Role and Rationale of Housing Finance System

NHB (Nationl Housing Board) was set up at a time when the local and regional level housing finance institutions were nearly absent, and the banking sector had no pressing priority to provide housing finance at a significant level. As a result, the sector had been grossly capital deficient and the housing shortage in the country had grown alarmingly.

Promotion function: The purpose of setting up more local and regional level specialized institutions is to have dedicated outlets for supply of housing credit. With the setting up of NHB in 1988, there have been sustained efforts at creating and supporting a new set of specialized institutions to serve as dedicated centers for housing credit. NHB’s role in this regard can be measured from the fact that from a handful of companies that were acting as dedicated housing finance institutions when NHB came into existence, there are now more than 345 such specialized institutions spread over the expanse of the country.

Regulatory function: The second important function of NHB is the regulatory role assigned to it. This responsibility becomes all the more relevant as the housing finance system enters a secondary phase of development in terms of integration with the debt and capital markets. The requirement of regulation also emanates from the need for a credible and stable housing finance system. Without in any manner going against the free market approach, NHB has attempted to put in place an effective system of “responsive regulation”. The housing finance system is still evolving in the country, and in this context it becomes necessary that it exhibits a greater amount of stability in terms of resources development, policy development and institution building.

NHB has evolved, over a period of time, directions and guidelines in keeping with the various functions it has to carry out. It has come out with guidelines for approving HFCs for financial assistance and for participating in their equity. It has also issued the Housing Finance Companies (HFC) Directions and guidelines for prudential norms for income recognition, assets classification etc. These guidelines have been formulated keeping in view the mandate given to NHB to establish a sound and healthy housing finance system in the country. With these guidelines in place and close monitoring and off-site and on-site supervision by NHB, the HFCs may be considered to be the more organized segment of the NBFCs group.

Financing function: The third important role of NHB is to provide financial assistance to various banks and housing finance institutions. As an apex refinance institution, the principal focus of NHB’s programs is to generate large scale involvement of various primary lending institutions to serve as dedicated outlets for assistance to the housing sector. These institutions include scheduled banks (both commercial and co-operative), regional rural banks, specialized housing finance institutions, state level agriculture and rural development banks and the state apex co-operative housing societies. NHB has formulated schemes to support all these agencies and help them to cater to the housing needs of the community at large. It also undertakes direct financing of projects for government-sponsored bodies/institutions.

The refinance assistance provided by NHB to HFCs has enabled them to increase their operations and cover a larger section of the population. The need for easy flow of institutional credit for housing in rural areas was being considered as necessary for quite sometime. This formed the background for the announcement of a separate scheme for financing rural housing by the Government of India. NHB formulated Swarna Jayanti Rural Housing Scheme, which was launched in August 1997. It envisages provision of institutional credit to individuals desirous of constructing or acquiring new dwelling units, and for extensions or repairs of existing units, in the rural areas of the country.

In view of the flexible approach needed to modulate the options according to the shelter needs of different sections of the population, the terms of the loan under the scheme has been suitably framed, and is being operated through the banking sector, the co-operative sector institutions and the HFCs which possess a substantial geographic coverage functional reach and necessary infrastructure to ensure its effectively operation. In this context, conscious about the long term nature of housing finance, sufficient backup has been in-built by way of refinance facility from NHB to all the eligible institutions, in order to supplement their efforts.

NHB is also considering to mobilize the support of NGO’s and community based financial institutions in extending housing finance to the people who have not had access to formal sector credit.