In May 1988, The National Housing Policy was announced. The policy reflected the thrust, the Government wished to give to the housing sector and pointed out that housing was not merely a consumption expenditure, but also a productive investment which would provide economic activity and create a base for attaining several economic activity for attaining several national policy goals such as providing shelter and rising the quality of life. The National Housing Policy also envisaged that an impetus given to housing would stimulate economic activity through creation of substantial employment opportunities.

A working group on housing sector finance has projected a shortage of 41 million housing units by the turn of the century and that the resources required by the housing sector in the eighth five year plan itself would be of the order of 97,350 crores. The organized sector accounts for only about 30% of the total needs for housing finance in the county. This includes the listed and unlisted housing finance companies. The remaining 70% of housing finance needs are met by various sources such as moneylenders, disposal of existing property, friends and relatives etc.

NHB is a wholly owned subsidiary of Reserve Bank of India. NHB refinances scheduled commercial banks, state co-operative banks, scheduled urban co-operative banks, housing finance companies and state level apex co-operative housing finance societies to the extent of 100% of their direct loans to individuals upto Rs. 1 lakh for acquisition/construction of a housing unit with built-up area not exceeding 40sq. metres or cost (including cost of land) not exceeding Rs. 1.5 lakhs (applicable in the year 1991).

Certain changes have been effected in refinance scheme as applicable to HFCs with effect from July 1, 1994. The changes relate to the area/cost parameters and eligibility of loans. These changes have since been extended to other categories of primary lenders with effect from November 1, 1994 as per details below:

1. Area/cost parameters are dispensed with
2. Eligibility of housing loans for refinance is increased from –

1. Rs. 2 lakhs to Rs. 5 lakhs for scheduled commercial banks.
2. Rs.2 lakhs to Rs. 3 Lakhs for apex co-operative housing finance societies (ACHFS) and scheduled primary (urban) co-operative banks.
3. Rs. 1 lakh to Rs. Lakhs for scheduled state co-operative banks and for state co-operative land development banks for their direct lending to individual borrowers under the scheme for subscription to special Rural Housing Debentures (SRHDs).

3. Not less than 60 percent of the refinance should be for loans upto Rs. 3 lakhs and the balance 40 percent for the loans between Rs. 3 lakhs and Rs.5 lakhs in respect of scheduled commercial banks.
4. Loans for upgradation/major repairs upto Rs.60,000 shall hereafter be eligible for refinance in terms of the said scheme applicable to the respective eligible institutions as against loans upto Rs.30,000 as at present.

The cumulative disbursement upto December 31, 1994 to eligible institutions by NHB stood at Rs.2,078.22 crores. The corresponding cumulative number of dwelling units stood a Rs.4,64.502. The share of disbursement to HFC’s is 81.3% while the remaining 18.7% was given to scheduled banks and co-operatives together. The total number of HFC’s eligible for financial assistance from NHB as on December 1, 1994 is 21.

Consequent upon the credit policy announcement of the RBI the National Housing Bank has reviewed the interest rate structure in respect of its refinance schemes and has announced a reduction in its refinance rates from 14.25% to 13.5% for all loans above Rs.25,000 and upto Rs.5 lakhs. The on-lending rates for the slabs Rs.1 lakh to Rs.5 lakhs has been freed. For loans upto Rs.25,000 the Bank has decided to retain the refinance rate at 10% and the on-lending rates on project loans while reducing the refinance rates by 0.5% to 1%. The interest rates on direct lending are common for HFC’s, Scheduled Commercial Banks, apex co-operative housing finance societies, scheduled state co-operative banks, scheduled primary (Urban) co-operative banks and direct housing loan sanctioned by state co-operative land development banks (SLDBs) under the scheme for subscription to special Rural Housing Debentures (SRDHs) in terms of the lending slabs prescribed for the respective eligible institutions.

Almost all Housing Finance Companies, which provide long-term finance for construction or purchase of houses in India for residential purposes, come under the purview of National Housing Bank. So, all the lending of these companies should be sound, healthy and viable proposals and must satisfy all the norms, guidelines and directions of National Housing Bank.

