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Finance Project Icici Bank document sample
Finance Project Icici Bank document sample
ASIAN DEVELOPMENT BANK RRP: IND 30204 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON FOUR PROPOSED LOANS TO THE HOUSING AND URBAN DEVELOPMENT CORPORATION, NATIONAL HOUSING BANK, HOUSING DEVELOPMENT FINANCE CORPORATION, AND ICICI FOR THE HOUSING FINANCE II PROJECT IN INDIA August 2000 CURRENCY EQUIVALENTS (as of 25 August 2000) Currency Unit – Rupee/s (Re/Rs) Re1.00 = $0.021791 $1.00 = Rs45.890 The exchange rate of the rupee is determined by the Reserve Bank of India under a system of managed float. For the purpose of calculations in this report, a rate of $1.00 = Rs43.5 has been used. This was the rate generally prevailing at the time of appraisal of the proposed Project. ABBREVIATIONS ADB – Asian Development Bank BME – benefit monitoring and evaluation CFI – community-based financial institution EWS – economically weaker section HDFC – Housing Development Finance Corporation HFC – housing finance company HFI – housing finance institution HFP – Housing Finance Project HUDCO – Housing and Urban Development Corporation KfW – Kreditanstalt für Wiederaufbau LIG – low-income group LIH – low-income household MBS – mortgage-backed securities MIG – middle-income group NGO – nongovernment organization NHB – National Housing Bank NHHP – National Housing and Habitat Policy NHP – National Housing Policy PIU – project implementation unit SHG – self-help group TA – technical assistance USAID – United States Agency for International Development NOTES (i) The fiscal year of the Government ends on 31 March. (ii) In this report, “$” refers to US dollars. CONTENTS Page LOAN AND PROJECT SUMMARY ii I. THE PROPOSAL 1 II. INTRODUCTION 1 III. BACKGROUND 1 A. Sector Description 1 B. Government Policies and Plans 3 C. External Assistance to the Sector 4 D. Lessons Learned 5 E. ADB’s Sector Strategy 6 F. Policy Dialogue 6 IV. THE PROPOSED PROJECT 8 A. Rationale 8 B. Objectives and Scope 9 C. Cost Estimates 14 D. Financing Plan 15 E. Implementation Arrangements 16 F. The Borrowers 19 G. Environmental and Social Measures 21 H. Policy Issues 24 V. PROJECT JUSTIFICATION 26 A. Economic Analysis 27 B. Financing Justification 27 C. Subsidies 28 D. Affordability 28 E. Impact on Poverty 29 F. Risks 29 VI. ASSURANCES 30 A. Specific Assurances 30 B. Conditions for Loan Effectiveness 31 C. Conditions for First Disbursement 32 VII. RECOMMENDATION 32 APPENDIXES 33 LOAN AND PROJECT SUMMARY Borrowers Housing and Urban Development Corporation (HUDCO), National Housing Bank (NHB), Housing Development Finance Corporation (HDFC), and ICICI. Guarantor India Project Description The Project will improve the efficiency of the housing finance sector so that it can better serve the housing needs of low-income households. The loans will be used as lines of credit for directing housing finance to low- income households through different lending channels, and for financing housing-related poverty reduction subprojects. A systematic and sustainable process will be developed whereby financing is made available from formal housing finance institutions through financial intermediaries such as community-based finance institutions (CFIs) and nongovernment organizations (NGOs) to assure effective and efficient delivery of market- based housing finance to low-income households. All of the beneficiaries will be low-income households. Classification Primary: Human Development Environmental Category B Assessment The environmental implications of the subprojects were reviewed and their likely impacts found to be easily mitigated. Initial environmental examinations will be undertaken for the subprojects. Rationale In spite of the recent liberalization of the financial sector and associated policy and regulatory reforms to promote increased participation in housing finance and development, the housing shortage in India remains critical, especially for low-income households. It is estimated that India's housing shortage is as high as 40 million units, suggesting that more than 200 million people are living in chronically poor housing conditions or on the streets. Although “shelter for all” is the overarching goal of the Ninth Five-Year Plan, this was not achieved by 2000 and will not be achieved by the end of the Ninth Plan period in 2002. Since over 90 percent of the housing need is from low-income families, these families are most directly impacted by unacceptable living standards and the poor quality of life in all of India’s urban centers. Lack of basic services such as water supply, drainage, sanitation, and electricity also negatively impact the productivity and incomes of poor households, especially those who work in their homes. iii Since the major source of housing finance for low-income households is their own meager savings and family assets, the principal constraint to the ability of low-income families to improve their housing and living conditions is the absence of affordable credit for housing. Although various CFIs and NGOs have assisted low-income families to mobilize their savings and have extended loans for housing construction and improvement, these efforts are extremely small when compared with the total housing finance demand of low-income households. Project resources will therefore be focused on assisting poor families with one or more income earners to gain access to housing finance from formal and informal housing finance institutions, especially CFIs and NGOs. In doing so, the Project will promote market-based lending, as these families would otherwise have to pay higher than market interest rates to money lenders to access small housing loans. For the poorest families, the Project will support subprojects such as slum networking and home workplace schemes to improve their housing, income earning potential, and access to basic infrastructure and community services. Objectives and Scope The objectives of the Project are to (i) increase access of low-income households to market-based housing finance by increasing and broadening the finance channels of both informal and formal housing finance institutions (HFIs); (ii) reduce poverty by improving infrastructure and services in slum areas, and financing innovative low-income housing subprojects; and (iii) expand the lending operations of housing finance companies (HFCs) to include a greater proportion of loans to low-income households. The overall thrust of the Project is to promote market-based lending without subsidies, and the target beneficiary group is low-income households. The Project consists of three parts: part A: lending to low- income households through intermediaries such as CFIs, NGOs, public and private enterprises, and state and local bodies; part B: reducing poverty through slum networking and home-workplace subprojects; and part C: increasing lending to low-income households through formal HFIs. Cost Estimates The Project is estimated to cost $517 million equivalent, of which $61 million is the foreign exchange cost and $456 million equivalent is the local currency cost. iv Financing Plan ($ million) Source Foreign Local Total Percent Exchange Currency Cost ADB 61 239 300 58 HUDCO 0 21 21 4 NHB 0 10 10 2 HDFC 0 20 20 4 ICICI 0 20 20 4 Beneficiaries 0 146 146 28 Total 61 456 517 100 Loan Amount and Terms Loans of $100 million to HUDCO, $80 million to HDFC, $80 million to ICICI, $40 million to NHB, totaling $300 million, from the Asian Development Bank’s (ADB) ordinary capital resources, with a term of 25 years, including a grace period of 5 years, at an interest rate in accordance with the ADB's market-based loan facility, an annual commitment charge of 0.75 percent, and a front-end fee of 1 percent of the loan amount. Period of Utilization Until 30 June 2007 Implementation Arrangements The Project will be implemented through a housing finance facility established within each of the four Borrowers. The facility will provide market-based housing loans to low- income households as well as subloans to CFIs, NGOs, state agencies, municipal corporations, and private companies for onlending to low-income households. Executing Agencies HUDCO, NHB, HDFC, and ICICI. Procurement Procurement of ADB-financed facilities under the Project will be in accordance with ADB's Guidelines for Procurement. For procurement of goods and services to be financed by the subloans out of the loan proceeds, the Borrowers will satisfy ADB that the procurement procedures they apply are appropriate to the circumstances. Estimated Project 31 December 2006 Completion Date Project Benefits The major benefit of the Project will be the catalytic and Beneficiaries impact on improving the access of low-income households to housing finance, and the accompanying policy reform agenda that will promote sustainable mechanisms for the delivery of housing finance at market rates, strengthen the institutional capacity of HFIs in both the formal and informal sectors, and facilitate housing investment. The ADB loans totaling $300 million will result v in housing investments of about $517 million by leveraging project funds with the beneficiaries’ own investments, as well as investments by the Borrowers. The Project will increase the capacity of the major lenders in the public and private sectors as well as CFIs and NGOs to respond to the housing finance needs of low- income borrowers, and will directly benefit about 270,000 low-income households, or over 1.3 million people. The recycling or relending of repayment proceeds will maximize the impact of the ADB loan, resulting in more than 500,000 housing loans benefiting approximately 2.7 million people over the loan period. There is a basic linkage between improved housing and human welfare; therefore, human development will be enhanced by the increased availability of housing finance for low-income households. The Project will have an immediate impact on the welfare of low-income household beneficiaries who presently have to obtain finance through the unregulated system and pay interest rates of between 5 and 10 percent per month. Thus, many impoverished families will, for the first time, have access to affordable, yet market-based housing finance. Critical urban infrastructure and services will be provided under the slum networking component of the Project, and institutional capacities will be strengthened to improve the living conditions of families living in slum areas across India. I. THE PROPOSAL 1. I submit for your approval the following Report and Recommendation on four proposed loans to the Housing and Urban Development Corporation (HUDCO), the National Housing Bank (NHB), the Housing Development Finance Corporation (HDFC), and ICICI for the Housing Finance II Project in India. II. INTRODUCTION 2. Given the severity and scale of India’s housing shortage, the Government asked the 1999 Country Programming Mission for technical assistance (TA) to prepare a second loan project to address the financial, institutional, and regulatory constraints to increasing the availability of housing finance to low-income households. Project preparatory TA1 was approved in November 1999 with the objective of identifying sustainable, market-based channels and institutional arrangements for the delivery of housing finance to meet the borrowing needs of low-income households. The loan Fact-finding Mission visited India in April 2000 and the Appraisal Mission2 in June 2000. The missions reviewed the results and recommendations of the project feasibility study with the Government, bilateral funding agencies, housing finance institutions, nongovernment organizations (NGOs), community groups, and low-income beneficiaries, and reached an understanding on the project scope, cost, financing, implementation arrangements, and policy reform initiatives. This report is based on these discussions and the reports prepared by the TA consultants. The project framework is shown in Appendix 1. III. BACKGROUND A. Sector Description 1. Housing Situation 3. Rapid population growth coupled with rapidly increasing urbanization and widespread poverty have created a serious shelter problem in India, contributing to the proliferation of slums, increased demand for urban infrastructure and services, and declining quality of life for low-income households. Additional key factors that have aggravated India’s critical housing situation include institutional deficiencies, especially among state and local housing agencies, and regulatory constraints to new housing development and investment such as the Urban Land Ceiling (and Regulation) Act of 1976 and the state rent control acts. In terms of the magnitude of India’s housing shortage, the demand-supply gap in 1991 was 31 million units, according to a study prepared by the National Building Organization.3 Urban areas account for about 30 percent of the shortage. Although reliable statistical data on the existing housing deficit are not readily available, the study concluded that the annual demand for housing across the country was about 4.5 million units, whereas the annual supply was about 3.5 million units. Based on a net increase of housing demand of 1 million units per year since 1991, today’s housing shortage is estimated to be as high as 40 million units. While these estimates suggest that more than 200 million people across India are living in abject housing conditions or on the streets, millions more are without decent, safe, and affordable housing. 1 TA 3288 IND: Housing Finance II, for $405,000, approved on 8 November 1999. 2 The Mission comprised J. Lynch, Urban Development Specialist and Mission Leader; A. Goswami, Counsel; and V. V. Subramanian, Investment Officer. 3 National Building Organization. 1997. Prominent Facts on Housing. New Delhi. 2 4. One critical indication of the housing shortage in urban areas is the proliferation of slums. In the 23 Indian cities with populations in excess of 1 million, approximately 28 percent of the urban population live in slums. Since 1981, the slum population has been increasing at a rate of about 7 percent per year, more than twice as high as the average annual urban population growth rate over the same period. The health and environmental implications of households’ lack of access to potable water, sanitation facilities, adequate drainage, and proper solid waste collection and disposal services are overwhelming, especially for women and children who spend proportionally more time at home than men. It is estimated that upward of 25 percent of slum residents are home-based workers, mostly women. For these families, access to decent living conditions and basic urban infrastructure and services is extremely important, as they are primary factors of production as well as productivity. 5. In terms of investment requirements to meet India’s housing shortage, the 33 million unit target of the Ninth Five-Year Plan (1997-2002) was estimated to require over Rs1,500 billion ($37.5 billion). However, not more than 25 percent of funding required to meet India’s staggering housing deficit is expected to flow from formal sources such as banks; financial institutions; government-directed insurance companies; and central, state, and local governments.4 With the exception of government-sponsored housing programs, formal housing finance institutions (HFIs)5 are reluctant to lend to low-income households because of factors such as the relatively high transaction and servicing costs, irregular and unsubstantiated income sources, and the absence of collateral in the form of title to real property. Consequently, the remaining funding requirements will derive from informal sources that largely consist of individual efforts with the help of community-based financial institutions (CFIs),6 NGOs, employer financing, and moneylenders. Since most of the housing needs of the middle- and upper-income groups will be met through more formal channels, the shortfalls of the Ninth Plan will mainly impact low-income households. Therefore, increasing funding through the informal sector is an essential and integral means to meet the housing needs of low-income families in India. 2. Housing Finance 6. The formal housing finance sector in India had its beginnings in the 1960s when the Government, through its various schemes for public and low-cost housing, was the sole provider of housing finance. The Government implemented many of its schemes through state housing boards that allocated serviced land and housing to individuals based on social welfare objectives, not commercial considerations. The 1970s marked two significant developments in the housing finance sector. A public sector housing company, HUDCO, was established in 1970, and the first private housing finance company (HFC),7 HDFC, was established in 1977. HUDCO served as the principal institution to finance Government-supported housing programs, whereas HDFC introduced mortgage financing to India and has become the largest and most successful HFC in the country. 7. The late 1980s heralded a number of important events, beginning with the formation of NHB in 1988 as an apex bank for housing finance. NHB’s responsibilities include establishing 4 Government of India. 1998. National Housing and Habitat Policy. Ministry of Urban Affairs and Employment, New Delhi. 5 HFIs include any organization, public or private, that is established with the primary intention of facilitating housing finance. 6 CFIs are registered or unregistered agencies involved in savings and credit activities with direct participation and control by a community, such as a neighborhood or a common occupation or place of employment. 7 HFCs are public or private sector nonbank finance companies with the primary objective of providing housing finance. 3 guidelines for HFIs to ensure sound financial management, refinancing mortgage loans made by qualified HFIs, and mobilizing formal sector resources into housing finance. The draft National Housing Policy (NHP), calling for the removal of many legal and regulatory constraints in the housing sector, was also tabled in Parliament in 1988, and ultimately adopted in 1994. Also in the late 1980s, the Government directed insurance companies, commercial banks, provident funds, and other agencies to invest a part of their incremental resources in housing. Based on the success of HDFC, a number of new HFCs were subsequently established during the 1980s to enter into the mortgage lending market. 8. The 1990s witnessed significant changes in housing policy starting with the NHP, which envisaged the Government’s role as a facilitator of housing activity, rather than one of provider; this position was reiterated and elaborated in the National Housing and Habitat Policy (NHHP) of 1998. As a result, Government contributions to housing finance have fallen to less than 9 percent, compared with 23 percent four decades ago. The liberalization of the financial sector has also accounted for an increase in mortgage lending by formal finance institutions not traditionally in the housing sector, most notably commercial banks and nonbank financial institutions. Based on data from the National Sample Survey Organization, however, the share of formal sector housing finance varies from only about 22 percent for new houses in urban areas to less than 8 percent for additions and alterations in rural areas. By comparison, informal sources contribute as much as 79 percent of the finance for new construction in urban areas and 88 percent in rural areas. Another important event in the late 1990s, which has significant implications for the future development of India’s housing finance sector, was the structuring of a pilot mortgage securitization issue that is expected to raise about Rs600 million ($14 million). 9. Despite the relatively recent and rapid evolution of the formal housing finance sector in India, the informal sector continues to play a significant and sustained role in the provision of housing finance, particularly to low-income households. Although the informal sector accounts for more than 80 percent of housing finance in India, its unregulated nature makes it difficult to ascertain how much comes from household savings versus loans from different sources such as family members, friends, employers, suppliers’ credits, moneylenders, CFIs, and NGOs. Surveys suggest that household savings, including incremental stockpiling of building materials, represent the principal means by which low-income households finance housing construction and improvements. Besides loans from family members and friends, the most preferred source of credit is from CFIs, including self-help groups and NGOs. Interest rates from these sources range from 15 to 18 percent per annum for loans up to five years, which are significantly lower than rates charged by moneylenders who charge 5 to 10 percent per month. Borrowing from reputable CFIs and NGOs also provides low-income households with the means to establish credit as well as open savings accounts. The majority of CFIs are commercially viable and financially sustainable, achieving high rates of cost recovery in the upper 90th percentiles, largely due to community and peer group pressure, as well as the borrower’s desire to access additional credit in the future. However, CFIs and NGOs suffer from a problem also faced by their borrowers: lack of access to sustainable, longer-term sources of credit for relending as well as expanding their operations. The roles and responsibilities of key participants in housing finance, and the organization and functioning of the housing market in India are described in Appendix 2. B. Government Policies and Plans 10. India has traditionally assigned a relatively low priority to housing finance in policy formulation compared with other sectors. Housing finance constitutes a small percentage of gross domestic product and the share of mortgage finance in total housing investment is estimated to be only about 10 percent. However, the 1994 NHP marked a significant transition 4 in the Government’s position on housing policy by stressing the importance of housing as an integral part of the national strategy for poverty reduction and employment generation in the context of overall economic development. It advocated increased participation by the private sector and emphasized that the role of government agencies was to create conditions for the expansion of housing supply by removing legal and regulatory constraints and supporting appropriate infrastructure investments. The policy also recognized the need for the continuation of Government-supported programs for vulnerable sections of society. In accordance with the increased priority for housing, the Government formulated the NHHP in 1998 to promote the creation of an enabling environment and to encourage the nongovernment sector to take up land assembly, housing development, and infrastructure investments. The central theme of the NHHP is the development of strong public-private partnerships for tackling housing and infrastructure problems. In emphasizing an enabling environment, the role of Government is defined to provide fiscal concessions and to carry out legal and regulatory reforms. For housing schemes, the policy marks a shift away from purely subsidized schemes to schemes where costs can be recovered with minimal subsidies. The policy also emphasizes the importance of securitization in the development of a dynamic and sustainable housing finance system in India. 11. Based on the NHHP, a number of housing investment incentives were provided in the central budgets of 1998/99 and 1999/2000: (i) deductions for interest on housing loans were raised from Rs30,000 to Rs100,000; (ii) commercial banks were required to invest 3 percent of incremental deposits in housing versus 1.5 percent previously; (iii) company depreciation allowances were raised from 20 percent to 40 percent on new housing stock provided to their employees; and (iv) foreclosure and transfer of property laws were amended to facilitate the foreclosure of mortgages. In addition, the targets of the Ninth Plan were modified in the final plan document to include a special action plan for the construction of 2 million housing units (700,000 in urban areas) annually over five years. The overall housing target of 10 million units, including 3.5 million units in urban areas, over the NHHP period, however, falls far short of meeting the total estimated housing shortage of 40 million units. 12. Recent Government actions are indicative of the steps being taken implement policy reforms in line with the continuing policy dialogue with the Asian Development Bank (ADB). The Urban Land Ceiling (and Regulation) Act has been repealed at the central level allowing states to repeal the act within their respective jurisdictions. Parliament has passed amendments to the NHB Act to enable registered HFIs to foreclose on defaulting loans. Several states have initiated actions to amend their rent control acts in line with model legislation prepared by the central Government. NHB has expanded the national housing finance system by increasing the number of HFCs eligible for refinancing from 26 to 29. NHB is also in the process of launching the first pilot issue of mortgage-backed securities (MBS), the initial step in establishing a secondary mortgage market. C. External Assistance to the Sector 13. External assistance to India’s housing sector is summarized in Appendix 3. In addition to ADB’s involvement in the sector, external assistance has come from Germany, Japan, Netherlands, United Kingdom, United States, and the World Bank. Germany has extended several lines of credit through Kreditanstalt für Wiederaufbau (KfW) to HUDCO and HDFC for low-income housing schemes and the establishment of rural building centers throughout the country. The United Kingdom has extended grant assistance for habitat improvement projects in six cities nationwide. Under its Housing Guarantee Program, the United States Agency for International Development (USAID) began lending to HDFC in 1983 to help HDFC expand its operations as the first private sector housing finance organization in India. USAID also entered into an agreement with NHB under which NHB borrowed $25 million of an authorized $40 5 million to expand its refinancing operations. In addition, the USAID Housing Finance System Expansion Program from 1992 to 1996 laid the groundwork for establishing financial linkages between formal and informal housing finance institutions by assessing the housing finance operations of key CFIs and NGOs in the country. 