rs. 150 Crore. In March, 1988
the limit was enhanced to 225 Crore which was further enhanced to Rs 300 Crore by
the end of 1989.
The government of India established a high level group in 1986 to address the
housing problem in the country. The group recommended that a network of
specialized housing finance institutions be created to mobilize additional savings and
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provide financing for housing construction. Two types of institutions were envisaged
as belonging to this network: local-level institutions, which would mobilize household
savings and provide home loans, and regional Housing Development Finance
Corporation-type institutions with wider territorial jurisdictions, which would mobilize
household savings and provide housing finance to middle-and higher income groups
(Garg Yogendra Kumar., 2002).
In 1987, the insurance act was amended to allow the Life Insurance Corporation of
India (LIC) and General Insurance Corporation of India (GIC) to directly issue
mortgage loans (Mishra., 1997). Till 1988, HDFC was the only formal housing finance
company operating in India as it is after 1988, that banks and insurance companies
entered into this sector.
The governmental efforts towards the development of a sound regulatory mechanism
for housing finance in India can be traced back to 1987 when the government came
out with a National Housing policy. A revised version was tabled in Parliament in
1992 and adopted by both houses of Parliament in August 1994. This document
forms the nucleus of the policy framework for the housing sector. It envisages the
removal of the legal and regulatory constraints on the creation of a secondary
market in housing loans.
As per one of the directions of the above policy, the National Housing bank Act was
enacted by Parliament in 1987. The Bank has been mandated to establish a network
of housing finance outlets across the vast span of the nation to serve different
income and social groups in different region. One of the fundamental ideas behind
the inception of NHB in 1988 as the apex institution for the housing finance sector of
the country was to facilitate development of a sound, healthy and sustainable
housing finance system(National Housing Bank., 2000). After start of the
liberalization process in India government has taken so many measures to promote
housing finance from the formal sector and share the task of providing of housing
7
finance with the private sector. Linking with global scenario the policies of
government of India has started-showing shift in approach towards housing finance.
In the post liberalization era housing finance industry has registered unprecedented
Growth. The Value of total residential mortgage debt moved up from USD 1.84 billion
in 1994 to USD 12.26 billion in 2004, which is registered a growth of 21%
Compounded Annual Growth rate (CAGR). Industry has recorded robust growth in
the last 5 years, clocking an annual growth rate of about 40% between financial year
1999 and financial year 2004. Residential mortgage debt as a percentage of GDP
was a mere 0.58% in 1994 which has moved up to 2.21% in financial year 2004, still
miniscule when compared to about 45% in the European Union, 70% in the US, 38%
in Taiwan, 26% in Malaysia, 18% in Thailand, 14% in South Korea, 6% in China and
upwards of 30% in East Asian economies (Business World., 2004). This aspect shows
the further growth of housing finance in future. As per the ICRA Limited ( Formerly
Investment Information and Credit Rating Agency of India Limited) reports, in the
last five years housing finance industry has shown unprecedented growth as
compared to other counterparts. In the year 1999-2000 housing finance growth
rates was registered with 44.4%, which has reached to 77.6% in the year 2003-04.
The main factors driving this growth are: 1. Fiscal concessions, 2. Encouraging
regulations to extend by regulating agencies, 3. Declining interest rates in different
years and has come down to 7.65% from 17.00%, 4. Increase in products offerings,
5. Rapid construction, increasing supply and stable/declining property prices, 6.
Steady increase in urbanization levels, 7. Increase in disposable income for large
sections of the population (ICRA Rating Feature., 2003). 8. Aggressive lending by
banks to the housing sector due to lower credit off takes by the corporate sector,
attractive spread and lower non-performing assets, lower risk weightage and higher
risk adjusted profitability( BSE., 2003).
