Housing Finance Corporations Are Contributing More To Mortgage Penetration
Mortgage penetration in India is very low as compared with global standards. According to the National Housing Bank, mortgage penetration in 2013 was merely 8 per cent of India's GDP. Interestingly, the contribution of housing finance corporations (HFCs) to mortgage penetration has been surging. In March 2007, the contribution of HFCs to mortgage penetration was merely 25 per cent. But, in March 2014, this had risen to 37 per cent. The market share of public sector banks is nearly 63 per cent. But, the National Housing Bank expects the share of the HFCs to become as high as that of public sector banks by 2019.
Why do banks contribute more to housing finance than HFCs? Why is the share of the HFCs rising steadily? Banks offer more diverse kind of loans to customers. Banks also cater to high income, urban home buyers. As mortgage loans are more easily available to urban, high-income home buyers, it is not surprising that banks have a greater reach than the HFCs. The HFCs face many constraints that banks do not face. As banks are funded by deposits, it is easy for a bank to scale up its operations. But this is not true of the HFCs which have a wholesale funding model. But the share of the HFCs is rising because they cater to a much broader segment of customers -- to home buyers in Tier-II and Tier-III towns, and lower middle income home buyers. After all, banks and HFCs offer services that are very similar. Both banks and HFCs offer loans to build houses and to renovate or redevelop existing houses. Banks and HFCs also offer loans to buy land, and both Banks and HFCs offer land and other real estate assets as collateral while extending loans. So, it is not surprising that the share of HFCs rose because of their wider reach.
There are other factors that come into picture as well. Housing loans are only a small fraction of the loans they extend to customers. So, banks are unable to specialise in extending mortgage loans. But, HFCs cater only to home buyers. Greater specialization often leads to better services. Banks also have a much longer turnaround time, when compared to HFCs. Banks do not offer end-to-end solutions, like HFCs do. This is very important for home buyers, as some websites like PropTiger.com realize. PropTiger.com, for example, by joining hands with Makaan.com will offer end-to-end solutions for home buyers. If HFCs are allowed to accept deposits from customers to the extend commercial and public sector banks do, this will lead to much greater mortgage pentration in India.