Project on Housing Loan

Project Report

Individual House Financing

Summer Internship

AT

Housing and Urban Development

Corporation Ltd.

By:KULEIN CHAUHAN

(SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES)

Objective of the Study

The main objective behind the preparation of this project is to get a deep understanding

of the procedure adopted to sanction a loan for financing individual housing projects and

parameters considered by Housing and Urban Development corporation Ltd..

ACKNOWLEDGEMENT

I take this oppurtunity to thank all those people who have directly or indirectly helped me in completing this project.

I am grateful to Mrs.Neena Jain, Chief Manager (HUDCO NIWAS ) & Mr.Nimit Jain under whose guidance I undertook this project,which has been a great learning experience and given me an opportunity to understand the dynamics of project financing.

And my sincere thanks to the finance department of HUDCO for providing their valuable time and facilitating the completion of the project by ensuring the availability of the necessary resources.

OBJECTIVES

To provide long term finance for construction of houses for residential purposes or finance or undertake housing and urban development programmes in the country.

To finance or undertake, wholly or partly, the setting up of new or satellite town.

To subscribe to the debentures and bonds to be issued by the State Housing (and or Urban Development) Boards, Improvement Trusts, Development Authorities etc., specifically for the purpose of financing housing and urban development programmes.

To finance or undertake the setting up of industrial enterprises of building material.

To administer the moneys received, from time to time, from the Government of India and other sources as grants or otherwise for the purposes of financing or undertaking housing and urban development programmes in the country.

To promote, establish, assist, collaborate and provide consultancy services for the projects of designing and planning of works relating to Housing and Urban Development programmes in India and abroad.

VISION

"TO BE AMONG THE LEADING KNOWLEDGE HUBS AND FINANCIAL FACILITATING ORGANISATIONS FOR HABITAT SETTLEMENT

MISSION

"TO PROMOTE SUSTAINABLE HABITAT DEVELOPMENT TO ENHANCE THE QUALITY OF LIFE"

MANAGEMENT TEAM

FUNCTIONAL DIRECTORS

Shri T Prabakaran

Chairman & Managing Director (Additional Charge)/Director Finance

Ph: 011-2469 0478, Fax: 011-24620745

Email: [email protected]

GOVT. NOMINEE DIRECTORS

Dr P K Mohanty

Director, HUDCO and Additional Secy. (JNNURM) & Mission Director (BSUP), Ministry of Housing and Urban Poverty Alleviation

Ph: 011-23061419, Fax: 011-23061420

Email: [email protected] & [email protected]

Smt Sudha Krishnan

Part time Official Director HUDCO, Joint Secy. & Financial Advisor, Ministry of Housing and Urban Poverty Alleviation

INDEPENDENT DIRECTORS

Shri Raj Pal Singh Solanki

Part-time Non Official Director,

Chartered Accountant

Ph: (O) 25712813, 32966756 (R) 45621986

Email: [email protected] Fax: 25781744

mailto:[email protected]




Shri Dinesh Mahajan


Environmentalist & Process Engineer

Ph: 9814006928, 9417021828, 9818116060, 0186-2221828, 3290228, Fax: 0186-2221828

Email: [email protected] & [email protected]

Smt Nirmala Samant Prabhavalkar


Advocate High Court Mumbai, Ex Mayor of Mumbai, Ex Chairperson Maharashtra State Commission for Women

Ph: 022-26455858


Dr Radha Binod Barman

Part-time Non Official Director, Ph: 9820059122

CHIEF VIGILANCE OFFICER

Shri T K Sanyal

Chief Vigilance Officer

Ph: 24624447, Fax: 24365317


EXECUTIVE DIRECTORS





Shri R K Khanna

Sr. Executive Director – (Resource Mobilisation including PDS, Banking & Investment, NHB and HSMI)Email: [email protected]

Shri A K Kaushik

Executive Director FinanceHyderabad Regional Office

Ph:040-23235759


Smt Manorama Dutta

Executive Director – (SBU for value added real estate & other housing)

Ph: 24647792, Fax: 24620019


Shri K Subramanian

Executive Director – Chennai Regional Office

Ph: 044-28529500, 044-28412711


Dr D Subrahmanyam

Executive Director - Kolkata Regional Office Email: [email protected]






Dr. P Jayapal

Executive Director – (Urban & Regional Planning & SBU for Social Housing-Core Infrastructure, P&SU)

Ph: 24620353


Shri S K Chaudhary

Executive Director Projects (Administration & JNNURM)

Ph: 24627321, Fax: 24627439

Email:[email protected] & [email protected]

Shri P K Aggarwal

Executive Director Finance

Shri Vivek Kumar

Executive Director – (Internal Audit)

Ph: 24627396, Fax: 24690804


Shri M Balakrishna

Executive Director – Finance (SBU for Emerging Sector, Industry, Telecom & other infrastructure projects)

Ph: 24627093Email: [email protected]






Shri H K Dubey

Executive Director - (Human Resource Development, Operations, SBU for Power & Transport, Special Projects & DMRC)

Ph: 24647121, Fax: 24643675


Shri S S Gaur

Executive Director -Law & Central Public Information Officer, Nodal Officer (Public Grievances)

Ph: 24651880, Fax: 24648428


Shri R K Safaya

Executive Director - Works & Disposal

Ph: 24651675, Fax: 24648367


Shri Harender Verma Deputy Chief (F)/Company Secretary

Tele-fax: 24615534Email: [email protected]

SECTORAL OVERVIEW

Post colonial India was traditionally a heavily planned and regulated economy with predominantly directed investment. The financial sector was subject to a variety of allocation and interest range regulations and only in the past decade has really progress been made in deregulation. Housing was not considered a priority sector, and, in fact was looked upon as a social good. In this environment, investment in low and moderate-income (LMI) housing was directed thought the housing and urban Development Corporation (HUDCO) a government owned entity.





India’s first private sector retail housing finance institution, the housing development and finance corporation (HDFC), was formed in 1978.Until then there was effectively no market rate housing finance available. HDFC steadily grew into a major force in this sector, despite the control credit allocation structure in the country. Other private sector competitors began to appear in 1983. In 1988, an apex institution, the national housing bank was created

In the early 1990s there were essentially three strands of financing flowing into LMI financing. The first and the largest were the continuing flow from HUDCO at below market prices. The major problem with this process was not just the non-sustainability of the pricing and rates, but the high degree of political intervention and default that was tolerated. The second was a significant amount of lending to moderate-income households by HFCs, which were required by NHB, to cross subsidise small loans by charging higher rates on bigger loans. Although there was evidence that many of these lower rate, smaller loans were taken by relatively higher income households, moderate income borrowers did receive some benefit from this system. The third was the flow of funds and technical assistance to NGO’S. These amounts remained small and most such institution struggled under the burden of limited management capacity.

From 1993 onwards, the pace of deregulation has picked up, there was a slowing of the growth of NHB refinance, which has supported the cross subsidization by HFCs. A shift in fund raising efforts towards the attraction of fixed deposits at market rates from the public eliminated the capacity of private HFCs to continue cross subsidization. Interest rates of all kinds were allowed to be freely set and more and more lenders and borrowers accessed a free financial market place for funding, rather than a political market place of directed credit.

The housing finance sector has recently reached a major turning point, with deregulation proceeding to the point that new categories of market rate lenders have appeared- banks, ICICI, IDBI, LIC, UTI etc. lending to higher income groups has become very dynamic. This is the first and very important step in a process of introducing real competition and eventually greater pressure for going down market to LMI lending on a larger scale.

HUDCO As A Wholesale LMI Lender

HUDCO is the only HFC with a special mandate to server households below the median income. With its emphasis on the poor, HUDCO targets 55% of its housing finance, to the low-income group and weaker sections. HUDCO is basically a wholesale lender of local housing boards, channeling approximately its 95% of its loans and advances to these agencies, unfortunately most of these agencies have serious problems.

The often do not target their activities to lower income groups

Due to poor demand assessment and project inefficiencies, large amounts of resources have ended up locked up in unsold property and housing units.

The inefficiencies are aggravated by pervasive state controls on most aspects of functioning of housing agencies, and political directions on estate management project implementation.

One result is that the loan portfolios of these agencies are full of defaults, and some of the loans to them from HUDCO are themselves non performing. In other words, the central government does provide a large amount of funding through state and local government organs for LMI housing.

Role Of National Housing Bank

The National Housing Bank (NHB) was set up in July 1988, under an Act of the Parliament. NHB was conceived and promoted to function as the apex institution in the housing sector and is wholly owned by the Reserve Bank of India. NHB’s principal mandate has been to establish a network of housing finance outlets across the vast expanse of the nation to serve different income and social groups in different regions. The purpose of setting up more local and regional level specialised institutions is to have dedicated outlets for supply of housing credit. The need to set up this institution as the apex body stemmed from various factors. Most prominent amongst them was the acute shortage of funds confronting the housing sector and the resulting serious gap in housing supply. Absence of specialised and mature housing finance system resulted in inadequate finance for both individual loans and delivery of buildable/serviced land, building materials, cost-effective technologies and other related know-how. With the setting up of NHB in 1988, there has been a sustained effort at creating and supporting new set of specialised institutions to serve as dedicated centres for housing credit.

Objectives Of NHB

To promote a sound, healthy, viable and efficient housing finance system to cater to all segments of the population.

To establish a network of housing finance outlets to adequately serve different regions and different income groups.

To promote savings for housing. To promote appropriate technologies for housing.

To strengthen the backward and forward linkages of the housing sector with rest of the economy.

To augment the financial resources for the sector.

Functions Of NHB

The activities of NHB can be broadly divided into following three categories:

Promotion & Development Intervention through institutional credit can be made more effective by adoption of different approaches to cater to the needs of different income groups. With the setting up of NHB in 1988, there has been sustained efforts at creating and supporting new set of specialised institutions to serve as dedicated centres for housing credit. NHB’s role in this regard can be measured from the growth of specialised institutions spread over the vast span of the country.

Regulatory Function The second important function of NHB is the regulatory role assigned to it. The objective is to create the framework for an effective system of ‘responsive regulation’ in tandem with the free market approach which would promote the credibility of the housing finance system among the savers and investors. Financial Function The third important role of NHB is to provide financial assistance to the various banks and housing finance institutions. As an apex refinance institution, the principal focus of NHB’s programmes is to generate large scale involvement of primary lending institutions falling in various categories to serve as dedicated outlets for assistance to the housing sector. These institutions include scheduled banks (both commercial and cooperative), regional rural banks, specialised housing finance institutions, Agriculture and Rural Development Banks and the Apex cooperative housing finance societies. The National Housing Bank (NHB) has formulated a special Rural Housing Finance Scheme to mark the Golden Jubilee of Indian Independence.

Institutions Providing Housing Finance

In India, the following types of institutions provide long-term finance for housing:

Commercial banks;

Cooperative banks;

Housing finance companies;

Regional rural banks;

Agriculture and rural development banks; and

Cooperative housing finance societies

The commercial banks are the largest mobilizer of savings in the country. In terms of coverage also, the banking system has the largest branch network. However, in the past, the savings mobilized were not being ploughed back to the households for shelter purposes. The reluctance on the part of the banks to extend credit for housing as a regular part of their business was basically due to their perceived role being limited to financing of working capital needs of commerce, industry and trade. Yet another factor was that the banks did not want to tie up their short resources in extending long-term housing loans.

However, with the ongoing financial sector reforms and deregulation of the banking sector, the banks, such as SBI, PNB, etc. have become competitive players in the housing finance sector. Their advantage lies in the wide network and relatively lower cost of funds.

Constraints in Expanding Financial Assistance

The basic security for the loan to be given to the borrower is the mortgage of the property. In the case of farmers, the agricultural land cannot be mortgaged. In many rural areas, clear demarcation of the land for agricultural and other uses may not exist. Similarly, in many villages land records may not be available to verify the title to the land. Steps have been initiated to create land records where they are not in existence.

Another impediment is the high registration charge imposed on transfer of land. If these charges could be lowered significantly, the affordability could be increased.

Integration of Informal Sector with Formal Sector

The chief problem for the poorer people in any country is that they do not have access to institutional finance. It is, therefore necessary to find ways in which these people can be brought into the fold of institutional financing. Moreover, most of these people belong to the unorganized or informal sector. Although India can be proud of a mature primary market, the efforts of all HFIs and banks, including the foreign banks, tend to be focused within the formal sector, i.e., on the employee class. By and large, the informal sector

comprising smaller businessmen, traders and others have been tapped only to a small extent.

There are, of course, factors that preclude the provision of financial information by borrowers in this sector in a form and manner required by the financial institutions. Therefore, this segment of the population tends to look for non-institutional credit.

A number of initiatives have been taken to bring in a majority of such population to the formal sector financial institution fold. The RBI has promoted self-help groups (SHG) and NGOs so as to expand their activities and deepen their role, link SHGs with banks and increase the building capacity of NGOs.

Similarly, the emergence of a micro finance sector is also of recent origin. While this mode provided funds to people to set-up income-generating activities, over a period of time some of them have provided funds for shelter improvement as well.

However, certain problems need to be sorted out. Some of these relate to the rates of interest, security for the loan, selection of borrowers, and credit appraisal. Others involve loan processing fees, end use of funds, and organizational problems at the SHG level, like the capacity to manage long term loans.

Issues in the Development of the Housing Finance Sector

The major issue in the development of the housing sector is the availability of long-term resources. One such source is mortgage securitization, which is still at a nascent stage in India. Although NHB in association with some HFCs like, Can Fin Home has effected securitization of mortgage loans in various trenches, a lot of ground is left to be covered. The constraints arise from some legal issues, taxation matters and the regulatory environment.

As mortgage debt is regarded as related to immovable property, its transfer can only be effected by means of an instrument in writing, which requires payment of stamp duty for the instrument to be valid. The stamp duty on conveyancing ranges from 3% to 15% of the consideration for transfer in different states.

Further, only a registered instrument can transfer such mortgage debt. As securitization envisages pooling of mortgages originated by housing finance institutions in different states, the requirement of registration not only makes the transaction too costly to be financially viable but also makes it impractical.

Some of the state governments have realized the importance of mortgage backed securitization and have reduced the stamp duty payable on the instrument of securitization to 0.1%. A few others are expected to follow.

INTRODUCING HUDCO

Housing and construction have been regarded as the engine of the economy on account of their inherent potential to kick starts the economy. Apart from being a basic human need, housing functions as the catalyst for the development of concomitant infrastructure and stimulates the growth of secondary and tertiary sectors. This is on account of the intrinsic chain of backward and forward linkages with other sectors of the economy, fuelling growth of ancillary industries such as cement, steel, brick and tiles, building material, paints and finishes etc. besides triggering off the demand for consumer goods as well as supporting services. Empirical evidence has established that along with the significant contribution to the national income and gap, housing is one of the largest employment generators in India.

Incorporated on 25 April 1970, HUDCO was an expression of the concern of the central government in regard to the deteriorating housing conditions in the country and a desire to assist various agencies in dealing with it in a positive manner. The principal mandate of HUDCO was to ameliorate the housing conditions of all groups with a thrust to the needs of low-income group (LIG) and economically weaker sections (EWS). HUDCO today has emerged as the leading national techno-financing institution with a major objective today of financing/encouraging the housing activity in the country and alleviating housing shortage of all groups in rural and urban areas and the development of urban infrastructure of various shades in human settlements.