14. Although ADB’s involvement in India’s housing sector has been relatively recent, it is now the major international lender in the sector and plays a leading role in supporting the Government’s policy and institutional reform agenda. ADB’s first loan for housing was a $20 million line of credit to HDFC under the Karnataka Urban Infrastructure Development Project,8 which targeted lending for low-income housing and slum improvement schemes. ADB has also supported two TAs for capacity building: Strengthening Housing Finance Institutions9 and the ongoing Restructuring State Level Housing Finance Institutions.10 The Housing Finance Project11 (HFP) represented a major intervention in the sector by supporting (i) lending to HFIs, HFCs, CFIs, and households; (ii) lending for slum improvement and low- income subprojects; and (iii) expanding the national housing finance system by injecting equity and debt capital to strengthen existing HFCs and establish new ones. The HFP was implemented through a $100 million line of credit for each of the three Borrowers: HUDCO, NHB, and HDFC. The HFP was extremely fast disbursing in that, after taking the first drawdown in December 1997, all three Borrowers had completely drawn down their loans by December 1999. D. Lessons Learned 15. The HFP provided many lessons, which serve as the foundation for the proposed Project as well as ADB’s future role in the sector. First, the HFP highlighted the importance of establishing minimum onlending targets for each of the different lending channels and subprojects. The fast-disbursing nature of the HFP is largely attributed to the Borrowers onlending funds through more traditional or familiar channels rather than adopting innovative lending schemes that require more time for project design, appraisal, and implementation. Second, the channeling of funds from HFCs to CFIs was not a preferred lending modality for HFCs, as HFCs were unfamiliar with CFIs and such loans often need to be reported as “unsecured” on HFCs’ balance sheets due to the absence of collateral. This experience suggests that a specialized HFI with a social mandate, such as HUDCO, is best suited to downmarket housing finance through CFIs. Third, the HFP did not stipulate that the proceeds from the repayments of loans financed with project proceeds should be re-lent for similar purposes; such a stipulation could have increased the multiplier effect of targeted lending. Fourth, required Borrower contributions were not clearly defined to ensure maximum leveraging of ADB funds. Fifth, most lending for slum networking and low-income housing subprojects were simply directed to state slum improvement and housing boards, thereby mitigating the need for the Borrowers to appraise subprojects and monitor the use of funds. Sixth, many of the policy reform measures under the HFP were not within the purview of the three Borrowers; this highlights the need to ensure that recommended policy reforms can be undertaken or implemented by the borrowing institutions. Lastly, the HFP permitted 50 percent of the loan proceeds to be lent to middle- and upper-income households. The rapid disbursement rate of the HFP and the removal of Government-defined interest rate ceilings for different loan sizes suggests that financially viable and sustainable lending programs targeted entirely to low- income households can be supported. 8 Loan 1415/1416-IND: Karnataka Urban Infrastructure Development Project, for $105 million, approved on 14 December 1995. 9 TA 2833-IND: Strengthening Housing Finance Institutions, for $600,000, approved on 24 July 1997. 10 TA 3067-IND: Restructuring State Level Housing Institutions, for $500,000, approved on 11 September 1997. 11 Loan 1549/1550/1551-IND: Housing Finance Project, for $300 million, approved on 25 September 1997. 6 E. ADB’s Sector Strategy 16. In India, ADB’s overall strategic focus is to assist the Government in achieving its objectives of increasing employment and reducing poverty by supporting improved economic efficiency and higher levels of sustainable economic growth. This is to be achieved through support for structural reforms, promotion of increased competition and greater private sector participation, development of a supportive regulatory environment, strengthening of institutional capacities, and enhancing resource mobilization through financial sector and capital market reforms. 17. ADB is integrating social welfare concerns into its strategy, with particular emphasis on poverty reduction, by supporting the development of urban infrastructure, including the provision for housing finance, and developing sustainable mechanisms for the financing and delivery of essential social services at the municipal level. ADB’s Urban Sector Strategy 12 for India is defined according to the two urban subsectors of infrastructure and housing. For housing, ADB's strategic goals in India are to (i) strengthen linkages between formal and informal housing finance as a means to increase the availability and affordability of housing loans to low- income households; (ii) promote microcredit programs for housing loans and home-based, income-generating activities, and support low-income shelter schemes; and (iii) provide technical advice and expertise in the establishment of a secondary mortgage market as a means to increase the availability of capital for housing finance. F. Policy Dialogue 18. ADB, through its lending and TA program, has been engaged in policy dialogue with the Government on a wide range of issues in the housing and financial sectors.13 Under the HFP, the policy dialogue focused on (i) removing major legal and regulatory impediments to developing a sustainable housing sector; (ii) promoting greater cost recovery and community participation for slum improvement and low-income housing subprojects; (iii) strengthening financial management capacities of state-level housing institutions; (iv) supporting market- based lending to low-income households; and (v) expanding the national housing finance system. Throughout implementation of the HFP and support for related TA activities, ADB has continued in its policy dialogue with the Government and progress has been made in several key areas. 19. The existing situation and agreed upon policy reform measures to be linked to the Project are presented in a time-bound action plan contained in Appendix 4, the Policy and Institutional Action Plan. The plan incorporates reforms that focus on establishing a conducive environment for housing investment, setting up appropriate and sustainable mechanisms for housing finance, and strengthening institutional capacities of formal and informal sector HFIs. Some reforms require support from institutions other than the Borrowers. For such cases, the Government as Guarantor of the loan will be responsible for supporting the reforms. The critical issues, which form the basis of the ongoing and long-term policy dialogue between ADB, Borrowers, and Government, are summarized in the following sections. 12 Asian Development Bank. 1998. India: Urban Sector Strategy. Manila. 13 ADB’s support for developing India’s capital markets through Loan 1408-IND: Capital Market Development Program, for $250 million, approved on 25 November 1995; and TA 3473-IND: Development of Secondary Debt Market, for $600,000, approved on 28 July 2000 are also directly relevant to the housing sector, particularly in addressing the legal, regulatory, and financial reforms required for the securitization of home mortgages. 7 1. Legislative and Regulatory Reforms 20. Since approval of the HFP in 1997, the Government has initiated a number of important legislative and policy reform measures, many of which are designed to remove constraints to increased private sector investment in India's housing sector. Parliamentary approval of the Bill to Amend the NHB Act in May 2000 represents significant legislative reform, which clarifies foreclosure provisions and authorizes the NHB to play a major role in promoting mortgage securitization. In January 1999, the Government repealed the Urban Land Ceiling (and Regulation) Act of 1976, which served as a key impediment to private development of land in urban areas; several states are now taking steps to pass separate legislation repealing the act in their respective jurisdictions. In an effort to address the negative effects of India's Rent Control Act on the development of new housing and maintenance of existing units, the Government has also prepared model rent control legislation that exempts new rental units from rent controls, permits rent revisions based on market trends, and expedites the judicial process for settling disputes. Several states and union territories are preparing new legislation in line with the model act. 2. Subsidized Housing Schemes 21. Up to now the Government has maintained the policy of heavily subsidizing slum improvement and low-income housing projects implemented through state slum improvement boards, state housing boards, and municipal corporations. This is also the case for housing loan schemes to low-income families. These highly subsidized schemes have increased the burden on state finances and have hindered the development of sustainable slum improvement subprojects. Given the poor condition of state finances, many states are becoming reluctant to issue loan guarantees and are instead issuing comfort letters. From a financial perspective, this shift suggests that more rigorous project appraisal and due diligence criteria must be applied to proposed subprojects so that they are structured to ensure adequate levels of cost recovery. 3. Market-Based Lending Rates 22. At present HUDCO lending to economically weaker section (EWS)14 households is at a Government-mandated ceiling of 10.5 percent. ADB has continually emphasized the need to rationalize HUDCO’s interest rates to better align them with the market. This effort has been supported by KfW, which has stressed the importance of raising interest rates to minimize subsidies as well as market distortions. HUDCO agrees that rates should be increased, but the EWS lending rate is set by an empowered committee of the Government. Based on its policy objective of minimizing subsidies in the sector, ADB will continue to discuss this issue with the Government so that HUDCO’s EWS lending rate could, over time, move toward market levels. Similarly, onlending of funds to CFIs should be market-based to minimize market distortions and promote long-term financial viability and sustainability of these financial intermediaries. 14 For purposes of designating beneficiaries of housing and related poverty reduction assistance, the Government classifies households according to income levels. EWS households represent the poorest of the poor with monthly incomes less than Rs2,500 ($65). 8 4. Role of State and Local Housing Agencies 23. Although central Government policy has become more amenable to the needs of low- income households, state and local housing agencies such as state housing boards, slum improvement boards, and municipal urban development authorities, continue to be major public providers of housing. To this extent, they have not assumed the role of facilitator as called for in the NHP or the NHHP. This is mainly due to the traditional role of these agencies as public housing developers, the substantial number of employees involved, and the lack of institutional will and capacity to change. As part of the Restructuring State Level Housing Institutions TA, ADB is providing capacity-building assistance to state housing boards in Gujarat, Kerala, Madhya Pradesh, Tamil Nadu, and West Bengal. The transition of the housing sector from one that is highly regulated to an increasingly market-oriented one will pose significant challenges for these agencies. Their operational and financial performance in an environment of increasing competition will determine whether they will survive in their present form. 5. Expanding the Capital Market for Housing Finance 24. After a great deal of effort by NHB and HDFC, the mechanics of mortgage securitization are being tried out through the first pilot issue of MBS. Although securitization is one of the best ways to raise capital and manage the risks of fixed-rate lending, its viability depends primarily on the cost of shedding various risks, including credit, liquidity, interest rate, and prepayment compared with other forms of debt and equity fund-raising. As major financial institutions such as ICICI enter the housing finance market, ADB will continue to emphasize the issues of risk management and the potential role of mortgage securitization in expanding the capital market for housing finance. IV. THE PROPOSED PROJECT A. Rationale 25. In spite of the recent liberalization of the financial sector and associated policy and regulatory reforms to promote increased private sector participation in housing finance and development, the housing shortage in India remains critical, especially for low-income households. Although “shelter for all” is the overarching goal of the Ninth Five-Year Plan, this has not been achieved by 2000 and will not be achieved by the end of the Ninth Plan period in 2002. Since over 90 percent of the housing need is that of low-income families, these families are the ones who are most directly impacted by low living standards and poor quality of life in all of India’s urban centers, as well as its small towns and villages. Lack of basic services, such as water supply, drainage, sanitation, and electricity, also impacts negatively on the productivity and incomes of poor households, especially those who work in their homes. 26. Since the major source of housing finance for low-income households is their own meager savings and family assets, the principal constraint to improving housing conditions for these families is their lack of access to market-based housing finance. Although various CFIs and NGOs have helped low-income families to mobilize their savings and extended loans for housing construction and improvement, these efforts are extremely small when compared with the total housing finance demand of low-income households. Based on international experience, it has been found that once low-income families obtain sufficient income, their highest priority becomes improving their house or building a new one. Project resources will, therefore, be focused on assisting poor families with one or more income earners to gain access to housing finance from formal and informal housing finance institutions, especially CFIs and NGOs. In doing so, the Project will promote market-based lending, as these families would 9 otherwise have to pay higher than market interest rates to access housing finance. It must be acknowledged, however, that the poorest families, which do not have sufficient incomes to afford even small housing loans, need targeted, subsidized assistance to improve their living conditions. For the poorest families, the Project will support subprojects such as slum networking and home workplace schemes to improve their housing, income-earning potential, and access to basic infrastructure and services. B. Objectives and Scope 27. The objectives of the Project are to (i) increase the access of low-income households to market-based housing finance by increasing and broadening the finance channels of both informal and formal HFIs; (ii) reduce poverty by improving infrastructure and services in slum areas and financing innovative low-income housing subprojects; and (iii) expand the lending operations of HFCs to include a greater proportion of loans to low-income households. The overall thrust of the Project is to promote market-based lending without subsidies, and the target beneficiary group is low-income households.15 In relation to the Government's classification of households by income levels, low-income households encompass the EWS, low-income group households, and the lower one third of middle-income group households. A profile of low- income households based on income levels is presented in Appendix 5. Unlike under the HFP, the proposed Project will not provide for lending to higher income groups. 28. The design of the Project draws upon many of the lessons learned under the HFP and responds to the rapid policy and institutional changes taking place in India’s housing finance sector. First, the lending channels have been clearly defined and the respective loan allocations also represent lending targets to be achieved during implementation. Second, recent experience has demonstrated the financial viability of CFI lending and the Reserve Bank of India is strongly encouraging formal HFIs to increase the flow of microcredit for housing. Third, the Project will maximize the leveraging impact of ADB funds by (i) requiring that Borrowers make contributions from their own sources to support different lending modalities; and (ii) stipulating that subloan repayments, net of ADB loan repayments, be re-lent or recycled through the same lending channels and to the same beneficiary group(s) over the life of the ADB loan. Fourth, lending for slum networking and low-income housing subprojects will not be through slum improvement boards, but will be based on detailed subproject appraisals and include innovative partnership arrangements with CFIs, NGOs, municipal corporations, private enterprises, and slum residents, Fifth, the policy reform initiatives are within the scope and purview of the Borrowers and not government institutions with no direct role in the Project. Finally, all lending will be directed to low-income households and no funds will flow to higher income households. 29. The Project consists of three parts: part A: lending to low-income households through intermediaries such as CFIs, NGOs, public and private enterprises, and state and local bodies; part B: reducing poverty through slum networking and home workplace subprojects; and part C: increasing lending to low-income households through formal HFIs. The four primary Borrowers include HUDCO, NHB, HDFC, and ICICI. A description of the three project parts, their respective mechanisms for the delivery of housing finance, and the relationships of the Borrowers, the intermediaries or subborrowers, and low-income beneficiaries follows. 15 Low-income households are defined as households with monthly incomes of Rs7,000 (about $165) or less. This definition is approximately equivalent to an income of $1/capita/day at current exchange rates (Appendix 5). 10 1. Part A: Lending to Low-Income Households through Intermediaries 30. Given the limited availability of housing finance through formal HFIs, intermediaries represent important and viable conduits for responding to the housing finance needs of low- income households. By promoting and establishing linkages between formal HFIs and intermediaries, such intermediaries can onlend funds to low-income households for housing purposes. Experience has demonstrated that the intermediaries’ onlending modalities are best suited to meet the special needs and economic situations of low-income households, namely small, short-term housing construction, extension, and improvement loans that do not always require collateral in the form of clear title to real property. The three categories of intermediaries that will serve as the primary onlenders to low-income households under part A of the Project include (i) CFIs and NGOs, (ii) public and private enterprises, and (iii) state and local bodies. To increase the lending impact on low-income households, the Project will provide that all repayments under each component will be re-lent to households in the same income group through similar intermediaries over the life of the ADB loan. Additionally, to maximize the leveraging of ADB funds and to promote own-source contributions on behalf of the Borrowers, ADB will finance 80 percent of all lending to public and private enterprises and state and local bodies; ADB will finance 100 percent of all lending to CFIs and NGOs. a. Community Finance Institutions and NGOs 31. This component will improve access by low-income households to housing finance by expanding the volume of lending to CFIs and NGOs to onlend to low-income households. More than 100 CFIs and NGOs have been identified as potential subborrowers under the Project, including the Self Employed Women’s Association, Society for Integral Development Action, Sri Padmavathy Mahila Abyudaya Sangam, Society for Promotion of Area Resource Centre, and Friends of Women’s World Banking. CFIs exclude state apex cooperative housing federations, state agricultural rural development banks, and state cooperative banks. Eligibility criteria for subborrowers under this component, to be applied by the participating Borrowers, will include their lending experience, operational capacity, technical expertise, outreach potential, knowledge of target communities, reputation, and loan repayment track record. 32. Lending under this component, as well as under the remaining components of Part A, will be market-based to ensure commercial viability. The participating Borrowers, namely HUDCO, HDFC, and ICICI, will onlend funds to eligible CFIs and NGOs at interest rates that include a spread to cover their loan processing expenses and a risk premium, based on an assessment of the credit rating of the recipient CFI or NGO. Likewise, the CFIs and NGOs will provide housing loans to eligible low-income households at interest rates that include an additional spread for the CFIs or NGOs to cover similar expenses. As the survey of CFI and NGO lending practices indicates, the average loan size is Rs35,000 with interest rates ranging from 15 to 18 percent per annum for a term of four years. Based on a detailed assessment of the absorptive capacity of CFIs and NGOs, conservative estimates indicate that at least $50 million can be channeled through these subborrowers over the five-year project implementation period. A total allocation of $40 million is provided for this component for HUDCO, HDFC, and ICICI to onlend to qualified CFIs and NGOs. b. Public and Private Enterprises 33. Drawing from the lending procedures pioneered by HUDCO and HDFC under the HFP, public and private enterprises represent another important and financially viable channel for directing housing finance to low-income households. Under this arrangement, HFIs provide bulk loans to public and private enterprises for onlending to their employees. The enterprise 11 guarantees repayment of the bulk loan and, in turn, deducts the individual loan repayments from the borrowers’ salaries. Representative public enterprises include state power corporations and port authorities, as well as local water and sanitation authorities. Additionally, associations of police, teachers, and nurses can be considered, along with other types of employee associations. Private enterprises include industrial estates; nongovernment cooperatives such as those in the textiles, milk, and sugar industries; cottage industry associations; and the Sarvodaya Sangh societies, which operate department stores across India selling textiles, handicrafts, leather goods, and food items. As distinct from the bulk lending modality, up to 50 percent of lending under this component can be in the form of direct housing loans to enterprise employees when the enterprise is used as a means to market loans and to consolidate potential low-income borrowers. A total of $60 million is allocated for this component to finance 80 percent of disbursements through HUDCO, HDFC, and ICICI. c. State and Local Bodies 34. This component will promote lending through state and local bodies to respond to the housing finance needs of low-income households in their respective states and local jurisdictions. Lending under this component will be restricted to state governments (and the respective local bodies) that have undertaken various sector reforms initiatives such as putting into place progressive urban land ceiling laws and/or amending state rent control legislation. Based on these criteria, the eligible states and union territories (and local bodies located therein) include Andhra Pradesh, Delhi, Gujarat, Harayana, Karnataka, Kerala, Madhya Pradesh, Maharastra, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. In addition to the state governments, lending will only be permitted to the five state housing boards that have (or are in the process of) undertaking improvements to their financial management and accounting systems under the ADB Restructuring State Level Housing Institutions TA (footnote 10), namely Gujarat, Kerala, Madhya Pradesh, Tamil Nadu, and West Bengal. The eligibility of other state housing boards will be considered on a case-by-case basis upon demonstration that they are initiating reform measures in accordance with recommendations and guidelines of the TA. Given the poor financial performance of state slum improvement boards, state apex cooperative housing societies, state housing improvement trusts, as well as municipal development authorities, no lending will be permitted to these institutions under the Project. However, exceptions will be considered when the Borrowers can present a convincing case that the subborrower’s financial position is acceptable and that adequate financial controls will be in place to ensure proper accounting of the sources and uses of funds. The $30 million allocation under this component will finance 80 percent of all funds channeled through HUDCO, HDFC, and ICICI to state and local bodies. 