INDIA: HOUSING FINANCE PORTFOLIO OF SCHEDULED COMMERCIAL BANKS

Document Download	Download
Document Type	General
Publish Date	14/06/2023
Author
Published By
Edited By

India: Housing Finance Portfolio Of Scheduled Commercial Banks

Introduction

This summary focuses on the evolution, structure, and performance of the Housing Finance Portfolio of Scheduled Commercial Banks in India over the period 2000–05 (and in subsequent years, where data is available), drawing on the central study “A Trend Analysis 2000-05: Housing Finance Portfolio of Scheduled Commercial Banks” (contributed by Lalit Kumar) and supplemental studies and reports. nhb.org.in+2acash.org.pk+2 This analysis has been prepared by the National Housing Bank (NHB) of India to analyze the performance of banks in housing finance over the last 5 years i.e. 1999-00 to 2004-05, the latest year for which disaggregated data is available in the public domain. The findings of the study are quite interesting. While it brings out the commendable penetration achieved by banks during this period, the gaps in financing are also clearly outlined.

Housing plays a central role in economic development, not only as a social good but as a sector with strong forward and backward linkages to industry, employment, finance, and infrastructure. The financing of housing is thus recognized as essential to achieving adequate shelter, improving living standards, and promoting broader growth. Within India’s financial architecture, the Housing Finance Portfolio of various institutions—especially Scheduled Commercial Banks (SCBs) and Housing Finance Companies (HFCs)—has gained attention as a key instrument enabling households to purchase, build, or improve homes.

The study aims, inter alia, to analyze growth rates, the share of housing loans in total bank credit, disbursement trends, regional patterns, challenges such as non-performing assets (NPAs), and comparisons with HFCs. The SCBs is examined as part of the broader housing finance ecosystem, and the study’s insights inform policy and strategic directions for banks, regulators, and stakeholders.

The Institutional Framework for Housing Finance in India

Players and Structure

In the Indian housing finance system, multiple institutional types contribute to the Housing Finance Portfolio:

Scheduled Commercial Banks (SCBs): These are full-service banks that include housing finance among many other banking operations. The HFP within SCBs is just one component of their overall loan portfolio.
Housing Finance Companies (HFCs): These are specialized non-bank financial institutions whose main business is housing finance. The Housing Finance Portfolio is their core focus.
Cooperative Banks, Regional Rural Banks, Non-Banking Financial Institutions (NBFIs), and Government Entities: These institutions also participate, though to a lesser extent, in housing finance.
National Housing Bank (NHB): As the apex institution for housing finance in India, NHB provides refinance, regulates HFCs, and influences policy frameworks. acash.org.pk+4World Bank+4Indian Institute of Banking & Finance+4

With financial sector liberalization beginning in the 1990s, commercial banks were encouraged to expand into housing finance, leading over time to increased participation of SCBs in managing HFP.

Regulation and Support

HFCs in India must be registered under Section 29A of the National Housing Bank Act, and are regulated by NHB’s guidelines (such as the Housing Finance Companies Directions, 2001). NHB also supports the Housing Finance Portfolio of institutions by providing refinance, guaranteeing bonds, and facilitating securitization of housing loan receivables. World Bank+2Indian Institute of Banking & Finance+2

In parallel, the Reserve Bank of India (RBI) sets macroprudential norms, risk weightings, and provisions that affect how SCBs can expand their HFP.

Evolution of the Housing Finance Portfolio of SCBs (2000–05)

Growth Trends

Between 2000 and 2005, the HFP of Scheduled Commercial Banks saw significant expansion. The study traces the trends in outstanding housing loans, disbursements, and share of housing finance in total bank credit:

Outstanding Advances: The outstanding amount of housing loans within SCBs grew sharply over this period, reflecting rising demand, urbanization, and affordability improvements.
Disbursements: Annual new disbursements into housing sectors increased consistently, showing that banks were actively issuing loans for housing construction, purchase, and improvement.
Share in Total Credit Portfolio: The share of the HFP relative to the total advance portfolio of SCBs increased, indicating that housing loans became a more important segment within the overall banking credit structure.