Resource Mobilization

HUDCO was established with an equity base of Rs 2 crore. Over the years, the Government has expanded the equity base. The present authorized capital base of HUDCO is Rs 2500 crore and paid-up capital is Rs 2001.9 crore (as on March 31,

2009). HUDCO has created a reserve of Rs 2,665.96 crore as on 31st March 2009. The net worth of HUDCO is Rs. 4,647.46 crore. Over the years, HUDCO has further been able to mobilise resource from institutional agencies like LIC, GIC, UTI Banking Sector, International Assistance (Kfw, JBIC, ODA, ADB, USAID etc.) and market borrowings through debentures, taxable and tax-free bonds as well as through public deposits taking the overall borrowing to Rs. 19,249.32 crore

Programs

In order to realize the objectives for which it was established HUDCO has implemented a variety of schemes for shelter and services, there by improving the living conditions of the people.Apart from financing housing schemes HUDCO is also contributing to improve the quality of life by augmenting basic community facilities and infrastructure services.

Projects involving self-help by the beneficiaries are promoted by encouraging sites and services schemes, core housing, skeletal housing, shelter up gradation and so forth. In

order to provide basic facilities in the existing houses where adequate sanitary disposal systems are not available, financial assistance for basic sanitation schemes is being extended on liberalized terms. HUDCO extends assistance benefiting the masses on urban and rural areas under a broad spectrum of programs as listed below;

Housing

Urban housing Rural housing Staff rental housing Repairs and renewals Shelter and sanitation facilities for foot path dwellers in urban areas (night shelter,

pay and use toilettes) Working women ownership condominium housing Housing through NGO’s/ CBO's; Housing through private builders/joint sector Vambay Land acquisition

Infrastructure

Integrated land acquisition and development Basic sanitation Environmental improvement of slums Utility infrastructure Social infrastructure Economic and commercial Infrastructure

Building Technology

Building centers for technology transfer at the grass roots Building material industries

Consultancy Services

Consultancy in housing, urban development and infrastructure

Research And Training

Capacity building and technical assistance to all borrowing agencies Research and training in human settlements

Eligible Agencies

HUDCO’s financial assistance for these projects are made available to agencies which included state housing boards, rural housing boards, slum clearance boards, development authorities, improvement rusts, municipal corporations, state/city Para stalls, primary cooperative societies, apex cooperative housing federations, public and privates sector agencies, NGO’s, CBS’s professional private developers, joint sector individuals.

Housing

HUDCO assistance for urban housing started in 1970. Under urban housing, HUDCO has so far extended assistance for supporting 51.2

lakhs residential units Though HUDCO started assistance for rural housing only from 1977-78, its

contribution to rural housing for weaker section has been significant and it has assisted in the construction of over 81.52 lakh rural houses.

HUDCO in its nearly 30 years of existence has reached people in over 1756 towns and hundreds of villages across the length and breadth of the country. The number of its borrowing agencies is on the ascent and has reached a high of over 1309 from a mere 12 in the beginning. At the outset, a loan of Rs 35 crores was sanctioned annually by HUDCO. HUDCO has show a quantitative jump in its operation over the last decade and HUDCO annual sanction in 2001-2002 alone had crossed Rs. 8140 crores.

The fund releases have increased from Rs. 270 crores in 1987 to 466 crores in 2001-2002

HUDCO finance is invariable project oriented and the objective is to ensure that projects are affordable to the target groups and at the same time technically sounds, financially viable and legally valid.

HUDCO has taken a number of steps to see that the houses built for all families remain well within their repaying capacity.

Housing

Housing options are provided to the different economic categories as given belowThe economically weaker section with household income of Rs 2500 per month or lessThe low income grow with household income from Rs 2501 to Rs 5500 per monthThe middle-income group with household income from Rs 5501 to Rs 10000 per monthThe high-income group with household income more than Rs 10001 per month

Considering the income brackets, HUDCO has evolved ceiling costs and loan limits for various income groups linked with affordability and prevailing costs of construction for various geo-climatologically contexts. These are kept under constant review for income limits costs of houses and loan limits.

HUDCO NIWAS

To provide housing finance to resident and non-resident Indians, HUDCO launched its retail finance window on Mar 1999. Ever since its launch it has received overwhelming response for it most competitive interest rates coupled with a broad based user friendly options and value added service as a part of its scheme. Loan is provided for construction or purchase of house/flat; for purchase of plot from public agencies and for extension or improvements on existing house.

Interest calculated on monthly reducing balance Waiver of last two months installments if all earlier installment are paid on time Free personal accident insurance and insurance of borrowers house against fire

and natural calamities. Low processing and administrative charges further reduction for armed/Para

military/ police forces personnel, widow or physically challenged persons. No prepayment penalties Free counseling to alternate building technologies Free counseling on designing the house.

Urban Infrastructure

HUDCO has also been entrusted the responsibility to fiancé urban infrastructure projects. For this, the ministry of urban development and poverty alleviation, govt. of India upto the year 2002-2003, provided additional equity support of Rs. 188.50 crores.

HUDCO has so far sanctioned loan off Rs 20526 crores for 1933 urban infrastructure projects. These cover sectors of water supply, sewerage, and drainage, sold waste management, road/bridges. Transport nagar/terminal, airports, social infrastructure, area development projects, commercial complexes, integrated low cost sanitation and basic sanitation schemes.

Profitability With Social Justice

HUDCO performance can be summarized as one signifying “profitability with social justice”. HUDCO has been continuously managing its operations efficiently and also making profits, these are ploughed back as reserves for increased operations. In 2001-2002, HUDCO made a pre-tax profit of Rs 373.21 crores provisional (excluding provision for nap). Till 1989-90, HUDCO was exempted from income tax liability from 1990-1991, HUDCO has been paying tax. HUDCO for the first time has paid annual dividend of Rs. 10.17 crores for 1999-2000 & Rs. 20.87 crores for 2000-2001.

Year Profit before tax Net profit

1988-89 17.49 17.4989-90 25.51 25.5190-91 35.77 26.1691-92 40.82 28.0792-93 88.89 60.7793-94 73.62 59.0294-95 100.11 70.3795-96 125.41 77.7596-97 119.11 61.5497-98 157.71 40.5498-99- 220.43 69.7199-00 311.00 92.652000-01 316.36 106.9301-02 373.21 86.91

The HUDCO Vision -2012

To emerge as the market leader by consolidating and elevating HUDCO image in the area of housing and urban loan infrastructure finance through market orientation involving public private and people’s participation and wider coverage of market both by way of

reaching out the new segments and diversifying into related areas to provide new services; while keeping its social Commitments and promoting appropriated building technologies by means of a competent motivated, efficient workforce”.

The corporate plan 2010 envisages the formation of independent and synergetic cells or empowered groups on the area of strategy planning. Business development, asset liability management, risk management, Consultancy management, organizational systems and estate development to ensure sustained business growth besides exploring new avenues of diversification.

The stress is on expansion of lending to housing and urban infrastructure, housing deliver through expanded avenues including retail financing, increased Consultancy assistance for projects in India and abroad, impetus to building technology trader initiatives and in house research and training programs with national/international networking.

SANCTIONS AND RELEASES DURING 10TH AND 11TH PLANS

HOUSINGURBAN INFRASTRUCTURE TOTAL

Year Sanctions Releases Sanctions Releases Sanctions Releases

10th PLAN 2002-2003 3469 2428 5369 3490 8838 5918

2003-2004 3884 2719 6443 4188 10327 6907

2004-2005 4350 3045 7731 5025 12081 8070

2005-2006 4871 3410 9283 6034 14154 9444

2006-2007 5456 3819 11134 7237 16590 11056

TOTALS 22030 15421 39960 25974 61990 41395

11 PLAN 2007-2008 6110 4277 12406 8684 18516 12961

2008-2009 6843 4790 14887 10421 21730 15211

2009-2010 7664 5365 17864 12505 25528 17870

(Expected) 2010-2011 8584 6009 21437 15006 30021 21015

(Expected) 2011-2012 9614 6730 25726 18008 35340 24738

TOTAL 38815 27171 92320 64624 131135 91795

Recognition

UNCHS- Habitat scroll of honour is awarded every year as a part of the world habitat day celebration, to the countries institutions, individuals for outstanding contribution in the field of human settlements. The habitat scroll of honor has been awarded to HUDCO for the year 1991 in recognition of innovation, development and promotion of building

materials, design and construction for affordable housing for the poor and training in construction skills.

HUDCO received the Prime Minister’s MOU award for excellence in performance 1998-99 from the hon’ble prime minister on April 01, 2000 for being among the top ten public sector institutions in performance.

Elevation Of HUDCO As A Schedule A Company

In the year 2001-02 witnessed HUDCO’s attainment of schedule a status. Acceding to a longstanding demand, the government has elevated the company from schedule B to schedule A, in consideration of the increasing operational levels of fulfillment of requisite compliance criteria. The status up gradation was based on a comprehensive evaluation against quantitative factors such as investments, capital employed, net operation, profitability and staff strength as well as qualitative aspects like national importance, complexity of problems, level of technologies, expansion and diversification of activities and increasing market competition. While rendering greater operational flexibility, the elevation of status of the company entails added responsibility and enhanced responsiveness on the part of HUDCO, in its pursuit for excellence as a viable and commercially successful public sector enterprise.

Enhancement Of Authorized Capital Base

In line with the increasing operations of HUDCO, both in the housing and urban development sector the govt. of India raised the authorized capital base of HUDCO from Rs 1235.9 crores to 2500 crores with the expansion of authorized capital base. The government also infused equity amount of Rs 230 crores (Rs 180 crores from MOUD&PA and Rs 50 cr. From MORD) during the current year. HUDCO' paid up capital with the additional equity infusion during the current financial year stands at Rs 1408 crores at the end of 2001-02. The infusion of equity, acting as a leverage in mobilizing additional funds from the market would enable HUDCO in assisting large scale housing and urban development activities throughout the country.

INTRODUCING HUDCO NIWAS

The HUDCO NIWAS scheme emerging as a popular individual home loan-lending window continued to elicit an overwhelming response. Ever since the launch of the scheme in March 1999, it has benefited over 3.32 lakh families with a total sanction of Rs 2692.16 crores and disbursement of Rs. 2475.64 crores. During the year 2009-10 alone, an amount of Rs. 464. 03 crores have been sanctioned from 75296 applicants, besides accounting for a release of over Rs. 1006.73 crores.

As part of its objective to reach its beneficiaries directly, HUDCO is offering financial assistance to individual families to enable them to acquire a home of their own through its “HUDCO NIWAS” scheme.

HUDCO NIWAS offers the following schemes:

Individual housing finance scheme for resident Indians Individual housing finance scheme for non-resident Indians Bulk loans to govt. and public sector undertaking for HBA to their employees

“HUDCO NIWAS” offers loan assistant to/for:

a) Construct a house/buy a house or flat;b) Extend or improve the existing house or flatc) Purchase a plot from public agencies/co-op societies of government

employees/reputed developers.d) Registration of existing house including conversion from leasehold to free hold e) Refinancing of existing housing loans taken from other institutionsf) Loan to professionals for non residential premises;g) Loan against residential property

Eligibility For Loan And How It Is Determined

a) An applicant must be in service or engaged in any profession or business with regular income for servicing the loan.

b) The loan amount will not exceed 85% of the cost of the housing unit including incidental cost like stamp duty and registration. The maximum loan amount will be Rs. 50 lacs.

c) The actual loan amount will be determined on the basis of repayment capacity. Repayment capacity takes into account factors such as income, age, qualification, number of dependents, spouse’s income, assets, liabilities, stability and continuity of occupation and savings history.

Loan Application

a) An application for loan shall be submitted in any “HUDCO NIWAS” office in the prescribed form along with supporting documents. This form with a list of supporting documents is available at any “HUDCO NIWAS” office.

b) Proposed owners of the housing unit for which loan is sought will have to be co applicants. However all co-applicants need not be co- owners.

Loan Repayment Period

1. For purchase or construction of house or flat or composite loan2. For purchase of Plots3. For extension /improvement of existing house or flat4. For registration of existing house

It is normally upto 15 years, but the period will not extend beyond the age of 65 years (relax able by 5years on the merits of each case) of the applicant. However, “HUDCO NIWAS” will endeavor to determine the repayment period to suit the convenience of the applicant. In case the applicant wished to extend the period of repayment beyond 15 years, it can be extended upto 20 years. However, in such cases, additional interest ½ % will be charged over and above the rates quoted above. In case of floating rate of interest repayment period is upto 20 years

a) For loan to professional for non-residential premises. A maximum period of 10 years will be allowed for repayment of loan subject to the age of the applicant not exceeding 65 and repayment capacity.

b) For loan against residential propertyA maximum period of 5 years will be allowed for repayment of loan subject to age of the applicant not exceeding 65 years and repayment capacity.

Security For The Loan

Security for the loan is the first mortgage of the housing unit to be financed normally by way of deposit of title deeds and or such other collateral security as may be necessary. In some cases, interim security may be required. In all cases the applicant will be required to provide guarantee of one individual acceptable to “HUDCO NIWAS”. In respect of other applicants who have already availed house-building advance from their employers, HUDCO NIWAS may accept second mortgage of housing unit subject (a) central and state government employees-assignment of benefits under Central/State Government Group Insurance Scheme or else the repayment of the loan is completed before superannuating. (B) Public Sector Undertaking Employee – loan is repaid by employer through salary deduction/ post dated cheques and repayment of loan is completed before superannuating of employee.

In respect of house or flat purchased on power of attorney, HUDCO NIWAS may extend loan provided alternate tangible security of adequate value is made available to HUDCO. Alternate security can be third party mortgage, mortgage of other property owned by applicant/co-applicant, pledge of UTI units, National Saving Certificates, LIC policies etc. of equivalent amount.

Fees

A processing fee (non- refundable) of 0.2% of the loan amount applied for i.e. Rs. 2/per Rs 1000/- of the loan applied for is payable subject to minimum of Rs. 250 /- at the time of submission of application form to “HUDCO NIWAS”

a) On sanction of a loan, the loan offer is made to the applicant.b) On acceptance of the offer on time administrative fee (non-refundable) of

0.4% of the amount of loan sanctioned is payable.

In case the applicant is from armed forces/ police / Para military or handicapped or is a widow, or employee of central/State/Government, PSUs /women/journalists and Artists, administrative fee will be 0.2% of the loan amount sanctioned.

Loan Repayment

Loan will be repayable in equated monthly installments (EMI) comprising principal and interest. Interest is calculated on monthly reducing balance method, the monthly installment depends on quantum of loan, interest rate applicable and the term of repayment of the loan.

Repayment by way of EMI commences from the month following the month in which the last installment of the loan is disbursed by “HUDCO NIWAS”. Until the loan is fully disbursed pre-EMI interest is payable only on the portion of the loan availed as on the last day of every month.Repayment ahead of schedule will be accepted without any charges/penalty.

Disbursement Of The Loan

The loan will be disbursed after a full technical appraisal has been made and on completion of all legal documentation and after investment of the applicant’s own contribution in full.

The loan will be disbursed in full or in suitable installments taking into accounted requirement of funds and progress of construction.