2. Part B: Reducing Poverty through Innovative Subprojects 35. The poverty reduction component of the Project includes support for innovative subprojects falling into two categories: (i) slum networking, and (ii) home workplace schemes. The beneficiaries of these subprojects are predominately the urban poor or EWS households, and given their limited repayment capacities, subsidies are required to support subproject implementation and the operation and maintenance of basic urban infrastructure and services, such as water supply, sanitation, drainage, and solid waste management. HUDCO will serve as the Implementing Agency for all of the Part B subprojects and assume full responsibility for project identification, appraisal, implementation, and monitoring. Selection of subprojects will be on a case-by-case basis and based on criteria aimed at achieving substantial development impacts. Subproject proposals will need to include (i) mechanisms to ensure community and private sector participation in subproject planning, design, financing, implementation, and operation and maintenance; (ii) a clear quantification of subsidies and description of payment 12 arrangements; and (iii) simple cost-recovery mechanisms. As in part A, the Project will provide that all repayments under this component be re-lent for additional slum networking and home workplace schemes, over the term of the ADB loan. Additionally, both components are eligible for 100 percent financing through the ADB loan. a. Slum Networking 36. Slum networking subprojects require the formation of partnerships among community residents, municipal corporations, CFIs, NGOs, and often times private businesses and industries. The approach focuses on improving all essential services such as water supply, drainage, sanitation, access, and solid waste management within defined slum communities. It is estimated that 25 to 30 percent of slum dwellers have home-based production activities, and improvements to water supply, electricity, and sanitation have a direct positive impact on their productivity and incomes. Slum networking also includes a guarantee of tenure, which provides the slum dwellers with the necessary assurance to improve their housing conditions and to contribute financial resources and labor to community-wide improvements. This has proven much more effective than providing households with title certificates that allow them to sell the property and move to or establish new slums. The slum networking project in Ahmedabad is cited as an example of a successful partnership involving the Ahmedabad municipal corporation, community residents, CFIs, and local industries to deliver essential municipal services to more than 300,000 slum dwellers in the municipality. More than 10 slum networking subprojects have already been identified for consideration under the Project; all are to be based upon a strong partnership approach from design through implementation. The partnership approach represents a radical departure from HUDCO’s traditional support for slum improvement schemes whereby HUDCO provided loans directly to slum improvement boards with minimal involvement in subproject appraisal, implementation, or monitoring. Subborrowers under this component will include municipal authorities and CFIs. A total of $10 million is allocated to HUDCO for financing subprojects under this component, with the maximum subloan for any given subproject to be limited to $2 million. b. Home Workplace 37. Home workplace subprojects are designed to provide financial resources to low-income households that operate cottage industries from their houses for the purpose of improving their premises, resulting in increased income potential. It is estimated that 20 million to 30 million people across India are home-based workers; 80 percent are women.16 The subborrowers for home workplace subprojects will consist of handloom and handicraft cooperative societies, as well as various public and private companies that out-source their operations such as beedi (tobacco) rolling, weaving, pottery, brass works, footwear, and so on. Due to the low incomes of home-based workers, Government-sponsored home workplace schemes contain an element of subsidy that is released through the state government when an agreement is reached between HUDCO and the implementing agency on the financing arrangements, use of funds, and repayment capacities of the beneficiaries. The state government also obtains a written undertaking from the beneficiaries that the home worksheds financed under the scheme will not be sold or rented to any other person for at least 10 years. HUDCO funds are subsequently released based on a staged payment schedule, following a review of the physical and financial status of the schemes. HUDCO has successful ongoing programs for such subprojects with worker societies and cooperatives such as the Tamil Nadu Handloom and Weavers Cooperative Society, Rajasthan State Handloom Development Corporation, and Rajasthan 16 Mahila Housing SEWA Trust and UNDP-World Bank Water and Sanitation Program. 1999. Credit Connections. New Delhi. 13 Rajya Bunkar Sahakry Sangh Ltd. As the sole Implementing Agency for this component, HUDCO will be responsible for onlending $5 million to support home workplace subprojects; the maximum subloan size for any given subproject will be $500,000. 3. Part C: Lending to Low-Income Households through Housing Finance Institutions 38. This part of the Project is designed to increase share of HFI lending to low-income households. This objective is to be achieved through two channels: (i) expanding the housing finance operations of three HFCs, namely HUDCO, HDFC, and ICICI, to lend directly to low- income households through mortgages with market interest rates; and (ii) expanding the refinancing operations of NHB so that smaller HFCs, which will not be Borrowers under the Project, will be able to increase their lending to low-income households as well as to CFIs and NGOs. As distinct from the low-income households targeted under part A, the low-income beneficiaries of part C are those who do have title to real property to support a mortgage loan. Similar to part A, the Borrowers will make adequate provisions to ensure that repayments under this component are used to refinance loans to low-income households over the life of the ADB loan. ADB funds will refinance 80 percent of all lending under this part to maximize the leveraging of the ADB loan and Borrowers' own-source contributions. a. Direct Lending to Low-Income Households 39. Low-income households are an unserved segment of the formal housing finance market, as HFCs have traditionally focused on lending to middle- and high-income borrowers. The targeted beneficiaries of this component will have average household incomes ranging from Rs5,000 to Rs7,000 per month. These households can afford a mortgage loan of over Rs165,000 at market-rate terms.17 Combined with family savings and in-kind contributions, which often amount to the size of the loan, a moderate two- to three-room house could be built or purchased. Since the HFP, increased competition in the sector combined with deregulation have resulted in virtual elimination of interest rate differentials by loan size, except for loans by HUDCO to EWS households, which currently carry a Government-mandated annual interest rate ceiling of 10.5 percent. This situation indicates that the downmarketing of housing finance to low-income households is financially viable for HFCs. A total of $115 million has been targeted for this component under the Project to be implemented by HUDCO, HDFC, and ICICI. b. Refinancing Loans to Low-Income Households 40. Another means to promote increased lending by HFCs to low-income households is to provide NHB with financial resources specifically earmarked to refinance HFC mortgage portfolios comprised of housing loans to low-income households. This component will be implemented solely by NHB, which has the only refinancing facility among the Borrowers. The institutions eligible for participation under this component include all HFCs approved by NHB for refinancing, with the exception of HUDCO, HDFC, and ICICI. Given the desired focus on HFCs, refinancing of mortgage loans to low-income households by state apex cooperative housing societies, state agricultural rural development banks, and state cooperative banks will not be financed under the Project; however, exceptions may be considered when NHB can demonstrate that a given institution's financial position is acceptable and adequate financial controls are in place to ensure proper accounting of the sources and uses of funds. NHB can also refinance HFC loans to CFIs and NGOs under the CFI refinance scheme; this scheme was developed under the ADB TA for Strengthening Housing Finance Institutions (footnote 9) and 17 Assuming a mortgage repayment capacity of 30 percent of a monthly income of Rs7,000 per month and a 15-year mortgage at 13 percent (HDFC’s unified annual interest rate), the maximum affordable loan size is Rs165,976. 14 launched in January 1999. While only one loan has been refinanced under the scheme thus far, the Project will encourage more HFCs to lend to CFIs by requiring that NHB direct 20 percent of the funds under this component for CFI refinancing. The total allocation for this component, comprising both the refinancing of low-income housing loans by HFCs and the refinancing of HFC loans to CFIs, is $40 million. C. Cost Estimates 41. The project cost estimates, presented in Table 1, include all the investments in housing and related infrastructure improvements expected to be generated through the catalytic effect of the ADB loans. The cost estimates assume that individual households receiving housing loans through the Project will invest an amount roughly equal to 50 percent of each loan amount (Appendix 6). This assumed beneficiary contribution is very conservative, and based on CFI lending records as well as surveys of low-income borrowers. The contribution of household savings, land, and labor often exceeds two times the original loan amount, especially when household contributions are tracked over time. This tendency for low-income households to continue to invest a significant proportion of their disposable income for housing improvements is attributed to the economic and social benefits of home ownership. As well as constituting a household's most valuable asset, a home provides the physical environment to raise a family and membership within a local community, and often times a place to support income- generating activities. In addition to the beneficiary contributions, the provision to refinance 80 percent of all lending under part C, as well as lending to public and private enterprises and state and local bodies under part A, will stimulate the Borrowers to contribute own-source funds in an amount equal to 25 percent of the ADB loan for these components. Table 1: Project Cost Estimates ($ million) Foreign Local Total Item Exchange Currency Cost A. Lending to LIHs through Intermediaries 1. CFIs and NGOs 6 54 60 2. Public and Private Enterprises 11 102 113 3. State and Local Bodies 5 51 56 Subtotal (A) 23 206 229 B. Reducing Poverty through Innovative Subprojects 1. Slum Networking 2 13 15 2. Home Workplace 1 7 8 Subtotal (B) 3 20 23 C. Lending to LIHs through HFIs 1. Direct Lending to LIHs 32 184 216 2. Refinancing Loans to LIHs/CFIs 3 47 50 Subtotal (C) 35 231 266 Total 61 456 517 Percent 12 88 100 CFI = community-based financial institution, HFI = housing finance institution, LIH = low-income household, NGO = nongovernment organization. 15 D. Financing Plan 42. HUDCO, NHB, HDFC, and ICICI have requested loans totaling $300 million equivalent from ADB’s ordinary capital resources to finance 58 percent of the total project cost. It is proposed that ADB finance the entire foreign exchange cost of $61 million and $239 million equivalent (52 percent) of the local currency cost. The balance of the project cost will be borne by the Borrowers as well as the beneficiary households from their own resources. Table 2 shows the financing plan. Table 2: Financing Plan ($ million) Foreign Local Total Source Exchange Currency Cost Percent ADB 61 239 300 58 HUDCO 0 21 21 4 NHB 0 10 10 2 HDFC 0 20 20 4 ICICI 0 20 20 4 Beneficiaries 0 146 146 28 Total 61 456 517 100 ADB = Asian Development Bank, HDFC = Housing Development Finance Corporation, HUDCO = Housing and Urban Development Corporation, NHB = National Housing Bank. 43. The proposed loans will be provided as lines of credit to finance the entire foreign exchange cost, and part of the local currency costs (58 percent of the total project cost). The actual use of the loans, each of which will be in a fixed amount and guaranteed by the Government, will be periodically reviewed by ADB missions to assess the efficiency and effectiveness of use by the Borrowers. To stimulate financial contributions by the Borrowers, ADB will finance 80 percent of the total amount disbursed under part C as well as 80 percent of all loans channeled through public and private enterprises and state and local bodies under part A. 44. The proposed loan utilization for each Borrower is as follows: HUDCO will receive $100 million and onlend $25 million to CFIs and NGOs, $20 million to public and private enterprises, $10 million to state and local bodies, and $30 million to individual low-income households through retail lending, and use $15 million to support slum networking and home workplace subprojects. NHB will receive $40 million for refinancing HFC loans to low-income households and CFIs. HDFC will receive $80 million and onlend $5 million to CFIs and NGOs, $20 million to public and private enterprises, $10 million to state and local bodies, and $45 million to individual low-income households. ICICI will receive $80 million and onlend $10 million to CFIs and NGOs, $20 million to public and private enterprises, $10 million to state and local bodies and $40 million to individual low-income households. These allocations are based on several criteria, including development objectives and impacts, each Borrower's capability to implement the different lending modalities and subprojects, and an assessment of the absorptive capacity of the different financial intermediaries to onlend funds to low-income households. Such allocations also represent lending targets to be achieved by the Borrowers during the project 16 implementation period. Lending targets by project parts and primary Borrowers are detailed in Appendix 7. 45. The four loans will carry interest in accordance with ADB's market-based lending window and a front-end fee of 1 percent of the loan amount. In view of the development project orientation of part B, and the desire to improve the matching of assets and liabilities among the HFCs, the loans will have an amortization period of 25 years, including a grace period of 5 years. The foreign exchange risk will be borne by the Borrowers. 46. The provision for financing local currency costs is considered justified under ADB’s local currency financing policy.18 With a low per capita income, India is classified as a less developed country under the United Nations system, and such ADB member countries are to be given priority in ADB's local currency financing policy. The public sector saving rate is very low, the housing finance sector in general is weak, and consequently, financing is constrained, particularly for the poorest. The central Government and several state governments are taking steps to (i) improve savings performance through fiscal consolidation and public sector restructuring, and (ii) improve access to housing through legislative amendments and improved taxation systems and tax administration. Private sector participation in housing finance is being stimulated by the implementation of conducive policy reforms including appropriate incentives and ongoing liberalization of the financial sector and capital markets. Finally, the Government has initiated a program to ensure availability of shelter for the lower income groups by encouraging public and private lending through CFIs and NGOs, incorporating livelihood elements and other participatory approaches, and thus resulting in gradual reduction of grant elements and improvements in loan repayment rates. 47. The local currency component of the Project is high because most housing construction materials are produced locally; this is particularly true for low-income houses. The Project is expected to have a high demonstration and catalytic value in reforming the housing finance sector to make it more effective and efficient in improving access of low-income households to sources of finance for shelter. It thus has high economic, human development, and poverty- reduction values and merits and a relatively high level of local currency financing support, as there is insufficient opportunity for ADB to achieve its objectives by foreign currency lending alone. 48. HUDCO, NHB, HDFC, and ICICI will onlend the loan proceeds in local currency to subborrowers. Accordingly HUDCO, NHB, HDFC, and ICICI will hedge ADB's foreign currency loans against foreign-exchange risk through either a foreign-exchange risk cover under an appropriate facility available in the market or a currency swap or forward cover, or both, satisfactory to ADB. A representative financing structure under a currency swap arrangement, similar to the arrangement under the HFP, is described in Appendix 8. E. Implementation Arrangements 49. Each of the four Borrowers will be responsible for implementing their respective project components and subprojects in accordance with ADB guidelines and procedures. Lending through intermediaries under part A will be implemented by HUDCO, HDFC, and, in the case of ICICI, through ICICI Home Finance Company. Implementation of part B will be the sole responsibility of HUDCO. Given HUDCO's significant role under parts A and B, HUDCO will create a full-time project implementation unit (PIU) to ensure proper subproject identification, appraisal, implementation, financial reporting, and monitoring. The direct lending to low-income 18 R1-95: Review of Lending Foreign Exchange for Local Currency Expenditures on Projects, 3 January. 17 households component of part C will be implemented by HUDCO, HDFC, and, in the case of ICICI, through ICICI Home Finance Company. NHB will be responsible for implementing the refinancing component of part C. The four borrowing institutions must assume the dollar to rupee conversion cost, the associated cost of mitigating the risk of foreign exchange rate fluctuations, and the Government guarantee fee. However, it is expected that the longer maturity of the ADB loan will allow the Borrowers to better balance the maturities of their assets and liabilities. Each of the Borrowers will be responsible for maintaining separate accounts on the various uses of the loan proceeds. 1. Implementation Schedule 50. The Project will be implemented over five years (2000/01 – 2005/06). To ensure timely implementation and in-line with the Government’s emphasis on the disbursement readiness of approved loans, each Borrower will prepare a detailed disbursement plan for the first year of the Project including associated draft subloan agreements with intermediaries. The closing date for submission of an application for subproject approval will be four years from the date of effectiveness of each loan agreement, and for disbursement it will be the loan closing date. 2. Approval of Subprojects 51. All four Borrowers are required to submit the first two subprojects under each applicable onlending channel or component to ADB for review and approval. All subprojects to be financed under the slum networking and home workplace components of part B will require ADB approval to ensure that procurement, environmental, resettlement, and compensation procedures, as well as other ADB conditions, are met. Each slum networking subproject proposal will include a detailed description of the inputs and their cost; partnership arrangements of CFIs, NGOs, municipalities, slum residents, and the private sector; financing and cost recovery mechanisms; extent of subsidies involved; any resettlement or compensation issues, and a plan to address such issues; and the implementation plan including institutional and beneficiary responsibilities, an initial environmental examination of the subproject, and the long-term management and financing plan. Equally important, the subproject description will discuss the measures incorporated to ensure its sustainability and demonstration value. 3. Procurement 52. Procurement under the Project will be in accordance with ADB's Guidelines for Procurement. For procurement of goods and services to be financed by the subloans out of the loan proceeds, the Borrowers will satisfy ADB that the procurement procedures they applied are appropriate in the circumstances. Moreover, they will ensure, and certify to ADB, if requested, that the goods and services to be financed by such subloans are purchased at reasonable prices, account being taken of relevant factors such as time of delivery, efficiency, and reliability of goods; their suitability for the qualified housing proposals and slum subprojects; the availability of maintenance facilities and spare parts; and in the case of services, their quality and the competence of the parties rendering them. 4. Disbursement 53. The Borrowers will disburse subloans under the Project through (i) a separate imprest account of each Borrower, to be established immediately after the effective date of each Loan Agreement; or (ii) ADB's direct payment, commitment, or reimbursement procedures. The imprest accounts, which will receive initial advances equivalent to each Borrower’s anticipated disbursements to subborrowers over a six-month period must be set up with local commercial banks acceptable to ADB. The Borrowers may, from these accounts, make swap or other 18 hedging arrangements satisfactory to ADB to cover the foreign exchange rate risk for project- related expenditures. The imprest accounts will be established, managed, replenished, and liquidated in accordance with ADB's Loan Disbursement Handbook, as amended from time to time. ADB's statement of expenditures procedure will be used to liquidate advances provided into the imprest accounts. However, each individual payment reimbursed or liquidated using the statement of expenditure procedure will not exceed $2.0 million equivalent. Other disbursement procedures will be in accordance with ADB's Loan Disbursement Handbook. 5. Project Supervision and Reporting Requirements 54. Each Borrower will assign a project manager who will be responsible for project supervision, monitoring, accounting, and reporting. Each Borrower will also submit to ADB a quarterly progress report on commitments and disbursements, implementation status of approved subprojects, any problems encountered during the quarter under review including any material or adverse change in the Borrower’s activities, actions taken or proposed to be taken to remedy those problems, and the expected progress during the following quarter. The Borrowers will establish and maintain accounts and records in such a manner as to facilitate identification of income and expenditures related to the Project. The Borrowers will keep proper records of all onlending activities under part A, identifying the subborrower or intermediary; the size, term, and interest rate of the loan(s) to subborrowers; the estimated number and income levels of beneficiaries; the purpose(s) and use(s) of loans to the beneficiaries; and the average size, term, and interest rate of loans to the beneficiaries. Under part B, HUDCO will (i) record the lending terms of subloans for slum networking and home workplace subprojects, as well as prepare an assessment of the financial position of the subborrowers; and (ii) ensure that it has access to the list of beneficiaries. For part C, the Borrowers will maintain proper lending records that indicate the monthly household income levels of the borrowers, the purpose(s) of the loan (i.e., new house construction, home improvement, etc.), the security held for each mortgage, and the size, term, and interest rate of each loan. For part C, as well as for the onlending to public and private enterprises and state and local bodies under part A, the Borrowers will maintain adequate records to show that ADB funds were used to finance 80 percent of total lending through these channels. 6. Accounts and Audit 55. Each Borrower will submit to ADB certified copies of its annual audited financial statements and the auditor’s report within nine months of completion of the fiscal year. All of the accounts and statements of expenditures and revenues will be audited annually by auditors acceptable to ADB. Audited project accounts, together with the report of the auditor, will be submitted to ADB within nine months of the close of the financial year. In addition to the audited project accounts, the Borrowers will submit audited annual financial statements through the life of the loan. Each Borrower will also submit to ADB, not later than three months after the loan closing date, a completion report on loan utilization, subproject implementation, and the performance of intermediaries and subborrowers with respect to onlending funds to low-income households for housing purchase, construction, or improvement. 7. Periodic Reviews 56. At its discretion, but at least once every six months, ADB will conduct reviews of the management, financial, and operational performance of the Borrowers with respect to project activities and their compliance with implementation of the Policy and Institutional Action Plan (Appendix 4). The plan may be modified during project implementation by agreement of the Government, Borrowers, and ADB, and will be implemented in accordance with the 19 requirements and schedules set forth therein. A midterm review will be conducted by the end of 2003 with participation of the involved parties. The objectives of the midterm review are to (i) review the progress achieved relative to the targets set for each project component; (ii) assess the degree of accomplishments in meeting the Policy and Institutional Action Plan targets and revise targets as appropriate; (iii) reexamine the project design, implementation arrangements, and other relevant aspects; and (iv) formulate, within the updated sector setting and other changes in circumstances at the time of the review, any changes to ensure successful project implementation, achievement of project objectives, and sustainability of project benefits. In addition, independent project impact evaluations will be organized by the Government in the second and fourth years following commencement. 