Global J. of Arts & Mgmt.

, 2011: 1 (4)
Research Paper: Srinivasa Kumar et al., 2011: Pp. 11-15
HOUSING FINANCE SYSTEM IN INDIA AN EMPIRICAL ANALYSIS
Srinivasa Kumar. D, Santosh Ranganath N1 and T. Kama Raju1
Dept. of Basic Sciences and Humanities, GMRIT, Rajam, Srikakulam, Andhra Pradesh 532127
1Dept. of Commerce and Management Studies, Dr. B.R. Ambedkar University, Srikakulam, A.P 532410
Corresponding Author: drrao66@gmail.com
ABSTRACT
In this paper we analyze the housing situation, housing shortage and the analysis of housing market in India
for the last three decades. The rapid growth of the housing market in India in the recent years has raised
concerns about its sustainability and implications for financial and macroeconomic stability. Formal system
for housing finance in India is primarily dominated by two major type of institution viz., Scheduled
Commercial Banks (SCBs) and Housing Finance Companies (HFCs) and very small share of the market goes
to the third group viz., Co-operative Sector institutions. Among these financial institutions SCBs sanctions
more housing loans for needy people because these SCBs sanctioning procedures are liberal and they charge
the lowest interest rate while compared to the other financial institutions in India.
Keywords: Housing Situation, Economic Development, Housing Shortage, Rural Markets.
INTRODUCTION
According to the 2011 Census of India the total
Housing, a critical component of basic needs, can be
number of households in India is 231 million. Much
seen as the physical structure that human beings
in line with world trends of falling household size,
use for shelter. It is one of the basic human needs
in India, the average household size has fallen from
next only to food and clothing. It is a fundamental
5.71 in 1991 to 5.2 in 2011. This trend is expected
requirement for both human existence and
to continue as individuals migrate to urban centres
settlement. Even the Neolithic man who lived
in search of work, coupled with movement away
between 1000 and 2000 built their durable
from the joint family system to single family
habitations in order to protect themselves against
households that is further accelerating lower
wild animals and natural elements. Housing is
household sizes (Haffner and Heylen, 2008 and
considered a key sector of the national economy
Pattabhiraman, 2008).
that measures the standard of living and economic
condition of a country. Housing becomes a variable
METHOD OF ANALYSIS
tool for macro economic development, being
In the present study, analysis of data collected has
complementary to other variables. It also has a
been conducted with utmost care to give the
social benefit, for inadequate dwelling contributes
findings as much authenticity as possible. The data
to low family income, while well-planned housing
collected from 264 respondents among these
can increase national productivity, economize
respondents 175 respondents are loan seeker from
urban space and minimize the cost of urban
Scheduled Commercial Banks (SCBs) and remaining
infrastructure. In addition, homelessness results in
89 respondents are loan seekers from Housing
ill health and misery among the people (Jorgensen,
Financial Corporations (HFCs). The structured
2007 and Manoj. 2010). A basic human necessity
questioner has been given to all respondents and
like housing is no less a challenge in India which
collected opinion of all respondents and entered
has a population of more than 100 crores. The
into the computer using SPSS software. Simple
shortages in habitable conditions have been
statistical methods such as percentages, averages
contributed by many factors population growth,
and T-test etc., have been used to analyze and
increasing urbanization and rural urban migration,
interpret the data. The analysis has taken into
lack of infrastructure, nuclearisation of families are
account the statistical interpretation of the findings
some of them. As per estimates of the Government
from the survey.
of India, based on Census 2011 data, there is an
Housing Situation in India: The Indian total
aggregate shortage of 26 million housing units in
population of 1210 millions, as per the Census of
the country, out of which around 60% is by way of
India, 2011, consists of 231 millions of people
shortages in rural areas. The population of India is
residing 187.16 million housing units. A house in
over 1 billion and accounts for one sixth of the
India may be defined as any structure with four
entire worlds population. The population is second
walls and a roof.
Despite the countrys
only to China with one quarter of the worlds youth
achievements in different fields in the last quarter
living in India. 58% of the Indian population is
century, India is yet to tackle adequately one of its
below the age of 25 (Cahan Steven, 2000: Burger
basic needs -housing for its teeming millions. The
and Warnock, 2006 and Davis, 2011). In 2011 the
548 million people in the country live as 97 million
productive population (age 25-44) was 278 million
families or households in 93 million housing units.
which, by 2013, will grow to 369 million; a growth
The housing of the year 1971 in the country was
of 33%. This explosive growth will result in higher
not a satisfactory or hopeful as the ratio of
demand for housing loans in the foreseeable future.
households to the stock of houses (1.05:1) might
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Global J. of Arts & Mgmt., 2011: 1 (4)

