Housing Finance Market In India

Published Date: 02 Nov 2017

Faculty

Government Polytechnic, Bhubaneswar

[email protected]

Abstract:

Marketing is regarded as the pivotal force behind strategic planning and business operations. Effective marketing calls for managers to be equipped with adequate information for planning and allocating resources to different markets, products, territories and marketing tools. The housing finance being a financial service is considered to be influenced by marketing strategies of the marketers. As an outcome of increased competition, the market changed from a sellers’ one to a buyers’ one- where the customer is armed with choice, negotiating power and demanding quality services. The present study makes an attempt to study the marketing practices adopted by Commercial Banks & Housing Finance Companies in India in general and Odisha in Particular.

Keywords:

Commercial banks, Housing Finance Institutions, Housing Finance Services, Household, Housing Finance Schemes, Quick Processing of Home Loans, Credit Worthiness

Introduction:

Indian housing finance sector has experienced unprecedented changes in its structure from its formulation stage. The structure of the Indian housing finance market rapidly changed with the arrival of the commercial banks in the late nineties. The beneficiary at the end in this stiff competition is the customer. The marketers in the housing finance market, due to tough competition, started offering heavy concessions to the home finance seekers. The players with competition to each other started offering most value added and efficient services to the customers. Virtually, the housing finance market became dominated by the customers with various options in their hands. The offering of services and applying best marketing strategies are some of the weapons in the hands of the marketers to attract customers and retain them. This objective can be achieved by good quality service, better human approach, courtesy of the employees and better infrastructure facilities. Familiarity with various laws relating to home loans, knowledge about environmental constraints & new product developments will help the marketers to compete in the housing finance market.

Two major types of institutions primarily dominate the formal housing finance system in India. The two major institutions are Commercial Banks (CBs) and Housing Finance Companies (HFCs). These two institutions share about 99.5 percent of total housing finance market of India. Co-operative institutions share the rest of 0.5% of Indian housing finance industry. In the pre-reforms era, the HFCs were prominent in the institutional housing finance market, many of these HFCs being the housing finance subsidiaries of prominent CBs or those promoted by leading developmental institutions. The most prominent HFC continued to be HDFC-the pioneer HFC and also the largest in India, ever since its inception in 1977. Commercial banks were permitted by the banking regulator RBI to provide onward lending towards individual housing finance in 1999. Accordingly, many CBs entered into the system, thus poising a serious threat to the HFCs which hitherto controlled almost the full market as specialized institutional agencies in housing finance. With the entry of CBs, the competition in the industry has become very intense and the relative prominence of the HFCs gradually met a drastic fall. HFCs were dominating the market till the year 2001-02 putting the CBs behind them. However, from the year 2002-03, the scenario changed and CBs dominated the market keeping the HFCs behind them. (Manoj, 2010). Consequently, the market share and profitability of HFCs are growing under threat year after year. The marketing strategy adopted by the CBs was aggressive in nature for which the housing finance market experienced cut-throat competition with the developed new marketing strategies. Although HFCs are specialized institutions in housing finance, their market share was taken away by the CBs. So, marketing played an important role in determining the market share , profitability and survival of the players in the market. Marketing of housing finance became an essential for the institutions operating in Indian housing finance industry. This research work includes extensive research work which is carried out to measure the differences in marketing strategies adopted by Commercial Banks and Housing Finance Companies.

Past Studies:

From the origin of human life to this modern society, housing bears an important aspect in the life of every individual. The basic need of housing is growing day by day due to many factors. A number of studies have been undertaken in the Individual level and Institutional Level to access the marketing practices adopted by Commercial Banks & Housing Finance Companies in India.

Lafarge Group (2010) conducted a survey and the work of study was done by Escale Responsible in the year 2010 on affordable housing. The various objectives of the study are to give an overview of low income housing sector in India and to identify key innovations and initiatives on housing for the poor people. The study put priority on finding cheap land and construction of smaller housing units with cheaper building materials with participation with NGOs and HFIs and banks. Mehta Asit C. (2010) studied over housing sector in India and reviewed the performances of different key players of housing finance market in India. It is found that maximum shortage of housing is found in UP, Tamil Nadu, Maharastra and Madhya Pradesh.

