Competitive Dynamics of Indian Housing Finance Industry

Ashwani Kumar Bhalla Senior Lecturer SCD Government College Ludhiana (Punjab) ashwanibhalla@gmail.com. Dr. P.S. Gill Professor Punjab School of Management Studies Punjabi University Patiala. Dr Parvinder Arora Associate Professor Institute of Management Technology

Ghaziabad parora@imt.edu

Competitive Dynamics of Indian Housing Finance Industry

Abstract:
The growth in housing and housing finance activities in recent years reflect the buoyant state of the housing finance market in the country. The financing institutions have come to see good value in funding this component of the economy. With a growing number of players, the housing sector is becoming increasingly marketdriven. The affordability of housing loans clearly appears to have improved with fast growing number of borrowers. The market has also witnessed change in lending practices in certain segments to accommodate customer needs, as an offshoot of increased competition and a buyers market. There seems to be high intensity of competition among different players of the Housing finance industry. But this competition needs to be measured to observe the efficiency of the provision of housing finance services, the quality of housing finance products and the degree of innovation in the sector, etc. The Present paper is an attempt to measure the level of competition in Indian housing finance industry for the purpose of which Herfindahl Hirschman Index (HHI) has been used as a tool for measuring the concentration.

Key Words: Housing Finance, Housing Finance Companies, Herfindahl Hirschman Index.

Competitive Dynamics of Indian Housing Finance Industry

Characteristics of Indian Housing finance Industry: In the post liberalization era Indian housing finance industry has registered unprecedented Growth. Housing finance in India has evolved in three distinct phases. The first phase occurred before the 1970s when the government, through its various social schemes for public and low-cost housing, was the sole provider of housing finance. Housing finance through recognized institutions was relatively non-existent in India till 1971. There were few takers for housing finance in the country. Hardly 10% of the houses were built or purchased through institutional agencies and the rest 90% were dependent on peoples own savings and borrowings from friends and relatives (padhiari et al., 2001). According to the Indian National Statistical Surveys (NSS) 44th round survey, more than 80 per cent of housing finance comes from private savings, sale of assets and non-formal sources of credit(Biswas Smita., 2003). Earlier it was considered socially unviable to borrow funds. Theres been an evident shift in perception and mindset in the Indian middle class over the last five to ten years, thanks to the impact of liberalization and opening up of the Indian economy, a rise in average income across households, and a palpable desire to own things now Prashat Mahesh., 1998) . The most crucial aspect of this shift in the consumers mindset is perhaps explained by the fact that the young (or Generation Next) are more in charge of their lives and eager and impa tient to assume the world. Its a generation that is independent, self-reliant and nuclear in nature. And it is this eagerness to succeed that has fuelled a drive to own what one desires the most: a home, a car and a healthy lifestyle. Other drivers have been incentives from the government to buy homes, improved quality of buildings and property services and a

bouquet of financial options. Tax concessions, property price dips and lower interest rates have also helped. But whats helped more is the change in consumers mindset over a loan being a stigma, the extra freedom of making an informed choice, and flexible, customized finance options coupled with mutual trust (Karnard Renu., 2004). In the second phase formal system of housing finance was originated in India in 1971 with the establishment of the Housing and Urban Development Corporation Limited (HUDCO) in the public sector. HUDCO provided technical assistance to statesponsored undertakings, housing and urban development institutions, and the cooperative sector. HUDCO was established at a time when the country was facing problem of growing housing shortage and restricted availability of Bank credit to this sector. Major objective of establishing HUDCO was to enhance the residential housing stock by providing an avenue for housing finance on a systematic and professional basis and to increase the flow of resources to this sector by integrating the domestic housing sector with the capital market. However HUDCOs role was

that of wholesaler which financed the public housing agencies rather than individual. In 1977, the Industrial Credit and Investment Corporation of India (ICICI) took the initiative and set up the Housing Development Finance Corporation (HDFC) in collaboration with International Finance Corporation (IFC) and Agha Khan Fund. HDFC was the first primary housing finance institution in the private sector at that time. At that time, the business was looked at with great skepticism - no one so far had experimented with retail housing finance in the country, there was no access to long-term domestic resources nor was there a legal system to support foreclosure. It's of course a whole different story that HDFC was successful and even the World Bank has referred to HDFC as a model housing finance company for developing countries (HDFC ., 2003).