suggest. In addition to an outright shortage of four
million houses, about 19 million houses fall below
accepted standards of habitation. Moreover, the
increase in the household size from national
average 4.9 members in 1951, to 5.2 persons in
1961, and again to 5.7 persons in 1971 has lessened
the pressure on the housing stock during the past
two decades. About 75 per cent of the households
in the below Rs.100 income group live in one-room
or two room accommodation. More than 15 per
cent of the households in the two income groups
above Rs.500 have three or more rooms.
Furthermore, above 10 per cent of the households
in the above Rs.1000 income-group have 5 or more
rooms. Housing is not just a roof over four walls; it
is an extension of human personality, as Nehru
called it. The social quality of life is reflected to a
large extent in the state of its housing. A certain
minimum standard of housing is essential for
healthy and civilized existence.
The 1991
population census of India shows that less than 0.3
per cent of rural population is totally houseless,
which is an improvement to the last population
census of 1981 indicating nearly 0.5 per cent. The
population census refers only to the aggregate
numbers without giving reference to the quality
and amenities provided to the Indian households
(Quigley and Raphael, 2004 and Vora, 2010).
Types of Houses: Houses in the nation can be
classified into Kutcha, Pucca and Semi-Pucca
according to the structure. A Kutcha structure is
one that has walls and roofs made of non-pucca
materials. Semi-Pucca structures are those which
have either the walls or roofs made of pucca
materials. A structure is one whose walls and roofs
are made of pucca materials such as bricks, stones,
cement concrete and tiles. An independent house is
a free-standing structure with a separate entrance.
Chawls and bustees are collections of huts or
tenements generally of Kutcha or Semi-Pucca type.
Flat is a part of a building with one or more rooms
and normal housing facilities like toilet, water
supply, latrine etc. The census of 1961 revealed that
out of total 78.9 million houses, 51 million were
houses without appropriate amenities and
infrastructure facilities. The number of Indian
houses according to class in urban area has been
slowly but steadily increasing over the years as
shown in Table 1. The number of Kutcha houses
declined from 1.96 million to 2.56 million as against
the respective totals of houses in 1961 and 2011.
At the same time, the percentage of Pucca houses
increased from 6.44 million in 1961 to 53.49
million in 2011. This shows the steady progress of
pucca houses in the country.
Housing Shortage in India: The housing shortage
is a more serious problem in developing countries
like India than in the developed countries because
in the former, housing problems are comparatively
more than severe and the available resources are in