Any proposal should be considered only if the applicant satisfies all the following conditions stipulated by NHB as tests of eligibility. Broadly the eligibility criteria are as follows:

• The loans should be directly to individuals or groups of individuals.
• A co-applicant, if there is any, either the spouse of the applicant or son or brother (if there were no male children in the family) or daughter (if only child), co-applicant may be a co-owner of the property. Minors cannot be co-applicants.
• Residential active (earning) life of the applicant reckoned at 60 years – should cover the repayment period.
• Any other criteria that may be stipulated by NHB from time to time.

Having decided upon the eligibility, the application is accepted with the processing fee (ranging from 0.8%-1%depending upon the institution) along with the necessary documents. The third step consists of appraisal of the proposal. This appraisal can be broadly divided into 3 steps.

• Credit Appraisal
• Legal Appraisal
• Technical Appraisal

The main objective of this credit appraisal is mainly to assess the applicants sustained repayment capacity over the period. The main points, which are considered here, are:

• Income
• Age
• Academic Background and Employment Stability
• Family Background
• Assets and Liabilities
• Servicing record in respect of other institutional borrowings
• Savings history/capacity
• Number of dependents
• Income and expenditure pattern

The list cannot be exhaustive and fool proof. The inputs differ from case to case.

Some of the documents when obtained and scrutinized which throw light in the desired direction are:

1. Salaried Class

1. Salary Slip or Certificate for deduction from salary.
2. Salary Certificate for last 6 months.
3. Copy of Ration Card (third, fifth and sixth page)
4. Electricity Bill (latest available)
5. Rent Receipt (if applicable)

2. For Self Employed

1. A brief introduction to business/profession.
2. Balance Sheet and Profit and Loss Account certified by a Chartered Accountant.
3. Income-tax/Wealth-tax returns for last 3 years certified by a Chartered Accountant.
4. Acknowledgment from the Income-tax Department for the above returns.
5. Copies of Advance tax paid.
6. Assessment orders.
7. Registration Certification of establishment under Shops and Establishment Act.
8. Confidential Credit Report from the Bank.
9. Rent Receipt for the establishment.
10. Copy of Certificate of Practice (where professional association.
11. Membership Certificate of respective professional association.
12. Copy of Bank Sanction Letter for term loans/overdraft etc. facilities.
13. Electricity Bill (latest available).
14. Ration Card.,
15. Rent Receipts.

The sources of income of the individual may be:

Employment (salary)

Business/Profession

Other Income (to be specified and verified)

Three main factors are to be considered here

1. Gross Salary
2. Deductions
3. Adjusted take-home salary

The Gross Salary shall not include annual payment like Bonus/LTA. Medical benefits etc. which are not a regular source of Income and thus will not help the borrower in repayment of the instalments regularly.

In the case of certain other income, like overtime allowance, incentives, commissions etc., the stability and regularity of such income is the criteria for consideration.

Deductions of a regular nature and/or statutory deductions shall be deducted from the Gross salary. However, deductions that are of savings or an investment nature shall be added back to the net salary. This is to remove the disparity between individuals who save or invest directly through their salaries and those who do not do so.

Further, deductions of short-term nature may also be added back to the income to arrive at the exact net income or adjusted take-home salary. While assessing the income, due weightage should be given to the age of the person, his qualifications and experience, his alternate employment prospects, whether his salary is commensurate with these factors and his previous employment history.

In this category the individual may be a sole proprietor or a partner or a Director of Private Limited Company, May be a manufacturer or a Trader or a provider of a service.

In all these cases the income is to be ascertained from the financial statements for three years produced, supported by other relevant documentary evidence.

1. Expenses which are of a personal nature and debited to the profit and loss account may be given due weightage while assessing the income.
2. Non-cash expenses like Depreciation or Investment Allowance over and above normal rates required for asset replenishment can be written back.
3. Excessive stock and fluctuations in income to be viewed with concern and appropriately assessed.

Financial ratios like Debt/Equity, Debtors/Creditors current asset/liabilities, Debt/Income, Fixed Asset/Income. Gross Profit to Turnover, Net Profit to Turnover etc. are to be compared with previous performance as well at the industry levels.

This maybe from investments, Rental, Agricultural or vocational.

Legal Appraisal

After credit appraisal is done, the next step is legal appraisal wherein all the other documents like original title deeds, revenue receipts, encumbrance (search certificates for the past 30 years are verified by an experience lawyer to confirm that the withholder can create an equitable mortgage in favour of the Housing Finance Company by simple deposit of title deeds.

