THE Indian mortgage industry, which is less than three decades old, has managed to shield itself from the ravaging financial hurricane that has knocked off hundreds of billions of dollars of ‘toxic assets’ from established western financial institutions.

Importantly, the well-regulated housing finance industry in India – which has been growing at between 30 and 35 per cent every year for the past decade – has not seen any major increase in bad debts or defaults, despite realty prices declining sharply in many cities.

Industry experts also do not see any major liquidity problems for the industry, nor do they expect loans turning delinquent over the coming months. Analysts also expects growth to continue over the coming years, may be at a more modest pace of around 20 to 25 per cent.

One of the major factors that triggered off the global financial crisis was the sub-prime mortgage fiasco in the US, where banks and other lending institutions merrily went about offering housing loans on ‘attractive terms’ to all and sundry and at sub-prime rates, at least for the initial few years. The real – and higher – interest rates, kicked in at a much later date, taking the borrower by surprise.

Prudent lending norms were given the go-by as lenders rushed in with deals – offering home-loans even to the unemployed or temporary workers – hoping to encash in on the real estate boom (or rather bubble). Worse, many of the individual debts were re-packaged and securitised, which meant selling it off to other entities, many of who then re-sold it to others.

When the real estate bubble burst in 2007, many of the lenders – and borrowers – were stunned. Liquidity virtually drained out of the system, resulting in massive bail-outs by the government – or virtual nationalisation – for the likes of mortgage majors Freddie Mac and Fannie Mae, the humbling of the American Insurance Group, and the demise of Lehman Brothers.

The financial meltdown in the US had its impact on the other side of the Atlantic as well, with countries ranging from Iceland to the United Kingdom taking massive hits. There were fears that the property-driven crisis would soon cross over into India, where the real estate industry had also been expanding at a dangerous pace over the past few years.

Property prices in cities like Mumbai, Delhi, Bangalore and Pune have been expanding at phenomenal rates, doubling or even tripling in some cases in a span of a year or two. Developers, hungry for land, were bidding absurd figures at auctions being organised by local authorities in places like Mumbai, Gurgaon, Noida and Bangalore.

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FORTUNATELY, the ‘exuberance’ in the market was restricted only to developers and other players in the real estate business. Housing finance companies did not let themselves be duped by the high valuations of land and real estate firms, and maintained the balance.

The last few years have seen interest rates head northwards in India, and housing finance firms passed on the burden to borrowers. Foreclosures – where the lender acquires a property when the borrower fails to pay dues – have been negligible and mortgage lenders have been flexible and re-adjusted the loans.

Keki Mistry, vice-chairman and managing director, HDFC Ltd – the oldest and biggest housing finance firm – points out that there are various reasons why the industry has remained insulated from the meltdown in the West. The mortgage: GDP ratio in India is a mere six per cent, as against 80 per cent in the US.

In fact, even the retail credit: GDP ratio (retail credit includes housing loans, automobile and personal loans and credit card dues) is less than 15 per cent in India, as against 100 per cent in the developed world.

Indian mortgage firms are conservative in their approach. They insist that the borrower has to invest nearly a third of the cost of the property, and the loan amount does not exceed 65 to 70 per cent.

In a country where land titles are opaque and ownership of land is often embroiled in court battles, housing finance companies have established legal departments – staffed by experts – that thoroughly go over the builders’ documents to protect their exposure. This is also beneficial for the borrower, as he knows that the apartment will be delivered to him on time, as the lender has done all the necessary checks.

Unscrupulous developers in Mumbai and other cities also put up projects without the necessary technical expertise. In the past, multi-storeyed buildings have tumbled months after construction, as the foundation was weak, or the materials used were sub-standard. Similarly, many buildings are demolished by the civic bodies as the builder did not bother to take the necessary permission.

Housing finance firms do all the proper checks to ensure that they do not end up funding such illegal or unauthorised projects. Most of the top lenders have developed in-house expertise and extend credit only to projects of reputed builders.

Repayment of housing loans, unlike in America, begins as soon as possession is given. The repayment is done through equated monthly installments, and the EMI includes both the principal and interest components. Housing finance companies do not offer fancy products – priced at below market rates – nor do they dilute their fairly strict standards in aggressive pursuit of business.

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ANOTHER major factor that has protected the Indian housing finance industry is the debt-averse nature of consumers. Even today, borrowing from banks or others is still frowned upon in many quarters.

Says the executive of a leading housing finance firm: “There is a lot of sensitivity relating to a housing loan. Many borrowers are restless and want to clear their dues at the earliest.” Not surprisingly, top lenders like HDFC see about 10 per cent of their loans being pre-paid years before the end of the loan tenure.

For a majority of middle-class Indians – unlike their counterparts in the US – buying a home is an exercise one undertakes just once or twice in a lifetime. One of the worst humiliations for a person is being thrown out of that dream home, for which he or she has sacrificed such a lot in life.

So non-performing assets (NPAs) are inconsequential in the industry and the balance-sheets of lenders are clean. Not surprisingly, the housing finance business has of late attracted several players, including public sector banks, many of who have had to write-off huge loans in recent years, mainly from corporate borrowers.

While the mortgage industry in the developed world, burdened with toxic assets, will take several more years to revive, in India the business is expected to stay buoyant for a long time. India is facing a housing shortage of nearly 25 million units, with cities accounting for over 10 million units.

The country is also witnessing massive urbanisation, with millions of rural workers migrating to urban areas, seeking livelihood in cities. At present, less than 30 per cent of the 1.1 billion population lives in cities. This is expected to change dramatically over the next decade, fuelling demand for urban homes.

Another factor that will drive demand for homes – and home loans – is the demographic profile of India. About 60 per cent of the population is below the age of 30, which means millions of apartments and flats would be needed over the coming years to meet the demand. The joint family system is also crumbling in urban areas, which will drive growth of the housing industry.

The government has also been offering hefty incentives – by way of tax-breaks – encouraging people to go for home loans. The aim is to boost the construction trade, which has a ripple effect on several other sectors, including steel and cement, transportation and services, and leads to generation of thousands of jobs.

The relatively young mortgage business in India has managed to survive the worst crisis to have hit the global housing finance sector. Now with interest rates plunging in India, housing finance companies have also started reducing their rates, hoping to attract more borrowers.