8. Benefit Monitoring and Evaluation 57. To ensure that the target beneficiaries are realizing the anticipated benefits, the Project includes a benefit monitoring and evaluation (BME) program to be undertaken by the Borrowers. The BME program will (i) monitor the Project’s implementation performance, which will mainly deal with the efficiency and effectiveness of the different onlending arrangements; (ii) monitor the Project’s operational performance, mainly in terms of the Borrowers achieving their respective lending targets; and (iii) evaluate the Borrowers' performance during and after project implementation. The key monitoring indices, in addition to targets and actions set forth in the project framework (Appendix 1) and policy and institutional action plan (Appendix 4), will be (i) internal efficiency of sublending operations, (ii) satisfaction of demand for finance, (iii) level of beneficiary participation, (iv) ability to service target groups, (v) financial impact on Borrowers and subborrowers, (vi) sustainability of strengthened linkages between HFIs and CFIs, and (vii) socioeconomic impact on low-income beneficiaries. The BME information system design will be based on ADB’s Benefit Monitoring and Evaluation Handbook and carefully tailored to meet the conditions in the Project. The Borrowers will provide ADB with the information produced under the BME program in the first quarterly report for each calendar year. F. The Borrowers 58. The Borrowers represent Government-sponsored, regulatory, and private sector housing finance institutions. All four institutions have borrowed from ADB in the past, and their sound financial management and performance qualifies them to participate in the Project as Borrowers and Executing Agencies. A brief description of each of the four Borrowers follows. 1. Housing and Urban Development Corporation 59. HUDCO was incorporated in April 1970 as a wholly Government-owned company to promote housing and urban development, particularly for the low-income and economically weaker sections of society. As the first financial institution dealing exclusively with the housing sector, its establishment marked the beginning of formal housing finance in India. HUDCO is registered under the Companies Act as a public limited company and run by a board of directors consisting of professionals appointed by Government. Its corporate office is located in New Delhi, and it has 5 zonal, 16 regional, and 12 development offices throughout the country. Its current operations are divided between housing and infrastructure finance through state and local agencies. In the past year it began to lend directly to individuals for housing through its HUDCO Niwas retail lending window. 60. HUDCO currently has authorized capital of Rs12.5 billion ($290.7 million) and paid-in capital of Rs5.8 billion ($135 million). The cumulative number of housing and infrastructure schemes sanctioned through 31 March 1999 is 14,623. Loans sanctioned total Rs230.55 billion, 20 of which housing comprises Rs146.04 billion. Cumulative disbursements through 31 March 1999 were Rs154.73 billion, and the total number of dwelling units financed through the same period are almost 8.6 million. As a wholly owned Government institution, HUDCO is mandated to lend at least 55 percent of its funds to low-income groups and the EWS. Since the majority of its lending is through state and local bodies for which cost recovery from borrowers has been poor, HUDCO has required state guarantees for such lending. Hence, prior to the early 1990s, cost recovery and rigid appraisal were not vigorously pursued. Recent economic reforms and the decline of Government funds for such schemes have made states increasingly reluctant to issue guarantees. HUDCO has therefore undergone fundamental changes in recent years; it is assisting its borrowers to achieve improved cost recovery techniques, and assisting state and local bodies to adopt reforms such as commercialization of selected urban infrastructure projects. The ongoing ADB TA to strengthen state-level housing finance agencies (footnote 10) will also serve to improve HUDCO’s lending and cost recovery. 2. National Housing Bank 61. NHB was established in July 1988 to function as the apex body for the housing finance sector. It is wholly owned by the Reserve Bank of India, and has an authorized and fully paid-up share capital of Rs3.5 billion ($81.4 million). NHB’s three primary responsibilities are to mobilize resources for the housing sector, promote the development of HFCs, and regulate the operations of HFCs. As a promoter, NHB provides financial support to HFCs and facilitates access to institutional credit. It provides refinancing to 29 HFCs and other entities according to a refinancing schedule whereby refinance rates are based on loan sizes. As a regulator, NHB sets prudential norms for HFCs based on required capital adequacy ratios, income recognition, asset classification, and acceptable levels of nonperforming assets. 62. As of December 1999, NHB had refinanced a total of Rs47.6 billion ($1.11 billion) for three categories of approved borrowers: HFCs, scheduled banks, and cooperative institutions. HFCs account for 77 percent of all refinancing; cooperative institutions for 18 percent, and scheduled banks for 5 percent. Lately, due to the decline in interest rates in the country, scheduled banks have not taken any refinancing from NHB, although they have increased their lending for housing. In January 1999, the NHB board approved a new refinancing scheme for CFIs under which any approved institution, mainly HFCs, could avail of refinancing for loans made to CFIs. Only one HFC has accessed this facility. Over the past few years, NHB has been preparing to undertake a pilot issue of MBS. It has obtained approval from the Reserve Bank of India for such an issue, drafted the necessary legal documents, appointed merchant bankers for the offer, prepared an operations and accounting manual, and discussed the issue with interested investors. The pilot issue is expected to come to market in the near future. 3. Housing Development Finance Corporation 63. HDFC was established in 1977 as the first specialized housing finance institution in the country. The company was promoted by ICICI with initial equity investments by the International Finance Corporation and his Royal Highness, the Aga Khan. HDFC is a public limited company specializing in the provision of housing finance to individual borrowers. As the only private housing finance institution at the time, it grew rapidly and is still considered the market leader in the retail housing finance business. The majority of HDFC’s loans are to individuals who currently number over 800,000. To reach lower income borrowers, HDFC has utilized several lines of credit from KfW to finance various projects for low-income households as well as loans to CFIs. 21 64. As of 31 March 2000, HDFC’s paid-up capital was Rs1.20 billion ($27.60 million); its net worth was Rs20.96 billion ($481.84 million). As a publicly listed company, its shares are regularly traded on the stock exchange. As of March 2000 the company had 116,000 shareholders. It has 67 branches throughout the country, and some 47,000 agents who collect deposits and submit loan applications where there are no branches. HDFC’s major source of funds is deposits through various deposit schemes tailored to different types of depositors. It also raises funds through bond and debenture issues, long-term loans from domestic and international finance institutions, and NHB refinancing. A new source of finance will be through the pilot securitization issue of HDFC mortgages. In its efforts to diversify, HDFC has also established an infrastructure finance services company, a credit-rating company, consumer finance companies, a property management company, and a bank. 4. ICICI 65. ICICI was established in 1955 under an initiative of the Government, the World Bank, and representatives of Indian industries. Since that time, ICICI has developed into a universal banking group with 18 subsidiaries and affiliates. ICICI operations include medium- and long- term project finance, corporate finance, leasing, and other types of financial and advisory services. Until recent years, ICICI’s operations concentrated on project-based lending to the manufacturing sector. In response to the changing economic and financial environment, ICICI has taken steps to diversify its operations with an increasing focus on corporate and infrastructure financing. As a result of this diversification, ICICI’s asset base has continued to grow. Disbursements increased by 34 percent from Rs192.25 billion ($4.42 billion) in FY1999 to Rs258.36 billion ($5.94 billion) in FY2000, while total assets increased by 11.16 percent, from Rs538.57 billion ($12.38 billion) in FY1999 to Rs598.659 billion ($13.76 billion) in FY2000. During the same period loan approvals increased by 38 percent from Rs323.17 billion ($7.43 billion) in FY1999 to Rs447.79 billion ($10.29 billion) in FY2000 indicating a strong pipeline of business. 66. ICICI was not a Borrower under the HFP, and the primary justification for its inclusion in the Project is to promote greater competition, especially given ICICI's size and its ability to have a significant impact on India's housing finance sector. In 1998/99 ICICI began to provide the entire range of personal loans to individuals, including housing finance, automobile financing, and consumer durable finance. ICICI Home Finance Company was established during this period as a 100 percent subsidiary to provide focus to ICICI's housing finance initiative. As of March 2000, ICICI Home Finance Company approved housing loans for Rs2.57 billion ($59.08 million), while disbursements total Rs0.765 billion ($17.60 million). ICICI’s corporate recognition as well as the group’s large retail customer base and wide distribution network give it a strategic advantage in entering the housing finance sector. Utilizing its corporate relationships, ICICI’s geographic reach is nationwide, with 90 branches, 55 service centers, and 9 locations serviced by direct marketing agents. Cumulative disbursements of ICICI Home Finance Company projects are projected to be Rs123 million ($2.83 million) by FY2006. G. Environmental and Social Measures 1. Environment 67. All three parts of the Project will increase the availability of housing finance for the purchase, improvement, extension, and construction of housing for low-income families. Improved housing and living conditions also mean better environmental conditions, both at the household and community levels, thereby contributing to a better quality of life, improved family health, and greater environmental awareness and pride of community. In the long run, better economic conditions, resulting from the associated benefits of improved housing and 22 neighborhood infrastructure, will enable communities to sustain additional environmental improvements. 68. Housing improvements financed under the Project will have a strong positive impact on the immediate living environment for women and children who spend much of their time at home. Better ventilation, increased usable space, and adequate lighting will have a positive impact on conditions within the house itself. The use of solid, better quality building materials and construction practices will reduce household vulnerability to fire, building collapse, rodents, and in many cases, flooding or standing water. 69. Under the slum networking component of part B, the Project will finance improvements in selected urban slums. Access to clean water in these areas is scarce and many households have either no toilet facilities or use latrines that discharge directly into drains and open water bodies. Exposure to human waste is exacerbated by the inadequacy of drainage and by the improper disposal of solid waste. In addition, slums are often situated in low-lying areas that are subject to flooding during the monsoon season. Without adequate drainage and sewage, wastewater mixes with storm water and creates conditions for the spread of waterborne diseases. 70. The slum networking component will also have direct positive impacts on family health and the surrounding environment by improving community water supply and sanitation, solid waste management, and drainage. All of these efforts will reduce the incidence of waterborne disease. The active involvement of local communities in the conception, implementation, financing, and maintenance of slum networking projects will complement and reinforce these benefits, ensure greater cost recovery and sustainability, create subproject ownership, and promote greater awareness of environmental issues. 71. The only potential adverse environmental impact of the Project could be the disruption of public services and transportation during the construction phase for slum networking subprojects; however, given the relatively small scale and labor-intensive nature of such subprojects, these disruptions are expected to be minor and can be easily mitigated through appropriate measures. Initial environmental examinations will be prepared for each slum networking subproject to identify and minimize any potential adverse environmental impacts. These assessments will be submitted to ADB for review to ensure that they comply with its environmental guidelines. 2. Social Analysis 72. Social aspects of lending to low-income households are presented in Appendix 9, which summarizes the results of a comprehensive survey of CFIs, NGOs, and low-income borrowers. The Project will focus on extending loans to low-income households that are currently unable to access housing finance from the formal sector. It will involve CFI and NGO networking, community participation, and the education and empowerment of low-income groups to support sustainable improvements in their social well-being. With the exception of the direct lending component of part C, the Project will have a high degree of community engagement in all of its components and strong positive social impacts. 23 a. Profile of Project Beneficiaries 73. Project beneficiaries will be low-income households with monthly incomes of Rs7,000 or less. Under the CFI and NGO lending component of part A, beneficiaries, for the most part, will be members of self-help groups in urban and peri-urban areas with a positive record of borrowing and repaying small loans. The majority of these households will be able to afford loan repayments between Rs250 and Rs500 per month. Most of the beneficiaries will be women. The beneficiaries under other project parts will include slum dwellers, low-income employees from public and private sector enterprises, state and local government workers, home-based workers, and individual borrowers. All of these beneficiaries will be part of households interested in building or improving individual housing, but unable to access market-based housing finance through formal channels. b. Beneficiary Impacts 74. The Project will have a strong positive impact on three levels of beneficiaries. First, individual low-income households will benefit directly from increased access to market-based housing finance that, in turn, will provide for (i) a safe, secure, and more comfortable place in which to live and raise a family; (ii) a higher standard of living that enhances a family’s social status and improves its children’s prospects for marriage; and (iii) a greater degree of residential and household stability due to the possession, in many cases by women, of a valuable fixed asset. Also at the household level, improved housing will have several economic impacts that include savings in rent; ownership of a long-term asset with a generally appreciating value; improved infrastructure and services resulting in more time for productive activities; a healthier environment, particularly for home-based workers and children; and the establishment of acceptable collateral that can be used to obtain additional credit. Second, self-help groups and slum neighborhoods will be organized and trained to work closely with CFIs and other development partners. Finally, the capacities of HFIs, CFIs, and NGOs will be strengthened to increase and sustain their lending to low-income households. c. Impact on Women 75. Women will constitute the majority of subborrowers from CFIs and NGOs for housing loans under part A, as well as for home workplace improvement loans under part B. Their active participation in self-help groups provides opportunities to empower them in household and community decision making and to address their immediate housing and neighborhood concerns. The use of project funds for housing will provide women with an important physical and financial asset that will substantially increase their status and security within the household as well as in their communities. Since women have the ultimate child-rearing responsibilities, the right and security to land and property will also help safeguard the family’s interests. Women and children are particularly affected by poor housing conditions and the lack of clean water and proper sanitation facilities. Better living conditions, and improved community services and facilities will reduce the vulnerability of women and children to disease, diminish the drudgery of many household tasks, and provide more time for income-generating activities. d. Community Participation 76. Many components of the Project will be community-driven, not only in terms of traditional levels of participation, but also in terms of developing community ownership and providing support to people-driven initiatives. Support for CFI lending, for instance, will catalyze the development of savings groups and other forms of community participation. Emphasis will be placed not only on delivering basic housing and services to the poor, but also on 24 empowering the low-income segment of the population through the establishment of sustainable grassroots processes and institutions. The creation of working partnerships among CFIs, slum neighborhoods, and municipal authorities will be one of the primary conditions for the selection of slum networking subprojects. These subprojects will provide a legitimate arena for local community institutions to act as civic institutions and to establish viable partnerships with mainstream agencies for housing and infrastructure development, as well as ongoing operation and maintenance activities. H. Policy Issues 77. The Project emphasizes the establishment of a comprehensive and conducive policy, institutional, and regulatory environment to foster the development of sustainable housing finance mechanisms to meet the housing finance needs of low-income households. During project preparation, a number of policy reform measures to improve the efficiency and competitiveness of the housing finance delivery system were identified. These policy reform measures, presented in Appendix 4, will be periodically and jointly reviewed by ADB administration missions, the Borrowers, and the Government against progress achieved. Following such reviews, actions and schedules will be amended, if deemed appropriate. The principal project-related policy reform measures and initiatives are outlined here. 1. Strengthen Linkages between the Formal and Informal Sectors 78. The informal sector represents the primary means for low-income households without collateral to access loans for housing. Experience clearly demonstrates that CFIs are important and viable channels for lending to low-income households on a market-based and sustainable basis. However, CFIs also suffer from a lack of capital to expand their lending operations. To bridge this gap between the demand for housing loans and the financial resources available to CFIs, formal finance sector linkages with CFIs must be financially viable. Toward this objective, HFIs need to develop in-house expertise in microcredit lending, develop rating criteria for CFIs based on their lending records and repayment capacities, standardize and streamline loan processing procedures, and develop innovative financing structures such as escrow accounts, guarantee funds, and revolving funds to mitigate the potential risks associated with lending through CFIs. Additionally, NHB needs to encourage HFCs to extend credit to CFIs by expanding its CFI refinancing window. To strengthen linkages between the formal and informal housing finance sectors, TA will be provided for CFIs to inform and educate the Borrowers about microfinance and specifically the lending operations, systems, and procedures of CFIs involved in housing finance. 2. Support Market-Based Housing Finance 79. The Government must come to recognize that mandated interest rates serve as a disincentive for lending to lower income groups. The due diligence costs for smaller loans coupled with the higher risks of uncollateralized lending result in an interest rate premium relative to larger, collateralized loans. Failure to recognize this basic market principle has resulted in a severe shortage of financing available to lower income groups, and the financing that is available commands usurious interest rates from informal moneylenders. While it is true that increased competition in the housing finance sector has contributed to the virtual elimination of a Government-defined tiered interest rate structure, as well as the interest rate cap of 12 percent for loans to microfinance institutions, mandated interest rates remain for EWS households. Acknowledging the Government’s desire to ensure that housing loans are affordable to the poorest of the poor, the gap between existing mandated interest rates and market interest rates for EWS loans should be narrowed. The Project will also promote market- 25 based lending to CFIs to ensure the commercial and financial viability and sustainability of linkages between formal and informal sector HFIs. 3. Raise Corporate Governance Standards for Public Institutions 80. Liberalization of India’s financial sector has highlighted the need for public sector institutions to raise their corporate governance standards to improve their financial conditions, management practices, and operational efficiencies. For HUDCO and NHB, the Project will require that each institution take specific steps to improve corporate governance by establishing an independent board audit committee with specified composition, powers, and functions, board-specified code of conduct and ethics, and reporting on corporate governance compliance as part of the annual report. As such HDFC and ICICI will be required to demonstrate that they are in compliance with the corporate governance standards prescribed in the Kumar Mangalam Committee's Report. 4. Improve Subproject Appraisal and Implementation 81. The financial condition of states across India is generally poor and consequently many states are reluctant to offer guarantees on loans from both public and private sector institutions. Given the significant volume of state lending by HUDCO, this situation has significant implications for how HUDCO needs to improve its internal appraisal procedures for its state- level lending operations. In addition, at the subproject level, greater attention needs to be directed by HUDCO to ensuring the financial viability of slum improvement schemes as well as incorporating the requisite degree of community participation to promote greater subproject ownership, cost recovery, and sustainability. The requirement that HUDCO establish a fully operational PIU is expected to increase HUDCO's capacity in these areas. Additionally, assistance is envisaged for the design, appraisal, and implementation of slum networking subprojects, with particular attention directed at ensuring that the preparation of such subprojects is in accordance with ADB's social, environmental, and economic guidelines. 5. Implement Foreclosure Regulations and Provisions 82. An important provision of the amendment to the NHB Act, enacted in May 2000, is to enable HFIs to foreclose on mortgages for defaulting loans in an expeditious manner through mortgagee power of sale without intervention. However, to make these provisions operational requires regulations under the amended NHB Act on procedures for mortgagee power of sale without court intervention, HFI debt recovery appellate tribunals, and preservation of the exercise of mortgagee power of sale without court intervention notwithstanding judicial review under the NHB Act as amended. As the apex regulatory body for the housing sector, NHB will take the lead in preparing these regulations for the concurrence of the Government and Reserve Bank of India, as these are to be issued under the NHB Act, as amended. 6. Improve the Mortgage Registration System 83. To avoid stamp duties, HFCs across India have increasingly been using equitable mortgages rather than the traditional or standard "English" mortgage. Equitable mortgages, which may comprise as much as 80 percent of the market for new mortgages in India, are legally recognized and enforceable under the Transfer of Property Act of 1882. Such mortgage instruments were originally created to facilitate merchant transactions without being burdened by high stamp duties. Equitable mortgages are not registered, but the original title deeds are deposited with the mortgagee who, in turn, typically provides the mortgagor with a record of receipt. Potential issues or problems with the proliferation of equitable mortgages include (i) the 26 possibility that states could take action to recoup stamp duties; (ii) their use is restricted to certain geographic areas per the Transfer of Property Act; (iii) they do not allow for appointment of receivers or any foreclosure remedy without court intervention; (iv) there is lack of registration and consequent lack of public notice; and (v) they cannot be securitized without being registered and thereby subjected to stamp duties. Given the complex legal, financial, and political issues involved in addressing equitable mortgages, registration, and stamp duties, the Project requires that a working group comprising representatives of Government, NHB, HUDCO, HDFC, and ICICI be established to prepare a policy paper on improving the mortgage registration system in India. 