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Competitive Dynamics in Housing finance: Back in the nineties, getting a good
house was easy, but finding finance was tough (Outlook Money., 2003). . Today, the
reverse is true. There seems to be Housing Finance boom in the country because of
the increasing number of players in the field. Presently there are four types of major
players in the field of housing finance which are competing with each other namely:
Housing Finance Companies (HFCs), Banks, Cooperative Housing finance societies,
Refinancing institutions Like National Housing Bank (NHB) and National Bank for
Agricultural and Rural Development (NABARD). Presently there are 343 Housing
finance companies (HFCs) working in the business of housing finance. Now almost all
the banks in India including SBI and associates, Nationalized banks, Indian private
banks and Foreign banks has entered in the field of housing finance and by the end
of March 2005, the retail portfolio of banks shows 50.43% share in the housing
finance (National Housing Bank., 2005). At present there are 92000 housing co-
operatives at the base level with a membership of about 65 lakh all over the country
represented by 26 apex co-operative housing federations at the state/union territory
level (National Housing Bank., 2005). The performance of the HFCs in recent years
has been overshadowed by the competing banking sector with aggressive lending
abilities, the relatively high cost of funds, higher regulatory capital requirement and
lower degree of penetration in terms of geographical presence and market segments
of the HFCs (National Housing Bank., 2004). A large network and access to low cost
retail deposits have helped them to offer home loan products at competitive rates
giving stiff competition to the housing finance business by the HFCs.
There is aggressive campaign on the part of Banks, and Housing finance Companies
(HFCs) to provide home loans to more and more customers. These HFCs are
adopting aggressive strategies like tele-marketing, engaging direct sales agents,
conducting exhibitions and loan melas besides offering softer terms of repayment,
9
enhanced quantum of loans, taking over the loans of other banks/HFCs, shifting of
loans from fixed rates to floating rates and vice versa. Now the financers are more
willing to finance the entire house even the furnishings. Few years ago, the word
mela in India meant a village fair, a place where artisans displayed and sold their
wares to villages. Today, India’s consumer banks and property developers in urban
and suburban India use the same word to sell and finance dreams. In the past years,
home loan melas have been sponsored by a dozen Indian banks and have been held
in every major Indian city (Indian Brand Equity Foundation., 2004). The biggest
reason for the surge in home loans is because of supply side economics. “Banks are
flush with funds, and they find it attractive to lend in the mortgage market( Douglas
et al., 2001). Historically, this segment had a very low rate of non-performing assets
— below one per cent— and that is an added attraction’’. Banks and financial
institutions have brought sea changes in their strategies and there is a clear shift
from sellers’ market to buyers’ market. It is also worth noting here that development
banks such as Industrial Development Bank of India (IDBI) and Industrial Finance
Corporation of India (IFCI), whose task was to lend to industry for projects, are in
terminal decline. Industrial Credit and Investment Corporation of India (ICICI) has
merged with its own banking arm, and has become a bank, plugging consumer loans
(including housing) rather than industrial finance. Banks and Housing Finance
Companies are offering attractive loans schemes with so many lucrative add-ons to
the customers. Main features of these loans schemes are consumer flexibility,
adjustable rate plans, lower processing fees, low Equated Monthly Installment (EMI),
lower margin money, no pre-payment penalty, etc. Many of the players of housing
finance have offered some add-ons with their loan plans such as Life Insurance,
credit card and consumer loans. Some of the players have offered tailor made loan
schemes for repair, renovation, extension, conversion, improvement, water proofing,
roofing, painting, plumbing and electrical work, tiling, flooring, and grilling etc. In
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order to increase the market share, the lending institutions are competing with each
other by offering very attractive terms to customers in the form of lower rate of
interest, liberal collateral requirements, longer repayment period or a very high loan
to value (LTV) ratio which at times goes up to or even beyond 100% of the value of
the house including the cost of land. In recent years, the lending institutions also
introduced floating rate products besides the fixed rate ones with the option available
to the borrower for conversion against a nominal payment. Besides, the speedier
processing and disbursement, efficient advisory services, waiver or reductions in
associated up-front fees have also become common tactics of market acquisition
(National Housing Bank., 2003). The acute competition has made the possible
“Housing Finance at door step” with the customers having a wide variety to choose
from.
The above all shows that there seems to be high intensity of competition among
different players of the Housing finance industry. But this competition needs to be
measured to observe its intensity to understand the competitive dynamics of housing
finance to make it more consumers friendly and favourable to industry as well. As in
other industries, the degree of competition in the housing finance sector can matter
for the efficiency of the production of housing finance services, the quality of housing
finance products and the degree of innovation in the sector Claessens et al., 2004).