Other Attractive Features

a) Free personal accident insurance to cover the outstanding loan amount and loan repayment period.

b) Free insurance for house or flat proposed to be acquired/constructed against the risks of fire and natural calamities so as to cover the loan amount and loan repayment period.

c) No charges for repayment of loan ahead of schedule.d) Waiver of last two monthly installments provided all installments were received

as per schedule without delay. ( if the loan repayment period is more than 5 years)e) Priority will be given in processing housing loan application for the subscribers of

HUDCO public deposit scheme.f) Free counseling by building material and technology wing of HUDCO on

selection of cost effective and environment friendly building material, technologies etc.

g) Free counseling by Design Wing of HUDCO on design aspects suggesting various options in designing including interiors.

h) Guidance to facilitate completion of legal formalities leading to quick disbursal of the loan

i) Construction options using cost efficient methods will also be provided by availing the services of trained professional and through building centers, Nirmithi Kendra’s (only for fixed rate of interest).

Payment of EMI

Applicant can make payment for fees, charges and towards loan repayment by cheque marked “payee’s account only” favoring “housing and urban development corporation Ltd.” Drawn on a bank in a city were HUDCO has an office, or by demand draft (payable at par to HUDCO) or by cash (to be deposited in HUDCO NIWAS offices only.

Tax Benefits

Tax benefits on principal (u/s 88 upto Rs. 20000) and interest (u/s 24 upto Rs 150000) components of loan are available under the income tax act, 1961. All these benefits could vary each year, current benefits may be checked.

CREDIT APPRAISAL

Credit appraisal assumes significance since the total recovery is dependent on an efficient and financially viable credit appraisal. Therefore, a good credit appraisal is a pre-requisite to a good recovery position of any lending institution. In retail housing finance sector, there are two issues to be addressed that is, what to appraise and why to appraise.

Individual housing loan is rendered to a borrower for purchase of a property, which he/she can use for her/his residential needs. Therefore, we shall be appraising a person for his ability, inclination and willingness to pay. The ability to pay can easily be determined after ascertaining the income, repayment capacity, etc. of the applicant and/or co-applicants. It is more or less objective in nature. On the other hand, the inclination/willingness to pay is a subjective assessment, which would depend upon the risk perception of the appraising officer. This factor cannot be quantified in terms of ratio, but the appraising officer should exercise his discretion here. The appraising officer has to satisfy that there would not be any problem in the recovery of the loan that is being advanced to the individual. It has to be ensured that an applicant gets the loan amount he is eligible for. At the same it has to be ascertained that the applicant is not borrowing from any other source because otherwise, the repayment might have some problem owing to the repayment to two or more parties at the same time.

Appraisal is essential from the point of view of the lending institution because of the following critical reasons:

To cover ourselves against the business risks To keep a healthy portfolio which could be liquidated at a better rate in the market

(securitised), if need arises It is an aide to overall business development.

It is necessary to verify the employment of applicants for loan in case of salaried employees as it may give certain vital information that the applicant would otherwise have not disclosed. Moreover, it serves the purpose of verifying details of salary and employment provided by the applicant.In case of government employees there is a standard format for appraisal; there are minor variations, like more disclosure of income, for private employees. However, a higher degree of caution is required with regard to self-employed borrowers. A thorough assessment of the authenticity of his income tax returns and other sources of income coupled with verification of his credit worthiness from the references he gives during the lending process.

Repayment CapacityThe repayment capacity is a factor of the disposable income of the borrower. It has been universally accepted that any individual family can afford to an equated monthly installment that does not exceed 25%-35% of its gross monthly income in case there is no other fixed obligation to pay back existing loan/s, if any. If the prospective borrower is already servicing a loan, the monthly installment being paid towards the existing loan would have to be considered while determining the repayment capacity (in such cases all installments combined together can go up to 45% including EMI of proposed loan from HUDCO NIWAS) of the individual and accordingly the same should be taken care of.

However, in respect self-employed cases, an EMI up to 45% of the monthly income may be allowed if there is no other fixed obligation to pay back existing loans. In the presence of other fixed obligation all installments combined together can go up to 55% including EMI of proposed loan from HUDCO NIWAS.Besides income, there are a few more elements that decide the repaying capacity of the individual as follows:

Age

Qualification

Nature of employment

Past occupational history

No. of dependents

Family background

Savings history

Sources of own contribution

Assets

Liabilities

The maximum age for repayment of entire loan would be 65 years. However, in some

select cases, a relaxation of up to 5 years in the upper age limit can be considered.

Chairman and Managing Director- HUDCO would consider such a relaxation on the

basis of track record of the applicant and the supportive financial backing.

While a few of the elements like age mentioned above can be quantified, many of other

factors are quite subjective in nature. The appraisal officer is the best judge on these

subjective issues because he is the one who is interacting with the individual more often

than any body else. For example, the repayment capacity of a young doctor cannot be

compared with a shop floor labor. The doctor's income would be increasing over years at

a much higher rate than the labor’s income. Likewise, the loan eligibility of a qualified

MBA working with a top investment bank cannot be compared with an ordinary graduate

working with a chit fund company. Similarly, all other factors would have a bearing on

the loan amount like the number of dependents etc. More the number of dependents, the

claim on income would be more and therefore, the repayment capacity of the individual

would be limited by that extent.

Applicant And Co-Applicant

All proposed owners of the housing unit / plot for which loan is sought will have to be

co-applicants. However, all co-applicants need not be co-owners. Normal relationship

that are acceptable for co-applicants in case they are not co-owners are as follows:.

Husband -wife

Father- Son/Unmarried daughter

Father- Mother -Son- Daughter in law

Income Of Applicant And Co applicant

Income from salary

In the case of salary earners, the income through salary can be easily ascertained from the

salary slip / salary certificate. While entertaining salary slip/ salary certificate, it has to be

ensured that the exact break-up of salary giving all allowances and deductions, statutory

or otherwise are indicated and the authenticity of the salary slip is verified. Usually, all

allowances appearing in the salary slip on a monthly basis may be taken as part of gross

income except for a few specifically mentioned in this section. In case of applicant

working in a small private concern, the credentials of the employer also needs to be

examined that would give a basis of establishing the individual's stability of employment

and accordingly decide the loan eligibility of the individual. Generally, following

allowances appearing in the salary slip may be considered for calculation purposes:

Basic Salary

Dearness Allowance

House Rent Allowance

Conveyance / Transport allowance (not reimbursement) Special allowance/ personal pay

Education allowance

Medical allowance (not reimbursement)

City Compensatory allowance, etc.

It should be noted that the salary of an individual could consist of certain reimbursements

which would normally not appear in the salary slip/ certificate such as conveyance

reimbursement, vehicle maintenance, canteen subsidy, medical reimbursement, overtime,

productivity linked incentive. All these reimbursements are voucher payments apart from

overtime and PLI. Generally, any reimbursement appearing in the salary slip / certificate

should not be taken into consideration. However, on merit of individual cases, the

appraisal officer may consider a portion of such income as part of income and

accordingly the loan eligibility may be worked out. But in such a case it has to be ensured

that the applicant is receiving these payments regularly on a monthly basis. The applicant

may be asked to produce evidence of regular receipt of these payments and the appraising

officer should verify the same through bank passbook or by any other means. In such

cases, the portion of such income to be taken should not be more than 50% of such

monthly reimbursement.

Income From Business/Profession

In case of self-employed persons, the credit appraiser should be extremely careful in

determining the income arising out of the business or profession of the applicant. Careful

examination of Income Tax Returns for the past 3 years along with computation of

income is essential. The originality of IT returns will have to be verified in all the cases

from respective IT offices. The appraising officer should also look into the following

factors:

Nature of business

Age of business concern

Market trends Clientele of the organization

Previous experience of the promoters

Educational qualifications of the applicants

Products

The appraising officer has also to carefully examine the profit & loss account and balance

sheet for the past 3 years that would give him an idea of the profile of the applicant. It

should be noted that the profit & loss account, balance sheet, IT returns etc. has to be

certified by a Chartered Accountant stating "Certified True Copy" affixing his seal that

should clearly depict his registration number.

In case of the age of business is less than 3 years and/or the IT returns for 3 yrs are not

available, the available IT returns could be considered for determining the loan eligibility.

If IT returns for the past 3 years are filed with in the same financial year, such loan cases

are required to be out rightly rejected unless the ROs are satisfied about the delayed filing

income tax returns.

Income of spouse

When both husband and wife are working and their income has been declared in the

application form with supporting documents, repayment capacity of spouse can be

considered up to 60%. However, the repayment capacity of the main applicant will

continue to be taken at 35%. In such cases, overall IIR and FOIR may go beyond between

35% and 45%. But in cases where the income of the main applicant is either nil or not

verifiable, then repayment capacity of the income of the spouse is to be taken as 35% and

not 60%.

Other Income

Apart from regular income from salary/ business/ profession, there are certain other

sources of income that an applicant might have. Depending on the nature of the income,

it may be considered for augmenting the main source of income. Generally, such income

should be added only if the requirement of loan amount is more than normal eligibility of

the applicant(s). The additional income alone cannot be the basis for loan. In cases where

additional income is irregular it has to be ignored.

The other income can be:

Rental income

Agricultural income

Income/ Dividend from securities

Depreciation

Rental Income

If the applicant is having income from rental from another property, 60% of the rental

income may be included into the main income. However, in such a case, the applicant

should be asked to submit copies of lease agreement/ rent agreement, rent receipt I Bank

statement etc. The appraising officer should be able to clearly spell out the following

details out of the requisitioned documents:

Date of rent agreement

Expiry date of rent agreement

Rent per month (Including expected rent in case the property being acquired is to

be rented out)

Owner of the property

If the applicant wishes to let out the property being financed, 60% of expected rental

income might be taken for calculating the eligibility of loan amount. However, the

expected rental income should be based on the current rentals in the market and the

concerned officer should verify from all sources that the expected rental as stated by the

applicant is reasonable as per the prevailing rates in the market. Here, it should be

ensured that the applicant should have another house already existing to live in either

through ownership or allotment of dwelling unit by the employer, and then only he can

let out the property being financed. In case of Government allotment of a housing unit to

its employee (the applicant), notional value of HRA should not be added back to the

income from salary if the applicant wishes to continue staying in the Govt. quarter and

expected rental income has been considered for loan calculation.

Agricultural Income

Agricultural income, by its very nature is cyclical in nature and it would fluctuate even if

the land holdings of the applicant remain the same and therefore, much weight age cannot

possibly be given to such income. It is also very difficult to ascertain the agricultural

income, as we would need to have proof of land ownership and receipts from the

"Mandi" or other Government agencies of the sale proceeds etc.

In case, the applicant is able to produce evidence to show his agricultural income for the

last three years either through certificates from Tehsildar or revenue authorities, receipts

from Mandi Mills regarding the sale proceeds for his produce and ownership of

agricultural land, 60% of the average of last three years can be considered.

Income from Dividend and Securities

As far as income from dividends and interests on deposits or any other income from

securities like bonds, debentures etc. are concerned, by the very nature; these incomes

fluctuate depending on the holding /investment and the market conditions. Therefore,

such income should be ignored and should not be considered for determining the loan

eligibility of an individual.

Depreciation

Depreciation is a notional charge on P & L account wherein a sunken fund is created that

is used to replace the existing asset. In all probability, depreciation fund is used for

buying a new asset at a later date; therefore, depreciation should not be added back.

Income Of Co Applicant

In case of joint ownership of the property proposed to be acquired/constructed/renovated

etc., 100% income of all the co-applicants could be considered.

In the case of spouse becoming co-applicant, 100% income of the spouse could be

considered regardless of the fact that whether he/she is co-owner of the property or not.

In case of father and son /unmarried daughter, daughter -in -law, 50% income of the co-applicant(s) could be considered even if the co-applicant(s) is /are not co-owner in the property.

Pension Income

While deciding the repayment capacity, future pension income of the applicant may also

be considered which would be based on the last BASIC salary drawn before retirement.

Inclination to Pay

Once the ability to pay is established, it is required to have a view on the inclination to

pay for the applicant, which would have very crucial implications on the repayment of

loan.

The saving habits of the applicant and the repayment record of other loans, if any would

broadly decide the inclination to pay, which the applicant might have taken. For this, the

officer should check the bank statement for the last 6 months. The statement should be

checked very carefully, as it might contain regular payments made to some agency from

which the applicant might have taken a loan, which might not have been disclosed in the

application form. It should be highlighted here that the borrowing habit of the applicant is

a very important factor, which may adversely affect the repayment of loan, and therefore,

it is a critical factor in deciding the applicant's inclination to pay.

At the same time, the sources of funds must be evaluated to meet the cost of property. In

this connection, provident fund statement can be checked, saving bank pass-book

showing details of transaction, details of investment to be liquidated to meet cost of

property, loans from employer, and loans from thrift & credit society, loans from banks/

HFIs/ informal sources. What is to be ensured is that, as far as possible, the applicant

should not borrow from any other source for meeting his share of investment in the

property proposed to be purchased/constructed for which regular payments have to be

made.

Process of Interview

The first and foremost thing for conducting an interview is that the interviewer should

carefully read /study the application form, salary slip/Income tax returns and the property

papers etc. The person who is interviewing/interacting with the applicant should be well

prepared with his questions. Observations of the interviewer should be recorded in the

file for future reference.

Concept of Equated Monthly Installment (EMI)

EMI, as the name suggests, is equated monthly installments, which consists of principal

and interest components. The equated monthly installments will be based on monthly

reducing balances i.e., monthly rests. EMI is calculated in such a way that the loan

becomes self amortizing i.e. with payment of all installments, total principal and interest

thereon stands paid.

The formula for calculation of the equated monthly installment on monthly rests is given

below.

EMI = L*r (1+r) ^n

[(1+r) ^n-1]

Where,

L = Loan amount,

r = rate of interest / 12

n = number of months.

The EMI will start from the month following the month in which the disbursement of

loan will have been completed. Till such time when the loan is fully disbursed, pre-EMI

interest is payable only on the portion of the loan availed and is calculated at the same

rate at which EMI is calculated. For calculating PEMI interest for the month in which the

disbursement has been done, the computation would be done on the basis of a year of 365

days.

Repayment Plan

Generally, the following repayment options would be available to the applicants of

HUDCO NIWAS:

Standard repayment plan i.e. Fixed EMI

Step up repayment facility (SURF)

Step down repayment facility(SDRF) / Future lower installment plan (FLIP)

Balloon payment/ Bullet payment

Combination of more than one option may also be allowed.

Standard Repayment Plans i.e., Fixed EMI

Standard repayment plan can be made available to any applicant who has at least the

same years of service left (for salaried employees) for which he has applied for the loan.

Under this repayment plan, the EMI would be same for the entire tenure of the loan.

Step Up Repayment Facility (SURF)

There are many applicants of younger age who have no savings to support their own contribution to be invested in property or the savings are limited and their incomes are not high as they are in the beginning of their career. In order to facilitate such applicants to obtain a little higher quantum of loan than they would have otherwise obtained by repayment through standard EMI, we can step-up the monthly installment or graduate the monthly installment on the reasonable assumption that their income will go up every year as they progress in their career. We have to assume the maximum 5% as the incremental income for such applicants per annum. Five per cent increment has been decided; as any other percentage of increase will lead to negative amortization i.e. the EMI will not even cover interest on the loan amount in the initial installments. Following conditions are to be satisfied in order to give a step up repayment facility:

Applicant to be salaried employee of a company of repute;

Applicant to be professionally qualified;

Applicant to be around 35 to 40 years of age as this plan is ideally suited only for

young applicants who are in beginning of their career and do not have much

liability.

First step up at the beginning of 4th year; second step up at the beginning of 8th

year and 3rd step-up at the beginning of 11th year is to be given; if necessary to

give required loan amount. However, this is not at all mandatory to give all step-

ups if only one or two step-up(s) serves the purpose of giving the required loan

amount.