Although commercial banks were the largest mobilizer of savings in the country, traditionally banks were rather reluctant to lend for housing, as they preferred financing working capital needs of industry. In January 1977 the Reserve Bank of India set up a working Group on the role of Banking System in providing finance for housing schemes. The Working group was asked to examine the role of the banking system in housing finance. The group in its report submitted in January 1978, recommended that the commercial banks may be asked to earmark certain amount every year, for housing sector which may vary, depending upon the resources of banks and the absorptive capacity of the sector. The group has also recommended the bulk of the banks housing finance should be routed through intermediaries. It was also recommended that it may be left to the concerned bank to decide about the proportions of direct and indirect finance. Based on the recommendations of the working group in May 1979 Reserve Bank of India (RBI) issued detailed guidelines to Scheduled Commercial Banks (SCBs) for housing finance (Government of India., 1996). Initially it was desired that the banking system should provide housing finance to the extent of Rs. 75 crore per annum, which was only 0.5% of total advances of the commercial banks at the end of December 1978. Banks were also given freedom to decide about the proportion of housing finance to be finance directly or indirectly. In June 1981 the limit was enhanced to Rs. 100 Crore per annum, which constituted approximately 0.43% of the total advances of all SCBs at the end of 1980. In October 1982 RBI further enhanced the quantum of funds for housing sector to Rs. 150 Crore. In March, 1988 the limit was enhanced to 225 Crore which was further enhanced to Rs 300 Crore by the end of 1989. The government of India established a high level group in 1986 to address the housing problem in the country. The group recommended that a network of specialized housing finance institutions be created to mobilize additional savings and

provide financing for housing construction. Two types of institutions were envisaged as belonging to this network: local-level institutions, which would mobilize household savings and provide home loans, and regional Housing Development Finance Corporation-type institutions with wider territorial jurisdictions, which would mobilize household savings and provide housing finance to middle-and higher income groups (Garg Yogendra Kumar., 2002). In 1987, the insurance act was amended to allow the Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) to directly issue mortgage loans (Mishra., 1997). Till 1988, HDFC was the only formal housing finance company operating in India as it is after 1988, that banks and insurance companies entered into this sector. The governmental efforts towards the development of a sound regulatory mechanism for housing finance in India can be traced back to 1987 when the government came out with a National Housing policy. A revised version was tabled in Parliament in 1992 and adopted by both houses of Parliament in August 1994. This document forms the nucleus of the policy framework for the housing sector. It envisages the removal of the legal and regulatory constraints on the creation of a secondary market in housing loans. As per one of the directions of the above policy, the National Housing bank Act was enacted by Parliament in 1987. The Bank has been mandated to establish a network of housing finance outlets across the vast span of the nation to serve different income and social groups in different region. One of the fundamental ideas behind the inception of NHB in 1988 as the apex institution for the housing finance sector of the country was to facilitate development of a sound, healthy and sustainable housing finance system(National Housing Bank., 2000). After start of the

liberalization process in India government has taken so many measures to promote housing finance from the formal sector and share the task of providing of housing

finance with the private sector.

Linking with global scenario the policies of

government of India has started-showing shift in approach towards housing finance. In the post liberalization era housing finance industry has registered unprecedented Growth. The Value of total residential mortgage debt moved up from USD 1.84 billion in 1994 to USD 12.26 billion in 2004, which is registered a growth of 21% Compounded Annual Growth rate (CAGR). Industry has recorded robust growth in the last 5 years, clocking an annual growth rate of about 40% between financial year 1999 and financial year 2004. Residential mortgage debt as a percentage of GDP

was a mere 0.58% in 1994 which has moved up to 2.21% in financial year 2004, still miniscule when compared to about 45% in the European Union, 70% in the US, 38% in Taiwan, 26% in Malaysia, 18% in Thailand, 14% in South Korea, 6% in China and upwards of 30% in East Asian economies (Business World., 2004). This aspect shows the further growth of housing finance in future. As per the ICRA Limited ( Formerly Investment Information and Credit Rating Agency of India Limited) reports, in the last five years housing finance industry has shown unprecedented growth as compared to other counterparts. In the year 1999-2000 housing finance growth rates was registered with 44.4%, which has reached to 77.6% in the year 2003-04. The main factors driving this growth are: 1. Fiscal concessions, 2. Encouraging regulations to extend by regulating agencies, 3. Declining interest rates in different years and has come down to 7.65% from 17.00%, 4. Increase in products offerings, 5. Rapid construction, increasing supply and stable/declining property prices, 6. Steady increase in urbanization levels, 7. Increase in disposable income for large sections of the population (ICRA Rating Feature., 2003). 8. Aggressive lending by banks to the housing sector due to lower credit off takes by the corporate sector, attractive spread and lower non-performing assets, lower risk weightage and higher risk adjusted profitability( BSE., 2003).