Orissa Review (2010) included a chapter titled as ‘Orissa-Housing Profile’ which states that total number of households in Odisha are 77.4lakhs and census houses are 98.7lakhs. About 77% of the occupied houses in rural areas are used for residential purpose which is 75.4% in case of urban areas.

Veeraiah Konduri (2009) has opined that a decent housing is the common and minimum need of any individual for which she/he works for generations to get it realized. Vandell, Kerry D (2008) studied about price level changes of houses. It has been mentioned in his paper that there is a sharp rise and then sudden drop down of home prices from the period 1998-2008. Manoj p k (2010) has studied over the formal system of housing finance in India. It has mentioned by the author that till the FY 2002, housing finance market was dominated by HFCs and thereafter CBs took the lead in housing finance. The main purpose of the study was to make a review of the institutional system for housing finance in India, study problems and challenges faced by HFCs and analyze operational efficiency of major HFCs. Mahmood Zaigham Rizvi (2010) took an attempt to highlight housing as a social challenge and role of Housing Finance to face that social challenge. Chandrasekhar Dr V. & Krishnamoorthy Katyayini (2010) studied over the housing finance system prevailing in India and beyond. Mortgage as a percentage of GDP of different countries is shown in a graph wherefrom it is seen that it is 72.3% for USA, 86% of UK and only 4% in case of India. Berstain David (2009) mentioned that during the period 2001 to 2008 there is an increase in use of home loans as compared to private mortgage insurance (PMI). Samantak Das (2009) in his research report studied over Bank’s Credit Exposure Growth as regards Housing Credit, Home Loan Interest Rates , HDFC’s Credit Growth and trend in residential property prices for the period from 2004 to 2009. Karnad Sud Renu (2008) has presented a paper in which it was highlighted about overview of housing in India, housing finance in India, issues of affordable housing, government initiatives and role of private sector.

The marketing effectiveness has drawn attention of many researchers and business practitioners over the last years. Manoj PK (2010) studied over institutional housing finance system in India and challenges of HFCS in the emerging housing finance market in India. Mehta Asit C. (2010) studied the competitive advantage of players of housing finance market in India. Gupta S.L. & Mittal Arun (2008) have made an analysis of the various promotional strategies adopted by banks operating in India. Further it was also mentioned that out of the respondents 85% are well informed about the difference between public and private sector banks. Private sector banks are little bit better in attracting people in mass media advertising in comparison to public sector banks. Kwaku Apalh-Adu, Aian Fyall and Satyendra singh (2001) have examined the link between effective marketing practices and business performance in the financial industry. Soteriou Adnreas and Zenios Stavros A. (1997) developed a general framework for combining strategic benchmarking with efficiency benchmarking of the services offered by bank branches. Reliability, Responsiveness, Assurance, Tangibles and Empathy are the inputs of the model which are used for the operating efficiency model.

Objectives of the study:

To facilitate the study the following objectives were considered, like:

To evaluate the growth and development of Housing Sector of India

To examine the marketing of housing finance services in Odisha.

Scope of the study:

It is a specific research on the perception and experience of the marketers on marketing of housing finance in Odisha. The research is about various services offered by Commercial Banks and Housing Finance Companies.

The scope of the study is to identify any difference in marketing practices adopted by Commercial Banks and Housing Finance Companies. The study includes selected housing finance institutions from both public sector and private sector who are major players in the housing finance market of India. The City of Bhubaneswar along with some other cities, where housing loans are disbursed more, is included in the study.

Methodology of the study:

The methodology is the guiding principle for the creation of knowledge. (Yeganeh, Su and Chrysostome 2004). The present study is an exploratory research study, which is based on both primary and secondary data. Review of past literatures & conceptual/ theoretical overview gave knowledge of the study framework in the area of study. The researcher resorts to a choice-based or convenient sampling approach for selecting the respondents for this survey. Respondents to this survey are chosen from a list of known persons availed Housing Loans from the city of Bhubaneswar & Cuttack. The total sample consists of 200 respondents through a structure questionnaire for the study. Data collected from the survey are analyzed and interpreted using various statistical methods usually employed in positivistic study. Simple statistical tools like percentage, ratios, cross-tabulation, graphs, mean & chi-square test have been adopted to examine the data collected.