The installment to income ratio should not exceed 35% in working out the loan

eligibility on his present or projected income.

Here is an example to show as to how this step- up or graduated installment facility

works.

ExampleAssume a gross income of Rs.10, 000 at the time of application. Every year we are assuming 5% increment on Rs.10, 000 on a compounding basis. Therefore, his income at the beginning of the fourth year would be Rs.11, 576, at the beginning of the 8th year, it would be Rs.14, 071 and at the beginning of 11th year, it would be Rs. 16, 289. Let us also assume that the applicant would be able to pay an installment of 35% of his gross monthly income and that the rate of interest is 13.50%.

Therefore, the income and possible repayments would be as under:

Income Possible repayments @ 35% Rs. 10,000 for first 36 months Rs. 3,500 Rs. 11 ,576 for next 48 months Rs.4,051 Rs. 14,071 for next 36 months Rs.4,924 Rs. 16,289 for next 60 months Rs. 5, 701. For calculation, we may treat:

Rs. 10,000 for full 15 years, for which the loan eligibility would be Rs. 2, 69, 579 Rs. 1576 for last 12 years, for which the loan eligibility would be Rs. 39; 239 Rs. 2495 for last 8 years, for which the loan eligibility would be Rs. 51, 102 Rs. 2218 for last 5 years, for which the loan eligibility would be Rs. 33, 737.

Therefore, the total loan eligibility as per above example, works out to Rs.3, 93, 657, say

Rs. 3,93,000 as against Rs. 2,69,579 based on standard EMI, i.e. 1.45 times of the loan

eligibility based on standard EMI.

However, if we draw an amortization schedule of the same, we would observe that there

is negative amortization. The EMI of the first month is not even sufficient to cover up the

interest portion of the EMI, leave aside the principal. Now, as we are aware that the EMI

consists of interest as well as principal, we have to decide such an EMI that covers the

entire interest amount in the beginning and a small portion of principal. At 35% IIR, the

EMI cannot be more than Rs. 3, 500. If we are assuming an interest of 13.50% p.a., the

interest for the first month should not exceed approximately Rs. 3495 to Rs. 3499. Based

on this, we have to decide an amount for which the interest for the first month falls within

this range. Accordingly, we arrive at a loan amount of Rs. 3, 11, 000, i.e. 1.15 times of

the loan eligibility based on standard EMI for which the interest for the first month is Rs.

3, 498 approximately.

Hence, lower of the two loan amounts of Rs. 3,93,000 and Rs, 3,11,000 would be the

final loan amount that means that the loan amount works out to Rs. 3, 11,00 for which the

repayment plan would be as under:

Rs. 3, 500 for the first 36 months

Rs. 4, 051 for next 48 months Rs. 4, 717 for next 96 months. It is observed here that the

fourth step -up is not even required because otherwise, there would be negative

amortization.

On the basis of standard EMI, 'he would have got Rs.2.69 lacs. Thus, by graduated

monthly installment plan, the individual is able to get Rs.42, 000 more as compared to the

standard repayment plan. In the present case, as a rough and ready estimate his loan is

1.15 times of his normal eligibility.

Step Down Repayment Plan I Future Lower Installment Plan (FLIP)

It is quite possible that some applicant nearing the age of retirement may approach us for

loan assistance. In such cases, we have to assess the level of income likely up to their

retirement. In case of pension able services, post-retirement income would be generally

the pension. If there is any other income other than the pension, such an income should

be regular in nature. It is possible that some persons might have monthly income under

various installment plans. If we happen to consider pension on retirement, an undertaking

from the borrower should be taken confirming that he won't get the pension commuted at

the time of retirement. This is very much required because we are building our repayment

on the pension income.

Example:

1. The applicant is a Government employee aged 55 years and is due to retire at the age

of 60. The present income is Rs.20, 000 and the expected pension after retirement is Rs.

8, 000.

Working:

Income -a. Rs.20, 000 for 5 years

b. Rs.8, 000 for 5 years (up to age 65). For calculation:

Income: a. Rs.8, 000 for 10 years

b. Rs.12, 000 for 5 years

ROI- 14.5% p.a. IIR- 35%.

Loan eligible -Rs.176894 EMI Rs.2800

Loan eligible -Rs.178508 EMI Rs.4200

Rs.355402 or Rs.355000

EMI for first 60 months -Rs.7, 000 EMI for next 60 months -Rs.2, 781

Yet another way of helping such persons is to suggest the applicant to make a younger

person preferably son, who is in employment as a co-applicant. Ideally, the son and father

should be co-owners in the property and we should encourage joint ownership. In case, it

is extremely difficult to have such ownership we may still take the son as a co-applicant.

In all such cases where a son or daughter is a co-applicant we should take only 50% of

the income of such co-applicant if they are not co-owners in the property. In case the son

or daughter is a co-owner in the property we may consider up to 100% of the co-owner's

income to determine the loan eligibility. We may consider the loan eligibility for a longer

duration taking the co-applicant's age into consideration.

Balloon Payment

In case the applicant needs a higher loan that he is otherwise not eligible for, we can

build in bullet payment in the repayment. If the applicant is in a position to make a lump

sum payment at a future date by way of assigning of FDRs, NSCs, IVPs, KVPs, Gratuity,

LlC policy etc., or out of gratuity etc., we may consider giving him a higher loan amount

on the basis of repayment at a future date. In such a case, we will have to calculate

present value of the security being offered and then assign a weight age to the present

value for increasing the loan amount subject to a maximum of 100%. In the case of lump

sum payment from gratuity (applicable in those cases only where the retirement age is

less than four years), a confirmation from the employer that the gratuity amount would

not be released to the employee without express written consent of HUDCO should

suffice. However, if they demur to give such an undertaking, the individual applicant

should be asked to give an undertaking to make payment of gratuity to HUDCO NIWAS

even though the loan agreement provides for it.

The formula for calculating present value of a cash flow expected in future is as follows:

Present value = A / [(1+r) ^ n]

Where A = Future expected cash inflow

R = Rate of discounting (It is the rate of interest at which the loan is advanced or the

coupon rate of security whichever is higher)

N = Period after which the balloon payment is receivable.

Example:

If the applicant has a FDR maturing four years from start of the EMI for Rs. 1, 00,000,

then the present value of the security would be Rs. 58,180 that is discounted at the rate of

14.5% p.a. Now, we can assign a weight age to this present value depending upon the

comfort level of the credit appraiser with the applicant. If we give a weight age of 75%,

the loan amount that can be enhanced is Rs. 43,635.

It should be very clearly noted here that balloon payment could only be incorporated in

the loan, if there is a tangible security to be offered by the applicant of loan. The credit

appraisal/ sanction note should be prepared along with the amortization chart duly

incorporating the balloon payment details.

Ratios

The ratios in a credit-appraisal are required, because they serve as a symbol of

standardization, which aids in decision-making and quantifies the servicing capacity of

the applicant and security cover to the loan. Further, in the era of securitization, ratios

come as a big help if we want to securitize our assets.

There are following three ratios to be calculated and analyzed while appraising a loan

case:

Installment to income ratio (IIR);

Fixed obligation to income ratio (FOIR);

Loan to cost ratio (LCR)

Installment to Income Ratio (IIR)

It is the ratio of equated monthly installments on the housing loan to the gross monthly

income of the applicant.

IIR = EMI / Gross monthly income The IIR should be in the range of 25-35%. At no point in time, the ratio should exceed the limit of 35% except in self-employed cases, where it may go up to 45%. However, in cases where spouse is working and her income is considered, the gross IIR can be more than 35% since repayment up to 60% is allowed in respect of spouse.

Fixed Obligation to Income Ratio (FOIR)

It is the ratio of monthly outflow on account of loans taken (including EMI on proposed

loan from HUDCO NIWAS) to the gross monthly income.

FOIR = EMI of HUDCO loan + other fixed monthly obligation of other loans, if any

Gross monthly income

The FOIR should be in the range of 40-45%. At no point, the ratio as specified should

exceed the limit of 45% except in self-employed cases where it can go up to 55%. It

should be noted that other fixed monthly obligations consists of regular payments made

on account of loan taken from various agencies, viz., Banks/ HFCs/ Thrift and credit

society/ HBA / Other agencies, employer etc. all loans over 12 months of repayment

should be considered under other fixed monthly obligations for calculation of FOIR.

Loan to Cost Ratio (LCR)

It is the ratio of Loan amount to the total property cost.

LCR = Loan amount

Property cost

The maximum LCR should be 85%. It should be noted here that the property cost

includes the purchase price, stamp duty charges and registration expenditure.

Mode of Repayment The applicant can repay the monthly installments in following modes:

Post dated cheques

Deduction at source from employer of the applicant

Standing instructions to the bankers

In case the applicant wishes to repay through post-dated cheques, at least 36 post-dated

cheques should be taken from the applicant at the time of final disbursement. After 12

cheques have been utilized, the local branch of HUDCO NIWAS should replenish it with

12 fresh post-dated cheques.

In the case of deduction of EMI/ PEMI at source from the salary of the applicant, the

same is to be received directly at the branch office of HUDCO NIWAS. In such cases, it

has to be ensured that the deductions made by the employer are received by HUDCO on

or before the due date. Alternatively, the applicant can be advised to make two payments

against the first payment i.e. one by way of post dated cheque/ pay order/ bank draft to be

directly deposited by the applicant to HUDCO and the other by way of recovery by

deduction from the employer. It should be noted here that the recovery by way of

deduction from the salary would come only in the beginning of the next month.

Therefore, the applicant is not paying two installments in one month.

In case of personnel from armed forces, these people are very often posted at border

towns and it may not be possible for them to monitor their saving account from that place

for repayment. It is therefore, advisable in such cases to ask applicant to issue standing

instruction to his banker for directly sending the EMI to HUDCO NIWAS every month.

However, the standing instructions in such cases should be irrevocable. In addition, Post

Dated Cheques should also be taken so that in the event of non-remittance of EMI by the

Bank, cheque can be presented.

In case of outstation cheques, the cheque should be deposited in such a way that it is

presented in the bank on or before the due date. Further, in such cases, bank charges are

to be recovered from the applicant. Accordingly, the likely charges may be ascertained

form the bank and intimated to the applicant well in advance. Alternatively, the applicant

can be advised to make two payments against the first installment, one by way of post

dated cheque and second through a bank draft so that the possibility of default or short

payment or bank charges etc. are taken care of.

Post Sanction Procedure

Offer Letter

Immediately on approval of the loan by the competent authority, an offer letter (in

triplicate) communicating the loan approval in principle will be prepared and two of the

three copies would be issued to the applicant/co-applicant. Regional Chief/ Branch Head

of HUDCO NIWAS/ Law officer can issue the letter of offer. If the loan was sanctioned

with special conditions like assignment of Life Insurance Policy, hypothecation or pledge

of some securities, assignment of Group Insurance benefits, balloon payment at a future

date etc., it should be clearly mentioned in the letter of offer given to the applicant. In

case of Life Insurance Policies, it is necessary to indicate the particular policy number

and the amounts insured.

While issuing the offer letters, it is also necessary to enclose a check list of documents

relating to the property, guarantee format, instructions for filling the guarantee form, the

format of assigning the benefits under Life Insurance Policy, etc. depending upon the

conditions of offer which the borrower needs to furnish for disbursement of loan. It is

very important to ensure that the applicant is in full possession of the list of all documents

he has to deposit, leading to creation of security. These checklists should be prepared in

advance and kept ready. Obviously the nature of documents required would vary with the

type of property financed.

Acceptance of Offer

The normal duration offered for accepting the offer is 30 days. However, in case the applicant is not able to give his acceptance within the specified period of 30 days, the Regional Chief may extend the offer by additional 30 days up to a total of 90 days from the first offer. On receiving the acceptance copy of the offer letter, it must be ensured that the cheque for administrative fee is also received with it. If the administrative fee is not received, the acceptance is not complete. It should be noted here that the acceptance of the offer should be unconditional and as per the terms stated in the letter of offer clearly mentioning special conditions of sanction, if any.

Pre disbursement Procedure

No disbursement is possible without creation of security and fulfillment of all condition of offer. The legal officer will verify that he has received all the documents and the borrower has satisfied all conditions, general or special as mentioned in the letter of offer and credit appraisal note. In case, the borrower has not completed the requirements, inform him in writing about the balance documents he should submit for creation of security and subsequent disbursement of loan.

On fulfillment of all documents, a legal appraisal form (in the prescribed format) will be prepared and signed by the legal officer of HUDCO NIWAS.

Disbursement

After the completion of legal and technical formalities and on the basis of requirements

of the funds of the borrower and/or on the basis of technical appraisal, a disbursement

memo should be prepared in triplicate and the concerned authorized signatory will

authorize disbursement. The authorized officer for approval of disbursements is Regional

Chief. Two copies are meant for accounts, one of the copies will be sent back by the

accounts to the disbursing officer with the cheque/DD and the third copy will be placed

in file.

The borrower should be informed in writing about the date of disbursement based on his /

her request.

A copy of disbursement advice should be handed over to the borrower. It is important to

note that at the time of first disbursement, the loan documents have to be executed by the

applicant/co-applicant. It is also necessary to ensure the presence of the applicant/ co-

applicant before the disbursement can actually be made and for these purpose the

applicant, co-applicant should be advised.

In respect of outright purchase cases, the cheque/draft for disbursement should be handed

over to the seller in the presence of Registrar/Sub-Registrar and borrower after ensuring

that the deed to be executed contains HUDCO payment details, etc. the draft of the sale

deed, etc. to be executed should be vetted by the Law Officer before its execution

including confirmation about the applicability of the stamp duty.

It should be noted here that a maximum period of one year is allowed for drawl of

complete loan. However, HUDCO NIWAS can consider extension of one more year at its

discretion provided the total disbursement period does not exceed two years from the date

of offer.

Recovery

If credit appraisal is nervous system of any lending institution, then recovery is backbone of the organizational capability. A sound recovery system is a must for any lending institution. The recovery of the amount lend by HUDCO NIWAS would be primarily from Pre-EMI interest and regular EMI. The due amount on account of these should be credited into individual account on or before the last day of the month. For this, 36 post- dated cheques of EMI should be taken from the borrower on or before the final disbursement. In case of disbursement in installments, sufficient number of post-dated cheques should be taken to take care of Pre- EMI interest till the subsequent disbursement. In case, the recovery of Pre- EMI interest and / or EMI is done through outstation cheques, the bank charges should be recovered from the borrower. In this context, sufficient leverage for period of clearing should be given. It should be ensured that the due amount is credited on or before the due date.

Processing and Administrative Fee

Processing fee at the specified rate shall be taken from the borrower at the time of

submission of application form. Administrative at the specified rate shall be taken along

with letter of acceptance at the time of acceptance of offer. Both these fees are non-

refundable in any case.

Pre-EMI Interest

Pre-EMI interest is the interest levied on the disbursed amount prior to start of EMI. The

Pre-EMI interest would be levied till the time Emi does not start.

EMI

The due date of the EMI is the last date of the month. It has to be ensured by the branch

offices that all the payments come regularly. The bifurcation of EMI into principal and

interest shall be done every month after the bank gives credit and a credit voucher shall

be prepared for each EMI receipt only after encashment of cheques/drafts etc.

Penal interest:

Penal interest shall be levied @ 0.25% per month on the outstanding amount until the

time the defaulted amount is received. In case of default in repayment of EMI/PEMI,

incidental charges, penal interest, interest and principal have to be recovered in that order.