There are number of techniques which are generally used to measure the
competitive dynamics of the firms in the industry. The techniques which are widely
used by the researchers to measure the competition in the banking and financial
services sector include: Breshanan and Lau ( A. Prasad et al., 2005), Panzar and
Rosse (Barbara Casu., 2004) , the m-bank concentration ratio adopted by Sarkar
and Bhaumik and the Herfindahl Index adopted by Juan-Ramon and others (Classens
et al., 2004).
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However, few studies concerning the competition in housing finance industry are
available and these just point out certain indications of competition in housing
finance stakeholders. As far as Indian context is concerned there is no detailed
study, which has specifically dealt with the competition factor in the housing finance
as such, though studies concerning the competition in banking sector are available.
Jerome Fahrer and Thomos Roling ( Jerome et al., 1992) studied the competition in
housing finance market in Australia. They used Herfindahl index of concentration in
the market and estimated a model of conjectural variations to examine the reactions
of each bank to changes in the value of loans made by other banks. Renu.S. Karned
outlined that housing finance system in India facing intense competition and it
buyer’s oriented market and HFCs are following aggressive pricing strategies
(Karnard Renu., 2004). Harish Biyani, G. Krishnan talked about whether housing
finance institutions are ethically and morally correct in promoting risky products
without providing the consumers with adequate information ( Harish et al., 2004).
The study revealed that banks and HFCs are luring customers by cutting down their
interest rates and aggressively selling their products with floating interest rates.
Different studies have used Herfindahl index to measure the concentration in the
financial services industry. Sayuri Shirai has used the Herfindahl Index adopted by
Juan-Ramon and others to assess the extent of concentration in the banking sector.
Ingo Walter Aneel Keswani and David Stolin undertook a cross sector analysis for
mutual fund performance persistence and competition.
Objectives, Data and Methodology:
Objectives: The Present paper is an attempt:
1. To Measure the level of competition in Indian housing finance industry.
2. To Measure the level of competition amongst Housing finance companies.
12
3. To Understand H index and observe its trend to measure concentration level
to analyse competitive dynamics in the housing finance industry through
market share of players in Housing finance disbursements or assets base. .
Data and Methodology:
For the purpose of study data from the 1996-97 to 2004-05 has been used to
measure the competition level among major players. Inter Competition and
concentration level in 10 top HFCs has also been measured. The companies for
analysis has been selected from the list of companies approved by the National
Housing bank (NHB) under section 29 A of the NHB Act and which have been given
permission to accept public deposits and also been listed with recognized stock
exchange. Those companies has been selected which has a national character and
working from more than ten years These companies has largest number of branch
network in India. For measuring the inter-competition among selected companies’
data for five year i.e. 2001-02 to 2005-06 has been taken.
The most important way of observing competition among the different players is to
observe the degree of seller’s concentration in the market which plays a dominant
role in determining the behaviour of a firm in the market (Barthwal., 1996). If the
market is concentrated in the hands of few firms or players then it reflect low level of
competition and some times stage of monopoly. On the contrary if the market is
divided into different players equally or in small fractions then it leads high level of
competition. We have used Herfindahl- Hirshman index popularly known as
Herfindahl Index as a measure of the size of group of players in relationship to the
industry and an indicator of the amount of competition. It is an economic concept
but widely applied in competition law and antitrust (Brown et al., 1988). When
assessing market concentration, guidance can be found in the Herfindahl Index,
which sums up the squares of the individual market shares of all competitors. With
13
an HHI below 1000, the market concentration can be characterized as low, between
1000 and 1800 as moderate, and above 1800 as high (EEA ., 2002). The Herfindahl
index is a far more precise tool for measuring concentration. It is obtained by
squaring the market-share of each of the players, and then adding up those squares.