Housing finance market in india:

The changes in Money market funds helped to eradicate the constraints of interest rate ceilings, and provide an alternative investment vehicle grounded on highly rated short term debt security. Deregulation process contributed for development of commercial banks to act as primary providers of housing finance.

Over past 20 years housing finance pattern has been changed over to a marked extent leading to securitization and new types of mortgage contracts. Housing finance market in India was evolved as an oligopolistic market structure with three dominant players like HDFC, ICICI Bank and SBI. These three institutions accounted for about 75 percentage of the housing finance market. It was soon felt by the Government that monopolistic state owned providers of housing finance are not the most efficient of cost effective mechanism to develop the deepen the mortgage market . HUDCO & NHB have been set up by the Government of India to improve the condition of housing and housing finance in the country. State owned companies like LIC Home finance , SBI Home finance etc have been set up to fulfill and satisfy the increasing demand of people for housing finance . Private sectors also have played an important role in this sector.

Various Housing Schemes of Govt. of India

Year of Launch

Name of The Housing Scheme

1952

Integrated subsidized housing scheme for industrial workers &EWS

1954

LIG Housing scheme

1956

Subsidized housing scheme for plantation workers

1959

Middle Income Group housing scheme

1959

Rental housing scheme for state Government Employees

1956

Slum Clearance and Improvement scheme

1959

Village housing projects scheme

1959

Land acquisition and development scheme

1971

Provision of house sites of houseless workers in rural areas

1972

Environmental improvement of urban slums

1980

Sites and services schemes

1985

Indira Awas Yojana

1990

Night shelter scheme for pavement dwellers

1996

National slum development program

1998

2 million housing program

1999

Credit-cum-Subsidy Scheme for Rural Housing

2001

Valmiki Ambedkar Aawas Yojana

2009

Affordable Housing in Partnership (JNNURM)

(Source: Compiled from various Five Year Plan Documents, Government of India.)

6.1 Phases of Indian Housing Finance Industry:

In India housing market was dominated by housing finance companies which was changed after late 1990’s by aggressive entry of commercial banks. The market was changed from a sellers’ to a buyers’ one in which the customer is armed with choice, negotiating power and demands quality service.

Time Phases

Status of Housing Finance

Up to Late 1990s

Specialized Lenders- Housing Finance Companies.

Bank / Insurance Co sponsored HFCs

Builders Promoted HFCs.

Company Promoted HFCs

1998-2003

Aggressive entry of Bank- HFCs lose market share.

Irrational competition

Rapid disbursement.

Credit quality issues.

2003 onwards

Oligopolistic market structure.

Top 3 key players have over 80% of incremental market share.

More rational market.

Sustained mortgage growth at 25%.

Housing Finance –Timeline

(Source: D’Souza Conrad, "The Housing Finance Market in India" Workshop on Housing Finance in South Asia, Indonesia, 27th May 2009.)

6.2. Category of Consumers of India:

Population during 2005

Category of Population

Class

Income per Annum

CARG

Population during 2010

22 Million

Rich

A

> 2,42,000

11%

37 Million

16 Million

Consuming Class

B

2,11,200- 2,42,000

6%

21 Million

34 Million

Climbers

C

1,33,672-2,11,200

8%

49 Million

80 Million

Aspirants

D

71,280-1,33,672

0%

80 Million

53 Million

Poor

E

<71,800

-9%

35 Million

(Source: National Council of Applied Economic Research, 2005.)

6.3. Loan Disbursements during the Tenth FY Plan (`. in Crore)

Institutions

2002-03

2003-04

2004-05

2005-06

2006-07

Commercial Banks

23,553

32,816

50,398

60,000

67,000

Housing Finance

Companies

17,832

20,862

26,000

29,500

32,500

Co-operatives

642

623

421

500

500

Total

42,027

45,301

76,819

90,000

1,00,000

(Source: Report of Tenth Plan Document, Chapter-III, p-45.)

