Risks Attached to The Indian Real Estate Market

Regulatory Authority Requirement

Despite the fact that India currently has an emerging real estate market, it still lacks a regulatory authority that is able to control the risk involved in the housing finance sector , which primarily caters to the needs of the middle class community and urban population. This sector is responsible for the issuing of policies and laws that will encompass property rights and mortgage markets in order to maintain vigilance over the risks which are involved. The major threats in this sector come from:

1. Credit (collateral and lender)
2. Operations (for renting firms)
3. Legal
4. Market (requirements and competition)
5. Liquidity
6. Interest rate

There are various administrative and regulatory barriers which are also obstructing the growth of the credit securities market in India. These factors include outdated laws such as the Rent Control Act, Urban Ceiling Act, contrasting and high stamp duty charges across different states, etc.

Risks Involved

The number of credit defaulters in India is usually quite low when compared with the rest of the countries, mainly because of the small loan amounts and the high interest rates. Consequently, only people above a certain income level are considered as eligible for these loans. But this might not be true in the near future as interest rates have been decreasing for a while now. In order to counter this, finance firms should have a good administrative team that will be able to manage:

1. Credit Risk - They should first access the borrower’s track record and his ability to repay the loan and then sanction the loan.
2. Operation Risk – They should be able to manage the assets efficiently.

At the moment, except for HDFC, all other banks and housing finance institutions have very little experience in managing these risks.

Asset Liability Mismatch

Asset Liability disparity in banks and Housing Finance Corporations (HFCs) is another factor that can raise the risk of liquidity. This is due to the fact that although the loan tenure might have risen up to 15-20 years (from the initial period of 5 years), however, the asset still remains in the ledger of the lender for only 8-10 years. This is not troubling the banks as much as they have a diversified pool of assets and lending alternatives. About 75-80% of the bank deposits (which can be anything around Rs. 400-450 billion) are long term in nature and this has the effect of protecting the banks from asset liability disparity. But this might equally be a concern for the HFCs which mark a difference between their assets and the liabilities’ maturity profiles.

Looking Forward

In the coming years, profits for housing companies will be decided by their ability to reduce the number of defaulting mortgage assets. Banks and HFCs are looking for new ventures – they are now also targeting smaller towns. Also, a new model is being followed by some of the HFCs where they give out the initial loan (and cash on the processing fees) and then pass on the security to one of the bigger players. Nevertheless, with new players entering the market, it is possible that only HFCs with an adequate distribution system will be able to stand in this sector.

Article Source: http://www.realestatepropertyarticles.com.

About the Author:
Donald Keating is a contributing real estate editor at http://www.realestatepropertyarticles.com/. This article may be reproduced provided that its complete content, links and author byline are kept intact and unchanged. No additional links permitted. Hyperlinks and/or URLs must remain both human clickable and search engine spiderable.