Though precise numerical values from the original document are not reproduced here (given the unavailability of the full text), the trend is clear: housing credit, previously a marginal part of bank lending, became progressively more significant.

Moreover, in relative terms, the compound annual growth rates (CAGR) of housing finance were high, often outperforming general credit growth. This is because the HFP was benefiting from favorable demand, policy push, and improved risk management.

Institutional Expansion & Decline

Interestingly, the number of institutions engaged in housing finance via SCBs showed a decline in some years. For example:

In 2004–05, 284 SCBs were registered.
Over subsequent years, the number declined (218 in 2005–06, 179 in 2006–07, 171 in 2007–08, and 166 in 2008–09). nhb.org.in+1

This apparent contraction in number reflects consolidation, exit of weak players, or re-classification, rather than retreat from housing finance per se.

Meanwhile, HFCs remained a relatively stable group, though their growth was more moderate in early years before competition intensifies from banks.

Key Dimensions and Comparative Performance

Share of Housing Loans in Bank Portfolios

One key metric is the proportion of Housing Finance Portfolio to the total credit portfolio of SCBs. Over time, this ratio rose, showing that housing finance was becoming a more embedded and strategic component of bank lending. As banks optimized their retail segments, the HFP gained weight, though it remained smaller than some large sectors such as industry or commerce.

Analyses suggest that while housing loans were historically considered low-margin or high-risk, banks increasingly viewed the HFP as relatively stable, long-term, and with manageable risk — thus making it an attractive portfolio segment.

Disbursement and Outstanding Growth

Year-by-year data (2004/05 to 2014/15 in some studies) show that both disbursements and outstanding housing loans for SCBs and HFCs grew substantially. The Housing Finance Portfolio of SCBs in disbursement terms often showed a higher growth trajectory in periods when interest rates were favorable, regulatory support was present, or housing demand surged. Some studies cite that the Housing Finance Portfolio of SCBs grew faster post-liberalization and post-2003 when banks began playing a more dominant role. Bajaj Housing Finance+4ResearchGate+4nhb.org.in+4

However, growth was subject to cyclical variabilities: interest rate changes, liquidity constraints, or regulatory tightening occasionally slowed the expansion of the Housing Finance Portfolio.

Regional and Sectoral Patterns

The Housing Finance Portfolio of SCBs was not evenly distributed across states or regions. Metropolitan and urban centers received a disproportionately larger share of housing loans, reflecting higher property values, better income levels, and stronger banking infrastructure. For example, in 2005–06, over 50% of bank lending in housing finance was concentrated in metropolitan centers, while rural areas received only about 10%. Indian Institute of Banking & Finance

States like Maharashtra, Karnataka, and Tamil Nadu accounted for a large share of the Housing Finance Portfolio, with Maharashtra alone having over 20% in some years. Indian Institute of Banking & Finance+2ResearchGate+2

This geographical skew meant that underserved regions and weaker states had limited access to Housing Finance Portfolios, presenting a challenge for balanced housing growth.

Non-Performing Assets (NPAs) and Risk Profile

A critical constraint in expanding the Housing Finance Portfolio is the risk of non-performing assets (NPAs). Housing loan NPAs tend to be lower than many commercial exposures because houses are collateralized, and the borrower is often more motivated to service such loans. Nevertheless:

Some SCBs faced rising NPAs in the housing segment during economic stress or after interest rate hikes.
Legal impediments, property title disputes, regulatory complications, and slow judicial processes posed challenges for enforcing default recovery. Indian Institute of Banking & Finance+2nhb.org.in+2
Loan provisioning norms and risk weights imposed by regulators limited how aggressively banks could expand their Housing Finance Portfolio.