This would mean that penal interest would be recovered first followed by interest and

then principal amount.

Reasons For Default

A few possible reasons for default are enumerated below:

Initial financial problem after construction/ External borrowing

Sickness/ Marriage/ Family problems

Builder problem/Incomplete house

Non-deduction from salary by the employer/ remittance problem

Strike/ Temporary job dislocation

Loss of employment

Business problems

Employed at first, now in business

Death of borrower/ another member of family

Natural calamity/ permanent disability

Intentional defaulter

Casual attitude

Service complaints

Negligence/ ignorance of borrower

Postal delay

Borrower on leave

Cheque misplaced by HUDCO NIWAS

Borrower absconding/ bankrupt

From the point of view of recovery, the defaulters can be categorized into following four categories:

Able and willing

Unable but willing

Able but unwilling

Unable and unwilling

The first category of defaulters is non-intentional. The problem arises here only because

of certain delays/ ignorance/ negligence of borrower or problem with remittance or when

the borrower has proceeded on a long leave without maintaining proper balance in the

bank. The second category of defaulters are willing to pay but are unable to do so

temporarily because of some unforeseen circumstances like death in the family/ marriage/

sickness/ loss of employment/ problems of business etc. These defaulters can easily be

tackled with proper follow -up. The third class of defaulters is most dangerous of the lot

from company's point of view. These defaulters are habitual and intentional defaulters

who divert funds elsewhere for lucrative returns. The credit appraisal has to be very

stringent and effective which could filter these kinds of people at the time of

interviewing/ interaction with the borrower. The appraising officer has to be very clear of

these issues at the time of lending. This category requires rigorous follow-up and pressure

on the borrower. The fourth categories of defaulters, i.e. unable and unwilling are kind of

people who are absconding or have been declared bankrupt and they no longer want to

venture into earning avenues.

Building a good recovery team entails using right people, right techniques, right time and

right degree of proactive approach and reaction. It is worthwhile noting here that

precisely measured dosage of reaction is required to ensure collection of arrears and

maintaining future promptness in repayment by the borrower.

Preventive Measures Of Loan Recovery

The preventive measures for an effective recovery would require following actions:

Developing an efficient credit evaluation system: The journey of recovery begins

with credit appraisal. The credit evaluation officer should be able to study the

overall financial strength of the borrower employing ratio analysis and other

subjective tools ensuring that there is no undue financial pressure being put on the

borrower because of the proposed loan and that the borrower would be at ease

paying the installments in time. The verification of employment and the letter

from references should be obtained and carefully studied. At the same time, the

legal officer should be able to ensure that sufficient primary security and

additional security is obtained to cover the loan amount. Further, salary, deduction

and other methods to ensure promptness such as PDCs should be taken care of.

The legal and technical system must be in place:- The legal system should be able

to enforce correct implementation of security creation. A strong legal system acts

as a deterrent to default for fear of consequences. The technical department

should be able to ensure the end usage of funds. It should be able to ascertain that

the loan disbursed has been properly utilized in the property as per the estimates

submitted by the borrower under regulations as stipulated by local authorities. An

effective legal and technical system provides the entire necessary weapon to the

recovery department.

There should be a proper codification system in place. Proper action codes and

follow-up response codes, reasons for default code, observation codes should be

developed which come in handy at the time of visit or follow-up.

There should be a focused follow-up based on repayment commencement date

and high value loans.

The observations of recovery should be made available to the credit appraiser:

To keep him abreast of the latest recovery position.

To help him apply observations of the same in similar future loan cases.

Corrective Measures

As they say, prevention is better than cure, the preventive measures if taken care off

properly, the corrective I curative measures for recovery would not be required at all.

However, a few of the corrective measures are described below:-

1. Installing a recovery system:

The recovery function is a very structured function that requires people with strong

interpersonal skills who are persuasive and good negotiators and deal the situation with

firmness and tactfulness. As mentioned earlier, a precisely measured dosage of reaction is

required to ensure collection of arrears and maintaining future promptness in repayment

by the borrower. The staff and the officer designated for the purpose should be able to

clearly understand the organizational objective. The required software support for the

same would be provided and training needs of such personnel would be taken care of.

Recovery Techniques

Letters/reminders: The letter generation should be mechanized so that if

installment of one particular month has not been received, a letter should be

generated on 5th of subsequent month. The letter should be polite, straightforward

and concise with an attempt to get desired response. The letter should be sent by

courier/ registered post. Different formats should be designed for different

categories of defaulters. When sending reminders, the reminders should be linked

to the original letter.

Telecalling: Telecalling is often a cheap mode of recovery especially for local

recovery. At the same time, it saves time and energy. While making a telephone

call, the concerned officer should have all data on hand and up to date position of

the case. As far as possible, it should be tried that the borrower gives a promise

about payment on a specified date. The officer should leave a message for the

borrower, in case he is not available at that time. All the observations should be

properly recorded in the action sheet for future reference.

Telegram: Telegram, as a means of recovery gives a sense of urgency to the action. It should be used only after the first two options as mentioned above have been tried and no positive reaction is available. In case of chronic defaulters, it would not be a bad idea to send express telegrams. We may also monitor the activity of the borrower in such a fashion that we schedule our telegrams to reach at important family/ public occasions to the chronic defaulters.

Personal visit: Personal visit, as a means of recovery shou1d be used very

selectively only after the first few options as mentioned above has been resorted

to with no end result. The Officer making a personal visit should enquire as to

why there was no response to the letters, telegrams, telephone calls etc., and also

for the reasons for the default. The Officer should be polite but at the same time

very firm making the borrower aware of the additional interest and incidental

charges accruing out of non-payment of the arrears. The Officer should also be

persuasive enough to make the borrower aware of loss of creditworthiness that

may have negative impact on his all-future borrowings from us or from other

sources. He should give him an impression that the lending institutions share the

data regarding creditworthiness very frequently. The officer should try for a one

shot clearance but if the same is not possible phased manner of payment should be

suggested wherein the borrower clears at least a portion of the arrears. For

example, if two EMIs are pending in one particular account for non- payment

along with additional interest and incidental charges, the borrower may be

suggested to at least clear off one EMI immediately with a promise to clear the

outstanding at a specified future date.

Letter to Employer: Letter to employer should be written after prior warning to

the customer if all the above-mentioned options have been tried with no result.

The letter to be written to the employer should contain the background of the case

requesting the employer to prevail upon the employee for early payment of

arrears. We should also request for deduction at source facility and if that is

agreed to, a request for extra deductions to clear dues in a phased manner should

be made.

Letter to Guarantors: The letter to guarantors should be written only after

warning the customer. The first letter should be sent as a request letter giving him

full details of the dues and the promises made by the Borrower for payment

giving current address and telephone number of the borrower. Normally, a letter

to the guarantor would result in clearing all the dues by the Borrower. However, if

there is no result of the first letter the subsequent letters should explain the

consequences to the guarantor asking the guarantor to clear all the dues.

Letter to referees / bankers: -The letter to referees / bankers should be written

only after warning the customer and the guarantor. It should be clearly understood

here that the referees and the bankers do not have any liability to the loan. We

may only request them to impress upon the borrower to clear our dues indicating

that any loan forwarded by the referee f banker might also go the same way. The

letter should be sent as a request letter giving them full details of the dues and the

promises made by the Borrower for payment.

Monitoring of dishonored cheques: The cheque may be dishonored due to

various reasons and the monitoring of the same is a very important tool of

recovery wherein the exact cause of the cheque bouncing is ascertained and

adequate action is taken accordingly.

Disposal of property by the borrower: Encourage the borrower to liquidate the

financed property and settle the loan. If possible, we may assist him to liquidate

the property. We can refer the property to any of our prospective customers. In

such a case, we are ensuring that the arrears in that particular account no more

exist, at the same time; we are getting a new customer to take a loan from us.

Alternatively, we can suggest the borrower to borrow from some other source and

clear our loan.

Action on collateral securities: If there are any collateral securities along with

the primary security, we can go ahead with liquidating the same, if we are left

with no other option for recovery except the legal action.

Report generation and default analysis: A proper reporting format for

generation of default analysis has to be developed which should be able to give

details of number of borrowers in arrears, installments outstanding and Principle

loan outstanding in respect of borrowers in arrears.

Legal action: This is the last resort of recovery wherein all possible options for

physical recovery have been tried time and again with no end result. The legal

action would comprise of cheque bounce notice under section 138 of the

Negotiable Instruments Act within 15 days of cheque bouncing, summary suit in

the court of law within 3 years of receipt of last EMI and /or mortgage suit.

Action in case of default due to dishonoring of cheque: In the event of default

by an applicant either due to dishonor of cheque or non receipt of cheque from

employer, the applicant should be immediately contacted and payment against the

dishonored cheque should be collected through bank draft I pay order I cash. In

case of dishonored cheques, the same should not be represented in the bank for

recovery. In cases where the cheques are dishonored more than twice or payment

being not received against dishonored cheques, it is necessary the referees,

bankers, guarantors and employer of the applicant be also intimated besides

taking action as per the loan agreement.

Penalties for Default

Additional interest: Additional interest is levied @ 2.5% per month on the outstanding

amount. The regional office would have no discretion to waive off additional interest in

any case what so ever. The discretion to reduce or waive the additional interest in

deserving cases lies with the HUDCO NIWAS Corporate Office.

Incidental charges: Incidental charges are levied in order to recover the cost incurred for

recovery in making a telephone call, writing a letter, sending a telegram, making personal

visits, man hours, etc. It should be a justified amount internally worked out as per the

actual cost incurred. It should be recorded and levied uniformly. It should act as a

deterrent to the borrower from delaying payments.

Bulk Loans

Bulk Loans Bulk lending under HUDCO NIWAS has to be undertaken in case of State Governments / Para statals of State Governments / profit making Public Sector Undertakings (other than loss making / sick units / units referred to BIFR) for giving House Building Advance to their employees.

Rate of Interest

Rate of interest Repayment Period (yrs.)

9.50% Up to 59.75% 6 to 1010.00% 11 to 15

Repayment of Loan

The method of recovery will be either of the two options given below:

1. Equated quarterly installments (EQI) on quarterly rests basis;

2. Equated monthly installments (EMI) on monthly rests basis.

The EMII EQI would be allowed for a fixed term of up to 13 years i.e. 156 months or 52

quarters. In addition to this, a period of 2 years (24 months or 8 quarters) is allowed for

payment of Pre- EMI interest.

It needs to be mentioned that in case state government, etc. opt for EQI, the ultimate

interest incidence would be higher as compared to EMI route.

Security for the Loan

Security for the loan would be either Government guarantee or Bank Guarantee or

Mortgage of property including pass through arrangement of the individual mortgages

held by the employers for the entire loan. An undertaking from the State Governments /

Para statals of State Governments / Public Sector Undertakings for payment of total

amount of EMI every month irrespective of recovery from the salary of concerned

employees has also to be taken. The Government would retain individual mortgage in

such cases. In addition, the borrowers will also give an undertaking for making budgetary

provisions every year. Further, the borrower will also take insurance cover for the entire

loan amount and benefits of such insurance cover will have to be assigned in favor of

HUDCO.

The format of Government guarantee will require "mutatis mutandis changes depending

upon the facts of the case I terms and conditions of loan". Accordingly, necessary

changes, if any, required will have to be carried out by the concerned law officer at

HUDCO Branch Offices.

Documentation

a) Loan agreement

b) Commitment letter from the borrower as per format to be provided by HUDCO.

Processing And Administrative Charges

Processing and administrative fees @ 0.25 % of the loan amount is payable with the

application. Sanction letter:

Sanction letter has to be issued by the authorized signatory as per the format of sanction

letter.

Disbursement of Loan

Entire amount of bulk loan should be released in maximum of four installments. However, loan can also be disbursed in one installment if the borrower wants to withdraw entire amount.

Utilization of Loan

A certificate will have to be obtained from the borrower regarding utilization of loan amount for giving House Building Advance to their employees. In addition, list of their employees who have availed House Building Advances will have to be obtained from the

borrower indicating name, address of the property, cost of house / flat, loan amount, gross salary etc.

Construction Period

A maximum construction period of two years is allowed. During construction period, pre- EMI interest has to be recovered and thereafter EMI shall be recovered from the borrower.

Sanction Note for Bulk Loans

The bulk loan proposals should be examined as per the enclosed format and the same is required to be sent to Corporate Office of HUDCO NIWAS for consideration of competent authority.

Non-Resident Indian (NRI)

Under the Foreign Exchange Management Act of 1999, Non-Resident Indians are:

1. Non-Resident Indian Nationals (i.e. Indian passport holders only) who stay abroad

employment or for carrying on business or vocation outside India or for any other

purpose in circumstances indicating an indefinite period of stay abroad;

Or

2. Government servants who are posted abroad on duty with Indian Missions and sir

other agencies set up abroad by the Government of India where the officials draw I

salaries out of Government resources;

Or

3. Government servants deputed abroad on assignments with foreign Government

Regional/International agencies like the World Bank, International Monetary Fund (I

World Heath Organization (WHO) etc.;

Or

4. Officials of the State Governments and Public Sector Undertakings deputed abroad;

temporary assignments or posted to their branches or offices abroad.

Purpose of Loan

HUDCO NIWAS offers loan assistance to NRI's to:

Construct a house;

Buy a house or flat;

Purchase a plot- from Public Agencies.

Eligibility for loan and how it is determined:

a) An applicant must be in service or engaged in any profession or business with

income for servicing the loan.

b) The loan amount will not exceed 85% of the cost of housing unit including

incidental costs like stamp duty and registration. The maximum loan amount will

be Rs. 50 lacs for purchase or construction of house/flat or

extension/improvement and Rs. 15 lacs for purchase of plot.

c) The actual loan amount will be determined on the basis of repayment capacity.

Repayment capacity takes into account factors such as income, age,

qualifications, number of dependents, spouse's income, assets, liabilities, stability

and continuity of occupation, savings history, and alternate employment prospects

on return to India.

Loan Application

a) An application for loan shall be submitted in any "HUDCO NIWAS" -Office in the

prescribed form along with supporting documents.

b) Proposed owners of the housing unit for which loan in sought will have to be co-

applicants. However, all co-applicants need not be co owners.

d) The applicant can also appoint a power of attorney in India and the power of

attorney should be executed as per the draft provided by HUDCO. This draft is

available at any HUDCO NIWAS Office.

Rate of Interest

Fixed rate scheme

Purpose of Loan Loan limit Rate of Interest Repayment

period (yrs.)

Construction/purchase/composite

loan

100,00,000 9.75%/10.00% Upto 5/10

Purchase of plot 100,00,000 9.75%/10.00% Upto 5/10

Extension/improvement 100,00,000 9.75%/10.00% Upto 5/10

Floating rate scheme

Purpose of Loan Loan limit Rate of Interest Repayment

period (yrs.)

Construction/purchase/composite

loan

100,00,000 9.50% Upto 20

Purchase of plot 100,00,000 9.50% Upto 20

Extension/improvement 100,00,000 9.50% Upto 20

Loan Repayment Period

It is normally up to 10 years for purchase or construction of house or flat, but the

period will not extend beyond the age of 65 years of the applicant. However,

"HUDCO NIWAS" will endeavor to determine the repayment period to suit the

convenience of the applicant.

The repayment period is up to 10 years for purchase of plots but the period will

not extend beyond the age of 65 years of the applicant.