The formula for this index is: H = (%S1)2 + (%S2)2 + (%S3)2 +….(%Sn)2 Here %S
stands for the percentages of the market owned by each of the larger companies, so
that %S1 is the percentage owned by the largest company, %S2 by the second, and
so on. Here n stands for the total number of firms you are counting. The Herfindahl
index gives added weight to the biggest companies. The higher the index, the more
concentration and (within limits) the less open market competition. A monopoly, for
example, would have an Herfindahl index of S12 or 1002, or 10,000. By definition,
that's the maximum score. By contrast, an industry with 100 competitors that each
has 1% of the market would have a score of 12 + 12 + 12+ ...12 or a total of 100.
Now that we've seen the limits, a more typical situation might be a duopoly. If each
of the two firms has a market shares of 50%, the Herfindahl index would be (50)2 +
502 =2500 + 2500 = 5000. With two firms that have of 75% and 25% respectively,
the H index would be: (75)2+ (25)2 = 5,625 + 625 = 6,250
The Herfindahl index takes into account the relative size and distribution of the firms
in a market The Herfindahl Index is the prevalent economic index which measures
the centralization of any organizational system using two parameters: inequality
among firms, and the number of firms in the industry.
The Herfindahl index increases both as the number of firms in the market decreases
and as the disparity in size between those firms increases. Decreases in the
Herfindahl index generally indicate a loss of pricing power and an increase in
competition, whereas increases imply the opposite.We are applying Herfindahl Index
in our study by two ways. Firstly to calculate the concentration level amongst the
14
players on the basis of their market share in total disbursements of housing finance
and secondaly to calculate Herfindahl index among 10 leading Housing finance
companies on market share and assets values seprately. The main virtue of the
Herfindahl is its simplicity. But it has two unfortunate shortcomings. It relies on
defining correctly the industry or market for which the degree of competitiveness is
open to question. This is rarely simple and can be a matter of fierce debate. Even
when the scope of the market is clear, the relation between the Herfindahl and
market power is not. When there is a CONTESTABLE MARKET, even a firm with a
Herfindahl of 10,000 (the classic definition of a monopoly) may behave as if it was in
a perfectly competitive market.
For the purpose of measuring the competition in Housing finance segment, Market
share of different players in the total Housing loan disbursements or Total assets can
be taken as base to compute the index. In our study we have used both the basis to
compute concentration level in Housing finance companies to measure the stage of
their competitiveness. In case of major players of Housing finance like banks,
Housing finance companies (HFC’s) and Apex Co-operative Housing Federations
(ACHFs) share of Housing loan disbursements has been taken as base rather than
assets base because banks may be using their assets for purposes other than
housing finance business.
Analysis and Results:
The level of concentration and Competition among the major players of Housing
finance like Banks, Housing Finance Companies (HFC’s) and Apex Co-operative
Housing Federations(ACHFs) can be studied from the table:1 shown below, which
shows the disbursements of these players over the years along with percentage of
their share in total disbursements shown in brackets. By using these percentages of
share in the total disbursements Herfindahl index has been computed.
15
Table: 1 Market share of different Housing finance players in disbursements of Housing loans and Herfindahl index.