7. Expand the Capital Market for Housing Finance 84. NHB has played an important and essential role in addressing the many complex legal, regulatory, and financing issues associated with structuring the first pilot mortgage securitization issue in India. To build upon this process, NHB must assess the lessons learned from this experience in the context of other MBS markets in Asia as well as in developed market economies, and define the requisite reform measures that are necessary to develop India’s MBS market. The progressive development of the MBS market in India also presents some fundamental questions regarding NHB’s future role in the sector. NHB’s traditional role in refinancing HFC mortgages, for example, will undoubtedly change, and NHB should take definitive steps to operationalize and expand its CFI refinancing scheme. Whether NHB should assume the role of “market maker,” given its regulatory mandate, needs further consideration to ensure an efficient and competitive housing finance sector in India. ADB will assist NHB address many of these complex yet fundamental issues related to the future growth and development of India's housing finance sector. V. PROJECT JUSTIFICATION 85. The shortage of housing in India is severe. It is estimated to be as high as 40 million units. This directly impacts on the quality of life of low-income households, and the economically weaker sections of society. The lack of access to affordable housing finance is the most serious problem facing low-income households in India who wish to improve their living conditions. Through the different lending modalities, the Project is expected to directly benefit more than 270,000 low-income households, or more than 1.3 million people. The recycling or relending of ADB funds will maximize the impact of the loan, resulting in a total of more than 500,000 housing loans benefiting approximately 2.7 million people over the loan period. Additionally, ADB funds will serve to leverage financial contributions on behalf of the Borrowers as well as the low-income beneficiaries who will contribute land, labor, and household savings to housing improvements. Once low-income families, who already have stable incomes, obtain access to housing credit, they invest several times the original loan amount in improving their housing over time. This is in contrast to the conventional provision of housing finance to higher income groups who move into a completed house and amortize the debt over time. From the financial perspective, the onlending arrangements are designed to be financially viable and sustainable through market-based lending whereby the financial intermediaries obtain a sufficient spread to cover their associated cost of operations. 86. Given the basic linkage between improved housing and human welfare, human development will be enhanced through increased availability of market-based housing finance to support new construction, home improvements, or home workplace activities. Although many of the benefits that will accrue as a result of improved housing conditions are difficult to quantify, most are based on the connection to improved health and its relation to increased productivity. The availability of loans for housing from CFIs and other financial intermediaries will also enable 27 low-income households to establish credit. In addition, basic infrastructure and essential services provided as part of the slum networking subprojects will improve the living and health conditions of slum dwellers, as well as promote partnerships of community residents, CFIs, NGOs, private enterprises, and municipal authorities. A. Economic Analysis 87. Detailed economic internal rate of return analyses have not been carried out for the slum networking or home workplace subprojects as neither their precise subproject locations nor final terms and uses of funds is available. Additionally, the benefits associated with these types of subprojects are difficult to quantify. Among these are health benefits resulting from improved water supply, sanitation, drainage, and solid waste management; safety benefits and less property damage due to reduced flooding and fires; land tenure benefits associated with the enhanced security of tenure; and increased productivity and access to education due to improved health and access to work and schools. For home workplace subprojects, there is also the financial benefit to the individual household deriving from home improvements to support income-generating activities. Although property value increases associated with slum networking subprojects are often used to calculate improved economic opportunities and benefits, this methodology is not appropriate given that (i) property value increases are subject to various influences, including speculation; (ii) these increases may be regarded as a transfer between buyer and seller; and (iii) Government could impose a windfall tax on the increase, and such a tax, as a transfer, would not be measured as an economic benefit. B. Financing Justification 88. The justification for lending long-term dollars to finance the rupee costs and cash flows required in India’s housing finance sector is based on a number of considerations. Housing finance, to be sustainable and available to all segments of society, requires an efficient and functioning long-term debt (bond) market. Such a market does not exist in India today. Currently, long-term debt maturities in the private sector range from 3 to 7 years, and up to a maximum of 10 years for government institutions. However, sufficient investor appetite for securities over five years is lacking, and even the best issuers cannot count on raising funds on a sustainable basis for maturities over 3 to 5 years. HFIs are forced to rely on short-term deposits (typically with a 36-month maximum term) for more than 50 percent of their funding, with the balance coming from 3- to 5-year borrowings and some multilateral assistance. At the same time, mortgages are normally for a period of 15, sometimes 20, years. This situation creates an asset-liability mismatch for these financing institutions, exacerbated by the absence of prepayment penalties and the lack of adjustable rate lending. As a result, virtually all HFIs without proper in-house asset-liability management expertise and access to long-term funding are at significant risk. 89. The ADB loan is not providing long-term rupees for housing finance. Rather, by its structure, the loan is creating the means to allow commercial sources of local currency to provide long-term rupee financing to the participating Borrowers. The long-term rupee funds allow the Borrowers to offer affordable interest rates and longer maturities. The “swap” arrangement achieves this by removing both the present and future potential adverse risks of foreign exchange rate fluctuations, interest and principle repayments, and asset-liability mismatch. The underlying value of the ADB loan lies in its ability to generate long-term rupee financing for housing and the associated demonstration value of the need to create domestic long-term debt markets, given that foreign sources of finance are neither sustainable nor long- term solution. 28 C. Subsidies 90. Subsidies represent a very small part of the overall Project. The majority of project funds are targeted to low-income households at market rates of interest. Subsidies are not required for project funds that will be onlent through CFIs, enterprises, state and local bodies, or under direct lending. Onlending arrangements are structured to provide the Borrowers and subborrowers with sufficient spreads to cover their operational costs, risk premiums, and project margins. Subsidies are only required, in part, for the slum networking and home workplace components of part B. 91. For the slum networking component, capital investments will be financed through a combination of loans from HUDCO to local government bodies, usually municipal corporations; contributions from beneficiary households; and grant financing from central and state governments, international funding agencies, and private sector sources. Slum networking subprojects are typically structured to include approximately 70 percent subsidization of the capital costs associated with basic infrastructure improvements including water supply, sanitation, drainage, street lighting, and solid waste management; government grants and contributions from international funding agencies and the private sector constitute the principal source of such subsidies. The remaining 30 percent of capital costs is borne by the slum residents who are organized into associations by CFIs, and contribute through a combination of an up-front payment and weekly or monthly installments. Depending upon the financing arrangements, operation and maintenance costs are often partially subsidized with provisions that the local communities will assume an increasing share of operation and maintenance costs over time through different cost-recovery mechanisms. This cost-sharing arrangement will only be possible, however, if communities feel they have ownership of the subprojects. 92. For the home workplace component of part B, subsidies are provided by state governments. A large number of organized workers are involved in weaving, beedi rolling, handicrafts, and other types of home-based work in rural and semirural India. Virtually all of these workers belong to unions or cooperatives, and are in the lowest income category. To be eligible under the government-supported home workplace program, beneficiaries must earn at least 50 percent of their income from home-based work. The current program provides subsidies from state governments to specified implementing agencies that include unions, cooperatives, and other state apex institutions. The cost of an eligible housing unit, whether built by the implementing agency or by the individual, is estimated at Rs44,000 in urban areas and Rs35,000 in rural areas. The subsidy component is generally Rs20,000 per unit or about 45 percent of its cost. The beneficiary contribution, through any combination of cash, land, materials, and labor, is about 10 percent. HUDCO provides loans through cooperatives to individual households for the remaining 45 percent. State subsidies are released only upon issuance of the HUDCO loan. The subsidies under the home workplace component are justified due to the very low incomes of the beneficiaries, and the fact that a great number of home workers are women. D. Affordability 93. An affordability analysis was conducted for parts A and C of the Project to ensure that the loans provided under the different project components will not create an undue financial burden on the ultimate beneficiaries. The results of the analysis are summarized in Appendix 10. Loan repayment schedules for different loan sizes were calculated on a monthly basis for each of the components and compared with the maximum household income of EWS, low- income group (LIG) and middle-income group (MIG) households. Affordability limits were defined as the maximum percentage of monthly household income that households could apply 29 to repay the loan, namely 15 percent for EWS, 20 percent for LIG, and 30 percent for MIG households. The graduated scale is due to the fact that very low-income households have less disposable income for housing expenses, as a percentage of their total incomes, than higher income households. 94. Under part A, which will facilitate access to housing finance through financial intermediaries, a repayment period of five years and an annual interest rate of 18 percent is assumed. The interest rate is a conservative estimate and includes the interest rate charged by the Borrowers to the intermediary plus the spread charged from the intermediary to the final borrowers. The results of the analysis demonstrate that borrowers of the EWS group will be able to afford a loan up to Rs15,000. LIG borrowers will be able to borrow up to Rs45,000 and MIG households with an income of up to Rs7,000 per month will be able to borrow up to Rs80,000. 95. For the direct lending component of part C, the interest rate is assumed to be 13 percent per annum with a 15-year repayment period. While the affordable percentages of income for each income group are assumed to be the same as those in part A, in practice many HFCs apply a flat rate of 30 percent of income when they analyze the repayment capacity of potential borrowers. The resulting analysis shows that EWS households will not be able to access loans under this component. LIG households will be able to afford loans up to Rs90,000, and MIG households earning up to Rs7,000 per month will be able to access loans of up to about Rs165,000. The results of the analysis demonstrates that part C of the Project will allow many low- and moderate-income households direct access to market rate loans for construction and improvement of their houses. E. Impact on Poverty 96. Lending to low-income households will have a significant impact on the reduction of poverty. Access to housing finance will reinforce a process of steady incremental improvements in household incomes by providing the means to finance the construction of better living, as well as home workplace conditions that, in turn, will increase household stability by providing a fixed asset of considerable value that can be used to safeguard household interests. To the extent that housing loans are made to households with home- based workers (in most cases women), the impact on poverty reduction will be significant. Lending through worker cooperatives and societies under part B, such as the Sarvodaya Sangh network of handicraft workers, will have a similarly strong impact on reducing poverty. Low-income state and local employees, such as nurses and teachers who need to live close to their work, will benefit from savings in transportation costs and time spent commuting. Improved water supply, sanitation, drainage, and footpaths under the slum networking component will improve the health, safety, and productivity of slum residents. Individual direct lending will have positive impacts on poverty reduction to the extent that household living conditions, health, productivity, and access to employment are improved. F. Risks 97. One of the potential risks related to the ability of HUDCO, ICICI, and HDFC to increase their lending to CFIs is the absence of bankable collateral for loan security. The majority of CFIs do not have substantial real collateral, nor do their members have registered titles to land. Where individual or group land titles are not available, HUDCO has required an interest- bearing cash deposit from 10 to 15 percent of the loan, depending on the track record, loan recovery mechanisms, and experience of the CFI. These funds must come from the savings of their members, which is a burden on the CFI membership. In contrast to the present policy, the 30 Project is proposing that superior lending and repayment track records be taken as the principal criteria for extending loans to established CFIs. The Borrowers must therefore closely monitor the financial positions as well as the absorptive capacities of partner CFIs. 98. Regarding slum networking schemes, although most states in India have slum improvement or slum clearance boards, they have a poor performance record in terms of promoting community participation and establishing partnerships with CFIs, NGOs, community residents, local government authorities, and the private sector. Additionally, their ability to use and leverage financial resources efficiently, and to promote cost recovery has largely been unsuccessful. The Project’s partnership slum networking approach is therefore a significant departure from the traditional approach to slum improvement. However, selected subprojects will take more time to appraise, design, and implement. The success of this component will therefore require a major commitment and educational effort on behalf of HUDCO. 99. Each of the Borrowers must cover the foreign exchange risk associated with their respective loans. To avoid a negative spread on their loans, the Borrowers will have to negotiate beneficial agreements with swap partners. There is a risk associated with interest rate movements in the domestic capital markets vis-à-vis the cost of ADB funds. However, a mitigating factor is the relatively long maturity of the ADB funds which will allow all the Borrowers to better balance the maturities of their assets and liabilities. VI. ASSURANCES 100. The Government and the Borrowers have given the following specific assurances, in addition to the standard assurances, which have been incorporated in the legal documents: A. Specific Assurances (i) The Government and the Borrowers will execute the policy and institutional action plan as agreed to by the Government, Borrowers, and ADB. (ii) Each Borrower will ensure that it is in compliance at all times with the prudential norms issued by the regulatory authorities, including capital adequacy, income recognition, classification, and provisioning for nonperforming assets. (iii) Each Borrower will maintain a debt-equity ratio no higher than 12 to 1 and a debt service coverage ratio of at least 1.1, and confirm that it has no arrears in repayment of its current debt obligations. (iv) No withdrawals will be made from the loan account of a Borrower, until an opinion is received by ADB from an auditor acceptable to ADB, in form and substance satisfactory to ADB, that certifies that the Borrower is in compliance with prudential norms, debt service coverage ratio, and debt-equity ratio specified in the assurances. (v) Each Borrower will select subprojects and subborrowers for purposes of onlending to state and local bodies under part A of the Project only in states and union territories which have undertaken or are undertaking measures to put into place progressive urban land ceiling laws and/or amend state rent control legislation. 31 (vi) Each Borrower will ensure that subloans are only made available to eligible subborrowers, including those who are not in default, individually or collectively, on any prior loan. (vii) Each Borrower will submit to ADB, for prior approval, its first two subprojects under each project component to be financed under the loan; and HUDCO will submit to ADB for prior approval all subprojects under part B of the Project. (viii) Each Borrower will ensure that subprojects to be financed under the loan shall meet the requirements of ADB's guidelines on environmental and social assessment and management measures. (ix) Each Borrower will ensure that subprojects involving involuntary resettlement are either eliminated, or subloans will be undertaken in accordance with ADB's involuntary resettlement policy and ADB's Handbook on Resettlement, as amended from time to time. (x) Each Borrower will ensure that subprojects to be financed under the loan observe subloan agreements, criteria, and subloan application procedures acceptable to ADB, and no sublending is based on comfort letters unless such criteria is approved by the Government and is acceptable to ADB. (xi) Each Borrower will observe subloan financing criteria that include maximum ADB financing of 80 percent of the subloan(s) provided by the Borrower for lending and refinancing under part C, and for lending to public and private enterprises and to state and local bodies under part A of the Project; the remaining Project components will be eligible for 100 percent ADB financing. (xii) NHB will ensure that all refinancing under part C of the Project is directed to housing finance companies approved by NHB for refinancing, with the exception of HUDCO, HDFC, and ICICI. (xiii) NHB will ensure that 20 percent of the loan to NHB, equivalent to $8 million, is directed to refinancing HFC lending to CFIs. (xiv) Each Borrower will take all necessary measures satisfactory to ADB to ensure that subloan repayments, net of ADB loan repayments, are relent through the same lending channels and to the same beneficiary groups specified under the Project, during the loan period. (xv) Each Borrower will ensure that the foreign exchange risk under the Loan Agreement is hedged through an appropriate swap or other hedging arrangement in form and substance satisfactory to ADB. B. Conditions for Loan Effectiveness 101. An onlending agreement between ICICI and ICICI Home Finance Company, in form and substance satisfactory to ADB, will be duly executed and delivered on behalf of ICICI and ICICI Home Finance Company, and be fully effective and binding on the parties to it. 32 C. Conditions for First Disbursement 102. Conditions for the first disbursement include the following: (i) No withdrawals will be made from a Borrower's loan account until the Borrower ensures that it is in compliance, or has performed undertakings under a time- bound action plan acceptable to ADB to be in compliance, with corporate governance standards, as specified in the legal documents. (ii) No withdrawals will be made from the loan account of HUDCO until HUDCO’s management has confirmed to the satisfaction of ADB (i) the preparation of a time-bound action plan on the establishment of a PIU, outlining the PIU’s functions and responsibilities, staffing arrangements, financing arrangements, office accommodations, and longer term integration into HUDCO’s operations; (ii) the appointment of a full-time qualified PIU senior manager; (iii) the appointment of all necessary PIU supporting staff in terms of staff numbers and qualifications; and (iv) the provision of PIU office space, accommodation, and equipment. (iii) No withdrawals will be made from the loan accounts of HDFC or ICICI, until both Borrowers jointly establish a working group on mortgage registration to develop recommendations to the Government on mortgage registration, as specified in the legal documents. VII. RECOMMENDATION 103. I am satisfied that the proposed loans would comply with the Articles of Agreement of ADB and recommend that the Board approve (i) the loan of $100,000,000 to the Housing and Urban Development Corporation; (ii) the loan of $40,000,000 to the National Housing Bank; (iii) the loan of $80,000,000 to the Housing Development Finance Corporation; and (iv) the loan of $80,000,000 to ICICI for the Housing Finance II Project from ADB's ordinary capital resources, each with interest to be determined in accordance with ADB’s market-based loan facility and each with an amortization period of 25 years, including a grace period of 5 years, and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Guarantee Agreements presented to the Board. TADAO CHINO President 29 August 2000 33 LIST OF APPENDIXES Cited on Number Title Page (page, para.) 1 Project Framework 34 1, 2 2 A Synopsis of India's Housing Finance System 40 3, 9 3 External Assistance to the Housing Sector in India 44 4, 14 4 Policy and Institutional Action Plan 45 6, 19 5 Profile of Low-Income Households 50 9, 27 6 Total Project Cost and Impact 52 14, 41 7 Lending Targets by Project Parts and Primary Borrowers 54 16, 44 8 Representative Financing Structure 55 16, 48 9 Summary of Survey of CFIs and NGOs and their Members 57 22, 72 on Housing Finance Needs and Delivery Mechanisms 10 Affordability Analysis 68 28, 93 SUPPLEMENTARY APPENDIXES (available on request) A Review of the Housing Finance Project B Detailed Description of the Project Components and Finance Delivery Mechanisms C Survey of CFIs and NGOs and their Members on Housing Finance Needs and Delivery Mechanisms D HUDCO's Lending Window for Community-based Finance Institutions E Financial Performance and Projections for the Borrowers F Outline Terms of Reference for HUDCO's Project Implementation Unit 34 Appendix 1, page 1 PROJECT FRAMEWORK Design Summary Targets Project Monitoring Risks/Assumptions Mechanisms 1. Goal Support human • Approximately 270,000 • Quarterly reports; annual • The Government development by housing loans reports and evaluations, continues to place a high increasing the availability benefiting over 1.3 loan documentation, priority on addressing the and affordability of million people are review missions housing finance needs of housing finance to low- disbursed through LIHs and on promoting income households formal and informal sectoral policy reforms. (LIHs). housing finance institutions. 2. Purpose • Project completion Improve the living • At least 270,000 LIHs report • The relationship between standards and quality of obtain loans for home the cost of Asian life of LIH that lack purchase or Development Bank (ADB) access to affordable improvement by Dec funds and market interest credit for housing and 2006. rates results in financially home-based, income- viable lending modalities. generating activities. • Project completion • Borrowers establish and • At least 14,000 LIHs report expand linkages with obtain microcredit to financial intermediaries to finance home channel housing loans to workplace LIHs. improvements by Dec 2006. • Project completion • HUDCO improves its • At least five slum report institutional capacity to networking subprojects structure, appraise, and are prepared and manage innovative financed by Dec 2007. housing subprojects. 3. Outputs • Housing and Urban • HUDCO, National 3.1 Linkages established • At least 49,000 loans Development Housing Bank (NHB), between housing finance totaling $40 million to Corporation (HUDCO), HDFC, and ICICI institutions (HFIs) and LIHs are channeled Housing Development establish appropriate CFI community-based through CFIs/NGOs. Finance Corporation lending windows, financial institutions (HDFC), and ICICI marketing strategies, and (CFIs)/nongovernment • Approximately $20 lending records and disbursement procedures organizations (NGOs) to million additional quarterly project reports, to increase lending to onlend to LIHs. leveraging contributed field evaluations, ADB CFIs. by LIH beneficiaries. loan disbursement requests, review • Adequate effective missions demand and CFI absorptive capacity exists for housing loans. 35 Appendix 1, page 2 Design Summary Targets Project Monitoring Risks/Assumptions Mechanisms 3.2 Linkages established • HUDCO, HDFC, and • HUDCO, HDFC, and between HFIs and • At least 46,000 loans ICICI lending records ICICI establish public/private enterprises totaling $75 million to and quarterly project appropriate lending to onlend to LIHs. LIHs are channeled reports, field windows, marketing through public/private evaluations, ADB loan strategies, and enterprises. disbursement requests, disbursement procedures review missions to increase lending to • Approximately $38 public/private enterprises. million additional leveraging contributed • Public and private by LIH beneficiaries. enterprises willing and able to support housing • Approximately $15 loan programs for million additional employees. leveraging contributed by HUDCO, HDFC, and ICICI. 