Competitive Dynamics in Housing finance: Back in the nineties, getting a good house was easy, but finding finance was tough (Outlook Money., 2003). . Today, the reverse is true. There seems to be Housing Finance boom in the country because of the increasing number of players in the field. Presently there are four types of major players in the field of housing finance which are competing with each other namely: Housing Finance Companies (HFCs), Banks, Cooperative Housing finance societies, Refinancing institutions Like National Housing Bank (NHB) and National Bank for Agricultural and Rural Development (NABARD). Presently there are 343 Housing finance companies (HFCs) working in the business of housing finance. Now almost all the banks in India including SBI and associates, Nationalized banks, Indian private banks and Foreign banks has entered in the field of housing finance and by the end of March 2005, the retail portfolio of banks shows 50.43% share in the housing

finance (National Housing Bank., 2005). At present there are 92000 housing cooperatives at the base level with a membership of about 65 lakh all over the country represented by 26 apex co-operative housing federations at the state/union territory level (National Housing Bank., 2005). The performance of the HFCs in recent years has been overshadowed by the competing banking sector with aggressive lending abilities, the relatively high cost of funds, higher regulatory capital requirement and lower degree of penetration in terms of geographical presence and market segments of the HFCs (National Housing Bank., 2004). A large network and access to low cost

retail deposits have helped them to offer home loan products at competitive rates giving stiff competition to the housing finance business by the HFCs.

There is aggressive campaign on the part of Banks, and Housing finance Companies (HFCs) to provide home loans to more and more customers. These HFCs are adopting aggressive strategies like tele-marketing, engaging direct sales agents, conducting exhibitions and loan melas besides offering softer terms of repayment,

enhanced quantum of loans, taking over the loans of other banks/HFCs, shifting of loans from fixed rates to floating rates and vice versa. Now the financers are more

willing to finance the entire house even the furnishings. Few years ago, the word mela in India meant a village fair, a place where artisans displayed and sold their wares to villages. Today, Indias consumer banks and property developers in urban and suburban India use the same word to sell and finance dreams. In the past years, home loan melas have been sponsored by a dozen Indian banks and have been held in every major Indian city (Indian Brand Equity Foundation., 2004). The biggest

reason for the surge in home loans is because of supply side economics. Banks are flush with funds, and they find it attractive to lend in the mortgage market( Douglas et al., 2001). Historically, this segment had a very low rate of non-performing assets below one per cent and that is an added attraction. Banks and financial institutions have brought sea changes in their strategies and there is a clear shift from sellers market to buyers market. It is als o worth noting here that development banks such as Industrial Development Bank of India (IDBI) and Industrial Finance Corporation of India (IFCI), whose task was to lend to industry for projects, are in terminal decline. Industrial Credit and Investment Corporation of India (ICICI) has merged with its own banking arm, and has become a bank, plugging consumer loans (including housing) rather than industrial finance. Banks and Housing Finance Companies are offering attractive loans schemes with so many lucrative add-ons to the customers. Main features of these loans schemes are consumer flexibility, adjustable rate plans, lower processing fees, low Equated Monthly Installment (EMI), lower margin money, no pre-payment penalty, etc. Many of the players of housing finance have offered some add-ons with their loan plans such as Life Insurance, credit card and consumer loans. Some of the players have offered tailor made loan schemes for repair, renovation, extension, conversion, improvement, water proofing, roofing, painting, plumbing and electrical work, tiling, flooring, and grilling etc. In

order to increase the market share, the lending institutions are competing with each other by offering very attractive terms to customers in the form of lower rate of interest, liberal collateral requirements, longer repayment period or a very high loan to value (LTV) ratio which at times goes up to or even beyond 100% of the value of the house including the cost of land. In recent years, the lending institutions also introduced floating rate products besides the fixed rate ones with the option available to the borrower for conversion against a nominal payment. Besides, the speedier processing and disbursement, efficient advisory services, waiver or reductions in associated up-front fees have also become common tactics of market acquisition (National Housing Bank., 2003). The acute competition has made the possible Housing Finance at door step with the customers having a wide variety to choose from. The above all shows that there seems to be high intensity of competition among different players of the Housing finance industry. But this competition needs to be measured to observe its intensity to understand the competitive dynamics of housing finance to make it more consumers friendly and favourable to industry as well. As in other industries, the degree of competition in the housing finance sector can matter for the efficiency of the production of housing finance services, the quality of housing finance products and the degree of innovation in the sector Claessens et al., 2004). There are number of techniques which are generally used to measure the competitive dynamics of the firms in the industry. The techniques which are widely used by the researchers to measure the competition in the banking and financial services sector include: Breshanan and Lau ( A. Prasad et al., 2005), Panzar and

Rosse (Barbara Casu., 2004) , the m-bank concentration ratio adopted by Sarkar and Bhaumik and the Herfindahl Index adopted by Juan-Ramon and others (Classens et al., 2004).

