The National Housing Bank (NHB), the regulator of India’s mortgage industry, sees a lead role for itself in developing the market for financial products associated with the housing finance industry.
The bank is doing this with products such as mortgage guarantees and reverse mortgage schemes on the one hand, and reaching out to retail consumers on the other.
In an interview with Mint,S. Sridhar, chairman and managing director of NHB, outlined his plans for the regulator. Edited excerpts:
You have been talking about repositioning the National Housing Bank. Could you elaborate on where the bank is headed?
I am looking at repositioning NHB from three angles—regulatory, development and financing. I believe that the role of the regulator is not just rule-based. We are trying to develop a customer interface for housing finance companies (HFCs)—something regulators all over the world have done (for their customers), including the Reserve Bank of India.
Most of the concerns that customers have in dealing with commercial banks or HFCs are issues such as transparency and fairness. These issues have been coming up with respect to floating rates, especially. This may not be a regulatory lapse, but there is definitely a need to understand the customer better.
What is NHB doing to educate customers?
We have put up guidelines on customer education and the concept of mortgage counsellors—someone who can read the fine print of loan documents and explain its implications to the borrowers. They may also give advice on which loan is best suited to you. These counsellors, after passing an online examination, will receive accreditation from NHB. Consumer education is becoming very important today. I have come across some well-educated people who have taken some inexplicable decisions on home loans as they have not read the fine print of loan documents.
We are also trying to simplify the underwriting and the valuation processes and reduce the documentation. We are trying to explore if there is a way to make it simpler and shorter. We have set up a small group of bankers and HFCs to find out how to tackle all these issues. For instance, in the US, you have an automated underwriting—you fill in a form online and get a score and on the basis of the score you get the loan. There is no discretion left for the banks. The whole issue is (about) standardizing procedures, simplifying documentation across the entire industry.
Would both HFCs as well as banks adopt these regulations?
These measures will also have to be adopted by banks, which today account for about two-thirds of the mortgages portfolio. Eventually, we will have something like the scores you have in the US. Based on a scoring mechanism, the customers can be rated. And if you can rate customers, you can price your risk better. As we move into Basel II norms (for banks; these mandate a certain level of capital), risk-adjusted pricing becomes very important. We have to develop the entire market infrastructure to do that. Today there is no benchmark for these things. NHB will put in place such a benchmark. We have a lot of overseas contacts and will leverage them to develop the market.
What about valuations? Is NHB evolving standards on those too?
I am not at all happy about the way valuations are being done today. The capital market regulator (recently) came down (hard) on the valuations of real-estate companies. I am trying to ensure proper valuations of smaller properties such as flats. Today it may not matter, but two years down the line it will matter as the banks will price their risk based on the valuation. It is important that the banking community has a dialogue with the valuation community. I am trying to push the regulatory role of NHB to regulate the entire market infrastructure. The market needs to be much more sophisticated than what it is today.
Non-performing assets (NPAs) have been rising both for HFCs and banks.
Actually, NPAs have not risen that much. The gross NPAs in the residential segment are less than 2% while net NPAs are less than 1%. NHB is continuously monitoring lending and has put some caps on non-housing loans such as loans to builders and loans against housing properties.
On the whole, HFCs are in reasonably good health and our attempt has been to keep the HFC universe financially stable. The asset quality continues to be quite good. If there are shocks from the market, the system should be able to take care of it.
What kind of shocks to do you envisage?
If interest rates rise high because of high inflation, or if there is a property crash as prices are quite high now... We are ensuring that HFCs’ exposure to the property markets is minimal—in terms of what the loan to value ratio should be. The loan to value ratio has been coming down. The mortgage guarantee product that we are bringing in will also help them hedge these risks.
What about rentals and the lack of enough rental housing? In places such as Mumbai and Hyderabad, this is a critical issue.
The government thought that abolishing the Rent Control Act and the Urban Land Ceiling Act will release a lot of housing units into the market, but exactly the reverse has happened. We are looking at how best to bring the available housing into the market in cities such as Hyderabad and Mumbai. It is important to look at ways of increasing the housing stock. The supply can be increased—developers are saying this. Within the constraints of land availability, better land use patterns and allowing commercial and residential zones to be combined in the same area can increase the supply of housing.
How do you plan to develop the market for housing finance related products?
We want NHB to be able to lead the industry in terms of new products. The one-size-fits-all kind of approach cannot work any more. An EMI (equated monthly instalment) type product can no longer serve the needs of all consumers. Our approach is to identify segments that are under-served and develop products for them. That is how the reverse mortgage product got developed. We are finalizing the guidelines for the product.
We are also working on indemnity and residential mortgage-backed securitization instruments for low-income mortgages. This is crucial for deepening the secondary mortgage market. There is a tremendous latent demand for these products.