For extension/improvement, repayment period up to 10 years may be allowed

which should not extend beyond the age of 65 years of the applicant.

Security for the Loan

Security for the loan is the first equitable mortgage of the housing unit to be financed

normally by way of deposit of title deeds and or such other collateral security as may be

necessary. Title of the property should be clear, marketable & free from encumbrance. In

all cases the applicant will be required to provide guarantee of one individual acceptable

to HUDCO NIWAS. Lien on borrower's other assets in India may also be required.

Collateral or Interim security could be assignment to HUDCO of life insurance policies,

the surrender value of which is at least equal to the loan amount, and such other

investments that are acceptable to HUDCO such as NSCs, UTI Units, etc.

Fee

A one-time fee of 1.25% of the loan amount applied for is to be paid when the application

form is submitted to HUDCO NIWAS.

REGIONAL DISTRIBUTION OF OPERATIONS HUDCO NIWAS has divided the country wide business into 6 zones viz: east zone, north zone, northeast zone, northwest zone, south zone and west zone.

On the cumulative as well as current year bases the south zone gives the maximum business of 37% and 85.2% respectively. Also the share of individual loans is quite fair at 24.27% cumulatively but its share in the current is markedly low at 10.46%.

It seems over the years business has increased more on a bulk loan front than on the individual loan side. On both cumulative and current, Chennai (35.17%,42.13%respectively) and Hydrabad (25.90%,22.13% respectively) are the largest business centers in the south zone.

Following the south zone according to disbursement are east zone, northwest zone, west zone, north east zone and north zone on a cumulative bases. In the current financial year south zone is followed by east zone, north east zone, north zone, west zone and finally north west zone.

In the east zone the Maximum business for current year, comes from Calcutta (31.31%) and Bhuwaneswar (53.47%),similarly Delhi(82.19%) in north zone ,Chandigarh (99.52%)from north west zone, Guwahati (97.16%) and Bhopal (66.93%) from west zone.

The complete analysis shows that there are wide variations across different cities in different zones. The main reasons can be attributed to population, income distribution, demand for housing, etc.

.

Details of HUDCO NIWAS application including individual and bulk loan

as on 31 may 2010

(Rs in crores)CUMULATIVE CURRENT YEAR

Zonal office Offices No of No of loan Repayment No of No of loan Repaymentapplication Amount disbursed Amount Amount application Amount disbursed Amount Amount

East zone Bhuwaneshwar 220527 1115.04 180482 912.74 8.28 17 0.49 18 0.52 7.72Calcutta 2153 27.14 1040 21.43 5.31 113 2.45 103 2.19 3.15Patna 98 2.96 86 2.54 0.25 3 0.06 3 0.07 0.12Ranchi 109 3.49 65 2.11 0.24 3 0.07 4 0.09 0.19

222887 1148.63 181673 938.82 14.08 136 3.07 128 2.87 11.18

North zone Dehradun 38 0.86 34 0.7 0.14 4 0.09 2 0.07 0.14Delhi 1956 67.44 1588 54.36 21.92 11 0.38 9 0.22 12.76Jaipur 50145 103.16 50114 102.42 3.69 1 0.02 4 0.03 3Lucknow 236 5.51 176 3.94 1.52 5 0.11 10 0.17 0.89

52375 176.97 51912 161.42 27.27 21 0.6 25 0.49 16.79

North East Guwahati 28919 430.95 18245 283.42 31.19 52 1.35 60 1.62 17.71zone Kohima 36 1.21 16 0.34 0 0 0 2 0.04 0

28955 432.16 18261 283.76 31.19 52 1.35 62 1.66 17.71

North West Chandigarh 17982 413.06 17848 409.19 23.1 12 0.39 3 0.06 9.17zone Jammu&Kashmir 10 0.17 8 0.14 0.03 0 0 0 0 0.02

17992 413.23 17856409.33 23.13 12 0.39 3 0.06 9.19

South zone Bangalore 22576 251.75 21765214.9 22.12 32 1 24 1.37 10.89

calicut 487 10.22 452 8.59 1.17 23 0.4 39 0.38 0.99

Chennai 18161 532.27 18185516.17 138.84 242 7.86 341 6.93 120.62

Hyderabad 2504 89.95 236082.13 33.16 41 1.73 66 1.68 22

Kochi 708 14.77 65013.24 2.02 2 0.04 2 0.02 0

Trivendrum 31275 442.26 31247440.09 6.49 28 0.74 50 0.7 3.68

Vijayawada 364 12.09 357 9.31 1.74 37 1.51 40 1.13 1.58Vishakhapatnam 295 8.45 274 7.5 0.3 4 0.09 14 0.44 0.29

76370 1361.76 752901291.93 205.84 409 13.37 576 12.65 160.05

West zone Ahmedabad 613 11.08 59610.79 5.5 2 0.04 0 0 4.78

Bhopal 1178 19.9 109616.71 2.64 2 0.05 2 0.02 1.47

Mumbai 14391 407.29 12709353.99 6.05 1 0.02 2 0.03 2.85

Raipur 64 1.58 54 1.27 0.39 4 0.1 2 0.04 0.38

Total 16246 439.85 14455382.76 14.58 9 0.21 6 0.09 9.48

Details of HUDCO NIWAS application on bulk loanas on 31 may 2010

(Rs in crores)CUMULATIVE CURRENT YEAR

Zonal office OfficesNo of schemes No of

No of loans No of No of No of loan

application approved Amount

disbursed

Amount schemes application Amount disbursed Amount

East zone Bhuwaneshwar 4 220000 1100180000 900 0 0 0 0 0

Calcutta 1 1000 2 0 0 0 0 0 0 0Ranchi 0 0 0 0 0 0 0 0 0 0

5 221000 1102180000 900 0 0 0 0 0

North zone Dehradun 0 0 0 0 0 0 0 0 0 0

Jaipur 1 50000 10050000 100 0 0 0 0 0

Lucknow 0 0 0 0 0 0 0 0 0 0

1 50000 10050000 100 0 0 0 0 0

North East Guwahati 6 27587 39517347 260 0 0 0 0 0

zone Kohima 0 0 0 0 0 0 0 0 0 0

6 27587 39517347 260 0 0 0 0 0

North West Chandigarh 4 17500 40017500 400 0 0 0 0 0

zone Jammu&Kashmir 0 0 0 0 0 0 0 0 0 0

4 17500 40017500 400 0 0 0 0 0

South zone Bangalore 3 19651 18319297 158 0 0 0 0 0

calicut 0 0 0 0 0 0 0 0 0 0

Chennai 4 14000 40014000 400 0 0 0 0 0

Trivendrum 1 30000 410.6830000

410.68 0 0 0 0 0

Vijayawada 0 0 0 0 0 0 0 0 0 0Vishakhapatnam 0 0 0 0 0 0 0 0 0 0

8 63651 993.6863297

968.68 0 0 0 0 0

West zone Ahmedabad 0 0 0 0 0 0 0 0 0 0Bhopal 0 0 0 0 0 0 0 0 0 0

Mumbai 2 13700 38812000 337 0 0 0 0 0

Raipur 0 0 0 0 0 0 0 0 0 0

ANALYSIS

The total loan disbursed by HUDCO NIWAS till March 2010 amounts to Rs 3450.18 Cr. Of this the bulk loan comprises 85.96% that is Rs 2965.68 Cr, the rest 14.04% consists of individual loan that is Rs 484.50 Cr.

By and large the figures (in %) are same for the current financial year 2010-11. Total loan amount =Rs 973.85cr Bulk loan amount =Rs 843.68 Cr, this is 86.6% of the total loan disbursed.Essentially, only 13.36% of total loan consists of individual loan portfolio.

It can be seen that that majority of the business of HUDCO NIWAS comes from its bulk loans. Bulk loans are mainly given to Government agencies, cooperative bodies etc which do not comprise the main Retail housing finance business of HUDCO NIWAS.

There fore HUDCO NIWAS should change its strategy and concentrate more on individual loans to achieve its long-term objective of being a market leader in this segment.

SUGGESTIONS

A of hub and spoke strategy for HUDCO NIWAS can be implemented to augment market share. In this strategy, HUDCO NIWAS should focus on those zones and cities where there is high potential for growth. These cities include those from which HUDCO NIWAS gets maximum business like Kolkata, Delhi, Chennai, Guhawhati, Hyderabad and Bangalore. These cities should have one large center or HUB and various offices scattered around the city. In this way our proximity to the customers is enhanced and we are better equipped to provide improved customer service. As of now there is only one branch office in the relatively large cities like Delhi, Calcutta, Bangalore and Chennai. This status quo has to be altered since it is not yielding the required returns.

The other strategy can be of door-to-door service to the customers. But in this case HUDCO NIWAS will have to go on a hiring spree for selling agents coupled with incremental costs.

SWOT ANALYSIS

OPPORTUNITIES AND THREATS

Opportunities

The traditional joint family system in India is yielding place to nuclear families. The demand for more homes from the same family is leading to a growth that has not been factored into the 40 million national housing shortages.

With expectations of adequate monsoon, the demand for housing is expected to rise consistently. Of a shortage of 40 million units, considerable demand is from the semi-urban and rural areas.

The fall in the rate of interest in the economy has made housing finance more affordable, leading to increased demand

The tax incentives and the classification of credit extended to the housing finance industry as priority sector lending has fuelled growth. The saving in tax has directly increased demand. The priority sector classification reduced the cost of borrowing. This was passed on to the customers, increasing demand indirectly.

With the improvement in the standard of living, housing has emerged a priority among the urban youth; the demand is expected to increase from this segment also.

The entry of a number of players has opened up yet another opportunity for inorganic growth. There are several private housing finance companies that are facing a squeeze on margins. This has opened up acquisition opportunities.

Threats

The threat for the housing finance companies comes from increased competition. Banks have realized that the loans allocated towards housing, classified as priority sector lending, can be raised at a reasonable cost. This enables them to give these loans out at low rates and report an attractive profit. The lending sector, and companies have been plagued with defaults in servicing and repayment. Remarkably, this has been the lowest in the housing finance sector since the house serves as an attractive mortgage.

STRENGTHS AND WEAKNESSES

Strengths

The main strength of the company is that it accepts a second mortgage, which is usually not accepted by other HFC’S. As a result customers who have already

taken the HBA from their department can get additional loan from HUDCO. The company has wide network of branches including one in Nagaland and other

far of places, thus having access to large number of people. The company provides a lot of flexibility as loan is given to a person at a place

where he is working even if the property for which the loan is taken is situated at a different place.

The transparent working helps in making the goodwill of the company as no hidden costs are involved.

Personal attention is given to each and every customer enabling them to understand the complexities of the calculation and procedure involved.

The company also gives free consultancy services for the cost effective methods of construction.

The company also enables customers to change the branch easily in case of their transfers and thus is usually preferred by people having transferable jobs.

As a result of its social mandate, HUDCO also does rural housing finance.

Weaknesses

The company does a good business in Delhi and NCR. However there is only one office in the whole region catering to the needs of many people.

The company is lacking on the technological front as a result paperless work is not possible, which in turn increases the workload of employees and also services to be provided to the valued customer.

The publicity and advertisement campaign of the company can be improved to increase the awareness among the general public.

There is no slab in case a person takes a loan in fixed rate; As a result people taking loan for shorter period are not benefited.

The rate of interest is comparatively higher than the market rates. The decision-making is centralized which in turn increases the response time.

CRITICAL ANALYSIS OF HUDCO NIWAS

Financial Overview

HUDCO has been raising funds at competitive rates from the market. The main sources of the funds are bonds (taxable & tax-free), subscribed by financial institutions and high net-worth individuals, and loans from banks. HUDCO raised capital at a weighted average cost of 10.09% in the financial year 2007-08 and at 7.51% in 2009-10. These rates are concurrent with one of the lowest rates quoted in the market.

The interest rates charged by HFCs for loans are basically determined by their cost of funds, although competition and some other factors may play a role in it. It can be observed from the comparison of interest rates of major players in the market that the interest charged by HUDCO NIWAS is, by and large, 50-100 bps higher than other HFCs. Here, immediately, one may be led to the conclusion that the cost of funds for other companies is lower, leave alone some of the banks. But facts do not support this result. The cost of capital for others are similar and rarely below that of HUDCO. The cause of this can be attributed to a deliberate decision by the management or some degree of inefficiency in translating the lower cost of capital to a reduced rate of interest charged by HUDCO NIWAS. The pros and cons to this state of affairs must be taken care of. A higher interest rate mean more margin for each loan disbursed. This adds to the bottom-line of HUDCO. But over the years the housing finance segment has become very competitive with a large number of players including foreign banks claiming a portion of the pie. In such a scenario, a 25-50 bps difference in rates can take away the market of an HFC to its competitors. This can be seen in the decline in disbursements by HUDCO NIWAS in the year 2009-10 from the previous financial year. However, there is an increase in sanctions but these sanctions can be explained by a higher level of bulk loans.

This anomaly needs to be rectified. Although, a lower interest rate puts pressure on the margins but it translates into higher volumes which more than suffices for the former. It also enhances the competitiveness in the market and maintains the reputation of the company in the long run. A somewhat precocious reduction in interest rate by HUDCO NIWAS will give it the much needed ‘early-mover’ advantage in this fiercely competitive market. This will also make the customer feel that the benefit of lower interest rates has been passed to him immediately. Moreover, it will enhance its image as a market leader and not a market follower in terms of interest rates.

Reducing the Cost of Funds

Statistics reveal that in the past 2 years HUDCO has raised capital at highly competitive rates taking full advantage of the low interest rate regime prevailing in the economy. This

phenomenon also reflects the credibility of HUDCO in the financial system. However, there is one potential area which has not been tapped well. It is ECBs or external commercial borrowings.If the going had been good in the domestic bond market, it is even better in the overseas markets. ECBs are enabling corporates to borrow cheaper than even the yields on government securities. The trickle to raise funds through ECBs is turning into a rush, as even after the rupee: dollar premiums moving up in the recent past, the cost still works below the yields on government securities.The 6-month Libor has come down from by around 45 basis points (bps) during ’10 to 1.03%. For corporate, borrowing 5-year funds at, suppose 100 bps over 6-month Libor, the all inclusive borrowing cost works close to 4.50/60%. This includes the hedging cost (towards buying forward cover) and arranger fees.This is even lower than the yield on the 5-year government security, which is currently trading at 5.33%. The ECB spree has been fuelled by the consistent fall in Libor after the European Central Bank (ECB) cut its key interest rate by 50 bps to 2%, the lowest level since ’48. The effect is enhanced by the recent cut in the Fed Rate by 25 basis points to 1%. If the rupee keeps rising, it would undermine the necessity to buy forward cover. A falling Libor with possibly very little or no forward cover would mean raising funds at the bare minimum levels.

Also, ECBs are regarded more a domain of the large borrowers. There are no lenders to borrowers who have demand of funds say in the region of $5-10 million. The large corporates can always bargain a competitive pricing, a liberty not available to smaller borrowers. Looking at this, HUDCO is reasonably well placed for ECBs. In fact, LIC Housing Finance has already raised $75 million at 69 bps from the overseas market. The range for corporates to borrow through ECBs could be between 60 to 150 bps over 6-month Libor. The term is usually 5 to 7 years. Hence, it is clear that the cost of funds can be markedly reduced through the ECB route. This reduction can be carried to the customer by decreasing the interest rate of HUDCO NIWAS, thus providing a competitive edge in the market without putting much pressure on the margins.