YEAR BANKS HFCs
ACHFs TOTAL HERFINDAHL
INDEX
1996-97 1805.62
(26.76)
4627.74
(68.58)
314.72
(4.66)
6748.08 5440.74
1997-98 1454.77
(16.96)
5767.55
(76.17)
519.57
(6.87)
7570.12 6137.45
1998-99 3951.99
(32.73)
7454.27
(61.73)
665.88
(15.54)
12075.14 4912.71
1999-00 3597.40
(25.49)
9812.03
(69.53)
700.86
(4.98)
14110.29 5510.20
2000-01 5531.11
(29.12)
12637.85
(66.29)
867.72
(14.59)
19063.68 5264.20
2001-02 8566.41
(35.97)
14614.44
(61.25)
677.58
(2.8)
23858.43 5049.40
2002-03 23553.37
(56.04)
17832.01
(42.43)
641.48
(1.47)
42026.86 4943.52
2003-04 32816.39
(60.43)
20862.23
(38.41)
623.08
(1.26)
54301.7 5129.55
2004-05 50398.00
(65.60)
26000.00
(33.8)
421.10
(0.6)
76819.10
5449.99
2005-06 27411
(31.72)
58623
(67.83)
388
(0.45)
86422 5607.58
(Data Source: Data has been compiled from the annual reports of National Housing Bank and Reserve Bank of India. Figures in Parenthesis indicate percentages) Amount in Rs. Crores
16
Figure:1
Market share of different Housing finance players in disbursements of Housing loans and
Herfindahl index
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Year
Ho
usin
g L
oan
s d
isb
urs
em
en
ts a
nd
Herf
ind
ah
l in
dex
BANKS
HFCs
ACHFCs
TOTAL
HERFIDHL INDEX
BANKS 1805.62 1454.77 3951.99 3597.4 5531.11 8566.41 23553.4 32816.4 50398
HFCs 4627.74 5767.55 7454.27 9812.03 12637.9 14614.4 17832 20862.2 26000
ACHFCs 314.72 519.57 665.88 700.86 867.72 677.58 641.48 623.08 421.1
TOTAL 6748.08 7570.12 12075.1 14110.3 19063.7 23858.4 42026.9 54301.7 76819.1
HERFIDHL INDEX 5440.74 6137.45 4912.71 5510.2 5264.2 5049.4 4943.52 5129.55 5449.99
1996-
97
1997-
98
1998-
99
1999-
00
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
If we look at the value of Herfindahl index in the above table initially this value
increases in 1997-98 but after that it start decreasing and in the year 2003-04 this
value comes down to 5129.55 which indicates some increase in the competition
among players of housing finance in the market. But it is too high as per the
standards of this measure. As far as the degree of competition among different
players is concerned the increase in the competition is not much encouraging this
because of lowering of the share of Housing finance companies as major players of
housing finance. In 1997-98, 387 Housing finance companies were doing the
business which comes down to 343 in 2003-04. Similarly their share in the total
disbursements has also come down to 38.41% in 2003-04 from 68.58% in 1996-97.
Similarly Co-operative sector share has also come down to 1.26% in 2003-04 from
4.66% in 1996-97. The trends in the market are making banking sector more
powerful because of their large network and potentiality in working. The value of
Herfindahl index shown in the table also indicates the high level of concentration
17
because in all the years the value is more than 1800 which mean high level of
concentration. Banks have still monopoly as far as their total market share in
disbursements is concerned. Similarly A survey conducted by the FICCI on 47
banks and housing finance companies has revealed that banks have overtaken house
finance companies (HFCs) in the home loan market. The main reasons behind this
are the largest network of banks and their reach to the every part of the country
which other players are lacking (National Housing Bank., 2005).
Concentration level among the major housing finance companies can also be studied
from the table 2 shown below, which shows the disbursements of top 10 Housing
finance companies registered with National Housing Bank (NHB) as per section 29 A
of the NHB act and are eligible to accept public deposits. Figures in the brackets
show the percentage share in the total disbursements of these companies.
Table: 2 Housing Loans disbursements by HFC’s, their percentage share and
Herfindahl index.
(Amounts in Rs. Crore) Name of the
Company/Year
2001-02 2002-03 2003-04 2004-05 2005-06
Housing and Urban Development Corporation Ltd
4661
(29.34)
8180
(35.09)
6136
(24.471)
5921
(19.867)
3766.52
11.443)
Housing Development and Finance Corporation Ltd
7616.56
(47.94)
9950.87
(42.68)
12696.82
(50.637)
16206.75
54.380)
20679.20
(62.829)
GIC Housing Finance Ltd
225.19
(1.417)
295.59
(1.268)
448.81
(1.789)
659.23
(2.221)
372.82
(1.132) LIC Housing Finance Ltd
1962.82
(12.355)
3190.83
(13.68)
4103.81
(16.366)
4650.42
(15.604)
4670.09
(14.189) Can fin Home Finance Ltd
354.19
(2.229)
366.32
(1.571)
394.86
(1.574)
456.61
(1.532)
653.95
(1.986) PNB Housing Finance
Ltd 267.62
(1.684)
255.65
(1.096)
284.71
(1.135)
297.83
(0.999)
393.02
(1.194) IDBI Home Finance Ltd.
