Housing Finance System

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Housing Finance System

In the country development of housing finance started very late. Initially it was the responsibility of government to provide the finance in this sector, as there was no initiative from private sector. The setting up of National Housing Bank (NHB) a fully owned subsidiary of the RBI in 1988 as the apex institution, marked the beginning of the emergence of housing finance as a fund-based financial service in the country. Since than, it has grown both horizontally as well as vertically with the entry of specialized financial institutions / companies in the private, public and joint sectors.


The implementation of housing finance policies presupposes efficient institutional arrangements. Although there were a large number of agencies providing direct finance to individuals for house construction, there was no well established finance system till the mid eighties in as much as it had not been integrated with the main financial system of the country. The setting up of the National Housing Bank as a fully owned subsidiary of the RBI as an apex institution was the culmination of the fulfillment of a long overdue need of the housing finance industry in the country. The system has been characterized by the emergence of several specialized financial institutions which have considerably strengthened the organization of the housing finance system in the country. In last few years, various companies have jumped into the field of housing finance, but major business is with few well recognized companies only.
Now let us look into the system of housing finance and discuss few of the important organizations in the system.

Central and State Government

Till the mid-eighties, the responsibility to provide housing finance rested by and large with the government. The Central and State governments support the housing / building efforts indirectly. The Central government has introduced, from time to time, various social housing schemes. The role of the Central government vis a vis these schemes is confined to laying down broad principles, providing necessary advice and rendering financial assistance in the form of loans and subsidies to the state
Real growth of housing finance sector was witnessed in last five years, due to rapid reduction in interest rates and governments efforts to boost housing infrastructure. Also, growth was propelled because of Income Tax benefit available on housing loans to individuals governments and union territories. The Central government has set up the Housing and Urban Development Corporation (HUDCO) to finance and undertake housing and urban development programme, development of land for satellite towns, besides setting up of building material industry.The Central government provided equity support to HUDCO and guarantees the bonds issued by it. Apart from this, both Central and State governments provide due house building advances to their employees. While the Central Government formulates the housing schemes, the state governments are the actual implementing agencies.
The HUDCO was established with an equity base of Rs. 2 crore. Over the years, the Government has expanded the equity base. It has further been able to mobilize resources from institutional agencies like LIC, GIC, UTI, commercial banks, international assistance as well as through public deposits.
The HUDCO provided assistance benefiting masses in urban and rural areas under a broad spectrum of programmes like rural & cooperative housing, urban employment through housing and shelter development, land acquisition, basic sanitation and environmental improvement of slums, consultancy for technology transfer, building material industry and building technology.
The HUDCO has also been entrusted with the responsibility to finance urban infrastructure projects with additional equity support provided by the Ministry of Urban Development, Government of India. The infrastructure projects cover sectors of water supply, sewerage, drainage, solid waste management, transport nagars/ terminals, commercial – social infrastructure, road, bridges and are development projects and so on.

Insurance Organizations / Corporations:

The LIC and GIC support housing activity both directly and indirectly. The LIC is statutorily required to invest 25 percent of the net accretion of funds in socially oriented housing, electrification, water supply and so on. Besides subscribing to bonds of the HUDCO and state housing boards, LIC grants loans to state governments for their rural housing programmes and to public sector companies for construction ofstaff quarters. Though LIC has been granting loans to individuals, directly, the thrust to housing finance was provided when, in 1989, the LIC promoted a subsidiary for the purpose, namely the LIC Home Finance Ltd.

Commercial Banks:

Commercial banks lending to individuals for housing emerged in the wake of the report of the working group on Role of Banking System in Providing Finance for Housing Schemes. They have been lending to the housing-sector based on annual credit allocations made by the RBI.

Cooperative Banks:

The cooperative banking sector consists of State Cooperative Banks, district central cooperative banks and primary urban cooperative banks. The RBI issued the first set of comprehensive guidelines, for these cooperative banks, in 1984. Cooperative banks finance individuals, cooperative group housing societies, housing boards and others who undertake housing projects for EWS, LIGs and MIGs.

Specialized Housing Finance Institutions:

There are certain institutions termed as ‘Specialized HFI’, which cater only to the needs of the housing sector. They can further be classified as housing finance companies promoted in the public / private / joint sectors and cooperative housing finance societies. A lead player in HFC category is the HDFC Ltd. It lends, mainly for new residential housing to individuals, groups of individuals, and individual members of cooperative societies.


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