FMs bonanza for housing sector

Finance Minister P Chidambaram, while announcing the Budget for fiscal 2004-05 said that more housing would be provided for the poor. Allocation for Indira Awas Yojana for housing for the rural poor, including scheduled castes and tribes, was raised to Rs 2,247 crore. Target for rural housing wass set at 250,000 units. The Government has set a target of 250,000 rural housing units per year.

Budget Measures

	The government has stressed on the rural housing sector and has raised the allocation for Indira Awas Yojana by Rs 5.3 bn to Rs 22.47 bn. RBI to revise the norms of repayment of rural housing loans by banks so that installments coincide with crop cycles.
	Tax exemption on interest on housing loans maintained at Rs 150,000 per year.

Budget Impact

	There may not be any direct impact of the government's thrust on rural housing. However increased lending to the rural housing sector may not be ruled out.
	The housing sector will continue to benefit from the tax exemption on housing loans.

Industry Wish List

	Maintain the tax incentives on housing loans.
	Housing finance companies (HFCs) are seeking level playing field after the aggressive entry of banks into the sector. This is due to the fact that HFCs are not allowed tax exemptions against provision for non-performing assets (NPAs) unlike banks and financial institutions.

Budget over the years

Budget 2001-02	Budget 2002-03	Budget 2003-04

Enhancement of limit for deduction of interest paid on housing loans under section 24(2), from the present Rs 100,000 to Rs 150,000. In respect of repairs of, and collection of rent from the property, amount of 30% (from the current 25%) of the annual value of house property is allowed as a deduction u/s 24(1)(i). FII limit increased to 49% from the current 40%. Automatic foreign direct investment in non-banking finance companies allowed up to 100%.	Deduction for interest payable on housing loans for self-occupied houses even where such houses are acquired or constructed after March 31, 2003. Capital gains exemption is provided in section 54EC of the Income-tax Act to bonds issued by the National Housing Bank. The NHB will launch a Mortgage Credit Guarantee Scheme.	Tax exemption on interest on housing loans maintained at Rs 150,000 per year. Tax breaks on specified housing projects have been extended till 2005. Reduction in the interest rates on all small savings schemes by 1%.

Key Positives

	Bank conversion key trigger - The RBI is taking a more proactive look in to the state of NBFCs in the country. The RBI has allowed Non-banking finance companies (NBFCs) with a good track record and net worth over Rs 2 bn to convert into a commercial bank. However, the number of licenses to be issued may be restricted to two or three of the best acceptable proposals (including permission for entry of new banks). The RBI had granted license to Kotak Mahindra to convert to a bank.
	Housing sector growth potential - There is a large demand supply mismatch as far as dwelling units are concerned in the housing sector and this will be one of the key drivers of growth in this sector. Tax incentives and ready availability of finance is also another important factor that is likely to aid growth in this sector.
	Lower capital requirement - The RBI has reduced the capital adequacy requirement of NBFCs as far as lending to the housing sector is concerned. The RBI has reduced the capital requirement to 50% from the earlier 100% and this has helped the NBFCs to increase their exposure to the housing sector due to availability of a higher quantum of capital.
	Policy benefits - HFCs are exempted from paying withholding tax on foreign currency borrowings. This enables HFCs to tap foreign markets to raise funds at lower cost.
	Enhanced foreign participation limits - FII limits for HFCs and financial institutions have been increased to 49% from earlier 40%. Automatic foreign direct investment in NBFCs is also allowed up to 100%.

Key Negatives

	High borrowing costs - High cost of borrowings to housing finance companies (HFCs) and high stamp duty dampens growth rates. HFCs are also not yet given 'Universal Banking' status for offering wholesale and retail finances under one roof.
	Interest rate dampener - The Indian economy is witnessing rising inflationary pressure and this has the potential to curtail the credit growth in the economy. As inflation inches close to the 6% mark, the Reserve Bank of India (RBI) may be forced to hike interest rates and this may prohibit potential borrowers from borrowing. A hike in interest rates may have a bigger impact on the high growth retail segment, which has a higher sensitivity to rising interest rates. Thus to that extent lenders like NBFCs may witness a slowdown in credit offtake.
	Growing competition - NBFCs as a class do not offer any products that are distinct form what the banks are capable of offering. NBFCs were historically strong in the retail and vehicle finance segment and they leveraged on local relationships to grow their business. However in the last 3-4 years banks have aggressively taken away market share both in the retail as well as the vehicle finance segment. Banks due to their low cost of capital have been able to offer services at lower cost to the consumer. Going forward if interest rates rise, NBFCs will be hit hard as banks will continue to remain more competitive

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