6.4. Houseless Households & Houseless Population of India (Figures in Millions)

Year

Houseless Households

Houseless Population

Rural

Urban

Total

Rural

Urban

Total

1971

3.88

1.77

5.65

15.20

4.66

19.86

1981

4.13

2.03

6.16

17.24

6.19

23.43

1991

3.05

2.17

5.22

12.82

7.25

20.07

2001

2.60

1.88

4.48

11.65

7.89

19.44

(Source–Registrar General of India.)

Houseless population is defined as the persons who are not living in ‘census houses’. A ‘census house’ is referred to a ‘structure with roof’. Houseless population are likely to live ‘on the road side’, pavements, temples, platforms and the like. (Census of India).

6.5. Share of HFCs & Banks, in Housing Finance Market

YEAR

HFCs

Banks

1999-2000

55

45

2000-01

58

42

2001-02

56

44

2002-03

50

50

2003-04

48

52

2004-05

32

68

2005-06

28

72

2006-07

29

71

2007-08

32

68

2008-09

34

66

2009-10

37

63

(Source: ACMILL Research, Housing Finance Sector, October 2010.)

6.6. Housing Shortage in Odisha

Census Year

Housing Shortage

Odisha

India

Rural

Urban

Total

Rural

Urban

Total

1951

0.39

0.21

0.6

6.5

2.5

9.0

1961

0.47

0.23

0.7

11.6

3.6

15.2

1971

0.72

0.28

1.0

11.6

2.9

14.5

1981

0.88

0.32

1.2

16.3

7.0

23.3

1991

1.04

0.36

1.4

14.67

8.23

22.9

2001

1.11

0.39

1.5

14.1

10.6

24.7

2011

1.50

0.56

2.06

47.43

26.53

73.96

6.7. Housing Profile of Odisha

Odisha

Total Number of Households

78,70,127

Average size of households

4.8

Permanent Houses

27.6%

Semi-permanent Houses

25.0%

Temporary Houses

47.4%

Census- 2001.

(Source : Registrar General of India.)

6.8. Housing Finance in Odisha & Role of SCBs

At this stage an attempt is taken to highlight about the home loan outstanding position of SCBs in Odisha during the period from 2000 to 2009. For the purpose of analysis a table is prepared showing the home loan outstanding of SCBs in Odisha for the period from 1999-2000 to 2008-09.

Home Loans Outstanding of SCBs in Odisha.

Years

Home Loan Outstanding in crores

Growth %

1999-2000

359

-

2000-01

540

50

2001-02

1019

89

2002-03

1320

30

2003-04

2318

76

2004-05

3253

40

2005-06

3819

17

2006-07

4109

8

2007-08

4100

-0.18

2008-09

5000

22

(Source: Compiled from Annual Reports of RBI of different years.)

As per Census-2011, population of India crossed 1210 million and this rapid increase in population puts huge pressure on demand for housing and consequently there arises housing shortage. Housing industry in India has grown significantly in the past few years due to continuous growth in population of urban areas, growing income levels, rise in nuclear families and easy availability of housing finance. The determinants of housing supply are availability of land, financial issues and legal issues. Although banks continue to dominate the housing finance space on account of their low cost advantage, it is assumed that HFCs do score better in terms of credit assessment skills and better operational efficiency. Indian housing finance industry has witnessed robust growth due to active participation of CBs and it is estimated that the growth rate will sustain in the long run also.

Results & Discussion:

The study is made on the basis of the intensive interview with the branch managers and senior officers of different housing finance institutions. The special area of focus for present study is the survey related to housing finance organizations’ strategic marketing practices. About 170 respondents from commercial banks were asked with the questionnaire and 30 respondents were from housing finance companies.

