Thursday, September 5, 2013

Financing a Home!

Owning a home is a keystone of wealth - both financial affluence and emotional security....Suze Orman

Susan Lynn "Suze" Orman is an American author, financial adviser, motivational speaker, and television host for finance related programs. And she has picked the exact essence that why people buy home & why home finance is the dearest to banks amongst all segments of financing!
Though I am not a bit of a finance person & sure I am not the only one who don’t understands it, rather millions in these country who slogs for hours under the name of various jobs, touch the finance word only for two things; one is while buying a vehicle & another is while buying their home! In recent economic slump, well I don’t actually know what it means but that’s what all the media is screaming so used the phrase. Two news made headlines about finance last week, one was about automobile finance & another was about guide line by Reserve Bank for home finance! Automobile isn’t our topic so let’s skip that but home finance is something we can’t ignore, though auto finance is also in a way impact on planning of homes or projects but that’s different subject , so we will talk about it sometime next!

Before discussing about the latest guidelines or norms whatever you call for home finance, let’s understand the scene in real estate on that front from a commoner's eye. Not very long back i.e. in late 80's to early 90', when home finance players were very few i.e. just names like HDFC, LIC housing finance or Diwan Housing were few of the names. Nationalize Banks were not much keen about this segment. Finance to the builders was a taboo then also, just like it is today! The amount of finance given for flat buying was also as meager as 60%-70% of the home price. To get the loan proposal sanctioned was difficult than climbing Mount Everest & disbursement was returning back safely from Mount Everest! The entire procedure used to take months even year sometimes. The criteria’s were extremely stringent about eligibility for the loans & mostly either Govt servants or Large Corporate Co's employees only were able to fulfill the criteria’s, restricting the customer base of real estate to a small segment. 

But by start of 2000 economy opened up a lot & every financial institute realized the importance of housing finance segment & its huge potential. Nationalize Banks like State Bank & others entered in the ring & so the private players ICICI & others with big funds for lending on this segment. Obliviously what happened in Mobile sector got reflected in the housing finance sector benefiting the customer as because the competition right from the reduced rate of interests too relaxing loan eligibility criteria’s many offers are given to widen the customer base. Out of such all schemes the major hurdle was customers own contribution towards the home. As the new breed of flat buyers was majority young as in compare to in 90's, their savings too were less & very few could qualify the criteria of paying 30%-40% of their share out of total costs. So the bar was lowered & in some cases its gone as below as 5%, means you have to pay only 5% of home price & rest will be taken care by the financial institute! No reason home finance became the dearest of all with such type of schemes, as still in our country home is looked after with sentiment & not just a commodity! And in lieu the bank is mortgaging the entire home for their loan amount however small it may be! And with ever increasing population & land being same, the property prices kept rising such was the trend, which will continue in future too. Means the assets which have been mortgaged by the financial institute keeps appreciating, in nutshell it’s the safest bait one can have! Then there were schemes like Advanced Payment by virtue of which the banks were to pay all the payment of most of the payment to the developer in advance & your EMI i.e. Equated Monthly Installments, starts immediately after your disbursement. This in regular case was to start only after completion certificate, so if the project completion time is two years then those two years the customer used to end up paying only interest on the disbursed amount, which in a way was loss to him! Here in simple words for a non finance person like me, EMI means repayment of capitol amount of the loan. This scheme was dearer to the developer also as he used to get all the money upfront for his use. One thing I have never understood then & even now also, if every financial institute is so keen on financing the home buyer, why they don’t finance the developer in itself? Still today no bank gives finance for land buying neither real estate is in priority segment. And it’s the land which is like a raw material for this industry has the main costing part of any project. Naturally the builder has to take help of outside finance at very high rate & to avoid this he has to relay in such schemes like advanced home finance. So the solution was like win-win situation for all involved i.e. the developer, the client & the lender!

And here is where it seems the things went overboard, which has seen the recent guide lines. There were few things which were not considered in the advanced payment scheme of home finance & they are what if the builder doesn’t get enough flat bookings? Means not enough to fund the project & because of which he is unable to complete the project in time? Or what if there is some legal problem hampering the project work or what if the builder didn’t use the advance disbursement for the project which he has got for & use it for some other proposal & the project which his clients has been financed for lands in to trouble?

I think that’s the main reason why RBI has raised a stick for advanced finance schemes & on the prima-fascia nothing wrong with it but then as usual are we not avoiding the main problem? First of all we have to decide why we are financing home buyers, no doubt to make some money but that should not be the only target. Home is an essential commodity for millions of this country & a basic need as well right of living also. So the target should be making a home affordable to the real needy ones & the policies should be worked out accordingly. Earlier the home finance was only for riches but it’s because of a bit liberal policies it was in capacity of a common man also & that’s why many could buy the homes in recent past. Let’s not over look this reality & if we are not going to finance the developers for land & not giving priority status to real estate then how the homes are going to be affordable & from where the end user is going to make arrangements of finance is the question we should ask to RBI!
Here cant we think of a safer option or checking the track record of the developer on front of fulfilling commitments about completing of the project & then ask the banks to have advance disbursement finance schemes? Also why can’t RBI take real estate in priority finance segment as homes are required in large numbers & make the policies accordingly. This will definitely take care of home finance in end as such advance disbursement schemes won’t be required if developer has enough funding for his own. Need of the time is to define such policies & have proper control to see that the funds allocated for the projects are being used for that project only & in proper manner. Instead with present directives it’s unjust with those who are doing their business by following all rules & regulations & with committed mind!  

As I have always said, no rules or policy should be made by considering all are guilty for breaking the law, but the end result should be kept in mind as what outcome we want from making any such law or the policy. This again has not happened & it is bound to have a big negative impact on already bed ridden real estate industry. On one hand it’s facing many lacuna's on Local as well State policy decisions for Housing & Urban Development & now if there won’t be backing up on even finance level then how we expect to fulfill the ever increasing demand of homes, especially in the Metros?

It’s high time to give a serious thought for the real estate or the dream of common man for his home will remain a dream only & we all will be the reason for that!

Sanjay Deshpande

Sanjeevani Dev.

MSEDCL (Power) Committee, Credai, Pune

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