224
(1.410)
279
(1.196)
190
0.757)
542
(1.818)
732
(2.224) Gruh Finance Ltd 188.80
(1.188)
202.16
(0.867)
218.13
0.869)
299.83
(1.006)
360.17
(1.094) Dewan Housing Finance Limited
203.04
(1.278)
418.65
(1.796)
468.54
(1.868)
633.76
(2.126)
1110.30
(3.373) DHFL Vyasya Housing finance Limited
183.28
(1.153)
170.61
(0.731)
132.39
(0.528)
134.89
(0.452)
175.25
(0.53 Total 15886.50 23309.68 25074.07 29802.32 32913.32 Herfindahl Index 3328.22 3252.53 3442.93 3612.773 4304.270
18
(Figures in brackets shows the Percentage share in total assets) (Figures has been taken from the CMIE data base and annual reports of the companies) (Average Herfindahl index of 5 years turn out to be 3588.144)
Figure: 2
Housing Finance disbursements by selected HFC's and Herfindahl Index
0
5000
10000
15000
20000
25000
30000
35000
2001-02 2002-03 2003-04 2004-05 2005-06
Year
Dis
bu
rs
em
en
ts a
nd
he
rfi
nd
ah
l in
de
x
Total Disbursements
Herfindahl Index
Figure 2 depicts the position of Total disbursements and Herfindahl index over the
years. Contrary to the results shown in the table 1 among the different players of
housing finance, competition among the housing finance companies is on the reverse
trend because H is showing the increasing trend during the last five years in the
table 2. This shows that three major players HDFC, HUDCO and LICHF are enjoying
the major share of housing finance business. This is because of their national
character. Other housing finance companies are either working regionally or their
reach is limited. The value of H also shows the high level of concentration and HDFC
19
is representing as the major player in the formal system of housing finance among
housing finance companies.
Table: 3 Assets base of Housing Finance Companies and Herfindahl Index
(Amounts in Rs. Crore)
(Figures in brackets shows the Percentage share in total assets) (Figures has been taken from the CMIE data base and annual reports of the companies) Average HHI of 5 years turn out to be 3342.255
Figure: 3
Name of the
Company/Year
2001-02 2002-03 2003-04 2004-05 2005-06
Housing and Urban Development Corporation Ltd
20068.08
(36.681)
24132.5
(36.602)
26908.3
(34.824)
26187
(29.261)
26496
(25.081)
Housing
Development and Finance Corporation Ltd
22932.13
(41.915)
28022.74
(42.502)
33910.2
(43.885)
42586
(47.584)
53459
(50.603)
GIC Housing Finance Ltd
784.17
(1.433)
918.18
(1.39)
1185.28
(1.534)
1642.2
(1.835)
1176.5
(1.113)
LIC Housing Finance Ltd
7230.42
(13.216)
8640.41
(13.105)
10582
(13.70)
12856
(14.365)
15757
(14.915)
Can fin Home Finance Ltd
1162.89
(2.125)
1129.95
(1.714)
1203
(1.556)
1401
(1.565)
1814.1
(1.717)
PNB Housing Finance Ltd
593.64
(1.085)
725.15
(1.099)
862.52
(1.116)
972.01
(1.086)
1205.7
(1.141)
IDBI Home Finance Ltd
265.488
(0.486)
457.348
(0.694)
504.323
(0.652)
948.6
(1.059)
1710.3
(1.618) Gruh Finance Ltd 583.3
(1.066)
657.51
(0.997)
680.6
(0.881)
954.42
(1.066)
1226.6
(1.161)
Dewan Housing Finance Limited
885.44
(1.619)
1046.76
(1.587)
1283.74
(1.661)
1797.5
(2.008)
2585.9
(2.447)
D H F L Vyasya Housing Finance Limited.
