Housing Finance

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Venture Capital versus Debt Financing Venture Capital Objective Holding Period Instruments Realise 'market' investment returns Long term Common & preference shares, convertible warrants, options No Earnings multiple, NTA Debt Financing Regular interest & principal payments Short/medium term Loans, factoring, installment plans

Collateral Pricing

Yes Interest spread Increase leverage Cash sourced from the borrower Above the line Loan repayments

Impact on Balance Reduce leverage Sheet Impact on CashFlow Impact on P & L Exit Mechanism Cash sourced from the market Below the line Listing, buy-back, sale to 3rd parties

What is Housing Finance?
Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers. For example, what is understood by the term “housing finance” in a developed country may be very different to what is understood by the term in a developing country. The International Union for Housing Finance, as a multinational networking organisation, has no official position on what the best definition of housing finance is. However, the selection of quotes below is offered as a snapshot of what housing finance as a topic covers: “Housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a country’s legal environment or culture, economic makeup, regulatory environment, or political system”
(2009) Loïc Chiquier and Michael Lea, Housing Finance Policy in Emerging Markets, p. xxx.

In addition, the concept of housing finance and housing finance systems has been evolving over time. Looking at definitions from the mid-1980s, we see that housing finance was defined primarily in terms of residential mortgage finance:

“The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.”
(1985) Mark Boleat, National Housing Finance Systems – A Comparative Study, p. 1.

However, in more recent years, a number of other much wider definitions have appeared:

“Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nation’s housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.”
(2009) Peter King, Understanding Housing Finance – Meeting Needs and Making Choices, p.3.

or

“There is recognition of other relevant forms of housing finance [apart from residential mortgage finance] such as developer finance, rental finance, or microfinance applied to housing. Developer finance is often in the form of unregulated advance payments by buyers, and developers sometimes provide long-term finance to buyers through instalments sales when mortgages markets are not accessible. Microfinance for housing is typically used for home improvement or progressive housing purposes. Loans are typically granted without pledging properties. Although the overall impact of microfinance in housing remains limited, this activity can represent an important source of funding for those in the informal sector.

Slide 1: Presented by: Priya Jain PGDM IV Semester BBDNITM, Lucknow HOUSING FINANCE INDUSTRY IN INDIA …a seminar on business policy report presentation

Slide 2: APPROACH INTRODUCTION ENVIRONMENTAL ANALYSIS MARKET OF HOUSING FINANCE AND RELATED ISSUES RECOMMENDATIONS AND SUGGESTIONS

Slide 3: INTRODUCTION

Slide 4: HOUSING FINANCE Housing finance connotes finance (or loans) for meeting the various needs relating to housing, namely: a) Purchase of a flat or house b) Acquisition of a plot, and construction of a house c) Construction of a house d) Extension of a house e) Repairs, renovation and upgradation of a house/flat f) Taking over housing loans from other banks/housing finance companies. Create & meet a growing housing demand Reduce poverty Prevent slum proliferation Engine of equitable economic growth Take part in financial sector liberalization IMPORTANCE

Slide 5: STRUCTURE RBI NATIONAL HOUSING BANK (NHB) Commercial Banks Housing Finance Companies Cooperative Institutions HUDCO HDFC Bank Sponsored Insurance Companies sponsored Private Sector Companies Apex Cooperative Housing Federations State Cooperative Banks Urban Cooperative Banks State Cooperative Agri. & Rural Banks

Slide 6: 1951 2003 2020 2015 1980 entry stage growth stage maturity stage saturation stage LIFE CYCLE Simple Segmentation Small Product Range Random Customer Segmentation Substantial National Advertising Measurement of sales success by key figures Less examination

of customer satisfaction Credit process compatible to segmentation Regular customer calls Increasing defaults