Marketing Overview

The housing finance industry, encompassing banks and housing finance companies (HFCs), has exhibited an average growth rate of around 35% in the last fiscal. This year too, a robust growth is expected. However, the high growth potential of the sector has invited numerous players bringing with them furious competition. HFCs, domestic banks- public as well as private and even foreign banks have joined the bandwagon and are aggressively marketing their products. The last six months or so has seen a series of rate cuts by almost all the companies. Currently, the interest rates vary between 8.25%-9.50% for fixed and floating rates and for different loan terms. Companies are now offering the basic home loan product with top ups like free insurance, innovative schemes like home-saver and promising enhanced service quality coupled with all round advertising force to

capture a share of this burgeoning market. In such a situation, a flat rate of 9.5% and hardly any aggression in marketing is going to make a dent in the business of HUDCO NIWAS.

It is time to have a strong focus and a sound strategy on marketing. A clear market segmentation and targeting and market positioning is required to remain competitive in the sector. Market segmentation and targeting involve classifying customers and potential customers in different groups according to some criteria, like demographic, psychographic, identifying the potential of each segment and finally targeting the specific segments according to resources, reach, etc. of the company and the prevailing competition in the segments. Housing finance depends on the income of the individual to a large extent. However, location as in urban, semi-urban or rural has a considerable effect on the requirement of loans. Therefore, market segmentation can be done according to income and location. Sometimes, tastes and attitude can also be taken into account. Hence, demographic and psychographic segmentation are the favored ones in the housing finance sector.

The next step can be- identifying the segments which have high growth potential for the coming few years. Although the requirement for housing is very high in the country (currently there is a shortage of more than 20 million houses), growth potential is skewed in housing finance. The housing scenario in small towns and rural areas is far from good, but housing finance has not picked up a lot due to low levels of income, legal hassles regarding land ownership and some other problems. The real potential lies in the so-called Indian middle class who lives in urban and semi-urban areas. HUDCO NIWAS should focus on this segment with a clear strategy. So it becomes the target segment.

Currently HUDCO NIWAS is not a strongly recognized brand in the housing loan market. It does not enjoy any particular positioning in the mindsets of customers. There seems to be no marketing push to sell their loans. There is no effort to make the brand a household name in housing loans. The organization does not appear to be driven by market forces. Although it has a wide reach through an extensive network of branches, it has not been able to turn this opportunity into profitability and improving its bottom line.On the other hand, other players are carving a niche and have been successful in building strong brands.

HUDCO NIWAS is known more in the government employees’ circles and lower or lower middle income groups. It has low brand recall and is not seen as high quality service providers or as product innovators. There is a need to change the customer perception. One way to accomplish the change is to project HUDCO NIWAS as a provider of “complete housing solution” and not just a home loan scheme. It should become a one-stop shop providing all kinds of housing solutions under one roof. Developing the advisory and consultancy services in housing and housing finance to help in locating the appropriate property and house. It needs to develop business relationships with real estate developers to achieve this objective. Besides this, it has to provide advisory service in housing finance as regards type of interest rate (fixed, floating, both), manner of payment, term of loan, etc.

HUDCO NIWAS also needs to improve its services markedly. According to the survey earlier mentioned in the project, customers give a lot of emphasis on the time taken for sanction of the loan. The average number of days taken by HUDCO NIWAS is 7-10 days, which is considerably higher than what the major players take (3-4 days). The other point to take heed of is that the customer should be asked to visit the office as infrequently as possible during the sanction and disbursement process. In this way, customer satisfaction can be enhanced.

Advertising

Fierce competition calls for aggressive advertising to stay in the mainstream of the market, otherwise there is a danger of getting overshadowed by other brands and becoming obscure in the market. Advertising, it seems, is not on the agenda of HUDCO NIWAS. It is not seen in the advertising-space. It may be that the management has deliberately reduced patronizing advertisements due to lower benefits as compared to the costs incurred. But low or no advertising can harm the organization more in the longer term. So it is pertinent to have a thrust in publicity and advertising to be in the reckoning and communicate effectively to the customers as well as potential customers.Identifying the various media for advertising is the first step. The media available currently are:

Radio

Radio is one of the cheaper media options but its effectiveness has been questionable in the urban areas where other forms of entertainment have become more popular. However, radio is still the medium in rural areas. Moreover, with the advent of numerous private F.M. channels it has gained people’s attention. And since competition is getting hotter in the F.M. segment also, competitive rates can be bargained for with them.

Television

Though television is a very effective medium, it is also quite expensive. And in the beginning, spending a lot in television advertisements may not be a useful strategy. The payoffs can be limited.

Print

This includes- newspapers and magazines. Newspapers are widely read in the urban and semi-urban regions. Some regional newspapers can also be targeted, like Malyala Manorma, for deeper penetration in the landmass. It should be ensured that the name of HUDCO NIWAS figures in all the articles regarding housing finance sector. This would go a long way in increasing its visibility. Magazines can also be exploited in a similar way.

Internet

It has been seen that off late HFCs like ICICI HFL, HDFC, etc. have started flashing their brands on popular websites such as yahoo.com. Internet has a reasonable penetration in urban areas. A tie-up with a well-known e-mail site can be a nice way to reach out to potential customers.

Word of Mouth

Word of mouth is a powerful source of publicity in the services industry. There is a high degree of intangibility and variability in services. The customer participates in the manufacturing and delivery of products. At the same, there is simultaneous consumption of the product. Hence the quality of service provided to the customer is of utmost importance. Customers propagate the quality of service offered to their relatives, friends and other acquaintances. An impressive impact on the customer makes him a kind of brand ambassador. This also helps in building trust on the provider.

Improving Internal Processes at HUDCO NIWAS

The housing finance sector, as I have mentioned earlier, is witnessing a lot of action and the competition only seems to aggravate in the future. In such a scenario, a high level of market orientation is required to maintain profitability. A change in the mindset and physical processes are needed at HUDCO NIWAS to develop sustained competitive advantage. This kind of change calls for a lot of support from the top management. The top management should take the initiative to undertake these changes. Moreover, it should practice the new work culture so that there is a successful trickle down impact on the middle and lower level management.

A mere change in physical processes will not do much because there will be a tendency to revert to the older order without simultaneous change in the mindset and attitude. Mindset and work culture develop over a long period of time and as the saying goes “old habits die hard”, there will be considerable resistance to change the prevailing order. But now a change is the need of the hour. It should be made inevitable as it is not just about maintaining status quo but viability.

Rigorous training, implementation of the code of conduct and higher standards of accountability should help in bringing about a change in the mindset and attitude. And all these need to be decentralized to reach all the branches in India and to all the echelons of management. A well developed management accounting system, managed by experts and professionals, with specific ‘cost’ and ‘profitability’ centers will go a long way in achieving this objective.

Internal Physical Processes

The average number of days taken to sanction a loan is about 7-10 days at HUDCO NIWAS, which is higher than the time taken by the top players (4-7 days). This has an important bearing on customer satisfaction and even on the perception of the potential customers. Training the line management to be efficient and fast in the delivery of service can help. The servicescape, which is the overall organization, design and décor of the office, also plays a crucial role in customer satisfaction. A friendly environment always leaves a pleasant impression on the customer. Computerization, networking and highly efficient database management is elements constituting internal physical processes. LAN and internet are required in all the offices across the country. Although there is WAN to connect the regional offices to the corporate office, there is a need to link the branch offices with each other for efficient and effective data processing. A Customer Relationship Management (CRM) system can help in building sound relationships with customers, with customers getting treated as “clients”. But such a system is also very expensive, so an intensive cost-benefit analysis needs to be done.Employee motivation is the key to improve internal processes. Performance based rewards; giving non-cash compensation along with regular compensation, employee enhancement programs like personal development sessions, can raise the motivation levels.

RESTRUCTURING OF HUDCO NIWAS

Sweeping changes have been mentioned in the previous section. How can they be brought about? One-way is- restructuring HUDCO NIWAS.

The organizational objective of HUDCO is different from HUDCO NIWAS. The business operations of HUDCO and HUDCO NIWAS are separate. HUDCO’s primary focus is on project finance, infrastructure development (sewage systems, etc.), township planning & development, and social upliftment through housing. HUDCO was established for this purpose and its top management is molded in such a business set-up. On the other hand, retail housing finance is a completely different ball game. It requires a different framework of focus, strategy, work culture and internal processes. HUDCO NIWAS operates in the highly competitive housing finance sector where the market dynamics keep changing with players reducing rates and coming out with new schemes frequently. A high degree of market orientation, quick decision making and implementation are key to excel in the market. It is also important to keep a keen eye on the moves of the competitors. It means being always on one’s toes.

These changes are difficult to bring about in the present set-up. An argument can be to make HUDCO NIWAS a subsidiary company of HUDCO, but not a wholly owned subsidiary. A part of the equity should be put on the block for private placement with Qualified Institutional Buyers (QIBs). Looking at the brand equity of HUDCO NIWAS, it may not be pragmatic to put more than 20-25% for private placement. This will also ensure smooth funds flow from HUDCO in the initial years. Later on, the stake of HUDCO can be progressively reduced as per the prevailing market conditions.

The principal objective of this restructuring is to bring change in the top management structure and bring more professionalism in the overall management. This exercise would entail separate financial accounting, management discussion & analysis, etc. which would bring more accountability in the overall organizational framework of HUDCO NIWAS.

However, what is the financial viability of restructuring currently? Though there are no exact figures available about the bottomline of HUDCO NIWAS, as it does not prepare separate financial statements being just a scheme, but there are indications that it is not financially very strong. Making it a subsidiary and simultaneously divesting a portion of it can be difficult due to lack of interest in the stake, etc. There are other organizational and legal issues, which need to be sorted out. By and large, it is a complex process involving marathon lobbying and manipulations.

NEW PRODUCT FOR HUDCO NIWAS

Currently the housing finance market offers only two products on the basis of interest rates, i.e. fixed and floating rates. The fixed interest rate caters to the most risk averse customers. On the other hand, floating rate moves simultaneously with the market, so it is highly risky. There is no such offering, which tries to achieve the balance between benefits and risks.

One such product could be a blend of both fixed as well as floating rate mortgage loan. In this, mortgage repayments on half of the loan amount is calculated on fixed interest rate and the other half is on floating rate. Here, if the rate goes down, the borrower gains from the floating portion of the loan and when the rate goes up, the fixed portion of the loan cushions the borrower against it. Therefore, this product combines the benefit of reduced rate (when rates go down) of floating loan and lower risk of fixed loan.

The borrower will also be allowed to convert, once in the tenure of loan, the floating rate portion into fixed rate to hedge his risk, or he is allowed to convert the fixed portion to floating to take advantage of the consistent fall in interest rates.

The detailed schedule is given in the following pages along with the proposed loan agreement.

LOAN AGREEMENT

LOAN AGREEMENT made at the place and on the date stated in the Schedule BETWEEN Housing and Urban Development Corporation Limited, a Company incorporated under the Companies Act, 1956 and Having its registered office at "HUDCO BHAWAN", IHC Complex, Lodhi Road, New Delhi-11 0003, hereafter Called "HUDCO" (which expression shall unless the context otherwise requires, include its successors and assign) of the ONE PART AND "the borrower" (which expression shall the context otherwise requires, include his heirs, executors and administrators) of the OTHER PART.

Article 1 -Definitions

1.1 In this Agreement unless the context otherwise requires:

(a) The term "Schedule" means the Schedule written after Article 11 of this Agreement.

(b) The term "Loan" means the loan amount provided for in Article 2.1 of this Agreement and the Schedule.

(c) The term "Repayment" means the repayment of the principal amount of loan interest thereon, commitment and/or any other charges, premium fees or other dues payable in terms of this Agreement to HUDCO; and means in particular, amortisation provided for in Article 2.6 of this Agreement.

(d) The term "Prepayment" means premature repayment as per the terms and conditions laid down by HUDCO in that behalf and in force at the time of prepayment.

(e) The expression "Rate of interest" means the rate of interest referred to in Article 2.2 of this Agreement. (f) The expression "Concessional rate of interest" means the concessional rate of interest arrived at by suitably adjusting the rate of interest or the increased rate of interest as per provisions to Article 2.2 as the case may be to give effect to the interest concession, the borrower is entitled to according to the rules of HUDCO in that behalf as in force from time to time.

(g) The expression "Equated Monthly Instalment" (EM) means the amount of monthly payment necessary to amortise the loan with interest over the period of the loan. (h) The expression "Pre Equated Monthly Instalment Interest" (PEMII)means interest at the rate indicated in Article 2.2, on the loan from the date/respective dates of disbursement to the date immediately prior to the date of commencement of EMI.

1.2 The term "Borrower" wherever the context so requires shall mean and be construed as "Borrowers" and the masculine gender wherever the context so requires shall mean and be construed as the feminine gender.

1.3 Subject to context thereof the expression "Property" shall mean and include land.

1.4 The term and expression not herein defined shall where the interpretation and meaning have been assigned to them in terms of the General Clauses Act, 1897 have that interpretation and meaning.

Article 2: Loan, Interest, etc

2.1 Amount of Loan

The borrower agrees to borrow from HUDCO and HUDCO agrees to lend to the borrower a sum as stated in the Schedule on the terms and conditions herein setforth. Interest

2.2 Interest

(a) The rate of interest applicable to the said loan will be both fixed rate and floating rate in ratio of 1:1 , so as to reduce the risk of borrower. .

Provided further that from time to time HUDCO may in its sole discretion increase the rate of interest suitably and prospectively if unforseen or exceptional or extraordinary changes in the money market conditions take place during the period of the agreement and hence- forth the rate of interest increased as aforesaid shall be applicable to the said loan under floating rate HUDCO shall be the sole judge to determine whether such conditions exist or not.

(b) The Borrower shall reimburse or pay to HUDCO such amount as may have been paid to payable by HUDCO to the Central or State Government on account of any tax levied on interest (and/or other charges including PEMII) on the loan by the Central or State Government. The reimbursement or payment shall be made by the borrower as and when called upon to do so by HUDCO.

2.3 Computation of Interest

The EMI comprises of principal and interest calculated on the monthly rests at the rate applicable, if any, and is rounded off to the next rupee. Interest and any other charges shall be computed on the basis of a year of three hundred and sixty five days.

2.4 Details of Disbursement

The loan shall be disbursed in one lumpsum or in suitable instalments to be decided by HUDCO with reference to the need or progress of construction (which decision shall be final and binding on the borrower). The borrower hereby acknowledge the receipt of the loan disbursed as indicated in the Receipt hereinbelow.

2.5 Mode of Disbursement

All payments to be made by HUDCO to the borrower under or in terms of this agreement shall

be made by cheque duly crossed and marked II A/c payee only" and the collection charges, if any, in respect of all such cheques will have to be borne by the borrower and the interest on HUDCO loan will begin to accrue in favour of HUDCO as and from the date of delivery/despatch of the cheque irrespective of the time taken for transit/collection/realisation of the cheque by the borrower or his bank.

2.6 Amortisation

(a) Subject to Article 2.2 the borrower will amortise the loan as stipulated in the Schedule subject however that in the event of delay or advancement of disbursement for any reason whatsoever, the date of commencement of EMI shall be the first day of month following the

month in which, the disbursement of the loan will have been completed and consequently the due date of payment of the first EMI shall in such a case be he last day of the said following month.

(b) In addition to (a) above, the borrower shall pay to HUDCO PEMII every month, if applicable. The borrower shall also make balloon payment, as required.