3.3 Linkages established • HUDCO, HDFC, and • HUDCO, HDFC, and between HFIs and • At least 23,000 loans ICICI lending records ICICI establish state/local bodies to totaling $38 million to and quarterly project appropriate lending onlend to LIHs. LIHs are channeled reports, field windows, marketing through state/local evaluations, ADB loan strategies, and bodies. disbursement requests, disbursement procedures review missions to increase lending to • Approximately $18 state/local bodies. million additional leveraging contributed • State/local bodies willing by LIH beneficiaries. and able to support housing loan programs. • Approximately $8 million additional leveraging contributed by HUDCO, HDFC, and ICICI. 3.4 Innovative slum • HUDCO lending records • HUDCO develops networking subprojects • At least five slum and quarterly project capacity to structure, are prepared, financed, networking subprojects reports, field appraise, and finance and implemented. totaling $10 million are evaluations, ADB loan slum networking prepared, financed, and disbursement requests, subprojects. implemented. review missions • Grant sources of • Approximately $5 financing are identified to million additional supplement loan funds. leveraging contributed by slum dwellers as • Sustainable partnerships well as municipal are established among authorities and private communities, CFIs, enterprises. NGOs, and local authorities. 3.5 Microcredit programs • HUDCO lending records • HUDCO establishes are established to support • A total of $5 million is and quarterly project partnerships and lending home workplace lending. channeled through reports, field lines with worker 36 Appendix 1, page 3 Design Summary Targets Project Monitoring Risks/Assumptions Mechanisms worker cooperatives to evaluations, ADB loan cooperatives and onlend to LIHs for disbursement requests, societies. improvements to home review missions workplaces, resulting in a minimum of 10 subprojects. • Grant sources of financing are identified to • Approximately $3 supplement loan funds. million additional leveraging contributed by LIH beneficiaries as well as cooperatives and government. 3.6 HFI lending directly to • HUDCO, HDFC, and • HUDCO, HDFC, and LIH is increased and • At least 65,000 loans ICICI lending records ICICI commit to sustained. totaling $144 million are and quarterly project expanding direct lending directly channeled to reports, field to LIHs. LIHs by HFIs. evaluations, ADB loan disbursement requests, • Appropriate screening • Approximately $72 review missions criteria and lending million additional procedures are in place leveraging by LIH to ensure that housing beneficiaries. loans are directed to LIHs. 3.7 Refinancing provided • NHB refinancing records • NHB develops for HFI lending to LIHs. • Approximately $29 and quarterly project appropriate refinancing million equity reports, field guidelines and contribution by HFIs. evaluations, ADB loan procedures to ensure that disbursement requests, only loans to LIHs are • At least 27,000 loans to review missions refinanced. LIHs totaling $50 million are refinanced by NHB. • NHB operationalizes its refinancing program for • At least $ 8 million is HFC lending to CFIs. used to refinance HFC lending to CFIs. • Approximately $10 million equity is contributed by NHB. 4. Activities • HUDCO, HDFC, and • HUDCO, HDFC, and 4.1 Linkages established ICICI develop sufficient between HFIs and ICICI lending records and quarterly project in-house capacity, CFIs/NGOs to onlend to expertise, and LIHs. reports, field evaluations, ADB loan commitment for CFI disbursement requests, lending. • CFI lending windows Start: Jan 2001. operationalized and review missions Complete: July 2001. • Lending to CFIs is marketed to CFIs Responsibility: HUDCO, financially viable given HDFC, and ICICI. cost of ADB funds vis-à- 37 Appendix 1, page 4 Design Summary Targets Project Monitoring Risks/Assumptions Mechanisms vis domestic sources of • Appropriate CFI Start: Jan 2001. capital. rating criteria and Complete: July 2001. lending procedures Responsibility: HUDCO, developed HDFC, and ICICI. • HUDCO, HDFC, and • HUDCO, HDFC, and 4.2 Linkages established ICICI lending records ICICI develop sufficient between HFIs and and quarterly project in-house capacity, public/private enterprises reports, field expertise, and to onlend to LIHs: evaluations, ADB loan commitment for lending to disbursement requests, public and private • Lending program Start: Jan 2001. review missions enterprises. marketed to Complete: July 2001. public/private Responsibility: HUDCO, • Lending to public and enterprises HDFC, and ICICI. private enterprises is financially viable given • Participation criteria Start: Jan 2001. cost of ADB funds vis a and appropriate Complete: July 2001. vis domestic sources of lending, monitoring, Responsibility: HUDCO, capital. and reporting HDFC, and ICICI. procedures developed • HUDCO, HDFC, and • HUDCO, HDFC, and 4.3 Linkages established ICICI lending records ICICI develop sufficient between HFIs and and quarterly project in-house capacity, state/local bodies to reports; field expertise, and onlend to LIHs: evaluations; ADB loan commitment for lending to disbursement requests; state and local bodies. • Lending program Start: Jan 2001. review missions marketed to Complete: July 2001. • Lending to state/local state/local bodies Responsibility: HUDCO, bodies is financially viable HDFC, and ICICI. given cost of ADB funds vis-à-vis domestic • Participation criteria Start: Jan 2001. sources of capital. and appropriate Complete: July 2001. lending, monitoring, Responsibility: HUDCO, and reporting HDFC, and ICICI. procedures developed • HUDCO lending records • HUDCO develops 4.4 Innovative slum and quarterly project sufficient in-house networking subprojects reports, field capacity, expertise, and are prepared, financed, evaluations, ADB loan commitment to prepare, and implemented: disbursement requests, finance, and implement review missions slum networking • HUDCO works with Start: Jan 2001. subprojects. CFIs, municipal Complete: Jan 2005. authorities, private Responsibility: HUDCO. • Grant funds are available enterprises, and slum from government communities to programs, bilateral structure viable funding agencies, and subprojects. private sector sources. 38 Appendix 1, page 5 Design Summary Targets Project Monitoring Risks/Assumptions Mechanisms • Appropriate Start: Jan 2001. mechanisms in place Complete: Jan 2005. to ensure community Responsibility: HUDCO. participation from subproject design through implementation • HUDCO lending records • HUDCO develops 4.5 Microcredit programs and quarterly project sufficient in-house are established to support reports, field capacity, expertise, and home workplace lending: evaluations, ADB loan commitment to partner disbursement requests, with worker cooperatives • HUDCO establishes Start: Jan 2001. review missions for microcredit lending. partnerships with Complete: Jan 2005. worker cooperatives Responsibility: HUDCO. • Grant funds are available and develops from government appropriate lending programs, bilateral guidelines, funding agencies, and procedures, and private sector sources. monitoring systems • HUDCO, HDFC, and • HUDCO, HDFC, and 4.6 HFI lending directly to ICICI lending records ICICI develop sufficient LIHs is increased and and quarterly project in-house capacity, sustained: reports, field expertise, and evaluations, ADB loan commitment to increase • Institutional Start: Jan 2001. disbursement requests, direct lending to LIHs. commitment to Complete: July 2001. review missions marketing and Responsibility: HUDCO, • Lending to LIHs is expanding lending to HDFC, and ICICI. financially viable given LIHs. cost of ADB funds vis-à- vis domestic sources of • Appropriate criteria Start: Jan 2001. capital. established to screen Complete: July 2001. borrowers and Responsibility: HUDCO, minimize credit risk HDFC, and ICICI. • Reporting systems Start: Jan 2001. developed to Complete: July 2001. document borrower Responsibility: HUDCO, incomes, loan sizes, HDFC, and ICICI. house location, collateral, etc. • NHB refinancing records • NHB develops sufficient 4.7 Refinancing provided and quarterly project in-house capacity, for HFI lending to LIHs: reports, field expertise, and evaluations, ADB loan commitment to • Procedures and Start: Jan 2001. disbursement requests, refinancing HFI loans to systems established Complete: July 2001. review missions LIHs. to facilitate timely Responsibility: NHB. refinancing of HFI lending to LIHs. 39 Appendix 1, page 6 Design Summary Targets Project Monitoring Risks/Assumptions Mechanisms • NHB develops sufficient • Reporting Start: Jan 2001. in-house capacity, requirements Complete: July 2001. expertise, and developed to ensure Responsibility: NHB. commitment to that only LIH loans refinancing HFI loans to are refinanced CFIs. • Refinancing is financially • Refinancing window Start: Jan 2001. viable given cost of ADB for HFI lending to Complete: July 2001. funds vis-à-vis domestic CFIs operationalized. Responsibility: NHB. sources of capital. 5. Inputs 5.1 Financial • HUDCO, NHB, HDFC, • Borrowing institutions • ADB Loan $300 million and ICICI lending comply with ADB financial • Beneficiary records and quarterly guidelines and contribution $146 million project reports; field procedures to account for • HUDCO contribution $21 million evaluations; ADB loan the sources and uses of • NHB contribution $10 million disbursement requests; funds, and to monitor • HDFC contribution $20 million review missions; project project impacts and • ICICI contribution $20 million completion report. benefits. 5.2 Capacity Building • TA progress reports; • Qualified consultants are • TA provided to Start: Jan 2001. review missions. recruited; counterpart expand lending to Complete: Jan 2005. commitment and CFIs and NGOs, to Institutional Focus: HUDCO contributions are realized. structure slum and NHB. networking subprojects, and to examine how mortgage securitization can expand the domestic capital market for housing finance. 40 Appendix 2, page 1 A SYNOPSIS OF INDIA'S HOUSING FINANCE SYSTEM A. Sources of Finance 1. Low-income households have limited access to formal sources of market-based housing finance. Studies in the 1980s showed that only 10 to 15 percent of housing finance in developing countries came from formal institutions, as such institutions cater mainly to middle- and high-income households. Although there is evidence suggesting that the availability of housing finance from formal sources has increased, formal institutions in India are not likely to account for much over 20 percent. Estimates of the share of various sources of finance in India for the construction of new buildings or for financing additions to existing buildings are provided in tables A2.1 and A2.2. 2. One striking feature of these data is that people largely depend on their own funds for financing new housing construction and home improvements. The dependence on own funds ranges from about 65 to 70 percent in the case of new houses and from about 75 to 85 percent in the case of additions to existing buildings. Although the dependence on own funds is generally higher in rural areas, this is not true in the case of kutcha (temporary) dwellings. Those building kutcha dwellings are the poorest segment of the population with low personal savings and thus are more dependent on moneylenders. In the case of new kutcha buildings the dependence on moneylenders is as high as 20 percent. According to these data, the share of formal sector finance varies from about 22 percent (for new buildings) in urban areas to less than 8 percent (for additions and alterations) in rural areas. For the numbers presented in tables A2.1 and A2.2, it is assumed "other sources of finance" are from the "formal" sector. To the extent that these are "informal" sources, the share of the formal sector is even lower. B. Formal and Informal Sources of Finance 3. Of the estimated Rs1,500 billion required for housing during the Ninth Five-Year Plan, only about Rs380 billion (about 25 percent) is expected to come from the formal sector. Sources of housing finance can broadly be classified into formal and informal. Informal sources comprise self-finance, including money from friends and relatives, moneylenders, suppliers' credit and rotating credit societies (chit funds/vishis). 4. The formal housing finance sector in India consists of specialized housing finance institutions such as National Housing Bank (NHB), Housing and Urban Development Corporation (HUDCO), housing finance companies (HFCs), and cooperative housing societies; general financing institutions such as insurance companies, commercial banks, and provident funds; and budgetary allocations of the central and state governments. Due to the earlier welfare approach to housing and to financial regulations, many of the providers and users of housing finance were government and/or public sector agencies. Somewhere between these two categories are the microfinance or community-based finance institutions (CFIs). For the purpose of this analysis we will classify these as informal sector institutions. C. The Informal Housing Finance Sector 5. As indicated in tables A2.1 and A2.2, informal sources account for the majority of housing finance in India. A description of four different informal sources of finance follows. Table A2.1: Shares of Different Sources of Finance for New Buildings (percent) New Buildings a b c Source Pucca Semi-pucca Kutcha All Total Urban Rural Urban Rural Urban Rural Urban Rural Own sources 69.0 72.6 69.4 72.1 65.1 67.8 68.9 72.2 70.1 Money lenders 1.4 7.2 10.2 11.2 18.2 20.0 2.7 8.8 4.8 Friends and relatives 7.1 6.7 10.1 9.9 10.0 6.9 7.4 7.3 7.4 Other sources 4.0 4.9 3.8 2.3 1.5 1.3 3.9 4.1 4.0 41 Cooperative 1.8 2.4 0.7 0.2 0.7 1.2 1.7 1.9 1.8 Govt. financial institutions 11.1 4.2 4.1 2.5 3.5 2.2 10.3 3.8 8.0 Non Govt. financial institutions 2.7 0.9 0.8 0.6 0.8 0.2 2.5 0.8 1.9 Govt. non financial institutions 1.9 0.9 0.6 0.5 0.1 0.3 1.7 0.8 1.4 Non Govt. nonfinancial 0.9 0.2 0.3 0.8 0.0 0.0 0.8 0.3 0.6 Appendix 2, page 2 institutions Informal 77.5 86.4 89.7 93.1 93.3 94.7 79.0 88.3 82.2 Formal 22.5 13.6 10.3 6.9 6.7 5.3 21.0 11.7 17.8 a b c = permanent, = semi-permanent, = temporary. Source: Sarvekshana. 1999. Vol. XXII (3): 262, table 46. Table A2.2: Share of Different Sources of Finance for Additions to Existing Homes (percent) Additions a b c Source Pucca Semi-pucca Kutcha All Total Urban Rural Urban Rural Urban Rural Urban Rural Own sources 75.3 77.0 84.7 76.7 99.6 63.8 78.6 75.4 77.2 Money lenders 3.5 7.2 8.8 7.8 0.4 14.6 4.4 8.2 6.0 Friends and relatives 6.8 7.9 4.0 8.1 0.0 13.1 5.8 8.6 7.0 42 Other sources 5.1 2.6 0.8 2.2 0.1 5.9 4.0 2.9 3.5 Cooperative 1.0 0.4 1.4 2.8 0.0 0.2 1.1 0.9 1.0 Govt. financial institution 5.2 4.5 0.3 0.6 0.0 2.3 4.0 3.4 3.7 Non Govt. financial institution 2.3 0.2 0.0 0.4 0.0 0.0 1.7 0.2 1.1 Govt. nonfinancial institution 0.5 0.1 0.0 1.4 0.0 0.0 0.4 0.4 0.4 Non Govt. nonfinancial 0.2 0.0 0.0 0.1 0.0 0.0 0.2 0.0 0.1 institution Appendix 2, page 3 Informal 85.6 92.2 97.5 92.6 99.9 91.6 88.8 92.2 90.3 Formal 14.4 7.8 2.5 7.4 0.1 8.4 11.2 7.8 9.7 a = permanent, b = semi-permanent, c = temporary. Source: Sarvekshana. 1999. Vol. XXII (3): 262, table 46. 43 Appendix 2, page 4 1. Self-Financing 6. It is clear from tables A2.1 and A2.2 that self-financing is currently the most significant source of funds for housing. This imposes an obvious constraint on translating the potential demand for housing. At the lower income levels, the amount of money, on average, that people need to acquire or improve a house, is relatively small and cannot be economically provided by large, formal HFCs. Channeling housing finance to low-income households often requires community-based financial intermediaries that can afford to issue and service small loans. 2. Suppliers' Credits 7. Under this arrangement, the household constructs the house on credit, and is charged interest rates, typically between 24 percent and 36 percent per year, by the supplier of building materials. The repayment period is very short, usually between 12 and 20 months. Physical assets such as gold and land are often used as collateral. With these high interest rates and short repayment periods, the ability to meet monthly payments, even for very small loans, is limited. 3. Rotating Credit Societies 8. These go by various names in different parts of the country, such as chit funds or vishis, but the principle is essentially the same. A group of people regularly subscribe to the scheme, and await their turn to access the accumulated pool. Clearly, the viability of such schemes depends heavily on the mutual trust among the members of the group. For that reason, these institutions tend to be exclusive and limited to groups of people who have a strong social affinity to each other. Their role in the provision of housing finance is therefore limited. 4. Community-Based Financial Institutions 9. CFIs provide small loans with market-based interest rates to low-income households. As institutions, they combine the lending approach of the formal HFCs, but with the monitoring and enforcement mechanisms of communities. This allows them to keep default rates, and therefore their interest rates relatively low. Some of the larger CFIs, such as the SEWA Bank of Ahmedabad, are able to directly mobilize funds through their deposit schemes, as well as through equity capital. In general, CFIs have problems mobilizing funds. However, because of their potential strengths in the lending aspect of the business, CFIs can be an effective channel of funds from the formal sector to low-income borrowers. 5. Interest Rates in the Informal Sector 10. There is quite a variation across the CFIs as well as within a particular CFI with respect to different interest rate schemes. According to the project survey, interest rates were found to range between 15 and 18 percent per annum, with some CFIs charging interest rates of 24 percent or more; the most common among CFI lending were 15 percent, 18 percent, 24 percent, and more than 24 percent. More than half of the economically weaker section borrowers and 29 percent of low-income group borrowers had obtained loans at 15 percent. The highest percentage of loans to middle-income group borrowers was made at rates greater than 24 percent. The most common loan maturity periods were from 3-5 years. Despite the short maturity and high interest rates, repayment records are extremely high. The lowest repayment rate among mature CFIs was 96 percent. 44 Appendix 3 EXTERNAL ASSISTANCE TO THE HOUSING SECTOR IN INDIA, 1983 – 2000 ($ million) Year Project Approved Source Amount A. Housing Projects-Loan Financed USAID Program – HDFC 1983 USA 125.00 USAID – NHB 1990 USA 40.00 USAID-FIRE – HUDCO 1994 USA 125.00 KfW I – HDFC & HUDCO 1987 Germany 30.50 KfW II – HUDCO 1988 Germany 18.75 World Bank – HDFC 1988 World Bank 250.00 International Finance Corp. – HDFC 1991 IFC 40.00 OECF – NHB 1991 Japan 250.00 CDC – HDFC 1993 UK 37.46 Karnataka Urban Infras. Development – HDFC 1995 ADB 20.00 Housing Finance Project – NHB, HUDCO, HDFC 1997 ADB 300.00 Subtotal (A) 1236.71 B. Housing Projects – Grant Financed Vizakapatnam Habitat Improvement Project 1988 United Kingdom 16.07 Hyderabad Habitat Improvement Project 1989 United Kingdom 24.59 Urban Basic Services 1990 United Nations 19.00 Calcutta Habitat Improvement Project 1990 UNICEF 22.18 Indore Habitat Improvement Project 1990 United Kingdom 25.31 Vijaywada Habitat Improvement Project 1990 United Kingdom 29.34 KfW III 1991 Germany 6.25 KfW IV 1994 Germany 21.87 KfW V 1995 Germany 21.87 Subtotal (B) 186.48 Subtotal (A+B) 1423.19 C. Technical Assistance – Grant Financed Housing Finance Facility Project 1996 ADB 0.10 Strenthening Housing Finance Institutions 1997 ADB 0.60 Restructuring State-Level Housing Institutions 1998 ADB 0.50 Informal Sector in an Urban Economy 1990 Canada 0.02 Housing Finance Development Fund and 1991 Netherlands 1.02 Miscellaneous Activities Housing Finance System Expansion Program 1992 United States 4.30 Subtotal (C) 6.54 Total 1429.73 ADB = Asian Development Bank, CDC = Commonwealth Development Corporation, FIRE = Financial and Institutional Restructuring Project, HDFC = Housing Development Finance Corporation, HUDCO = Housing and Urban Development Corporation, IFC = International Finance Corporation, KfW = Kreditanstalt fur Wiederaufbau, NHB = National Housing Bank, OECF = Overseas Economic Corporation Fund, UK = United Kingdom, UNICEF = United Nations Children’s Fund, USA = United States of America, USAID = United States Agency for International Development, WHO = World Health Organization. 45 Appendix 4, page 1 POLICY AND INSTITUTIONAL ACTION PLAN Policy Agencies Present Situation Actions Needed Time Frame Objective Involved Strengthen 1. Community-based 1. Housing finance Housing and July 2001 linkages financial institutions institutions (HFIs) will Urban between formal (CFIs) are develop in-house Development and informal important and departments and Corporation sectors viable channels for expertise for (HUDCO), market-based microcredit lending. Housing lending to low- Development income households Finance without collateral. Corporation (HDFC) and ICICI 2. CFIs lack sufficient 2. HFIs will prepare HUDCO, HDFC July 2001 capital resources to rating criteria for CFIs and ICICI expand their based on their lending operations, repayment capacities as their principal and lending track source of funds is records. from members’ savings. 3. Lending experience 3. Standardize and HUDCO, HDFC December 2001 and high streamline and ICICI repayment rates by processing borrowers indicate procedures for loans that CFIs are to CFIs to promote financially viable greater efficiency and with minimal credit predictability. risks. 4. Formal finance 4. Operationalize HUDCO, HDFC December 2001 institutions have innovative financing and ICICI been reluctant to structures such as extend credit to escrow accounts, CFIs based on their guarantee funds, and perceived credit revolving funds. risk and lack of collateral. 5. Expand refinancing National Housing December 2001 window for HFC Bank (NHB) lending to CFIs and streamline refinancing operations. 46 Appendix 4, page 2 Policy Agencies Present Situation Actions Needed Time Frame Objective Involved Support 1. Government- 1. Decision by the Ministry of July 2001 market-based defined interest empowered Finance, Ministry lending rate ceilings committee of the of Urban continue to apply to Government to Employment and loans to increase the interest Poverty Allevation economically rate ceiling for loans (MUEPA), weaker section to EWS to be in line HUDCO (EWS) households. with market interest rates. 2. Most public entities, including HUDCO, continue to lend at 10 percent per year to EWS households 3. HUDCO has applied to the empowered committee of the Government to increase the EWS lending rate to 12.5 percent Raise 1. Liberalization of 1. All Borrowers must HUDCO, NHB, July 2001 corporate India’s financial prepare a time-bound HDFC, and ICICI governance sector has action plan to adopt standards for highlighted the and implement public need for public corporate institutions sector institutions governance to raise their provisions regarding corporate board composition, governance the establishment of standards. an independent audit committee, a board 2. The Kumar remuneration Mangalam committee, Committee on accounting, and Corporate financial reporting, Governance and corporate provides model governance corporate compliance reporting governance as part of the annual standards to be report. adopted by all private companies with paid up share capital at Rs10 crores or more by 31 March 2001. Appendix 4, page 3 47 Policy Agencies Present Situation Actions Needed Time Frame Objective Involved Improve 1. Due to their poor 1. HUDCO to develop HUDCO, state and January 2001 subproject financial positions, a time-bound action local housing appraisal and states are plan to establish a agencies implementation increasingly project reluctant to give implementation unit guarantees for loans (PIU) within to state and local HUDCO, which level housing would review and institutions, thereby monitor subproject increasing financial design, appraisal, risks to lenders. and implementation. 2. Given the volume of 2. HUDCO will December 2001 state lending by strengthen its in- HUDCO to state- house capacity to level bodies, the conduct proper due lack of state diligence on guarantees requires subborrowers and more detailed subprojects to appraisal of the minimize its own financial viability of financial risk state institutions as exposure and to well as subprojects. ensure the financial viability and sustainability of 3. Increased attention subprojects. by HUDCO also needs to be directed to ensuring the financial viability of slum networking subprojects, mainly by incorporating greater community participation to promote improved cost recovery and sustainability. Implement 1. Foreclosure 1. Draft regulations NHB July 2001 foreclosure provisions for prepared, and regulations and housing finance approved by NHB’s provisions companies (HFCs) Board, for are contained in the submission to the NHB Amendment Reserve Bank of Bill 2000. India and the Government on (i) procedures for mortgagee power of 48 Appendix 4, page 4 Policy Agencies Present Situation Actions Needed Time Frame Objective Involved 2. Operationalization of sale without foreclosure intervention of provisions is not courts, precisely defined including notice of with respect to the default and methods roles and of valuation and sale responsibilities of of assets; (ii) HFI NHB, HFCs, and debt recovery civil courts. appellate Tribunals; including uniform procedures, administrative support, funding, and powers of enforcement; and (iii) preservation of exercise of mortgagee power of sale without intervention of courts given judicial review under the NHB Act as amended. 