Finance Project Icici Bank - PDF by xgw24599

VIEWS: 290 PAGES: 75

Finance Project Icici Bank document sample

More Info
									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.

								
To top