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However, few studies concerning the competition in housing finance industry are available and these just point out certain indications of competition in housing finance stakeholders. As far as Indian context is concerned there is no detailed

study, which has specifically dealt with the competition factor in the housing finance as such, though studies concerning the competition in banking sector are available. Jerome Fahrer and Thomos Roling ( Jerome et al., 1992) studied the competition in housing finance market in Australia. They used Herfindahl index of concentration in the market and estimated a model of conjectural variations to examine the reactions of each bank to changes in the value of loans made by other banks. Renu.S. Karned outlined that housing finance system in India facing intense competition and it buyers oriented market and HFCs are following aggressive pricing strategies (Karnard Renu., 2004). Harish Biyani, G. Krishnan talked about whether housing finance institutions are ethically and morally correct in promoting risky products without providing the consumers with adequate information ( Harish et al., 2004). The study revealed that banks and HFCs are luring customers by cutting down their interest rates and aggressively selling their products with floating interest rates. Different studies have used Herfindahl index to measure the concentration in the financial services industry. Sayuri Shirai has used the Herfindahl Index adopted by Juan-Ramon and others to assess the extent of concentration in the banking sector. Ingo Walter Aneel Keswani and David Stolin undertook a cross sector analysis for mutual fund performance persistence and competition. Objectives, Data and Methodology: Objectives: The Present paper is an attempt: 1. To Measure the level of competition in Indian housing finance industry. 2. To Measure the level of competition amongst Housing finance companies.

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3. To Understand H index and observe its trend to measure concentration level to analyse competitive dynamics in the housing finance industry through market share of players in Housing finance disbursements or assets base. Data and Methodology: For the purpose of study data from the 1996-97 to 2004-05 has been used to measure the competition level among major players. Inter Competition and .

concentration level in 10 top HFCs has also been measured. The companies for analysis has been selected from the list of companies approved by the National Housing bank (NHB) under section 29 A of the NHB Act and which have been given permission to accept public deposits and also been listed with recognized stock exchange. Those companies has been selected which has a national character and working from more than ten years These companies has largest number of branch network in India. For measuring the inter-competition among selected companies data for five year i.e. 2001-02 to 2005-06 has been taken.

The most important way of observing competition among the different players is to observe the degree of sel lers concentration in the market which plays a dominant role in determining the behaviour of a firm in the market (Barthwal., 1996). If the market is concentrated in the hands of few firms or players then it reflect low level of competition and some times stage of monopoly. On the contrary if the market is divided into different players equally or in small fractions then it leads high level of competition. We have used Herfindahl- Hirshman index popularly known as

Herfindahl Index as a measure of the size of group of players in relationship to the industry and an indicator of the amount of competition. It is an economic concept but widely applied in competition law and antitrust (Brown et al., 1988). When assessing market concentration, guidance can be found in the Herfindahl Index, which sums up the squares of the individual market shares of all competitors. With

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an HHI below 1000, the market concentration can be characterized as low, between 1000 and 1800 as moderate, and above 1800 as high (EEA ., 2002). The Herfindahl index is a far more precise tool for measuring concentration. It is obtained by squaring the market-share of each of the players, and then adding up those squares. The formula for this index is: H = (%S1)2 + (%S2)2 + (%S3)2 +.(%Sn)2 Here %S stands for the percentages of the market owned by each of the larger companies, so that %S1 is the percentage owned by the largest company, %S2 by the second, and so on. Here n stands for the total number of firms you are counting. The Herfindahl index gives added weight to the biggest companies. The higher the index, the more concentration and (within limits) the less open market competition. A monopoly, for example, would have an Herfindahl index of S12 or 1002, or 10,000. By definition, that's the maximum score. By contrast, an industry with 100 competitors that each has 1% of the market would have a score of 12 + 12 + 12+ ...12 or a total of 100. Now that we've seen the limits, a more typical situation might be a duopoly. If each of the two firms has a market shares of 50%, the Herfindahl index would be (50)2 + 502 =2500 + 2500 = 5000. With two firms that have of 75% and 25% respectively, the H index would be: (75)2+ (25)2 = 5,625 + 625 = 6,250

The Herfindahl index takes into account the relative size and distribution of the firms in a market The Herfindahl Index is the prevalent economic index which measures the centralization of any organizational system using two parameters: inequality among firms, and the number of firms in the industry. The Herfindahl index increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.We are applying Herfindahl Index in our study by two ways. Firstly to calculate the concentration level amongst the