2. NHB will submit NHB December 2001 foreclosure regulations for notification. Improve the 1. Equitable mortgages HDFC, ICICI January 2001 mortgage represent 1. HDFC and ICICI will registration approximately 80 establish a working system. percent of all new group on mortgage mortgages issued in registration including India, but such (i) defining instruments present composition of the the following representatives from potential issues and the Government, problems: (i) the selected state possibility that states governments, NHB, could take action to HUDCO, Reserve recoup stamp Bank of India, duties; (ii) their use professionals and is restricted to other relevant certain geographic partners; (ii) areas; (iii) they do outlining terms of not allow for reference for the appointment of working group; and receivers or any (iii) formulating a 49 Appendix 4, page 5 Policy Agencies Present Situation Actions Needed Time Frame Objective Involved foreclosure remedy time-bound action without court plan for submission intervention; and of the Working (iv) they cannot be Group’s securitized without recommendations to being registered and, Government on thereby, subjected to mortgage stamp duties. registration. Expand the 1. Mortgage 1. Lessons learned NHB July 2001 capital market securitization from the pilot issue for housing represents a viable require finance means to expand documentation and the capital market analysis in the for housing finance context of other in India. mortgage-backed securities (MBS) markets in Asia and elsewhere in order to define the requisite reform measures to develop India’s MBS market. 2. First pilot mortgage 2. NHB’s future role in NHB December 2001 securitization issue the sector requires has been structured, reassessment given but has not yet been the development of brought to market. the MBS market, as well as the entry on nontraditional participants in the housing finance sector. 50 Appendix 5, page 1 PROFILE OF LOW-INCOME HOUSEHOLDS A. Government Income Definitions 1. For purposes of designating beneficiaries of housing and other Government assistance programs, the Government classifies the population into four income categories: economically weaker sections (EWS); the low-income group (LIG); the middle-income group (MIG); and the high-income group (HIG). In January 1999, the Planning Commission updated the income brackets for the respective groups as follows: EWS households have monthly incomes of less than Rs2,500 or $62; LIG households have monthly incomes between Rs2,500 and Rs5,700 (about $142); MIG households have monthly incomes between Rs5,700 and Rs10,000 (about $250); and HIG households have monthly incomes of Rs10,000 and above. B. Low-Income Households 2. For the purposes of the Project, low-income households are defined as households with monthly incomes of Rs7,000 (about $165) or less. This definition is approximately equivalent to an income of $1/capita/day at current exchange rates for a family of five. The basis for this definition is the desire to identify a target beneficiary group under the Project that has little or no access to housing finance through formal housing finance institutions. In relation to the Government’s income classification categories, low-income households encompass the lower one third of MIG households and below. C. Income Distribution Data 3. To estimate where the various income groups are located on the national income distribution scale, data from the National Council on Applied Economic Research (NCAER) was reviewed and analyzed. NCAER carries out an annual survey of households, the Market Information Survey of Households. The sample for this survey consists of some 275,000 households distributed across the country. The main focus of the survey is household expenditure on several categories of consumer goods, durable and expendable. A portion of the data used in this analysis is collected from each household on its gross income. Sample households are classified into five income categories based on 1995/96 prices, but for purposes of the Project, the income ranges were updated to 2000 prices using the consumer price index. The categories are not of equal size, and the HIG income class is open-ended. Based on the sample distribution of households across income classes, the total number of households in each income category for urban areas has been estimated. This was also done for low-income households as defined above. D. Income Profiles of Households 4. According to the data, EWS families earning up to Rs2,500 per month comprise some 6.3 million households, which are at or below the 12th percentile in 2000. LIG households are the largest group, about 18.8 million households, the maximum income of which (Rs5,700 per month) is at the 49th percentile. With monthly incomes from Rs5,700 to Rs10,000, MIG households number 15.2 million, with the maximum income (Rs10,000 per month) at the 78th percentile. At Rs7,000 per month, the maximum income of LIH households is at the 61st percentile. 5. Although it is estimated that some 60 percent of the urban population earn less than Rs7,000 per month, this figure must considered with caution for several reasons. First, the data 51 Appendix 5, page 2 is based on income that is always difficult to determine. Due largely to tax reasons, many families, when surveyed, purposely understate their income. In the low-income brackets, where disposable income is minimal or nonexistent, expenditure data is often a better measure of total income. Secondly, a substantial portion of income of low-income households is often in kind rather than cash, and therefore goes undeclared. Thirdly, it is very difficult to update income distribution data without adequate sample surveys each year. While the consumer price index was used to update the data, another index such as a wage and salary index could have also been used. Given the lack of a recent household income and expenditure survey as well as the foregoing qualifications, the estimate of low-income households earning less than a dollar per day per capita could be as low as the 50th percentile. TOTAL PROJECT COST AND IMPACT Table A6.1: Total Project cost by Lending Channel and Leveraging Impact ADB Loan Borrower Total Funds Beneficiary Project a b c d Project Part Amount Contribution for Lending Contribution Cost A. Lending through Intermediaries 130 153 229 1. CFIs and NGOs 40 0% 40 50.0% 60 2. Public and Private Enterprises 60 25% 75 50.0% 113 3. State and Local Bodies 30 25% 38 50.0% 56 B. Reducing Poverty 15 15 23 1. Slum Networking 10 0% 10 50.0% 15 2. Home Workplace 5 0% 5 50.0% 8 52 C. Increasing Lending to LIHs and CFIs 155 194 266 1. Direct Lending 115 25% 144 50.0% 216 2. Refinancing 40 25% 50 0.0% 50 Total 300 361 517 ADB = Asian Development Bank, CFI = community-based financial institution, LIH = low-income household, NGO = nongovernment organization. a Represents the allocation of ADB loan proceeds to each Project part and lending channel (see Appendix 9). b Accounts for Borrower contribution of 20 percent of total lending through parts A.2, A.3, and C, expressed as a percentage of the ADB loan amount. c Represents total funds available for lending through the respective channels. Appendix 6, page 1 d Accounts for additional contributions or investments by the individual borrowers or beneficiaries, in cash, kind, and/or labor in their houses, expressed as a percentage of the ADB loan amount. Table A6.2: Total Project Impact by Number of Loans and Beneficiaries Total Funds Total Funds Avg. Number Number a b Project Part for Lending for Lending Loan of of c ($ million) (Rs million) Size Loans Beneficiariesd A. Lending through Intermediaries 153 6,633.8 119,625 598,125 1. CFIs and NGOs 40 1,740.0 35,000 49,714 248,571 2. Public and Private Enterprises 75 3,262.5 70,000 46,607 233,036 3. State and Local Bodies 38 1,631.3 70,000 23,304 116,518 B. Reducing Poverty 15 652.5 58,000 290,000 1. Slum Networking 10 435.0 10,000 43,500 217,500 2. Home Workplace 5 217.5 15,000 14,500 72,500 53 C. Increasing Lending to LIHs/CFIs 194 8,428.1 93,010 465,049 1. Direct Lending 144 6,253.1 95,000 65,822 329,112 2. Refinancing 50 2,175.0 80,000 27,188 135,938 Total 361 15,714.4 58,065 270,635 1,353,174 CFI = community-based financial institution, LIH = low-income household, NGO = nongovernment organization. a Accounts for ADB Loan and Borrower contributions as derived in column 3 of Table 1 b Derived from column 1 based on an exchange rate $1= Rs. 43.5 c Represents the average size of housing loans through the respective lending channels d Derived on the basis of an average household size of 5.0 persons Appendix 6, page 2 54 Appendix 7 LENDING TARGETS BY PROJECT PARTS AND PRIMARY BORROWERS ($ million) Components/Borrowers HUDCO NHB HDFC ICICI Total A. Lending to LIHs through Intermediaries 1. CFIs/NGOs 25 0 5 10 40 2. Public and Private Enterprises 20 0 20 20 60 3. State and Local Bodies 10 0 10 10 30 B. Reducing Poverty through Innovative Subprojects 1. Slum Networking 10 0 0 0 10 2. Home Workplace 5 0 0 0 5 C. Lending to LIH through HFIs 1. Direct Lending to LIHs 30 0 45 40 115 2. Refinancing Loans to LIHs/CFIs 0 40 0 0 40 Total 100 40 80 80 300 CFI = community-based financial institution, HDFC = Housing Development Finance Corporation, HFI = housing finance institution, HUDCO = Housing and Urban Development Corporation, ICICI = ICICI Limited, LIH = low-income household, NGO = nongovernment organization, NHB = National Housing Bank. 55 Appendix 8, page 1 REPRESENTATIVE FINANCING STRUCTURE 1. This appendix describes the representative financing structure for the utilization of Asian Development Bank (ADB) loan proceeds, denominated in US dollars ($), to catalyze the availability of Indian rupees (Rs) for the Borrowers to finance and implement their respective onlending activities and subprojects under the Project. A step-by-step example is presented. 2. Step 1. ADB provides a foreign exchange (FX) loan of $100 million for 20 years to Borrower A against which Borrower A, wishes to obtain rupee funding for 20 years. ADB charges market-based loan (MBL) rate (LIBOR based) plus 60 basis points (bp) on it’s loan (to the extent there is a difference in the spreads, there is a cost likely to be no more than 5-10 bp and minimal additional risk). 3. Step 2. Borrower A draws down $20 million and places these finds on deposit with an Indian bank (with an offshore branch) for 20 years obtaining LIBOR plus 60 bp on its deposit. Thus, the interest payments the Borrower pays to ADB, and that received on the deposit, match, and therefore there is no dollar interest rate cost or risk to the borrower. 4. Step 3. In consideration of this dollar deposit, the Indian bank (called the “swap” bank) purchases Borrower A’s 20-year rupee bond in the amount equivalent to $20 million. The $/Re exchange rate is fixed at the time of deposit/rupee bond issue (i.e., at 42 to $1, the rupee equivalent is Rs840 million) and remains fixed throughout the 20-year period. Thus, neither party to the transaction bears an exchange risk. 5. Step 4. The dollar deposit with the swap bank secures it’s purchase of the rupee bonds, thus there is no credit risk from the Borrower. The Borrower is thus able to obtain attractive rates for it’s various bond issuances. The interest rate on the rupee bonds is fixed, for example, for 7 years at a determined spread over 7-year Government securities; this “bench mark” is reset every 7 years. 6. Step 5. The interest rate payment dates on the dollar deposit, the rupee bonds, and the ADB loan are all matched. The Borrower pays ADB interest with the interest it receives from the dollar deposit. The Borrower pays the “swap” bank interest on it’s rupee bonds out of it’s cash flow (there is a rupee interest payment risk here to the swap bank but it could partially off set any noninterest payment by the Borrower, with the dollar interest payment. This could lead to, in a worst case scenario, the Borrower defaulting on it’s interest payment to ADB, which could involve ADB calling on it’s guarantee from the Government of India). 7. Step 6. Principal payments on the ADB loan, the rupee bonds, and the maturity periods on the dollar deposit (at interest adjustment dates) also match. Thus, when the principal payment is due on the bonds, once the swap bank receives payment, it releases an equivalent amount of dollars to the Borrower, who then pays ADB. 8. Step 7. The transaction is repeated with the swap bank, for each drawdown of the ADB loan by the Borrower. The “swap“ bank could change, depending on negotiations between these parties regarding the rupee borrowing cost, but with any swap bank, the interest rate on the dollar deposit and the ADB loan would remain the same, as would the interest and principal payment dates continuing to match the dollar and rupee payments. New dollar deposit would secure the new rupee bond issuance. 9. Step 8. This system allows the Borrower to obtain 20-year rupee funding, which is currently not available in the domestic market. It also allows the Borrower to obtain the most attractive rates at the existing market. It allows the swap bank to obtain long-term dollars that it 56 Appendix 8, page 2 may need to service it’s clients and/or treasury needs, which would otherwise not be available and at attractive (ADB) rates. There is no $/Re exchange rate risk, minimal, if any dollar interest rate cost/risk, and no principal payment risk to any party involved in the transaction. Ultimately in any worst case scenario, the Government would have to pay ADB under it’s guarantee and thus have exposure to the Borrower. Figure A8.1: Flow Chart of Representative Financing Structure ADB (b) Guarantee for $100 million loan GOI (f) Dollar loan repayment to ADB (h) Repayment of ADB loan (a) Loan of $100 million in dollars (h) (c) Dollar placement (d) Rupee equivalent of ADB loan Swap Borrower A Counter (e) Redemption of bonds/repayment of loan in rupees Party (g) Pay equivalent dollar deposit of (e) 57 Appendix 9, page 1 SUMMARY OF SURVEY OF CFIs AND NGOs AND THEIR MEMBERS ON HOUSING FINANCE AND DELIVERY MECHANISMS A. Introduction 1. A major component of the Project will be to provide housing finance to low-income households through community finance institutions (CFIs) working in partnership with Housing and Urban Development Corporation (HUDCO). Although general information exists on the housing finance needs of economically weaker section (EWS) and low-income group (LIG) households, there is only limited information about the characteristics and housing finance needs of CFI members likely to participate in the Project. The current understanding of housing finance needs and preferred loan conditions for low-income households in both urban and rural areas needs to be improved. A rapid coordinated set of consumer surveys was implemented during the feasibility study to provide this information. A summary of the survey results and analysis is presented here. 1. Survey Objectives 2. The basic objectives of the surveys of CFIs, nongovernment organizations (NGOs), and low-income households were (i) to assess low-income households' socioeconomic characteristics, their housing needs, and their potential demand for housing finance in different areas of the country; (ii) to develop an understanding of low-income households capacity to absorb housing finance; (iii) to identify existing sources and constraints related to housing finance for low-income households; (iv) to explore different forms of collateral for low-income housing loans; (v) to assess technical and capacity-building support required for loan-financed housing improvements; and (vi) to assess the impact of improved housing on poverty reduction and the condition of women. 2. Brief Description of the Coordinated Surveys 3. The coordinated set of consumer surveys included a sample household survey, case studies, six consumer workshops, and three NGOs and CFI workshops in different parts of the country. a. Sample Household Survey 4. A sample household survey was designed to obtain information about EWS, LIG, and middle-income group (MIG) households from the members of six major CFIs. These CFIs included DHAN Foundation, SHARE, SPMS, SIDA, Indcare Trust, and Shramik Bharti. The selection of households to be surveyed was based on a purposive sampling approach to expedite survey implementation and to ensure that adequate data were obtained about the different household types. The planned (and actual) distribution of the 500 (512) surveyed households were as follows: By Income By Location By Previous Access to Housing Loans EWS - 200 (192) Urban - 250 (280) Borrowers - 100 (106) LIG - 200 (238) Rural - 250 (232) Nonborrowers - 400 (406) MIG - 100 (82) 58 Appendix 9, page 2 5. The selected distribution of survey households has produced a very good cross-section of potential project beneficiaries. Survey households included rural and urban self-help group (SHG) members and borrowers, slum dwellers, and home workers, all with an ample representation of women. The survey questionnaire focused on obtaining relevant information on the housing need, demand, and absorptive capacity of these households. The DHAN Foundation was responsible for overall coordination and implementation of this survey. b. Household Case Studies 6. Fifty household case studies were undertaken as the second part of the set of surveys. The purpose of the case studies was to deepen current understanding about the characteristics and housing situation of low-income households, their potential demand for housing finance, and the conditions under which the provision of housing finance would be most effective. The purposive case study sample included 18 EWS households, 24 LIG, and 8 MIG. A professional team from DHAN Foundation coordinated the implementation of these surveys with help from each of the participating CFIs. c. Consumer Workshops 7. One-day consumer workshops were held in Kanpur, Delhi, Kottayam, Tirupati, Madurai, and Hyderabad at the end of the survey fieldwork. Participants at these workshops were urban and rural households from the three income categories of EWS, LIG, and MIG. They included borrowers and potential borrowers of housing finance within each income group. Financial representatives from local housing finance institutions (HFIs) attended two of the workshops. Workshop discussions focused on the relevance of microfinance to housing finance, preferred housing products, consumer experience with current lending terms and conditions, issues of collateral and security, importance of housing as a workplace, forecasting of demand for housing finance, establishing the need for technical and material support, and identifying improvements to loan processing. d. NGO and CFI Consultation Workshops 8. Three one-day consultation workshops were held with NGOs and CFIs in Calcutta, Chennai, and Mumbai. A total of 90 NGO and CFIs attended the three workshops. The purpose of the workshops was to determine potential demand for housing finance through CFIs and the amount of bulk lending required through the HUDCO lending window, and to discuss measures to increase the flexibility and effectiveness of this type of lending. B. Key Findings from the Sample Household Survey 9. Results from the sample household survey include (i) data on the socioeconomic profiles and characteristics of the client population; (ii) an assessment of the housing need, demand, and absorptive capacity of potential client households as expressed through their willingness and ability to make investments, use credit, and improve their housing situation; and (iii) an assessment of the impact of improved housing conditions on the reduction of poverty and situation of women. 1. Socioeconomic Profiles and Characteristics of the Client Population 10. Survey activities focused on CFI members who will make up the majority of low-income households borrowers under the Project. The survey sample included households from the 59 Appendix 9, page 3 three income groups of EWS, LIG, and MIG; households from urban and rural areas; existing borrowers and potential borrowers of housing finance; households working at home; private and public sector workers; etc. The broad geographic base of the survey has provided a good overall profile of potential project beneficiaries. a. Average Household Size 11. The average household size for the entire sample was 4.5. Basically similar results were obtained for all income and geographic categories except LIG households in rural areas. The average household size for this group was substantially higher at 5.9. At the same time, MIG households in rural areas had the lowest average household size of 4.0. One possible explanation for this situation is that the larger household size enables some rural EWS households to become LIG due to additional family workers. The larger household size among rural LIG also had an impact on the average size of borrower households (5.2) in this group. b. Age of the Head of Household 12. Survey results showed that there was little difference between the average age of household heads of borrower and potential borrower households. Roughly a third of the household heads in both categories were less than 36 years old. Another 36 percent of the household heads for borrowers and 40 percent for potential borrowers were between 36 and 40 years of age, the most common age group. Roughly 11 percent of the household heads in both groups were more than 50 years old. c. Primary Occupations 13. The most common primary occupations for surveyed household heads in rural areas were self-employed (at 33 percent) and construction/casual labor (at 28 percent). These same two categories were important for EWS households in urban areas (at 28 percent and 20 percent, respectively) along with private sector salaried workers (at 26 percent); self-employed households included all types of shop owners (petty shops, teashops etc), vendors (fruits, vegetables, flowers etc.) and other occupations such as tailoring, woodworking etc. Private sector salaried workers included those working in private establishments that ranged from grocery stores to large private enterprises. Service providers like barbers, dhobis, etc. were also included in this group. Most MIG households in both rural and urban areas were self-employed (41 percent in rural and 30 percent in urban areas) or salaried (28 percent with the private sector in rural areas and 23 percent in urban areas). An additional 28 percent of the MIG households in urban areas were working for the Government. As a result, some 51 percent of MIG households were salaried and had relatively stable employment. Only 23 percent of the EWS households and 19 percent of LIG households in rural areas were involved in any form of agriculture (either as laborers or farmers of their own land). d. Number of Workers per Household 14. Roughly 64 percent of the surveyed households had two or more working members, including 41 percent with two and 23 percent with three or more. Almost 70 percent of the borrower households had two or more working members with roughly 30 percent having three or more. The percentage of households with two or more workers was highest for LIG in urban areas (87 percent) followed by LIG in rural areas (83 percent). LIG households in these areas also had the highest percentage of households with three or more workers. The fact that EWS borrowers in urban areas had one of the highest percentages of households with only one worker (55 percent) was a surprise. 60 Appendix 9, page 4 e. Monthly Household Incomes 15. The average monthly income of all surveyed households was around Rs3,400. While there was little difference in income between EWS borrowers and potential borrowers in rural areas, EWS borrowers in urban areas appeared to have slightly higher incomes than potential borrowers in the same income group. EWS and LIG borrowers also appeared to have incomes that were almost 5 percent higher than the overall sample for the same income groups. Survey results showed that some 84 percent of EWS borrower households had monthly incomes between Rs1,500 and Rs2,500, while 52 percent of LIG households had incomes between Rs2,500 and Rs4,500. Some 88 percent of lower MIG households had incomes between Rs5,501 and Rs6,000. f. Monthly Household Expenditures 16. The average monthly expenditure for all surveyed households were close to Rs2,500. As expected, significant differences were found in monthly expenditures for households living in urban and rural areas. Cheaper access to food in rural areas and more expensive transportation costs in urban areas were undoubtedly two of the major reasons for these differences. 17. Roughly 80 percent of EWS households in rural areas and 54 percent of those in urban areas had monthly expenditures less than Rs1,500. The remaining EWS in both geographical areas had monthly expenditures less than Rs2,500. The difference in monthly expenditures for LIG households was more pronounced with a much higher percentage of LIG households in rural areas at the lower end of the scale (i.e., 82 percent with less than Rs2,500 expenditures per month compared with only 34 percent for urban LIG). Again, while 65 percent of the LIG households in urban areas had monthly expenditures between Rs2,500 and Rs4,500, this occurred for only 16 percent of the LIG households in rural areas. A more even situation was found for MIG households, with 21 percent in rural areas having expenditures greater than Rs4,500 compared with 36 percent in urban areas. 18. While only very limited household income and expenditure data were obtained from the survey, the results indicate a rather consistent pattern that provides useful insights into the financing of housing for low-income households. Households across all three income groups appear capable of dedicating an important amount of their monthly savings to the repayment of a housing loan, especially if it follows previous loans for the improvement of income. 2. Housing Need, Demand, and Absorptive Capacity of Potential Client Households 19. The conversion of housing need into demand and the subsequent engagement of a housing loan depend on a number of conditions that include the household’s socioeconomic situation, its security of tenure and period of residence, existing housing conditions, previous borrowing experience, and potential loan conditions and terms. a. Security of Tenure 20. The overall percentage of homeownership within the survey sample was roughly 87 percent. Little difference occurred in the degree of homeownership among the three income groups. A somewhat higher percentage of homeownership occurred among EWS households in rural compared with those in urban areas. There was also a higher percentage of homeownership among borrowers than among nonborrowers. 