Slide 7: BUSINESS CYCLE

Slide 8: ENVIRONMENTAL ANALYSIS

Slide 9: INFLUENCING FACTORS SOCIO-CULTURAL Lifestyle changes Family break-ups Growing population Regional shifts Increase in working force Impact of generation Y ECONOMIC TECHNOLOGY REGULATORY Reserve Bank of India requirements National Housing Board requirements Fiscal concessions Interest rates Lower output volatility Inflation Hardware improvements Software improvements Econometric modelling

Slide 10: PORTER’S FIVE FORCES ANALYSIS RIVALRY WITHIN THE INDUSTRY

BARGAINING POWER OF SUPPLIERS THREAT OF NEW ENTRANTS BARGAINING POWER OF CUSTOMERS THREAT OF SUBSTITUTES HIGH HIGH MEDIUM MEDIUM HIGH

Slide 11: SWOT ANALYSIS STRENGTHS WEAKNESSES OPPORTUNITIES THREATS An active mainstream sector Effective regulatory framework Interest rate war persistent Increasing Urbanization Housing microfinance has potential Tax rebates on house loans Falling interest

rates Lower transaction levels in realty sector High switching costs of customers NHB’s refinance assistance mainly directed towards developed players Extensive network of regional banks, microfinance institutions, cooperatives, credit unions and rural banks Dilution in due diligence on part of lenders is a often seen Lack of uniformity of norms Increase in default rates Lower SLR and CRR with enhance liquidity, so more loans can be offered Higher cost of home ownership is mainly dampening the demand at other end

Slide 12: VALUE CHAIN ANALYSIS PRODUCT DEVELOPMENT BACK –END PROCESSING RISK MANAGEMENT DISTRIBUTION TECHNOLOGY market knowledge best practice transfer introducing successful market vehicles to better target new segments with innovative products clearance settlement efficiency and cost management allows for price flexibility, creating competitive advantage credit controls CRM expertise experience in managing risk allows companies to charge high premiums while managing their NPL’s online loaning cross selling expanding branch networks and distribution platforms improves direct access to customer base CUSTOMER BASE

Slide 13: MARKET OF HOUSING FINANCE & RELATED ISSUES

Slide 14: INDIA – a potential market HOUSING SHORTGAGE CATEGORIES OF HOUSING LOAN DEMAND

Slide 15: INDIA – a potential market MORTGAGE PENETRATION HOUSING FINANCE DISBURSEMENT

Slide 16: MARKET SHARE

Slide 17: FUNDING SOURCES Various sources of funding for housing finance companies include : Public Deposits Term Deposits Institutional Borrowings (domestic and international) Capital Markets Foreign Currency Convertible Bonds Refinance from NHB Securitization

Slide 18: MARKETING & DISTRIBUTION Aggressive but mature marketing strategies pursued Extensive use of electronic and print media and mobile telephony Co-hosting or sponsoring property exhibitions Entering in special tie-ups with developers Roping in celebrities as brand ambassadors “Feet-on-street” selling approach Emergence of a new distribution arm “Direct Selling Agents” Cross selling of products and services

Slide 19: RECOMMENDATIONS & SUGGESTIONS

Slide 20: RECOMMENDATIONS BROAD BASING THE MARKET Mortgage insurance Need for an independent floating rate benchmark Introduction of new products REGULATORY ISSUES Need for a level playing field Removal of conflicts of interests Greater uniformity of standards Asset liability management FUNDING ISSUES Need for diversified resources Enhancement of exposure norms BUILDING AN INFORMATION DATABASE BETTER ACCESS TO CREDIT HISTORY OF CLIENT

Slide 21: CHALLENGES HOW TO GET TO TRUE POOR ? Microfinance for housing Remittance mortgages IMPACTING THE SUPPLY SIDE Increase house production via developer financing Ensure affordability CREATING NEW PRODUCTS/RELATIONSHIPS TO EXPAND IMPACT POLICY CHANGES Affordable land use and development rules Smarter housing finance related subsidies Efficient registration of property titles and liens Framework for long term mortgage securities

Slide 22: HOUSING FINANCE INDUSTRY IN INDIA …“better a hut on the ground than a castle in the air” THE END

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