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players on the basis of their market share in total disbursements of housing finance and secondaly to calculate Herfindahl index among 10 leading Housing finance

companies on market share and assets values seprately. The main virtue of the Herfindahl is its simplicity. But it has two unfortunate shortcomings. It relies on defining correctly the industry or market for which the degree of competitiveness is open to question. This is rarely simple and can be a matter of fierce debate. Even when the scope of the market is clear, the relation between the Herfindahl and market power is not. When there is a CONTESTABLE MARKET, even a firm with a Herfindahl of 10,000 (the classic definition of a monopoly) may behave as if it was in a perfectly competitive market. For the purpose of measuring the competition in Housing finance segment, Market share of different players in the total Housing loan disbursements or Total assets can be taken as base to compute the index. In our study we have used both the basis to compute concentration level in Housing finance companies to measure the stage of their competitiveness. In case of major players of Housing finance like banks, Housing finance companies (HFCs) and Apex Co-operative Housing Federations

(ACHFs) share of Housing loan disbursements has been taken as base rather than assets base because banks may be using their assets for purposes other than housing finance business. Analysis and Results: The level of concentration and Competition among the major players of Housing finance like Banks, Housing Finance Companies (HFCs) and Apex Co-operative

Housing Federations(ACHFs) can be studied from the table:1 shown below, which shows the disbursements of these players over the years along with percentage of their share in total disbursements shown in brackets. By using these percentages of share in the total disbursements Herfindahl index has been computed.

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Table: 1 Market share of different Housing finance players in disbursements of Housing loans and Herfindahl index. YEAR 1996-97 BANKS 1805.62 (26.76) 1454.77 (16.96) 3951.99 (32.73) 3597.40 (25.49) 5531.11 (29.12) 8566.41 (35.97) 23553.37 (56.04) 32816.39 (60.43) 50398.00 (65.60) 27411 (31.72) HFCs 4627.74 (68.58) 5767.55 (76.17) 7454.27 (61.73) 9812.03 (69.53) 12637.85 (66.29) 14614.44 (61.25) 17832.01 (42.43) 20862.23 (38.41) 26000.00 (33.8) 58623 (67.83) ACHFs 314.72 (4.66) 519.57 (6.87) 665.88 (15.54) 700.86 (4.98) 867.72 (14.59) 677.58 (2.8) 641.48 (1.47) 623.08 (1.26) 421.10 (0.6) 388 (0.45) TOTAL 6748.08 HERFINDAHL INDEX 5440.74

1997-98 1998-99 1999-00 2000-01

7570.12 12075.14 14110.29 19063.68

6137.45 4912.71 5510.20 5264.20

2001-02 2002-03 2003-04 2004-05 2005-06

23858.43 42026.86 54301.7 76819.10 86422

5049.40 4943.52 5129.55 5449.99 5607.58

(Data Source: Data has been compiled from the annual reports of National Housing Bank and Reserve Bank of India. Figures in Parenthesis indicate percentages) Amount in Rs. Crores

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Figure:1
Market share of different Housing finance players in disbursements of Housing loans and Herfindahl index
90000 80000 70000 60000 50000 40000 30000 20000 10000 0 BANKS HFCs ACHFCs TOTAL HERFIDHL INDEX

Housing Loans disbursements and Herfindahl index

199697

199798

199899

199900

200001

200102

200203

200304

200405

BANKS HFCs ACHFCs TOTAL HERFIDHL INDEX

1805.62 1454.77 3951.99 3597.4 5531.11 8566.41 23553.4 32816.4 50398 4627.74 5767.55 7454.27 9812.03 12637.9 14614.4 17832 20862.2 26000 314.72 519.57 665.88 700.86 867.72 677.58 641.48 623.08 421.1 6748.08 7570.12 12075.1 14110.3 19063.7 23858.4 42026.9 54301.7 76819.1 5440.74 6137.45 4912.71 5510.2 5264.2 5049.4 4943.52 5129.55 5449.99 Year

If we look at the

value of Herfindahl index in the above table initially this value

increases in 1997-98 but after that it start decreasing and in the year 2003-04 this value comes down to 5129.55 which indicates some increase in the competition among players of housing finance in standards of this measure. the market. But it is too high as per the

As far as the degree of competition among different

players is concerned the increase in the competition is not much encouraging this because of lowering of the share of Housing finance companies as major players of housing finance. In 1997-98, 387 Housing finance companies were doing the business which comes down to 343 in 2003-04. Similarly their share in the total disbursements has also come down to 38.41% in 2003-04 from 68.58% in 1996-97. Similarly Co-operative sector share has also come down to 1.26% in 2003-04 from 4.66% in 1996-97. The trends in the market are making banking sector more powerful because of their large network and potentiality in working. The value of Herfindahl index shown in the table also indicates the high level of concentration