short supply. It had been estimated that the

housing deficit in 1977 was 23 to 26 million units.
The impact of the deficit was felt most by the group
with monthly income below Rs.100, two-thirds of
total deficit arose form this class. It was observed
that the housing deficit in the income groups,
Rs.101-200 and Rs.201-500, we about 21 and 13
per cent respectively. Details of the housing
shortage in India are presented in Table 2. The
housing shortage in India was 9.0 millions in 1951
as per estimates of National Buildings Organization,
it was increased to 26.5 million units by 2011 the
shortage of houses in India, especially in urban
belts, had been increasing day by day due to the
migration of rural population to urban centers. The
shortage of housing in 2011 was estimated to be
15.4 million in urban areas and 11.1 million in rural
areas on the basis of the statistics on March1, 2011
there is a wide gap between demand and supply of
housing in India. The United Nations estimates that
the least developed countries will have to construct
at least ten houses per 1000 population to solve the
shelter problem by the end of the last century. But
in India, the growth of housing shortage is
indicative of the fact that India may have to face
worse housing problems in the days to come than it
is felt today.
Housing Markets: The Indian housing industry is
highly fragmented, with the unorganized sector,
comprising or government affiliated entities. The
housing market witnessed a frenzied boom in the
early nineties on the back of a booming stock
market and a liberalization process that was kicked
off in 1991. The stock market and real estate
markets crashed in quick succession - 1994 and
1995 respectively, followed by a prolonged period
of about 8 years of little or no appreciation in real
estate. The crash, accentuated by high inflation and
high interest rates, not only kept speculative
inflows out but also kept genuine home seekers at
bay. However, some reversal in that trend is being
witnessed small builders and contractors,
accounting for over 70% of the housing units
constructed and the organized sector accounting
for the rest. The organized sector comprises large
builders and government as the past 2-3 years has
seen real estate prices inch up on the back of
demand led by low interest rates and the software
services sector boom currently underway.
According to the Census of 2001 there were 249
million occupied houses in total, up from 108 in
1991, representing a CAGR of 8.71%. In 2001 there
were 178 million in rural areas and 71 million in
urban centres. The shortfall of about 22.44 million
units compared to the shortfall of 23.90 million in
1991. Out of the total shortfall of 22.44 million,
13.66 million is in rural areas and the balance 7.57
million in urban centres.
Housing Scenario in India and the Institutional
System for Housing Finance: In spite of the fact

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Global J. of Arts & Mgmt., 2011: 1 (4)

that investment in housing is an important driver of
economic development of any nation, in India
housing finance remained as an activity that failed
to occupy the key position that it deserved during
the early days of planned development. Only during
the late seventies there was any organized attempt
to set up an institutional mechanism for the
purpose of providing housing finance to the needy
sections of the society. It was only in 1977 that
HDFC (Housing Development Finance Corporation)
the pioneer development institution for housing
finance in India the private sector was set up,
though a fully owned government company viz.
HUDCO (Housing and Urban Development
Corporation) was set up way back in 1970 to
undertake housing and urban development
programs. Furthermore, it was after one more
decade (1988, to be specific) that a formal housing
finance system emerged in India with the formation
of National Housing Bank (NHB) in 1988. At that
time nearly 80 percent of the housing stock in the
country was financed from informal sources (RBI,
2009). When NHB was formed in 1988 as a fully
owned subsidiary of the RBI with a mandate to
operate as a principal agency to promote housing
finance institutions both at local and regional levels
and to provide financial and other supports to such
institutions and for matters connected therewith or
incidental thereto there were about 400 housing
finance companies (HFCs) in India, functioning as
NBFCs (Non Banking Finance Companies) regulated
by the RBI. These companies included many small
ones with restricted or localized activities and also
those engaged in construction/development but
offering housing credit as well. The only exception
in this regard has been HDFC the pioneer HFC in
India and also the largest among the HFCs in India
ever since its inception in 1977. At present (August
2009), there are 43 HFCs registered with the NHB
of which 20 have the permission to provide housing
finance and also to accept public deposits, while the
remaining 23 have permission only to provide
housing finance. Housing sector has been given
priority status by the successive Union
Governments and is accordingly entitled to
substantial allocations in the various Plans, apart
from a large number of fiscal and monetary
incentives. The Tenth Plan (2002-2007) sought to
promote housing sector in a big way. The ongoing
Eleventh Plan (2007-12) is also no exceptions are
presented in Table-3.
Housing Finance: Housing Finance refers to money
provided by any source other than the residents or
builders of the dwellings. It includes construction
funds loaned to builders and mortgage funds loaned
to individual families by private or public banks and
by a wide variety of other types of financial
institutions. It also includes various types of
housing subsidies provided by Government
Agencies. Thus a housing financial system is the

