Housing finance sector benefited from realty boom since 2002-03. But in the past few months, the demand for new dwelling units has turned sluggish partly due to skyrocketed prices, slowdown in economy and relatively higher interest costs. Further, as there is general expectation of a likely fall in realty prices, many prospective buyers have postponed their purchase decisions.
Thanks to falling interest rate regime in the country, housing finance companies in India too have responded warmly by lowering their lending rates. All banks and most financial institutions offering home loans have enable home seekers to avail best loan under competitive rates.
State Bank of India, IDBI, HDFC, Punjab National Bank, LIC Housing Finance Ltd. and some finance companies have a number of schemes across all categories of housing requirements most important of which are the purchase of flats, construction of residential houses and also for repairs, renovations, additions and alterations/improvements.
Industry Expectations from Union Budget 2009-10
Ensure parity between HFCs and banks on CAR requirement
There should be parity between banks and HFCs as far as risk weight (RW) and Capital adequacy requirement (CAR) are concerned. CAR for Housing finance companies is 12% as compared to 9% for banks even though the risk weight on housing loans is same for Banks & HFCs at 50% for loans upto Rs 30 lakh with LTV upto 75% and for loans above Rs 30 lakh it is 75%.
Increase deduction under Section 80 C that currently allows Rs 1 lakh deduction on various payments / deposits including principal amount of housing loan to be raised to Rs 3 lakh i.e. Rs 2 lakh exclusively to be allowed for principal repayment.
Double the deduction on interest payment of self occupied properties to Rs 3 lakh
The deduction of interest on housing loans is 100% for rented dwelling units and Rs 1.5 lakh for owner occupied houses. Deduction available should be 100% of interest for both rented as well as owner occupied houses. In case 100% deduction is not agreed, limit of deduction should be raised from Rs 1.5 lakh to Rs 3 lakh.
To Increase deduction under Section 36(1) (viii) of IT Act
Currently 20% of profit derived from business of providing long term housing finance is deducted from income carried to special reserve. But earlier this rate used to be 40% of profit derived from business of providing long term housing finance. The Association claims for restoring 40% deduction instead of 20% prevailing now.
To extend section 36(1) (viia) of IT Act to HFC's
Deduction for bad and doubtful debts equivalent to 10% of the doubtful and loss assets is available to banks. This should be extended to Housing Finance Companies like for banks and all the bad debts should be considered for deduction on provisions made and interest de-recognized as per the Regulators' directions.
Reintroduce section 10(23G) of IT Act
which was omitted by Finance Act 2006 wef 01-04-2007. It used to exempt income from investment by HFCs in housing projects, which were treated as infrastructure.
Analyst expectation
The Housing Finance companies have sought for parity between HFC's and Banks. They have also requested for increasing the deduction under Section 36(1) (viii) from current 20% to 40% which will help in improving the thin margins of HFC's and inturn increase their resources for affordable lending. Moreover extending section 36(1) (viia) to HFC's that are presently applicable to banks will ensure sustained growth of Housing sector and also help them to efficiently handle their NPA's.
By increasing the deduction under Sec 24(b) of the Income Tax Act, 1961 to Rs 250000 and also allowing Rs 2 lakh as deduction exclusively for principal repayment. We could see some spurt in demand from home loan segments, which will prove beneficial for HFC's.
Companies to watch:
HDFC, LIC Housing Finance, Dewan Housing Finance
Outlook
The second half of Year 2008-2009 was bad for the real estate market owing to global economic crisis. Real estate industry has gone through unprecedented liquidity crunch and slows down in demand. The uncertain financial outlook for most consumers has pulled down the home seekers sentiments. Nevertheless we currently see the home loan market is hotting up with promise of more goodies from the HFC's side. We expect the Union Budget 2009-10 to bring in more cheer to this segment by way of more concessions and grants.