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because in all the years the value is more than 1800 which mean high level of concentration. Banks have still monopoly as far as their total market share in disbursements is concerned. Similarly A survey conducted by the FICCI on 47

banks and housing finance companies has revealed that banks have overtaken house finance companies (HFCs) in the home loan market. The main reasons behind this are the largest network of banks and their reach to the every part of the country which other players are lacking (National Housing Bank., 2005). Concentration level among the major housing finance companies can also be studied from the table 2 shown below, which shows the disbursements of top 10 Housing finance companies registered with National Housing Bank (NHB) as per section 29 A of the NHB act and are eligible to accept public deposits. Figures in the brackets show the percentage share in the total disbursements of these companies. Table: 2 Housing Loans disbursements by HFCs, their percentage share and Herfindahl index. (Amounts in Rs. Crore)
Name of the Company/Year
Housing and Urban Development Corporation Ltd Housing Development and Finance Corporation Ltd GIC Housing Finance Ltd LIC Housing Finance Ltd Can fin Home Finance Ltd PNB Housing Finance Ltd IDBI Home Finance Ltd. Gruh Finance Ltd Dewan Housing Finance Limited DHFL Vyasya Housing finance Limited Total Herfindahl Index

2001-02

2002-03

2003-04

2004-05

2005-06

4661 (29.34) 7616.56 (47.94) 225.19 (1.417) 1962.82 (12.355) 354.19 (2.229) 267.62 (1.684) 224 (1.410) 188.80 (1.188) 203.04 (1.278) 183.28 (1.153) 15886.50 3328.22

8180 (35.09) 9950.87 (42.68) 295.59 (1.268) 3190.83 (13.68) 366.32 (1.571) 255.65 (1.096) 279 (1.196) 202.16 (0.867) 418.65 (1.796) 170.61 (0.731) 23309.68 3252.53

6136 (24.471) 12696.82 (50.637) 448.81 (1.789) 4103.81 (16.366) 394.86 (1.574) 284.71 (1.135) 190 0.757) 218.13 0.869) 468.54 (1.868) 132.39 (0.528) 25074.07 3442.93

5921 (19.867) 16206.75 54.380) 659.23 (2.221) 4650.42 (15.604) 456.61 (1.532) 297.83 (0.999) 542 (1.818) 299.83 (1.006) 633.76 (2.126) 134.89 (0.452) 29802.32 3612.773

3766.52 11.443) 20679.20 (62.829) 372.82 (1.132) 4670.09 (14.189) 653.95 (1.986) 393.02 (1.194) 732 (2.224) 360.17 (1.094) 1110.30 (3.373) 175.25 (0.53 32913.32 4304.270

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(Figures in brackets shows the Percentage share in total assets) (Figures has been taken from the CMIE data base and annual reports of the companies) (Average Herfindahl index of 5 years turn out to be 3588.144)

Figure: 2

Housing Finance disbursements by selected HFC's and Herfindahl Index

35000

30000

Disbursements and herfindahl index

25000

20000 Total Disbursements Herfindahl Index 15000

10000

5000

0 2001-02 2002-03 2003-04 Year 2004-05 2005-06

Figure 2 depicts the position of Total disbursements and Herfindahl index over the years. Contrary to the results shown in the table 1 among the different players of housing finance, competition among the housing finance companies is on the reverse trend because H is showing the increasing trend during the last five years in the table 2. This shows that three major players HDFC, HUDCO and LICHF are enjoying the major share of housing finance business. This is because of their national character. Other housing finance companies are either working regionally or their reach is limited. The value of H also shows the high level of concentration and HDFC

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is representing as the major player in the formal system of housing finance among housing finance companies. Table: 3 Assets base of Housing Finance Companies and Herfindahl Index (Amounts in Rs. Crore) Name of the Company/Year
Housing and Urban Development Corporation Ltd Housing Development and Finance Corporation Ltd GIC Housing Finance Ltd LIC Housing Finance Ltd Can fin Home Finance Ltd PNB Housing Finance Ltd IDBI Home Finance Ltd Gruh Finance Ltd

2001-02

2002-03

2003-04

2004-05

2005-06

20068.08 (36.681) 22932.13 (41.915) 784.17 (1.433) 7230.42 (13.216) 1162.89 (2.125) 593.64 (1.085) 265.488 (0.486) 583.3 (1.066) 885.44 (1.619)