7.1. Strategy for development of housing schemes:

To examine the strategy adopted in introducing housing finance schemes, the respondents were given some important considerations. The perception of the respondents are drawn in the following table-

Schemes

Commercial Banks

Housing Finance Companies

Total

χ2 Value

As per competitors’ Schemes

48

28.3 %

12

40.0 %

60

30.0 %

12.625*

(DF-3)

T.V.-7.815

Government Guidelines

13

7.6 %

06

20.0 %

19

9.5 %

By Customers’ Survey

19

11.2 %

06

20.0 %

25

12.5 %

Directions from Head Office

90

52.9 %

06

20.0 %

96

48.0 %

Total

170

100%

30

100%

200

100%

(Source: Primary Data. DF- Degrees of Freedom ,T.V.-Table Value)

It is found that most of the financial organisations depended upon the directions of head office for development of new schemes which accounts 48% on an average of both Commercial Banks and Housing Finance Companies. Of the respondents of Commercial Banks, 52.9% are of the view of depending upon head office directions for development of any new scheme. The second influencing factor was pattern of ‘competitors’ schemes’. About 30% of the respondents of both commercial banks and housing finance companies have adopted competitors’ pattern of schemes. But, it is interesting to note that market survey has not been influential factor in planning new schemes. The respondents of Housing Finance Companies give equal weightage to other three factors. New schemes are developed mainly on the basis of head office directions and competitors’ schemes.

Considering the table values, chi-square test is applied and the result comes out to be 12.625 which is more than the table value at 5% level of significance. The test result shows that there is clear difference between Commercial Banks and HFCs for development of new schemes. Commercial banks should also develop new schemes taking into consideration the schemes of the competitors as it is largely done by housing finance companies.

7.2. Quick processing of home loans:

Quick processing of home loan applications is one of the important steps for attracting consumers more and more towards the organizations. The perception of the respondents with regards to quick processing of home loan applications is presented in the table below starting from very satisfied to very dissatisfied.

Response Regarding Quick Processing of Loan Applications

Very Satisfied

Satisfied

Neutral

Dissatisfied

Very Dissatisfied

Total

χ2Value

Commercial Banks

50

29.4 %

93

54.7 %

21

12.4 %

06

3.5 %

00

00%

170

100%

2.035

(DF-3)

T.V.-7.815

Housing Finance Companies

10

33.3 %

18

60.0 %

02

6.7 %

0

0%

0

0%

30

100%

Total

60

30.0 %

111

55.5 %

23

11.5 %

06

3.0 %

00

00%

200

100%

(Source: Primary Data. DF- Degrees of Freedom, T.V.-Table Value)

It is observed that 84.1% of the respondents of commercial banks are either satisfied or very much satisfied with the processing of home loan application forms, whereas about 93.3% of the respondents of housing finance companies are satisfied or very much satisfied with the same services. All the financial institutions are giving more importance to the quick processing of the application forms. This is one of the point of attraction of this service industry.

Applying chi-square to the table, the value comes out to be 2.035 which is less than the table value at 5%level of significance. The test result shows that there is no significant difference between Housing Finance Companies and Commercial Banks regarding quick processing of home loans. Both of the sectors are insignificant as to quick processing of home loans. So there is no significant difference between the sectors as regards quick processing of home loan applications.

7.3. Clarity of information about terms & conditions of home loans:

Terms and conditions relating to home loans are expressed by the CBs and HFCs in written form but still some terms and conditions remain difficult to be understood. So clarity of information is important from bankers’ point of view. Respondents’ perception on clarity of information is presented in the following Table.

Very Satisfied

Satisfied

Neutral

Dissatisfied

Total

χ2Value

Commercial Banks

74

43.5 %

80

47.1 %

12

7.1 %

04

2.4 %

170

100%

8.406*

(DF-3)

T.V.-7.815

Housing Finance Companies

16

53.3 %

08

26.7 %

06

20.0 %

00

00 %

30

100%

Total

90

45.0 %

88

44.0 %

18

9.0 %

04

2.0 %

200

100%

(Source: Primary Data. DF- Degrees of Freedom, T.V.-Table Value)

It is found from the table that, 90.6% of the Commercial Banks’ respondents are satisfied with the clarity of information supplied. While analyzing the behaviour of Housing Finance Companies respondents, it is found that 53.3% respondents are very satisfied while 26.7% are satisfied with the clarity of information supplied.

The table values are tested with chi-square and the value found to be 8.406 which is more than the table value. The test is significant at 5%level of significance. So the test reveals that there is significant difference between the Commercial Banks and Housing Finance Companies as regards clarity of terms and conditions of home loans. So, housing finance companies should try in this regard to provide better clear information to customers.

