The Hindu : Level turf for non-banking firms?

Online edition of India's National Newspaper
Monday, Jul 07, 2003

Business

Business

Level turf for non-banking firms?

The move to extend the Securitisation Act to home loan firms is significant if one looks at the prospects for mortgages in India, says K. T. Jagannathan.

BEWARE HOUSNG loan defaulters! A move is reportedly under way to bring housing finance companies under the ambit of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. If it becomes a reality, housing finance firms can take over the homes of defaulting clients without going through the conventional court route.

The proposed application of the Securitisation Act will, in a way, facilitate housing finance firms get a level turf in a market that has seen many players indulge in intense rate wars and employ practices that are anything but ethical.

The extension of the Act to housing finance firms is inevitable as it is logical. The line dividing a financial institution and a commercial bank has already got erased in the dust and heat caused by competition. Fund-laden commercial banks have snooped aggressively around for lending avenues in a recession-hit economy and stormed the housing market, giving housing finance companies a run for their money.

Extension of Act

The housing loan turf has turned uneven with the Securitisation Act providing protection for banks vis-a-vis the right to enforce a mortgage and seize property in case a client has defaulted in payment. Why should one set of home loan providers be given protection while another goes without it? Viewed in this angle, the move to extend the ambit of the Securitisation Act to cover housing finance firms is welcome. It is, however, a different matter that asset selling under the Act has become the subject matter of a legal dispute with the Supreme Court granting a stay in the Mardia Chemicals' case. The legal tangle relating to asset selling notwithstanding, the current proposal, should go a long way in quickening the tempo of the home loan market.

Will it have any visible fallout? Most unlikely, it looks. The reason is not far to seek. The NPA (non-performing assets) levels of housing finance companies are generally very low. This has to be to read against the mindset of the Indian middle class. If gold is an auspicious metal to be bought, a house is a dream for any Indian family. If pledging gold is seen as inauspicious, defaulting on a home loan is considered a blot on family pride. Ipso facto, wilful defaults on housing loans are exceptional.

Then, why is the Act being extended to housing finance firms? Because this can do more than just set the turf right for the home loan field. One thing is for sure, however. The move will definitely perk up the confidence of these companies to make an aggressive pitch in the marketplace. Once sure of their standing vis-à-vis taking possession of mortgaged assets in case of defaults, these firms are in a better position to gauge the implications of competitive play and queue up to fund home loans unhindered. Hopefully, the legal hurdles that have been raised against enforcing the Act will be dismantled soon.

One view is that the housing segment has undergone a metamorphosis in the past few years. There is the rare spectacle of too many lenders chasing too few good borrowers. Further, many borrowers find themselves heavily leveraged. Not surprisingly, wilful defaults and white colour frauds have slowly crept into the home loan field with the active collusion of assorted players. The threat of confiscation, it is felt, will have a sobering influence on wilful defaulters. Unlike in the case of corporate asset confiscation and sale, finding a buyer for an attached home will not be that difficult for a lender.

The move to extend the Securitisation Act to home loan firms is significant if one looks at the prospects for mortgages in India. A glance at comparative numbers will give a clue or two to the enormous possibilities. According to the HDFC annual report for 2002-03, mortgages in India contribute just about two per cent to the Gross Domestic Product (GDP) as against 20-30 per cent in some Southeast Asian countries. They contribute 51 per cent to GDP in the U.S. and 20-70 per cent in OECD nations.

Notwithstanding the global recessionary trend, housing continues to grow at exceptional rates. India is no different.

According to the Finance Minister Jaswant Singh, the present Indian population requires 200-250 million houses against the present availability of 170 million pucca houses. This leaves a shortage of 30-80 million. By 2021, over 70 million additional houses will be required for a projected increase in population by 350 million. This means building 100 million houses over the next 18 years, or an annual addition of five million houses.

Given this, the proposal to extend the Securitisation Act is bound to bring lot more comfort for housing finance firms. Practical difficulties apart, the `theoretical empowerment' is sure to inject a `feel good factor' into them, triggering possibly a host of downstream effects on the economy as a whole.

Need for deft handling

There is a downside to the proposal. Unless handled deftly, this can lead to an ugly situation. Countless stories are told even today as to how certain private banks, especially the foreign banks, have turned to `outsourcing' in order to recover dues. The Act, it is pointed out, does not give a carte blanche for lenders to just walk in and take possession of the house from a defaulter.

In this technology age, banking has under gone a sea-change. The personal banking we hear about has gone very impersonal. The machine refuses to talk the human language. The men/women behind the machines only understand the language of the machine. The personal touch — a cornerstone of yester-year banking — is hardly visible.

Given this backdrop, there is every danger of the Securitisation Act doing a lot more damage to a client in difficulty (as distinguished from a wilful defaulter) due to assorted factors over which he/she has no control.

Nonetheless, the extension of the Act to home loan firms will go a long way in disciplining the common Indian borrower who is stretching himself too far either wilfully or inadvertently even as lenders of assorted categories fall head over heals to woo him.

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