204.19
(0.373)
201.44
(0.305)
149.34
(0.193)
150.31
(0.168)
210.93
(0.199)
Total Assets of 10 HFC’s
54709.748 65931.997 77269.3 89495.04 105645
(Herfindahl Index) 3288.987 3328.094 3336.246 3340.180 3427.77
20
Assets Base of HFCs and Herfindahl index
0
20000
40000
60000
80000
100000
120000
Year
To
tal A
ssets
an
d H
erfi
nd
ah
l in
dex
Total Assets of 10 HFC’s HHI
Total Assets of 10 HFC’s 54709.748 65931.997 77269.3 89495.04 105645
HHI 3288.987 3328.094 3336.246 3340.18 3427.77
2001-02 2002-03 2003-04 2004-05 2005-06
In the table 3, Herfindahl index is calculated on the basis of total assets of 10
leading Housing finance companies (HFCs). The Herfindahl index of table 3 also
shows the increasing trend and average index comes out to be 3342.255 which are
also rated as very high displaying increasing concentration and decreasing
competitiveness. This all shows the inequality among the different players and the
number of players in the industry.
The above fact is verified if we give a cursory look at the number of Housing Finance
Companies in India in the last 7 years. The Number of companies have not
increased so far and many of the companies which were originally established for
housing finance business vanishes because of the change in the scenario of housing
21
finance in India i.e. stiff regulations, entry of banks and other players in market. The
entry of banking institutions has compelled the housing finance companies to
reinvent their areas of core competence. The phenomenon has brought into
significant qualitative change in the fabric of housing finance system in India. As a
result of aggressive competition from banks and gradual softening of rate of interest,
the HFCs are compelled to operate on a basis of comparatively thinner spread. Stiff
competition in housing finance market has made the functioning of many of small
player unviable. Specialized housing finance companies promoted by commercial
banks like those of state bank of India (SBI Housing Finance Ltd.,), Andhra Bank
(Andhra Bank Housing Ltd.,),Vijya Bank (Vijya Bank housing Ltd), Indian Bank (Ind
bank housing finance Ltd), were liquidated and their assets were taken over by the
respective parent banks. Similarly, Vysya Bank housing finance Ltd has been
acquired by a bigger HFC viz. Dewan Housing finance Corporate Limited. These
consolidations in housing finance market point to the fact that functioning of small
HFCs is very much under pressure. Many small private HFCs without strong parent
backing are gradually losing market share in the medium to log term. HFCs have
higher cost of funds as compared with banks as they depend on priority sector sub-
PLR loans from banks, fixed deposits, NHB refinance and in some cases low cost
loans from multilateral agencies. Most private HFCs (excluding HDFC) do not enjoy
the highest investment grade ratings by credit rating agencies, which further
increase their cost of funds. As a result, HFCs, in general, either have lower spread
as compared with a bank or are not able to match rates with banks. In the face of a
fierce competition and desperation for survival, these HFCs resort to sub-standard
appraisal norms at the origination of loans (National Housing Bank., 2003). Thus, in
future, there is a serious possibility of degradation in asset quality of the small and
medium sized HFCs if they are not able to price their home loan products
competitively. Barring the Housing Finance Companies that are approved by the
22
National Housing Bank others are not showing the sign of progress. The prime-
withholding factor for the HFCs happens to be ‘the cost of funds’. Being institutional
borrowers, they are at a disadvantage as compared to banking entities, which have
access to low cost deposits. The minimum capital adequacy ratio for banks is 9% as
against 12% for HFCs. The Securitization Act, which brought a welcome relief to
banking entities, does not apply to HFCs. Also, over the years, the HFCs have
witnessed a decline in their average yields (Outlook Arena., 2004). It is expected
that if this trend continuous then coming years may witness many mergers and
consolidations in this segment of financial institutions which would eventually
determine the future of HFCs.
Widely connected branch network and feasibility of the banks to tap rural segment of
the population has made possible for the banks to concentrate of housing finance
segment and most of the banks are now concentrating of this sector. If we look at
the retail portfolio of the banks by March 2006, then it is evident that banks have
47.67% in the housing finance of the total retail portfolio in the consumer loans
segment (RBI., 2006).
