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The Indian Housing Finance Industry At Crossroads

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Case Details:

Case Code : FINC019
Case Length : 15 Pages
Period : 1970 - 1992
Pub. Date : 2002
Teaching Note :Not Available
Organization : Indian Government
Industry : Financial Services
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The availability of finance has improved significantly these days. Banks and financial institutions have become aggressive in marketing housing loans."

- Janki Ballabh, State Bank of India Chairman, commenting on the housing finance industry, in February 2002.

"The feel good factor will dampen."

- Rajiv Sabharwal, Chief Operating Officer, ICICI Home Finance, commenting on Kelkar recommendations, in December 2002.

An Unwelcome Development

In the early 21st century, the housing industry in India was one of the few sectors that was growing at a healthy rate of 28-30% in spite of the economic slowdown. A host of reasons were responsible for this growth, including favorable government policies, increased corporate activity, and above all, an increasing customer-base.

During 2000-2002, the government had announced many industry-friendly policies; in addition, during the same period, real estate prices had also gone down across the country. The industry's strong growth had a direct impact on many other related industries, such as the cement, engineering, paint and steel industries. One industry that experienced hectic activity during the period was the housing finance industry. In fact, some industry observers claimed that the ease with which housing finance could be obtained resulted in the increased activity in the housing industry. Not only were customers given tax concessions on housing loan repayments, companies were also given tax rebates on profits earned.

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As a result, many banks and financial institutions had entered the market with attractive financing rates and consumer-friendly schemes. In December 2002, companies as well as customers were shocked to learn of the recommendations made by a government appointed panel regarding direct tax reforms.

The panel, named the Kelkar Panel after its chairman, Vijay Kelkar, recommended that income tax deductions for interest payments on housing loans be abolished (Refer Exhibit I for the Kelkar Committee's recommendations). Since many salaried professionals in the country depended on these very exemptions for reducing their tax liabilities, the news came as a rather unwelcome development (reportedly, a large number of Indians took housing loans to take advantage of the tax concessions). According to media reports, the new recommendations, apart from being against the interests of the people, could halt the industry's growth if accepted in the next budget (due in end of February 2003).

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