Operational and Institutional Challenges

Expanding the Housing Finance Portfolio also required addressing operational challenges:

Credit appraisal and underwriting standards: Banks had to refine processes to evaluate borrowers’ incomes, repayment capacity, property valuations, and title checks.
Cost of funds and interest spreads: For housing loans, banks had to manage the spread between the long-term interest earned and their cost of funds, which sometimes squeezed margins.
Branch and network reach: Many banks lacked branches or housing loan outreach in smaller towns or rural areas, limiting expansion of their Housing Finance Portfolio.
Marketing, product differentiation, and customer awareness: Effective marketing and product features (fixed vs floating rates, tenure, prepayment options) were essential to grow the Housing Finance Portfolio.
Regulatory compliance and capital adequacy constraints: The capital and regulatory obligations on banks sometimes constrained growth of the Housing Finance Portfolio relative to other credit segments.

Comparative studies showed that some HFCs had more flexible and streamlined operations focused on their Housing Finance Portfolio, enabling faster service, specialized marketing, and better customer engagement compared to SCBs. ResearchGate+2Bajaj Housing Finance+2

Comparative Analysis: SCBs vs HFCs in Housing Finance Portfolio

A recurring theme in the literature is the rivalry and complementarity between SCBs and HFCs in managing Housing Finance Portfolios.

Market Share Dynamics

In earlier decades, HFCs dominated the housing finance domain, controlling 70%+ market share in some years.
With the entry of SCBs into housing credit, their share began to rise. By the mid-2000s, SCBs overtook HFCs in market share for the Housing Finance Portfolio. Bajaj Housing Finance+3ResearchGate+3nhb.org.in+3
Nonetheless, HFCs retained a strong presence and continued to grow their Housing Finance Portfolio, especially in niche or underserved segments, rural outreach, or specialized products.

Growth and Efficiency

Comparative assessments often revealed:

SCBs had larger scale and more diversified funding sources, enabling them to manage larger Housing Finance Portfolios.
HFCs, being specialized, sometimes achieved operational efficiency and competitive turnaround times for approvals, which aided growth of their Housing Finance Portfolio.
Return on equity, operational overheads, and cost of funds often varied; in many periods, HFCs were more nimble in delivering growth in their Housing Finance Portfolio.
But SCBs often enjoyed lower cost of funds, broader branch networks, and cross-subsidization opportunities, which supported their Housing Finance Portfolio growth.

Some studies used metrics such as CAGR, variance analysis, and provisioning costs to compare the Housing Finance Portfolio performance of banks and HFCs over multi-year periods. ResearchGate+2acash.org.pk+2

Strategic Challenges and Roles

While SCBs viewed housing finance as one among many loan products, HFCs focused almost exclusively on the Housing Finance Portfolio, giving them depth in mortgage servicing, customer relationships, and product specialization.
Yet, HFCs often faced more regulatory constraints, higher funding costs, or capital constraints compared to banks.
For the aim of achieving mass housing goals (e.g. “Housing for All by 2022” in India), the Housing Finance Portfolio of SCBs and HFCs had to complement each other — banks bringing scale and reach, HFCs bringing specialization and depth.
Policies often encouraged cooperation, refinancing, and securitization to bolster the Housing Finance Portfolio across institutions.

Post-2005 Developments and Contemporary Trends

Although the central document focuses on 2000–05, later literature and industry reports show that the Housing Finance Portfolio of SCBs (and HFCs) continued to evolve in notable ways.

Growth in Absolute Terms

The Housing Finance Portfolio in India has grown dramatically in the last decade. For example, the combined portfolios of HFCs and SCBs reached about INR 13 trillion (approx.) in recent years, with SCBs contributing significantly. EY

Likewise, the mortgage penetration (housing loan outstanding as a share of GDP) has remained relatively modest in India compared to many developed and emerging economies, but has been gradually increasing. veritasfin.in+2Bajaj Housing Finance+2

Role of NBFCs and Emerging Lenders

Non-Banking Financial Companies (NBFCs), microfinance institutions, and fintech lenders have begun playing a more important role in housing finance, especially for under-served segments. Their rise has had implications for how the Housing Finance Portfolio is distributed in India. Banks and HFCs face competition from NBFCs for retail housing customers. veritasfin.in+2Bajaj Housing Finance+2

Policy and Regulatory Reforms

To support expansion of the Housing Finance Portfolio, governments and regulators have introduced:

Subsidy schemes (e.g. India’s Pradhan Mantri Awas Yojana) that reduce interest rates or provide credit enhancement.
Securitization markets to allow banks and HFCs to convert parts of their Housing Finance Portfolio into tradable instruments, freeing capital and liquidity.
Refinancing windows and instruments via NHB or other housing finance agencies to support banks’ Housing Finance Portfolios.
Reforms to title registration, property records, and legal frameworks to reduce title risks and transaction costs affecting housing finance.
Emphasis on inclusive housing finance, rural housing, and smaller ticket size loans to broaden the Housing Finance Portfolio reach.