24132.5 (36.602) 28022.74 (42.502) 918.18 (1.39) 8640.41 (13.105) 1129.95 (1.714) 725.15 (1.099) 457.348 (0.694) 657.51 (0.997) 1046.76 (1.587)

26908.3 (34.824) 33910.2 (43.885) 1185.28 (1.534) 10582 (13.70) 1203 (1.556) 862.52 (1.116) 504.323 (0.652) 680.6 (0.881) 1283.74 (1.661)

26187 (29.261) 42586 (47.584) 1642.2 (1.835) 12856 (14.365) 1401 (1.565) 972.01 (1.086) 948.6 (1.059) 954.42 (1.066) 1797.5 (2.008)

26496 (25.081) 53459 (50.603) 1176.5 (1.113) 15757 (14.915) 1814.1 (1.717) 1205.7 (1.141) 1710.3 (1.618) 1226.6 (1.161) 2585.9 (2.447)

Dewan Housing Finance Limited

D H F L Vyasya Housing Finance Limited. Total Assets of 10 HFCs (Herfindahl Index)

204.19 (0.373) 54709.748 3288.987

201.44 (0.305) 65931.997 3328.094

149.34 (0.193) 77269.3 3336.246

150.31 (0.168) 89495.04 3340.180

210.93 (0.199) 105645 3427.77

(Figures in brackets shows the Percentage share in total assets) (Figures has been taken from the CMIE data base and annual reports of the companies) Average HHI of 5 years turn out to be 3342.255

Figure: 3

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Assets Base of HFCs and Herfindahl index

120000

100000
Total Assets and Herfindahl index

80000

60000

Total Assets of 10 HFCs HHI

40000

20000

0 Total Assets of 10 HFCs HHI

2001-02 54709.748 3288.987

2002-03 65931.997 3328.094

2003-04 77269.3 3336.246 Year

2004-05 89495.04 3340.18

2005-06 105645 3427.77

In the table 3, Herfindahl index is calculated on the basis of total assets of 10 leading Housing finance companies (HFCs). The Herfindahl index of table 3 also shows the increasing trend and average index comes out to be 3342.255 which are also rated as very high displaying increasing concentration and decreasing competitiveness. This all shows the inequality among the different players and the number of players in the industry. The above fact is verified if we give a cursory look at the number of Housing Finance Companies in India in the last 7 years. The Number of companies have not

increased so far and many of the companies which were originally established for housing finance business vanishes because of the change in the scenario of housing

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finance in India i.e. stiff regulations, entry of banks and other players in market. The entry of banking institutions has compelled the housing finance companies to reinvent their areas of core competence. The phenomenon has brought into significant qualitative change in the fabric of housing finance system in India. As a result of aggressive competition from banks and gradual softening of rate of interest, the HFCs are compelled to operate on a basis of comparatively thinner spread. Stiff competition in housing finance market has made the functioning of many of small player unviable. Specialized housing finance companies promoted by commercial banks like those of state bank of India (SBI Housing Finance Ltd.,), Andhra Bank (Andhra Bank Housing Ltd.,),Vijya Bank (Vijya Bank housing Ltd), Indian Bank (Ind bank housing finance Ltd), were liquidated and their assets were taken over by the respective parent banks. Similarly, Vysya Bank housing finance Ltd has been acquired by a bigger HFC viz. Dewan Housing finance Corporate Limited. These consolidations in housing finance market point to the fact that functioning of small HFCs is very much under pressure. Many small private HFCs without strong parent backing are gradually losing market share in the medium to log term. HFCs have higher cost of funds as compared with banks as they depend on priority sector subPLR loans from banks, fixed deposits, NHB refinance and in some cases low cost loans from multilateral agencies. Most private HFCs (excluding HDFC) do not enjoy the highest investment grade ratings by credit rating agencies, which further increase their cost of funds. As a result, HFCs, in general, either have lower spread as compared with a bank or are not able to match rates with banks. In the face of a fierce competition and desperation for survival, these HFCs resort to sub-standard appraisal norms at the origination of loans (National Housing Bank., 2003). Thus, in future, there is a serious possibility of degradation in asset quality of the small and medium sized HFCs if they are not able to price their home loan products competitively. Barring the Housing Finance Companies that are approved by the