Table: 4
Retail Portfolio of Banks
(Amount in Rs. Crore)
Items Amount
outstanding as
at the end of
March’ 04
Amount
Outstanding as at
the end of
Marrch’05
Amount
outstanding at
the end of
March’ 2006
Housing Loans 89449 (47.3) 134653 (50.43) 179116 (47.67)
Consumer
Durables
6256 (3.3) 3810 (1.43) 4469 (1.19)
Credit Card
receivables
6167 (3.3) 8405 (3.15) 12434 (3.31)
Other Personal
loans
87170 (46.1) (120120 (44.49) 179720 (47.83)
Total retail Loans 189041 (100) 266988 (100) 375739 (100)
Total Loans and
Advances
839092 1105725 1473723
Source: Reports on Trend and Progress of Banking in India -2003-04, 2004-
05 and 2005-06. Figures in parenthesis indicate percentage.
23
The reason for banks interest in the housing finance segment is lower level of NPA of
1.4% as against 4% in Consumer durable loan segment. A large network and access
to low cost retail deposits have helped them to offer home loan products at
competitive rates giving stiff competition to the housing finance business by the
HFCs( National Housing Bank., 2005). Another aspect of this growing concentration
is reversal trend of interest rate hike. Because of power of few players on the market
share, banks and leading HFC’s are not hesitating to raise the interest rates. Till
2006 interest rates were on the falling trend but now it is on increasing trend. Every
major bank and big housing finance company has started increasing the interest
rates after every quarter to six months from 25 point basis to 50 point basis. Partly it
is because of RBI alarming guidelines and partly because of the market forces.
Floating rates have been continuously rising and have increased by three to four
percentage points over the past 18 months to 11.5-12%.
Conclusion: The results of the study show that the main business of housing finance
in India is concentrated around few players like banks and major housing finance
companies. The Herfindahl index as an indicator of market concentration is showing
increasing trend in both the basis i.e. on the basis of Market share of players in
disbursement of loans and assets base. It shows that decreasing competitive ability
of small players. The small Housing finance companies are loosing battle to the
bigger players. Small players in the sector are facing threat from the banks to
capture their share because of their wider network and reach. Growing concentration
of major share of housing loans disbursements in the hands of larger banks and
giant housing finance companies has forced the small housing finance institutions to
identify the challenging areas in this field to capture the future market and ensure
their remarkable place. The most important aspect regarding the competitive
dynamics in housing finance is the indicators which shows that Banks, HFC’s and
other players are luring the customers to get the housing finance. It is not mainly
24
because of the stiff competition but because of the change in the attitude of the
Indian people regarding the loan phenomenon and to bring them into formal system
of housing finance. In India still 60% of the Indian households approach informal
sources of financiers to borrow funds, which mean an untapped market of housing
finance (Analysts. 2001). Housing finance institutions particularly Housing Finance
Companies (HFC’s) has to spread out geographically while ensuring consistency in
the processing and service standards to compete with banking sector. The
institutional performance of these institutions has been influenced by more than just
customer demand. Stricter NPA norms, rising interest rates and stiff competition in
mobilizing low cost deposits, have all affected the supply side factors, which in turn
has influenced the performance of these institutions in terms of volume and
competitiveness (National Housing Bank., 2005).
Healthy competitiveness in the field of housing finance is must for the customer’s
benefits. Here Government, National Housing bank and other regulatory and
financing agencies must come on the rescue of small housing finance agencies to
build their base by providing adequate re-finance to cover their supply side. Here the
role of National Housing Bank is very important. Presently the re-finance pattern of
National Housing bank is in favour of banks. In 2004-05 NHB provided Rs. 2060.95
crores to the HFC’s as compared to 1845.86 Crores in 2003-04 but refinance to the
banks was5404.09 Crores in 2004-05 as compared to 1275.50 Crores in 2003-04.
NHB has to increase the amount of refinance to Housing finance companies to make
them competent to compete with banks.
Similarly it must be ensured that fruits of competition are passed on to the
customers. Housing finance institutions has to offer more sophisticated and tailor
made housing finance products to suit customer needs. Differentiate and diversified
housing finance products will become the factor to make a housing finance institution
a market leader. The future prospects of this newly recognized industry are
25
undoubtedly bright. Going by the rate of growth of Indian population and its housing
needs, the formal sector of financing is bound to witness huge loan disbursements
that were not witnessed in the past.
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