financial institutions themselves, their legal status,

administrative procedures, the relationships and
the markets which link them. An effective housing
financial system should be able to mobilize savings
and protect their real value. An effective housing
finance system is judged in terms of its net macroeconomic impact namely, the effect of resource
mobilization for housing on aggregate savings and
availability of funds for other sectors; the impact on
the national budget; and the amount of employment
and value added generated by the housing industry.
The value of total residential mortgage debt moved
up from USD 1.84 billion in 1994 to USD 12.26
billion in 2004; a CAGR of 21%. The housing finance
market has recorded robust growth in the last 5
years, clocking an annual growth rate of about 40%
between FY99 and FY04. Residential mortgage debt
as a percentage of GDP was a mere 0.58% in 1994
which has moved up to 2.21% in FY04, still
miniscule when compared to about 45% in the EU,
70% in the US and upwards of 30% in East Asian
economies. Interest rates on housing loans have
fallen from a peak of 17% in 1996 to 7.5% last fiscal
making owning a home more affordable. This
combined with increasing loan tenures, increasing
loan-to-value ratio and a rise in the installment-toincome ratio are precipitating high growth rates in
the housing finance market. The organized lenders
in the housing finance industry, comprising 30% of
housing
units
constructed,
are
currently
concentrated in the urban markets, with a greater
presence in the major metros and Tier 1 cities. They
are however, moving to the Tier 2 cities and smaller
towns but are yet to venture into the rural
markets.Also, salaried borrowers constitute the
bulk of the clientele for the financier in comparison
to the self-employed borrowers, who constitute a
miniscule proportion. As a segment, the selfemployed category is much bigger than the salaried
segment, but the organized lenders have,
historically, been concentrating on the salaried
borrowers due to the lower risks associated with
them. Traditionally housing finance was dominated
by a handful of private sector institutions. These
Housing Finance Companies (HFCs) commanded
70% market share in FY99, which has subsequently
fallen to 50% in FY04 as a direct result of policy
changes that permitted the entry of banks into this
industry. Banks now control 40% of this market
and continue to show explosive growth on account
of government policy that categorizes this lending
under priority sector lending and the low NPA
levels experienced in this industry.
Institutional Finance for Housing in India: The
housing finance system in India comprises the
formal and the informal sectors. The formal sector
consists of banks, financial institutions and housing
finance companies and the informal sector consists
of credit societies, NGOs and private lenders. To
improve efficiency and effectiveness of the system,

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Global J. of Arts & Mgmt., 2011: 1 (4)

there is a need to strengthen linkages between
these sectors. The formal sector is generally geared
towards low-value, high-values lending operations
with full collateral. As a result, formal sector loans
are mainly provided to middle and high-income
households and they do not reach the lower income
state of society. On the other hand, the informal
sector, through reaching low-income groups lacks
the institutional structure and capacity to mobilize
resources substantially. Housing Finance through
recognized institutions was relatively non-existent
in India till 1971. Hardly 10 per cent of the houses
were built or purchased through institutional
agencies. The rest 90 per cent depended on
peoples own savings and borrowings from friends
and relatives. During the first 25 years after
independence, no serious attention was paid to the
problem of housing in India.
Refugees
Rehabilitation functioned till 1960, under a villagehousing scheme launched as a part of the
community development programme in 1957. In
1971 the Government of India initiated a scheme of
allotment of house sites and financial assistance to
construct houses for the rural landless labourers
and artisans, including scheduled castes and
scheduled tribes. In April 1974, it was transferred
to the State Sector on the recommendation of the
National Development Council (NDC). Gradually, a
number of Government and autonomous and public
sector institutions started paying attention to the
housing sector. The National Housing Bank (NHB)
a subsidiary of the Reserve Bank of India, acting as
the apex financial institution in the area of housing,
from July 1988. The HFCs are grouped into (A)
HFCs approved for refinance assistance from NHB,
(B) HFCs having net owned funds (NOF) of Rs.50,
000 lakhs and above and (C) HFCs having less than
50,000 lakhs. The amounts of housing loans
sanctioned and disbursed by the HFCs approved by
the NHB for its refinance facility have shown steady
growth over the five years as shown in Table 4.
The HFCs sanctioned loans are Rs.17923 crores in
2002-03 as compared to Rs.17832 cr in 2009-10
and disbursed amount is Rs.21211 crores in 200203 and Rs.57524 crores in 2009-10 its indicates the
gradual increase in amounts of sanctioned and
disbursed from 2002-03 to 2009-10.
Housing Finance by Scheduled Commercial
Banks: Till the late seventies Scheduled
Commercial Banks (SCBs) were not exposed to any
type of housing finance.
Based on the
recommendations of the working group in May
1979, Reserve Bank of India issued detailed
instructions to SCBs for housing finance. To start
with, it was desired that the banking system as a
whole should provide housing finance to the extent
of 75 crores per annum which was only 0.5 per cent
of total advances of the commercial banks at the
end of December 1978. The Reserve Bank of India
has been raising the amount for housing finance to

