Book Review - Looking into housing finance in Lanka authored by C.A. Sarathchandra
A significant number of home occupations by the average income earner of the country’s housing stock are not presently equipped with ‘the minimum facilities required for a dwelling unit’. The remedial action required for a better housing plan and standards for this category in the society still appears to be neglected or considered only haphazardly. The need for a housing demand is directly proportional to the increasing population growth and the speedy urbanisation.
C.A. Sarathchandra, Chief Executive Officer and the General Manager of HDFC Bank, who was the architect behind the metamorphosis of the former Housing Development Finance Corporation into a giant Licensed Specialized Bank, totally committed to housing development in Sri Lanka, has brought out his latest book, ‘Housing Development Finance in Sri Lanka’ that highlights areas to be developed to solve Sri Lanka’s housing problems.
The author explains that ‘a house provides not only shelter for a family but serves as a centre of its total residential environment’. He recognises a home as a force of economic activities which signifies a symbol of achievement, social acceptance and an element of urban growth and income distribution.
Sarathchandra discusses the magnitude of the housing problem, housing stock and household density in Sri Lanka which reflect the natural inherent trends in Lankan culture. He also touches on the quality of housing and issues related to rehabilitation of housing in Jaffna with details of internally displaced people in high security zones who have been rendered homeless.
The author also analyses the country’s demand and supply for housing finance and comments on various fundamental weaknesses in the finance market.
One major factor he focuses on is the potential risk of a liquidity crunch in housing banks due to maturity mismatch between housing loan portfolios and the funds used to finance them. He explains that this situation has arisen due to the lack of innovative long term money market instruments which are available in other developing and developed countries. Emphasis is also made on the need of a conducive infrastructure, including intermediary financial institutions to act as special purpose vehicles to help issue innovative long term funds.
The author also points out that when finances are restricted even on national level, how the resultant high interest rates could have a major impact on mortgage lending rates, by pushing up a few percent higher than the Central Bank Discount rates or Tresury Bill rates. This he recognises as adversely affecting the borrowers, particularly the deserving segments of the low and middle income groups, making them unaffordable to service the financial obligations of housing loans.
In Chapter 5, the author shows that the housing finance institutions have not been able to play their roles properly as evident from the 65% market share enjoyed by them up to 2000 being drastically reduced to 23% in 2006.
“Those commercial banks which entered the housing finance market since 2001 in an aggressive manner has by now acquired 77% of the market as they are in a position to do so with large deposit bases which have relatively low cost and zero cost current savings,” he points out.
In conclusion, Sarathchandra expresses his views on the present lending system (for long term individual borrowers with short term funds mobilised from the market through short term savings products) as fundamentally incorrect and highlights its risk factor as being very high.
As an alternative, he suggests the raising of long term funds from the market by making use of long term savings programmes (a specimen introduced in Para 9.2 in Chapter 9) to enable HFIs to finance their loan portfolio with funds and matching maturities.
The author further advocates the responsibility by the State to provide a conducive environment by providing tax incentives etc. to promote this type of long term financial instruments.
Housing Development Finance in Sri Lanka is a complex subject which the author has made easy and simple to understand even by an average person not so accustomed with macro finance.
Sarathchandra’s long years of experience as a commercial development investment banker at Senior Management level, has been successful in assessing the risks involved in the financial stability of banks, stemming from housing markets, and he provides proposals to overcome such problems by clearly analyzing the growth of house finance market and the difficulties the industry faces today.