61 Appendix 9, page 5 21. Some 92 percent of all borrower households owned their house with slightly higher percentages occurring for rural and EWS households. The percentage of home ownership for nonborrower households was 85 percent. The most notable difference occurred in urban areas where only 81 percent of potential borrower households owned their houses compared with 91 percent of the borrowers. The fact that 9 percent of urban borrowers were renters may be due to the fact that they were still in the process of completing their house. Roughly 30 percent of the borrowers that owned their housing units did not have documents legitimizing their occupation of the land. Another 24 percent were assigned patta, 31 percent had bought their plots, and the remaining 15 percent occupied their plot by right of inheritance. There were no EWS borrowers in rural areas without proper land documentation. Almost 50 percent of the EWS borrowers in urban areas, however, were without such documentation. 22. Conditions were considerably different for potential borrower households. There was a much lower percentage of households living on their land without documents (14 percent for nonborrowers compared with 30 percent for borrowers) and a much higher percentage of households that had inherited their land (30 percent for nonborrowers compared with 15 percent for borrowers). The difference was most evident in urban areas where 14 percent of the borrowers owned their land through inheritance as opposed to 32 percent of the nonborrowers. Other than this “flip” between inherited and land occupied without documents, the remaining percentages for plot tenure was very similar for borrowers and nonborrowers. b. Period of Residency 23. Results from the survey show that the amount of time that a household has lived in its house is not a major factor in the decision to borrow for housing. Some 38 percent of the borrowers in the overall sample had lived in their houses for less than 10 years compared with 44 percent for potential borrowers. At the same time, 48 percent of the borrowers had lived in the their houses for more than 15 years compared with 41 percent for nonborrowers. In terms of income groups, a higher percentage of EWS and MIG households in rural areas had lived in their houses for more than 20 years than LIG households. The situation in urban areas was reversed. More than half the LIG households had been living in their houses for more than 20 years. The situation for potential borrowers was the same, with a greater percentage of EWS and MIG households living in their houses for more than 20 years than LIG. c. Housing Conditions 24. Close to three quarters of the survey households lived in houses with tile or reinforced concrete roofs. This included a slightly higher percentage in rural areas compared with urban areas due perhaps to a greater sense of land tenure and security. At the same time, over 80 percent of the borrowers lived in housing with tile (semipucca) or reinforced concrete (pucca) roofs in basically equal proportions. Only about 20 percent were living in houses with thatched (kutcha) roofs. 25. Significant differences occurred in the type of houses occupied by potential borrowers. Some 45 percent of the EWS category lived in houses with thatched roofs, while 43 percent lived in houses with tile roofs. Roughly 25 percent of LIG households and 8 percent of MIG also lived in houses with thatched roofs. The average house size for the overall sample was 360 square feet (or an average of 80 square feet per person). Houses in rural areas were roughly 20 percent larger than those located in urban areas. There was little difference in house size between borrowers and nonborrowers within the different income and geographical categories. The biggest difference occurred between houses inhabited by the LIG and MIG categories. 62 Appendix 9, page 6 26. Slightly more than half of the surveyed households had in-house toilet facilities. The overall percentages for water supply and electricity were 45 and 74 percent respectively. There was little difference in the provision of these services between urban and rural areas. Given the importance of electricity and other basic services to the well-being of the household, housing construction and needed service improvements should be included in the same loan. d. Borrowing Experience 27. Borrowers became interested in obtaining housing loans for a number of reasons. The most common reasons were (i) an increase in household size, (ii) improved financial position of the household, and (iii) intrafamily disputes. The overwhelming majority of surveyed households had taken microfinance loans from informal sources. Most of these loans were used to meet consumption and social function needs. While EWS loans from money lenders were distributed over consumption, family function, medical, emergency, income generation, and other uses, more than half of these loans were used for medical reasons and family functions. Moneylender loans to LIG households were used mainly for consumption and family functions. 28. Results from the survey showed that borrowers of housing finance generally had taken more microfinance loans from a variety of sources than potential borrowers. In particular, EWS and LIG borrower households had clearly been more active borrowers for nonhousing purposes than their nonborrowing counterparts. EWS housing borrowers had taken 0.62 loans per household from moneylenders compared with 0.39 loans per household for those EWS households that had not borrowed for housing. Similarly, the ratio of loans through SHGs for EWS borrowers was 1.43 loans per household compared with only 0.96 for potential borrowers. SHG loans for LIG households were 1.17 for borrowers and 0.91 for potential borrowers. For all loans combined, the ratio for EWS borrowers was 2.19 loans per household compared with 1.51 loans per potential borrowers. For LIG households the ratios were 1.83 for borrowers and 1.42 for potential borrowers. Surprisingly, MIG households were the least active borrowers with only 0.67 loans per household for those that had borrowed for housing and 0.86 loans for those that had not. 29. Although little information can be derived from the survey concerning the percentage of households interested in borrowing for housing due to its purposive sample, the sources, frequencies and uses of housing loans can be examined. Close to 78 percent of those borrowing for housing had borrowed only from the CFI. Another 8 percent had borrowed from moneylenders, with roughly half these households in the EWS group and the other in LIG. e. Loan Conditions 30. The survey questionnaire indicated four uses of the housing loans. They include (i) small-scale improvement and upgrading; (ii) additions or expansion; (iii) new construction or rebuilding of an existing house; and the purchase of an existing house. While surveyed EWS households in urban areas used their housing loans more or less equally for improvement/upgrading, housing unit expansion, and new construction, the clear majority of other urban and rural borrowers did so for new construction. Overall, 57 percent of all borrowers used their housing loans for new or major construction. In rural areas, 75 percent of EWS borrowers, 78 percent of LIG, and 86 percent of MIG used their loans for this purpose. In urban areas, the respective percentages were 59 percent, 65 percent, and 64 percent. Roughly 19 percent used their loans for improvement and upgrading, while another 15 percent undertook housing additions and expansion. Only 2 of the 106 borrowers in the survey used their loan to purchase an existing house. 63 Appendix 9, page 7 31. Some 87 percent of all EWS borrowers obtained their loans from their CFI with only one household obtaining a loan from a bank. The remaining borrowers had obtained loans from moneylenders. While all of the LIG borrowers had obtained loans through CFIs, LIG borrowers in urban areas used a wider range of sources. Of these borrowers, 65 percent had obtained a loan from CFIs; 17 percent from moneylenders; and the remaining households from housing boards, banks, and other sources. Close to 71 percent of MIG borrowers in rural areas had obtained loans from housing boards or the government. In urban areas, 55 percent of MIG borrowers had obtained a housing loan from CFIs, 18 percent from housing boards, 9 percent from banks, and the remaining 18 percent from other sources. For MIG borrowers the overall percentages were 44 percent from CFIs, 22 percent from housing boards, 6 percent from banks, 17 percent from the Government, and 11 percent from other sources. Altogether, only three of the borrowers surveyed, all of whom lived in urban areas, had obtained a housing loan from a bank. 32. The sizes of loans borrowed by households in all income categories ranged from less than Rs10,000 to more than Rs100,000. Approximately 37 percent of the LIG borrowers obtained a loan for less than Rs10,000, while close to 21 percent of the EWS borrowers obtained a loan for more than Rs50,000. Altogether, 49 percent of EWS, 52 percent of LIG, and 28 percent of MIG borrowed for less than Rs15,000. Four interest rates were predominant: 15 percent (39 percent of the loans), 18 percent (11 percent), 24 percent (15 percent), and greater than 24 percent (19 percent). More than half the EWS borrowers and 29 percent of the LIG had obtained loans with annual interest rates of 15 percent. 33. While it might be expected that EWS borrowers would have lower monthly payments, the percentages of borrowers paying less than Rs250 per month actually increased with an increase in income. Survey results indicate that 30 percent of EWS, 37 percent of LIG, and 39 percent of MIG borrowers paid less than Rs250 per month. Similarly, 28 percent of EWS borrowers, 39 percent of LIG, and 28 percent of MIG were making monthly payments between Rs250 and Rs500. Surprisingly, some 28 percent of EWS households were making monthly payments greater than Rs1,000, which was virtually the same percentage as that for MIG borrowers. All of the EWS and LIG borrowers were making either weekly or monthly payments. Slightly more than half made payments on a weekly basis. Some 80 percent of the MIG borrowers were also making weekly or monthly payments. Payments by other MIG borrowers were either annual or based on other methods of payment. f. Collateral 34. In terms of the collateral, 55 percent of all borrowers provided a form of traditional collateral for their housing loan. Of those 34 percent provided a land deed, 4 percent provided a possession certificate, and 7 percent provided another form of guarantee. Consequently land ownership documents were the most common form of collateral even for informal finance. The percentages of borrowers able to provide collateral were virtually the same for all income categories. The ability to provide acceptable collateral as well as the form of collateral provided appeared to have little relationship to the category of income. 35. Slightly more than half of the borrowers (52 percent) felt that group pressure was also an effective form of collateral. Group pressure was strongest for EWS borrowers, 60 percent of which felt that such pressure was adequate to ensure the repayment of loans. Slightly less than half the borrowers felt that pressure from the CFI was strong enough to guarantee repayment, with EWS borrowers once again the highest percentage at 53 percent. The majority of respondents felt that only one form of collateral should be required and that it should not be large cash deposit. 64 Appendix 9, page 8 g. Loan Approval 36. In terms of loan approval, 38 percent of EWS borrowers were able to have their loan approved in less than a month and 91 percent in less than four months. For disbursal, the percentages were 45 percent for less than a month and 96 percent for less than four months. Percentages for all the other income groups were similar. Only 30 percent of all borrowers claimed to have experienced any problems in the approval or disbursal of their loan. Most of these problems were not major. h. Borrowers’ Own Contribution 37. Cash was the most frequent contribution made by borrowers to the construction of their house. Roughly 76 percent of the borrowers contributed their own cash to supplement their housing loan. The percentage of households putting in cash ranged from 70 percent for EWS to 78 for LIG, and 89 for MIG. Of those EWS households, 45 percent contributed less than Rs10,000. The situation was much different for the two other income categories. Some 34 percent of LIG households and 75 percent of MIG households contributing cash put in more than Rs40,000. Roughly 41 percent of the borrowing households contributed their own labor to the construction of the house. The contribution of labor according to income group showed 43 percent for EWS, 51 percent for LIG, and 11 percent for MIG. In almost every case, the value of self-help labor was considered to be less than Rs10, 000. 38. While the recycling of building materials can be an important cost-cutting approach, only about 15 percent of the borrowers made any contribution in kind to the construction of their house. Only about 27 percent of the borrowing households obtained building materials from the CFI, with the percentage for different income groups ranging from 25 percent for EWS households to 33 percent for MIG. Similarly, about 22 percent of the borrowers sold some of their assets to finance the cost of construction. The percentage was slightly higher in rural (29 percent) that in urban areas (18 percent). i. Supplemental Loans 39. Roughly half the borrowers engaged an additional loan to finance the construction of their house. Additional loans were most common when the primary loan was less than Rs 20,000. Roughly 61 percent of the borrowers of this size of loan obtained an additional loan, the majority of which ranged between Rs5,000 and Rs35,000. About a quarter of the households obtaining a loan for Rs5,000 or less obtained another loan for Rs5,000 or less as well. Only about 26 percent of the borrowers were interested in obtaining a maintenance loan once construction of their house was completed. 3. Impact of Improved Housing Conditions on the Reduction of Poverty and Situation of Women 40. CFI housing loans are intimately linked to the reduction of poverty through support to provide home work-places and working conditions for women, and the empowerment of women through the self-help group (SHG) approach to decision making and use of household resources. a. Home-Work Places 41. Slightly more than 31 percent of all households in the survey used their home as a place of work. This includes more than half the MIG borrowers in both urban and rural areas. Many 65 Appendix 9, page 9 of these households may have been able to use their home workplace to raise their category of income. Among borrowers, EWS households had the lowest percentage of households using their house as a workplace at 17 percent. Many EWS households have very poor quality houses that would require substantial improvement to serve as a place for income-generating activities. Further the survey revealed that close to 30 percent of rural borrowers of housing loans were using at least part of their house as a place of work. Some 80 percent of these rural home- workplaces were used for the rearing of domestic livestock. In urban areas, close to 36 percent of the borrowers were using their houses as workplaces for urban functions such as tailoring, petty shops, wood carving, etc. 42. Some 60 percent of these home-workplaces involved the use of a room, 16 percent involved the use of open space near the house, and another 14 percent involved the use of the kitchen. The use of housing as a workplace is particularly important for women borrowers, 60 percent of whom are home-based workers. Some of the work-related activities that typically take place in the home include mat weaving, broom making, tailoring, embroidery, small-scale food processing, petty commerce, temporary storage of goods, etc. 43. The most common home-based work in the survey involved small-scale shops, tailoring, and the holding of animals, which combined made up roughly 70 percent of the total. Results from the survey showed that improvement to housing and home workplaces generated an increase in household income between Rs200 and Rs1,000 per month with the average increase about Rs500. Almost 60 percent of the home-based workers in the survey were women. b. Impact on Women Workers 44. Some 48 percent of the survey households had at least one woman member working for cash. The LIG category had the highest percentage with 58 percent. The overall percentages for EWS and MIG households were 35 and 46 percent respectively. For borrowers, the percentage of households with women workers was 58 percent with 81 percent of these households having only one working woman. The presence of a working woman household member varied considerably between rural and urban areas. The percentage of borrower households in rural areas with a woman worker was roughly 76 percent, while that for urban areas was only 43 percent. LIG borrower households in both urban and rural areas had a slightly higher percentage of working women than EWS and MIG. 45. Results from the survey seem to indicate that rural households with at least one working woman are more likely to borrow for housing than those without. This is true for all three income groups. While the percentages of households with working women in urban areas are somewhat higher for EWS and LIG borrowers that difference is not substantial. 4. Technical Capacity and Support Provided and Needed 46. Roughly 34 percent of the borrowers obtained technical and/or management support for the construction of their house. The percentage was slightly higher for LIG households (41 percent) and slightly lower for MIG households (22 percent). The percentage for EWS was close to the overall average at 32 percent. The importance of technical support was clearly demonstrated during the field work with SPMS. Houses that were built with the help of the SPMS engineer were clearly better built and less costly than those built without such assistance. 66 Appendix 9, page 10 47. Technical support can help low-income household borrowers in the design, budgeting, and cost control of construction. It insures sound construction at reasonable and predictable cost. Low-income household borrowers of housing finance recognize the value of this service and are basically willing to pay between Rs200 to Rs600 per house, or about 1 percent of their loan amount, for this service. It would be in the interest of all parties if CFIs were equipped with a housing cell to provide this support. Survey results also indicated a preference for the bulk supply of materials from the CFIs (or NGOs); this would save time and reduce the costs of materials and their transport. C. Results from the Housing Case Studies 48. A series of case studies were implemented to deepen the understanding of EWS, LIG, and MIG needs for housing finance. The basic objective of the case studies was to more clearly understand the qualitative factors affecting the choice of housing products to be financed, the graduation of households from housing need to housing finance, the provision of support services and the impact of housing finance. The basic socioeconomic characteristics of case study households were very similar to those of households in the sample survey. 49. The most important result from the case studies was that they provided additional information on the types of housing finance available to low-income households and their preferences. The main sources of housing finance are all informal. The SHGs/federations have been the most widely used sources of housing finance in the southern and Delhi regions. SHG members usually approach their group or the parent CFI for their housing loans. Those employed in permanent jobs also can take loans from their employers. Chit funds are another widely used source of housing finance in the south. Table A9 illustrates the different loan conditions that case study households obtained from informal sources in borrowing for housing. Table A9: Loan Conditions of Different Housing Finance Providers Interest Repayment Repayment Security/Collateral Product Rate (%) Period (years) Schedule Housing Society 12 15 Monthly Land deed Weekly to Land deed, group NGOs 12 - 18 3-5 monthly security Monthly to Land deed (agri and Money Lender 36 - 60 2-3 quarterly others) Relatives None Pawn Broker 60 - 120 2–3 Flexible Jewelry, utensils NGO= non-government organization. 50. Household preferences for the types of housing finance and lenders were influenced by (i) formalities and procedures involved in obtaining the loan; (ii) loan terms and conditions including the rate of interest, repayment period, and collateral requirements; (iii) time required to process the loan; and (iv) rigidity in repayment schedules and terms. 51. The average amount of housing finance required to expand a housing unit was estimated to be Rs20,000 while the average cost of new construction was estimated to be 67 Appendix 9, page 11 Rs50,000. SHGs and CFIs were the preferred source of housing finance for their members. Case study respondents felt that housing finance terms should include a rate of interest of 12 to 18 percent with monthly payments over a period of 3 to 5 years. D. Results and Observations from the Consumer Workshops 52. Consumer workshops were held at the end of the sample survey and case study work in each of the six survey areas. The intention of these workshops was to expand the issues and ideas raised during survey work through open discussion. A significant part of the workshop was dedicated to identifying acceptable requirements for accessing a housing loan, the types of loan products desired and their estimated costs, and acceptable conditions of a housing loan from a CFI. 53. Generally agreed upon SHG and member requirements to obtain a housing loan from CFIs were: (i) for the SHG, at least 2 to 3 years of microfinance operation and a repayment performance of 90 to 100 percent; and (ii) for the member, 2 to 3 years membership in the SHG, savings accumulation of Rs3,000, successful use and repayment of 2 to 3 loans for income generation, repayment record of at least 95 percent for past loans, expressed housing demand, low cash outflow to service existing debt and adequate repayment capacity. 54. The type and estimated costs of desired housing products included: (i) the purchase of a plot for Rs5,000 to Rs10,000 for EWS households; (ii) purchase or construction of a new house for Rs45,000 for EWS, Rs70,000 for LIG and Rs100,000 for MIG; (iii) repairs, improvements, and additions for Rs25,000; redemption of a house site and house for Rs20,000: workplace improvements for Rs5,000 to Rs20,000; and construction of toilets, electricity, water facilities, etc. for Rs5,000. E. Results of the NGO/CFI Consultation Workshops 55. A major objective of the NGO/CFI consultation workshops was to determine an idea of the potential demand for housing loans through CFIs. The 30 participants at the consultation workshop in Calcutta expressed a potential demand for bulk lending from HUDCO of roughly $5 million. The 45 participants at the consultation workshop in Chennai expressed a much greater need for roughly $40 million. Some of the fast-track CFIs, which were not included as participants in the consultations (including SIDA, SHARE, SEWA and DHAN Foundation), have expressed a similar need for around $50 million. Clearly not all of the CFIs in the consultations have the capacity to handle large loans. Nevertheless, a concerted effort was made to develop reasonable estimates of what would be required once the new HUDCO lending window is in place. 68 Appendix 10 AFFORDABILITY ANALYSIS 1. An affordability analysis of loans to low-income households through community-based finance institutions (CFIs) under part A of the Project is presented in Table A10.1 and Table A10.2 summarizes an affordability analysis of direct lending under part C of the Project. Table A10.1: Affordability Analysis Part A - Lending through CFIs Price Monthly Loana % Household income Repayments (Rs) (Rs) EWSb LIGc MIGd 10,000 254 10 5 4 15,000 381 15 7 5 20,000 508 20 9 7 25,000 635 25 12 9 30,000 762 30 14 11 45,000 1,143 46 20 16 50,000 1,270 51 22 18 80,000 2,031 81 36 29 100,000 2,539 102 46 36 EWS = economically weaker section, LIG = low-income group, MIG = middle-income group. a Repayment period is assumed to be 15 years at 13 percent. b EWS = up to income below Rs2,500 per month. c LIG = income between Rs2,500 and Rs5,700 per month. d MIG = income between Rs5,700 and Rs7,000 per month. Note: The shaded areas show the loan amounts affordable for the different income groups. The affordable percentages depend on the income group (EWS<15%, LIG<20%, MIG<30%) however in the direct lending component, Borrowers consider that households can spend up to 30% of their income for repayment of housing loans. Table A10.2: Affordability Analysis Part C - Direct Lending Price Monthly Loane % Household income Repayments c (Rs) (Rs) EWSb LIG MIGd 50,000 633 25 11 9 90,000 1,139 46 20 16 100,000 1,265 51 22 18 125,000 1,582 63 28 23 165,000 2,088 84 37 30 175,000 2,214 89 39 32 200,000 2,530 101 44 36 EWS = economically weaker section, LIG = low-income group, MIG = middle-income group. a Repayment period is assumed to be 15 years at 13 percent. b EWS = up to income below Rs2,500 per month. c LIG = income between Rs2,500 and Rs5,700 per month. d MIG = income between Rs5,700 and Rs7,000 per month. Note: The shaded areas show the loan amounts affordable for the different income groups. The affordable percentages depend on the income group (EWS<15%, LIG<20%, MIG<30%) however in the direct lending component, Borrowers consider that households can spend up to 30% of their income for repayment of housing loans.
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