be made available by SCBs year by year. In March

1988, housing finance allocation was raised from
Rs.150 crores to 225 crores to be attained by the
end of December 1988 and to Rs.300 were to be
achieved by the end of the 1989. The housing
finance allocation for commercial banks form 20022003 to 2009-2010 is shown in Table 5. The
allocation for housing finance of SCBs has been
increased from Rs.18674 crores in 2002-2003 to
Rs.95135 crores in 2009-2010. The percentage of
increase in allocation during 2003-04, 2004-05,
2005-06 were 28.16, 39.81, 52.46 and starts
decreasing in 2006-07 and again slightly increases
in 2007-2008 and again decreases in 2008-2009
with 11.25 per cent as compared to the previous
years respectively and again increased in 2009-10
with 19.02 percentage.
The disbursals had
increased from Rs.18566 crores in 2002-03 to
Rs.944432 crores in 2009-2020. The percentage
achieved in housing finance of all SCBs varies for
99.60 percent to 97.89 percent during 2006-2007
to 2008-2009 and again it achieved in 2009-10 with
99.26 percent.
CONCLUSION
In this paper we provided a clear cut picture of
Indian housing situation, housing shortage, housing
finance system in India. The population of India is
over 1 billion and accounts for one sixth of the
entire worlds population. Houses in India can be
classified into Kutch, Semi-pucca and Pucca
according to the structures. Large percentage of
people are living in katcha houses in 1971 census
and steady progress of pucca houses took place in
India in 2001 census. The housing shortage is a
serious problem in developing countries like India
than in the developed countries. The shortage of
houses in rural area is more than the urban area in
India, the growth of housing shortage is indicative
of the fact that India may have to face worse
housing problems. The housing market witnessed a
frenzied boom in the early nineties on the back of a
booming stock market and a liberalization process
that was kicked off in 1991. The gradual increase in
allocation of funds in five year plans indicates that
the housing finance required rapidly increases in
India. HFCs, SCBs and Co-operative societies are
playing vital role in housing finance system in India.
Among these financial institutions SCBs sanctions
more housing loans for needy people because these
SCBs sanctioning procedures are liberal and they
charge the lowest interest rate while compared to
the other financial institutions in India. We finally
concluded that SCBs are playing a major role in
disbursement of housing loans in India in housing
finance system.
REFERENCES
Burger, J and F. Warnock,2006, Local currency bond
markets, IMF Staff Papers 53:115132.

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Cahan Steven F. 2000. Value Relevance of Mandated
Property, Housing Finance International, 21(11):
Comprehensive Income Disclosures, Journal of
40.
Manoj. P.K, 2010. Benchmarking Housing Finance
Business Finance and Accounting, 27:9 & 10:
1273-1303.
Companies in India: Strategies for Enhanced
Davis J. Erickson, 2011, A Review of The Housing
Operational Efficiency and Competitiveness,
European Journal of Economics, Finance and
Policy
Revolution,
Networks
and
Neighbourhoods, International Journal of
Administrative Sciences, 21: 21-34.
Housing Policy, 11: 108.
Pattabhiraman, S. 2008, Bank on Operational
Haffner, M. and K. Heylen. 2008, Affordability of
Efficiency, The Hindu Business Line, 14 Nov.
housing. Flanders and the Netherlands
2008, Andrapradesh.
compared in the shortterm and long-term, Paper
Quigley, J. M and S. Raphael. 2004. Is housing
unaffordable: why isnt it more affordable?
presented at the ENHR-conference, 69 June.
Journal of Economic Perspectives, 18: 191214.
Dublin,
Jorgensen, O. 2007. Housing the No-income Group,
Vora, P.P. 2010. Indian Housing Finance System,
The Role of Housing Finance in Alleviating Urban
National
Housing
Bank,
India,
Pp.2.
Table 1: Number of Indian Houses According to Class in Urban Area (Figures in Millions)
Census
Year