7.4. Ability to assess credit worthiness of customers:

Granting loans on housing need some assessment of credit worthiness of customers. Credit worthiness is assessed by the documents submitted by the customer but still the loan managers assess the credit worthiness of the customers from their own experience before granting of home loans. The assessing capacity of the workers on credit worthiness of customers is presented below in a table.

CBs

HFCs

Total

χ2 Value

Very Satisfied

51

30.0 %

08

26.7 %

59

29.5 %

1.550

(DF-3)

T.V.-7.815

Satisfied

106

62.4 %

18

60.0 %

124

62.0 %

Neutral

12

7.1 %

04

13.3 %

16

8.0 %

Dissatisfied

01

0.6 %

00

00 %

01

0.5 %

Very Dissatisfied

00

00 %

00

00 %

00

00 %

Total

170

100%

30

100%

200

100%

(Source: Primary Data. DF- Degrees of Freedom, T.V.-Table Value)

It is noted that 30% of the respondents of Commercial Banks are very satisfied in comparison to 26.7 percent of Housing Finance Companies as regards assessing creditworthiness of customers. Further, 62.4% of Commercial Banks respondents are satisfied with the assessing capacity of their employees in comparison to 62% average of both Commercial Banks and Housing Finance Companies. From the Housing Finance Companies respondents, about 60% respondents are satisfied with the assessing capacity.

Taking the values of the table into consideration, chi-square test is applied and the calculated value is 1.550 and the value is less than the table value for which it is insignificant at 5% level of significance. So the calculated result reveals that there is no difference in the assessing capacity of the workers of both Commercial Banks and Housing Finance Companies.

7.5. Valuing specific needs of customers:

Understanding the specific needs of customers and taking steps in that regard helps to produce satisfied customers. In order to know how far Commercial Banks and Housing Finance Companies understands specific needs of customers, the survey was conducted and the result is presented in the table below.

Strongly Agree

Agree

Neutral

Disagree

Strongly Disagree

Total

χ2Value

Commercial Banks

57

33.5 %

76

44.7 %

09

5.3 %

14

8.2 %

14

8.2 %

170

100%

20.848*

(DF-4)

T.V.-9.488

Housing Finance Companies

16

53.3 %

02

6.7 %

00

00 %

06

20.0 %

06

20.0 %

30

100%

Total

73

36.5 %

78

39.0 %

09

4.5 %

20

10.0 %

20

10.0 %

200

100%

(Source : Primary Data. DF- Degrees of Freedom, T.V.-Table Value)

From the table, it may be noted that about 78.2% of respondents from Commercial Banks ‘agree’ that their organization better understands specific needs of customers. From the respondents of Housing Finance Companies, about 60% respondents agree that their organization better understands specific needs of customers. Taking into consideration of all the customers, it is found that about 39% of respondents ‘agree’ that their organization better understands specific needs of customers and about 36.5% respondents ‘strongly agree’ to this effect.

Chi-square test is applied to the table and the computed value is more than the table value at 5% level of significance and the computed value comes out to be 20.848 which shows that there exist significant difference between Commercial Banks and Housing Finance Companies as to the matter that their organization better understands specific needs of customers. Housing finance companies should try to understand better the specific needs of customers.

Conclusion:

Housing is one of the basic needs of society. It is the place which witnesses all the important events in the life of a human being. Indecent, unclean and inhuman living conditions seriously affect and endanger both the physical and mental health of individuals. For the progress of nation, it is required that a confirming habitat in proper surroundings is available to every citizen. The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. The essential feature of any system is the ability to channel the funds of investors to those purchasing their homes. Marketing of financial services is a unique and highly specialized branch of marketing. The environment in which financial services are marketed is becoming more competitive. The study of financial services marketing is in many ways far more fascinating than other areas of marketing. In this research, an evaluation of marketing strategies of commercial banks and housing finance companies is made. Marketing strategies adopted by commercial banks and housing finance companies show their competitive edge over each other. There are different predictable behaviours that consumers often exhibit in their dealings with financial service providers. So this research work provides sufficient scope for further research and analysis.