Financial Services

The technical officer will first verify the original documents and counter check upon all the furnished information, records, approval, clearance, certificates and orders. The applicant should submit all the documents relating to guarantees, collateral securities (LIC policies, fixed deposits, etc). The needed documents differ from case to case depending upon, whether the house is being purchased – and, if so from whom – or whether it is a self construction.

Following Documents are, generally, called for in the case of self-construction:

1. Layout Plan
2. Approved Plan
3. No-encumbrance Certificate
4. Clearance under ULC
5. Commencement Certificate, if applicable
6. A detailed estimate of cost of construction
7. NOC for mortgage of said property in case the purchase is from a Development Authority or any Govt. allotted scheme.

By scrutiny of documents submitted, prior information about the proposed property like approval and clearance from competent authorities can be verified. A check on the estimate submitted can prevent the HFC financing additional amount more than the actual cost of property.

It should be appreciated that after the credit appraisal, technical appraisal is the most important stage in the processing of any loan. Technical appraisal safeguards the borrower's interest before and after he selects the property. If any property has been found to be illegal or unauthorized prior information given to the borrower can prevent him from losing his money and/or property buy entering into an agreement with the builder of unauthorized property, where proper approval is not there from component authority. Quality of work and materials used by builder can be checked at various stages of work so that the borrower gets the benefit for the amount invested by him for the said property. Assessing the work at various stages and recommending the correct disbursement to be released will prevent the borrower from paying additional amount to builder for work not carried out by him. A check can also be carried out on the estimate submitted by a borrower of current rates of materials by the finance company, so that they do not finance more than the actual cost of the property. A check on the progress of construction and interaction with the builder can safeguard the borrower, if the project suddenly comes to a standstill due to at lack of funds.

RD – Recommendation for disbursement in rupees

PC – Progress of construction in % points

AV – Aggregate Value = LC + CC

LC – Land Component

CC – Cost of Construction + Overheads + Profits

BC – Borrower’s Construction

CM – Cumulative disbursement made

Example: Flats

Loan = Rs 1,50,000

PC = 70%

AV = Rs. 2,00,000

LC = 20%

CC = 80%

BC = Rs 50,000

CM = Rs 40,000

RD = Rs 2,00,000 x 80/100 x 70/100 + 2,00,000 x 20/100 –50,000 – 40,000

= Rs. 62,000

In any financial system there is a general parameter laid down which restricts the advance levels to a certain percentage of the property cost which includes the land cost as well as the construction cost.

The National Housing Bank sets the guidelines, which is 70% of the cost of the proposed, including land cost.

The difference between the property cost and the maximum loan permissible is called margin or the own contribution.

Other Limiting Factors: The maximum loan possible is again restricted to levels as decided on the basis of repayment capacity (whichever is lower). The loan’s possible limit is limited to an extent such that the instalment payable every month by the borrower shall not exceed 1/3^rd of their joint take-home income. The period available at the disposal of the borrower to repay the loan is another limiting factor, which directly affects the payment capacity.

Instalments: Instalments are collected in the form of Equated monthly instalments (EMI) which provides for the payment of interest with principal for the payment of interest with principal simultaneously and is derived by the formula:

1 Lr(1+r)n

- -------------

1. (1+r)n - 1

Where

L: Loan

R: Rate of Interest in decimals

N: Period

Note: This formula gives an approximate value of EMI’s

Example: Mr. X approaches HDFC for a loan of Rs.5,00,000 for a period of 10 years for construction of a house, the rate of interest being 14.5% p.a. Mr. X has to pay in the form of EMI, an amount calculated as

1 5,00,000 x 0.145 (1.145)10

__ ---------------------------------

1. (1.145)10 –1

=Rs. 8,144.53

After credit, legal and technical appraisal and fixation of loan amount application is sent to Head Office for section. When sanction is accorded a sanction letter is issued to the application.

HFC’s in addition to the above mentioned documents insist on 2 guarantees from well-employed persons or established businessmen as further securities.

Finally, loan is disbursed and next comes post disbursement stage wherein monthly instalments are collected by HFC’s. In India it has been found out that the number of bad debt in this particular industry is very low.