Kutcha
(Non-permanent)

1961
1971
1981
1991
2001
2011

1.96
2.35
3.11
3.30
1.70
2.56

Semi-Pucca
(Semi-permanent)

4.90
6.44
4.35
11.80
6.80
18.09
6.21
29.79
8.08
41.17
10.05
53.49
Sources: Census of India 1971, 1981, 1991, 2001, 2011

Table 2: Housing Shortage in

India (In millions)
Year

Urban

1951
1961
1971
1981
1991
2001
2011

2.5
3.6
3.0
7.0
8.3
10.6
11.1

Rura
l
6.5
11.6
11.6
16.3
14.6
14.1
15.4

Total
9.0
15.2
14.6
23.3
22.9
24.7
26.5

Source: Annual Reports of

National Housing Bank

Sanctioned
17923
21211
26817
31283
41654
47132
49278
58262

13.30
18.50
28.00
39.30
50.95
66.10

Table 3: Investment for Housing during the various Plan periods (in crores)

First Plan (1951-56)

Public
Investment
250

Private
Investment
900

Total
Investment
1,150

Second Plan (1956-61)

300

1,000

1,300

Five Year Plan

Third Plan (1961-66)

425

1,125

1,550

Fourth Plan (1969-74)

625

2,175

2,800

Fifth Plan (1974-78)

796

3,640

4,436

Sixth Plan (1980-85)

1,491

18,000

19,491

Seventh Plan (1992-97)

2,458

29,000

31,458

Eighth Plan (1992-97)

31,500

66,000

97,500

Ninth Plan (1997-2002)

52,000

99,000

1,51000

Tenth Plan (2002-07)

4,15000*

3,11,300

7,26300

Eleventh Plan (2007-12)

5,07,318@

3,73560#

8,80,878

Source: (1) Report on Trend and Progress of Housing in India, 2003, NHB, New Delhi., p.79,
(2) Plan Documents, X Plan (2002-07) and XI Plan (2007-2012)
(3) Report of the 22nd Standing Committee on Rural Development 2005-06
* Estimates of X Plan Document.
@ From XI Plan Document on Urban Housing, p.43, investment for Urban Housing is
Rs.3,61,318.1Cr. Rural housing investment is Rs.1,46,000 Cr. As per Source (3), p.17. Thus,
the total is Rs.5, 07,318.1Cr.
# Estimated as 1.2 times as that of the X Plan ie. 1.2 times Rs.3,11,300 Cr = Rs.3,73,560 Cr.

Table 4: Housing Loans Sanctioned and

Disbursed by Approved HFCs (Rs. In
crores)
Year
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010

Total housing stock in

urban areas

Pucca(Permanent)

Disbursed
17832
20862
26000
30109
40141
46164
48413
57524

Source: Report on Trend and Progress of

Housing in India.

Table 5: Housing Financial Scheduled Commercial Banks (Rs.

In Crores)
Year

Allocati
on

%
Increased

Disbursed

%
Increased

2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010

18674
23934
33463
51020
58858
71839
79926
95135

28.16
39.81
52.46
13.31
22.05
11.25
19.02

18566
23533
32816
50398
58623
69859
78242
94432

26.75
39.44
53.57
16.32
19.66
11.99
20.69

%
Achie
ved
99.42
98.32
98.06
98.78
99.60
97.24
97.89
99.26

Source: Annual Reports of National Housing Bank.

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