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National Housing Bank others are not showing the sign of progress. The primewithholding factor for the HFCs happens to be the cost of funds. Being inst itutional borrowers, they are at a disadvantage as compared to banking entities, which have access to low cost deposits. The minimum capital adequacy ratio for banks is 9% as against 12% for HFCs. The Securitization Act, which brought a welcome relief to banking entities, does not apply to HFCs. Also, over the years, the HFCs have witnessed a decline in their average yields (Outlook Arena., 2004). It is expected

that if this trend continuous then coming years may witness many mergers and consolidations in this segment of financial institutions which would eventually determine the future of HFCs. Widely connected branch network and feasibility of the banks to tap rural segment of the population has made possible for the banks to concentrate of housing finance segment and most of the banks are now concentrating of this sector. If we look at the retail portfolio of the banks by March 2006, then it is evident that banks have 47.67% in the housing finance of the total retail portfolio in the consumer loans segment (RBI., 2006). Table: 4 Retail Portfolio of Banks (Amount in Rs. Crore) Items Amount Amount Amount outstanding as Outstanding as at outstanding at at the end of the end of the end of March 04 Marrch05 March 2006 Housing Loans 89449 (47.3) 134653 (50.43) 179116 (47.67) Consumer 6256 (3.3) 3810 (1.43) 4469 (1.19) Durables Credit Card 6167 (3.3) 8405 (3.15) 12434 (3.31) receivables Other Personal 87170 (46.1) (120120 (44.49) 179720 (47.83) loans Total retail Loans 189041 (100) 266988 (100) 375739 (100) Total Loans and 839092 1105725 1473723 Advances Source: Reports on Trend and Progress of Banking in India -2003-04, 200405 and 2005-06. Figures in parenthesis indicate percentage.

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The reason for banks interest in the housing finance segment is lower level of NPA of 1.4% as against 4% in Consumer durable loan segment. A large network and access to low cost retail deposits have helped them to offer home loan products at competitive rates giving stiff competition to the housing finance business by the HFCs( National Housing Bank., 2005). Another aspect of this growing concentration is reversal trend of interest rate hike. Because of power of few players on the market share, banks and leading HFCs are not hesitating to raise the interest rates. Till 2006 interest rates were on the falling trend but now it is on increasing trend. Every major bank and big housing finance company has started increasing the interest rates after every quarter to six months from 25 point basis to 50 point basis. Partly it is because of RBI alarming guidelines and partly because of the market forces. Floating rates have been continuously rising and have increased by three to four percentage points over the past 18 months to 11.5-12%.

Conclusion: The results of the study show that the main business of housing finance
in India is concentrated around few players like banks and major housing finance companies. The Herfindahl index as an indicator of market concentration is showing increasing trend in both the basis i.e. on the basis of Market share of players in disbursement of loans and assets base. It shows that decreasing competitive ability of small players. The small Housing finance companies are loosing battle to the

bigger players. Small players in the sector are facing threat from the banks to capture their share because of their wider network and reach. Growing concentration of major share of housing loans disbursements in the hands of larger banks and giant housing finance companies has forced the small housing finance institutions to identify the challenging areas in this field to capture the future market and ensure their remarkable place. The most important aspect regarding the competitive

dynamics in housing finance is the indicators which shows that Banks, HFCs and other players are luring the customers to get the housing finance. It is not mainly

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because of the stiff competition but because of the change in the attitude of the Indian people regarding the loan phenomenon and to bring them into formal system of housing finance. In India still 60% of the Indian households approach informal sources of financiers to borrow funds, which mean an untapped market of housing finance (Analysts. 2001). Housing finance institutions particularly Housing Finance

Companies (HFCs) has to spread out geographically while ensuring consistency in the processing and service standards to compete with banking sector. The

institutional performance of these institutions has been influenced by more than just customer demand. Stricter NPA norms, rising interest rates and stiff competition in mobilizing low cost deposits, have all affected the supply side factors, which in turn has influenced the performance of these institutions in terms of volume and competitiveness (National Housing Bank., 2005). Healthy competitiveness in the field of housing finance is must for the customers benefits. Here Government, National Housing bank and other regulatory and financing agencies must come on the rescue of small housing finance agencies to build their base by providing adequate re-finance to cover their supply side. Here the role of National Housing Bank is very important. Presently the re-finance pattern of National Housing bank is in favour of banks. In 2004-05 NHB provided Rs. 2060.95 crores to the HFCs as compared to 1845.86 Crores in 2003 -04 but refinance to the banks was5404.09 Crores in 2004-05 as compared to 1275.50 Crores in 2003-04. NHB has to increase the amount of refinance to Housing finance companies to make them competent to compete with banks. Similarly it must be ensured that fruits of competition are passed on to the customers. Housing finance institutions has to offer more sophisticated and tailor made housing finance products to suit customer needs. Differentiate and diversified housing finance products will become the factor to make a housing finance institution a market leader. The future prospects of this newly recognized industry are

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undoubtedly bright. Going by the rate of growth of Indian population and its housing needs, the formal sector of financing is bound to witness huge loan disbursements that were not witnessed in the past. References:

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