Risk Management and Technology

Modernization has enabled better risk assessment, digital underwriting, credit scores, geospatial verification, and reduced costs — all boosting the capacity to manage larger Housing Finance Portfolios more prudently. Also, increased focus on stressed assets, provisioning, and monitoring helps sustain growth while controlling downside risk.

Key Findings and Implications for the Housing Finance Portfolio of SCBs

From the analysis spanning 2000–05 and onward, several key findings emerge regarding the Housing Finance Portfolio of SCBs, along with implications and insights.

Key Findings

Rapid Growth: The Housing Finance Portfolio of SCBs expanded significantly over 2000–05, in terms of both disbursements and outstanding loan amounts.
Rising Share: The proportion of housing loans in total SCB credit portfolios increased, indicating greater strategic relevance.
Geographic Concentration: Growth in the Housing Finance Portfolio was concentrated in urban centers and a few progressive states; rural and backward regions remained under-served.
Risk Management: While NPAs in housing finance remained relatively lower than many other loan categories, legal and operational challenges limited aggressive expansion of the Housing Finance Portfolio.
Competition from HFCs: Though SCBs took leadership of the Housing Finance Portfolio space, HFCs persisted in capturing niche segments through specialization.
Constraints: Capital requirements, regulatory norms, funding costs, and branch network limitations constrained the scale of Housing Finance Portfolio growth in some cases.

Implications for Banks, Regulators, and Policy Makers

Strategic Focus: Banks should treat the Housing Finance Portfolio not as a peripheral product but as a core strategic business line, with dedicated risk, product, and marketing teams.
Diversification Across Regions: To ensure balanced housing growth and financial inclusion, SCBs should expand their Housing Finance Portfolio into Tier II/III cities and underserved states, leveraging lower ticket size and tailored products.
Strengthening Risk Controls: Robust underwriting, legal title verification, collateral management, and monitoring are crucial to safeguard the Housing Finance Portfolio.
Capital and Liquidity Support: Regulators may consider differential risk weights or capital incentives to promote growth in Housing Finance Portfolios, especially in affordable housing segments.
Securitization and Secondary Markets: Promoting active secondary market instruments for parts of the Housing Finance Portfolio can help banks manage liquidity and risk.
Policy Alignment and Subsidies: Aligning subsidies, credit guarantees, and incentive schemes with Housing Finance Portfolio goals (especially for low-income housing) can help bridge affordability gaps.
Technology and Process Innovation: Digital tools, credit scoring, automated appraisal, and streamlined processes can scale the Housing Finance Portfolio more efficiently with lower cost.

Conclusion

The study of the Housing Finance Portfolio of Scheduled Commercial Banks in India over 2000–05 offers valuable insights into how housing finance evolved from a marginal segment to a strategically significant part of bank credit portfolios. The expansion of the Housing Finance Portfolio was driven by demand, urbanization, policy support, and improved risk perceptions.

However, challenges such as regional imbalances, NPAs, funding constraints, and operational inefficiencies moderated the pace of growth. The comparative role of HFCs underscores the complementary nature of specialized versus diversified institutions in managing the Housing Finance Portfolio.

Beyond 2005, the Housing Finance Portfolio of SCBs has continued to grow, aided by regulatory reforms, market innovation, and policy emphasis on inclusive housing. The lessons from earlier periods remain relevant: sound risk management, regional outreach, product innovation, and enabling infrastructure are key pillars for sustaining and scaling the Housing Finance Portfolio.

Also Read: An Analysis of the Impact of Industrial Growth on Housing Affordability in Skellefteå, Sweden