(c) Notwithstanding what is stated in Article 2.6 (a) above and in the Schedule, HUDCO shall have the right at any time or from time to time to review and reschedule the repayment terms of the loan or of the outstanding amount thereof in such manner and to such extent as HUDCO may in its sole discretion decide. In such events the borrower shall repay the loan or the outstanding amount thereof as per the revised Schedule as may be determined by HUDCO in its sole discretion and communicated to the borrower by HUDCO in writing.

(d) The borrower shall in his own accord send to HUDCO a statement of his income every year from the date hereof. However, HUDCO shall have the right to require the borrower to furnish such information/documents concerning his employment, trade, business or profession at any time and the borrower shall furnish such information/documents immediately.

2.7 Delay in Payment of EMI, PEMII etc.

a) One notice,reminder or intimation will be given to the borrower regarding his obligation to pay EMI or PEMII regularly payment of EMI/PEMII

(b) The delay in payment of EMI or PEMII shall render the borrower liable to pay additional interest at the rate of 30 per cent per annum or at such higher rate as per rules of HUDCO in that behalf as in force from time to time. In such event, the borrower shall also be liable to pay incidental charges and costs to HUDCO.

2.8 Pre-Payment

HUDCO may, in its sole discretion and on such terms as to pre-payment charges, etc., as it may prescribe, permit acceleration of EMIS or prepayment at the request of the borrower.

2.9 Terminal Date for Disbursement

Notwithstanding anything to the contrary contained herein HUDCO shall cancel further dis-bursement of the loan, if the loan shall not have been fully drawn within 12 months from the date of the letter of offer.

2.10 Alteration and Re-Scheduling of Equated Monthly Instalments

If the loan is not totally drawn by the borrower within a period of 12 months from the date of offer, the EMI may be altered and re-scheduled in such manner and to such extent as the HUDCO may, in its sole discretion, decide and the repayment of the amount already drawn will be made as per the said alteration and re-scheduling, notwithstanding anything stated in Article 2.6 and the Schedule.

2.11 Liability of Borrower to be Joint and Several

The liability of the borrower to repay the loan together with interest, etc. and to observe the terms and conditions of this Agreement and any Agreements, documents that have been or may be executed by the borrower with HUDCO in respect of this loan or any other loan or loans is joint and several.

Upon the borrower opting for any scheme or accepting any offer from his employer providing for any benefit for resigning or retiring from the employment prior to superannuation, or upon the employer terminating his employment for any reason or upon any reason whatsoever, then notwithstanding anything to the contrary contained in this agreement or any letter or document, the entire outstanding principal amount of loan as well as any outstanding interest and the other dues thereon shall be payable by the borrower to HUDCO from the amount or amounts receivable by him from the employer under such scheme or offer, or any terminal benefit, as the case may be. Provided, however, in the event of the said amount or amounts being insufficient to repay the said sums of HUDCO in full, the unpaid amount remaining due to HUDCO shall be paid by the borrower in such manner as HUDCO may in its sole discretion decide and payment will be made by the borrower accordingly notwithstanding anything stated in Article 2.6 and the Schedule.

The borrower hereby irrevocably authorises HUDCO to communicate with and receive the said amount from his employer directly.

Article 3 –Security

3.1 Security for the Loan by Mortgage of Property

The borrower agrees and undertakes that the principal sum of the loan, interest, and other charges and any other dues under this Agreement shall be secured by mortgage of the property described in the Schedule (hereinafter referred to as "the property") and HUDCO shall have the right to decide, in its sole discretion, the type of mortgage or any other security and/or additional security it may require and the borrower shall be bound to execute the mortgage accordingly and furnish any such other or additional security as required by HUDCO.

The borrower shall comply with the following :

(a) To give a declaration to the effect that the borrower has a clear and marketable title to the property offered as security, free from reasonable doubts and encumbrances, and that the borrower indemnifies and keeps HUDCO saved and harmless against any risk whatsoever.

(b) To execute a demand promissory note in favour of HUDCO for the amount of the loan.

(c) To any execute any such agreement/s document/s, undertaking/s that may be required now or thereafter at any time during the pendency of this loan/ or any other loan or loans granted by HUDCO hereafter.

Article 4- Conditions Precedent to Disbursement Of the Loan

(a) Utilisation of Borrower-s Contribution

The borrower assures HUDCO that he has prior to receiving the disbursement of the loan

this day as aforesaid utilised his own contribution i.e. cost of the property less HUDCO

loan.

(b) Title

The borrower assures HUDCO that he has aboslute, clear and marketable title to the property to be mortgaged by him as security for the loan and that the said property is absolutely unencumbered and free from any liability whatsoever.

4.2 Other Conditions for Disbursement

The obligation of HUDCO to make any disbursements under the Loan Agreement shall also be subject to the conditions that:

(a) Non-existence of Event of Default

No event of default as defined in Article 7 shall have happened.

(b) Evidence for Utilisation of Disbursement

Such disbursement shall at the time of request there for be needed immediately by the borrower for the purpose of purchase or construction of the property as the case may be and the borrower shall produce such evidence of the proposed utilisation of the proceeds of the disbursement as is found satisfactory by HUDCO.

(c) Extra-ordinary Circumstances

No extra-ordinary or other circumstances shall have occurred which shall make it improbable for the borrower to fulfil his obligation under the Agreement.

(d) Utilisation of Prior Disbursement

The borrower shall have satisfied HUDCO about the utilisation of the proceeds of any prior disbursements.

(e) Pending Legal Proceedings

The borrower shall have furnished a declaration to effect that there is no action, suit, proceedings or investigation pending or to the knowledge of the borrower threatened by or against the borrower before any court of Law or Government authority or any other competent authority which might have a material effect on the financial and other affairs of the borrower or which might put into question the validity or performance of this loan agreement or any of its terms and conditions.

Article 5 –Covenants

5.1 Particular Affirmative Covenants

(a) Utilisation of Loan

The borrower shall utilise the entire loan for the purchase/construction of the property as indicated by him in his application and for no other purpose whatsoever.

(b) Purchase/Construction

The borrower covenants that he shall complete the purchase/construction as indicated by him in his loan application or otherwise and obtain and produce to HUDCO a proper completion certificate issued by the concerned Municipal Corporation or Municipality and/ or the purchase documents as the case may be.

(c) Notify causes of delay

The borrower shall promptly notify any event or circumstances, which might operate as a cause of delay in the commencement or completion of the construction/purchase of property.

(d) Maintenance of property

The borrowers shall maintain the property in good order and condition and will make all necessary additions and improvements thereto during the pendency of the loan.

(e) To notify change in employment etc.

The borrower shall notify any change in his employment, business or profession within seven days of the change.

(f) Compliance with rules etc. and payment of maintenance charges etc.

The borrower shall duly and punctually comply with all the terms and conditions for holding the property and all the rules an9 regulations, bye-laws etc., of the concerned Co-operative Society, Association, Limited Company or any other Competent Authority, and pay such maintenance and other charges for the upkeep of the property as also any other dues etc. as may be payable in respect of the said property or the use thereof.

(g) Loss or damage by uncovered risks

The borrower shall promptly inform HUDCO of any loss or damage to the property which the borrower may suffer due to any force majure or act of God such as flood, storm, typhoon, tempest, earthquake etc. against which the property may not have been insured.

(h) Insurance

Notwithstanding what is herein before stated, HUDCO shall get the house/flat including constructions/structure insured against fire, earthquake, cyclone, flood, storm, typhoon and riots and HUDCO shall be the sole beneficiary under the policy, for a value equivalent to the loan amount outstanding or cost of house/flat, whichever is less and the cost of such policy shall be borne by HUDCO. In case any portion of the cost of the house/flat remains uncovered in the insurance policy to be taken by HUDCO, the borrower shall obtain additional policy as his cost covering all risks as stated above. How ever the borrower has to pay half the cost in this scheme.

5.2 Notify additions, alterations etc.

The borrower shall notify and furnish details of any additions or alterations in the property or the user of the property, which might be proposed to made during the pendency of the loan.

5.3 HUDCO's right to inspect

The borrower agrees that the HUDCO or any-person authorised by it shall have free access to the property for the purpose of inspection/supervising and inspecting the progress of construction and the accounts of construction to ensure proper utilisation of the loan. The borrower further agrees that HUDCO shall have free access to the property for the 1 purpose of inspection at any time during the pendency of loan. . Negative Covenants

Unless HUDCO SHALL OTHERWISE AGREE:

(a) Possession

The borrower shall not let out or otherwise howsoever part with the possession of the property or any part thereof.

(b) Alienation

The borrower shall not sell, mortgage, lease, surrender or otherwise however alienate the property or any part thereof.

(c) Agreements and Arrangements

The borrower shall not enter into any Agreement or Arrangement with any person, institution or local or Government body for the use, occupation or disposal of the said property or any part thereof during the pendency of the loan.

(d) Change of use

The borrower shall not change residential use of the property. If the property is used for any purpose other than residential purpose, in addition to any other action which HUDCO might take, HUDCO shall be entitled to charge, in its sole discretion, such higher rate of interest as it might fix in the circumstances of the case.

(e) Merger

The borrower shall not amalgamate or merge his property with any other adjacent property nor shall he create any right of way or any other easement on the property.

(f) Surety or Guarantee

The borrower shall not stand surety for anybody or guarantee the repayment of any loan or the purchase price of any asset.

(g) Leaving India

The borrower shall not leave India for employment or business or for long term stay abroad without fully repaying the loan then outstanding together with interest and other dues/ charges including prepayment charges as per the rules of HUDCO then in force.

Article 6 -Borrower's Warranties

6.1 The Borrower hereby warrants and undertakes to HUDCO as follows:

(a) Confirmation of loan application

The borrower confirms the accuracy of the information given in his loan application made to HUDCO and any prior or subsequent information or explanation given to HUDCO in this behalf.

(b) Disclosure of material changes

That subsequent to the said loan application there has been no material change which would affect the purchase/construction of the property or the grant of the loan as proposed in the loan application.

(c) Charges and encumbrances

That there are no mortgages, charges, lispendens or liens or other encumbrances or any right of way, light or water or other easements or right of support on the whole or any part of the property.

(d) Litigation

That the borrower is not a party to any litigation of a material character and that the borrower is not aware of any facts likely to give rise to such litigation or to material claims against the borrower.

(e) Disclosure of defects in property

That the borrowers is not aware of any document, judgement or legal process or other changes of any latent or patent defect affecting the title of the property or of any material defect in the property or its title which has remained undisclosed and/or which may affect HUDCO prejudicially.

(f) Public schemes affecting borrower's property

That the borrower's property is not included in or affected by any of the schemes of Central/State Government or of the Improvement Trust or any other public body or local , authority or by any alignment, widening or construction of road under any scheme of the Central/State Government or of any Corporation, Municipal Committee, Gram Panchayat, etc.

(g) Infringement of local laws

That no suit is pending in the Municipal Magistrate's Court or any other Court of Law in respect of the property to be mortgaged with HUDCO nor has the borrower been served with any Notice for infringing the provisions of Municipal Act or any Act relating to local bodies or Gram Panchayats or Local Authorities or any other process under any of these Acts.

(h) Disclosure of facts

That the borrower has disclosed all facts relating to his property to HUDCO and has made available to them all the title deeds in his possession.

(i) Due payments of public and other demands

That the borrower has paid all public demands such as Income Tax and all other taxes and revenues payable to the Government of any State or to any local authority and that at present there are no arrears of such taxes and revenues due and outstanding.

j) It shall be the borrower's obligation to keep himself acquainted with the rules of HUDCO, herein referred to, in force from time to time.

Article 7 -Remedies Of HUDCO

If one or more of the events specified in this Article (hereinafter called "events of default") shall have happened, then, HUDCO by a written notice to the borrower may declare the principal of and all accrued interest on the loan that may be payable by the

borrower under or in terms of this Agreement and/or any other Agreements, documents subsisting between the borrower and HUDCO, as well as all other charges and dues to be due and upon such declaration the same shall become due and payable forthwith and the security in relation to all loans shall become enforceable, notwithstanding anything to the contrary in this Agreement or any other Agreements or documents.

7.1 Events of Default

(a) Payment of Dues

Default shall have occurred in payment of EMls and/or PEMII and in payment of any other amount due and payable to HUDCO in terms of this Agreement and/or in terms of any other Agreements, documents that may be subsisting or that may be executed between the borrower and HUDCO hereafter.

(b) Performance of Covenants

Default shall have occurred in the performance of any other covenants, conditions or agreements on the part of the borrower under this Agreement or any other Agreements between the borrower and HUDCO in respect of this loan and for any other loan and such default shall have continued over a period of 30 days after notice thereof shall have been given to the borrower by HUDCO.

(c) Supply of misleading information

Any information given by the borrower in his loan application to HUDCO for financial assistance is found to be misleading or incorrect in any material respect or any warranty referred to in Article 6 is found to be incorrect.

(d) Inability to pay Debts

If there is reasonable apprehension that the borrower is unable to pay his debts. or proceedings for taking him into insolvency have been commenced.

(e) Depreciation of Security

If the property given as security depreciates in value to such an extent that in the opinion of HUDCO, further security to the satisfaction of HUDCO should be given and such security is not given in spite of being called upon to do so.

(f) Sale or disposal of Property

If the borrower's property which is given as security for the loan is sold, disposed of, charged, encumbered or alienated.

(g) Attachment or Distraint on mortgaged Properties

If an attachment or distraint is levied on the mortgaged property or any part thereof and/or certificate proceedings are taken or commenced for recovery of any dues from the borrower.

(h) Failure to furnish information/documents

If the borrower fails to furnish information/documents as required by HUDCO under the provisions of Article 2.6 (d).

7.2 Bankruptcy or Insolvency

If the borrower shall become Bankrupt or insolvent, the principal of and all accrued interest on the loan and any other dues shall thereupon become due and payable forthwith, anything in this Agreement to the contrary notwithstanding.

7.3 Notice to HUDCO on the happening of an event of Default

If any event.of default or any event which after the notice or lapse of time or both would constitute an event of default shall have happened, the borrower shall forthwith give HUDCO notice thereof in writing specifying such event of default, or such event.

7.4 Expenses of preservation of assets of the borrower and of collection

All reasonable costs incurred by HUDCO after an event of default has occurred in connection with: (i) Preservation of the borrower's assets (whether now or hereafter existing) or (ii) Collection of amounts due under this Agreement or (iii) Litigation, may be charged to the borrower and reimbursed as HUDCO shall specify.

Article 8 -Waiver

Waiver not to impair the Rights of HUDCO

No delay in exercising or omission to exercise, any right, power to remedy accuring to HUDCO upon any default under this Agreement, mortgage deed or any other Agreement or document shall impair any such right, power or remedy or shall be construed to be a waiver thereof or any acquiescence in such default, or shall the action or inaction of HUDCO in respect of any default; or any acquiescence by it in any default, affect or impair any right, power of HUDCO in respect of any other default.

Article 9 -Effective Date of Agreement

Agreement to become Effective from the date of Execution The Agreement shall have become binding on the borrower and HUDCO on and from the date of execution hereof. It shall be in force till all the monies due and payable to HUDCO under this Agreement as well as all other agreements, documents that may be subsisting/executed between the borrower and HUDCO are fully paid.

Article 10 -Miscellaneous

Place and Mode of Payment by the Borrower

All monies due and payable by the borrower to HUDCO under or in terms of this Agreement shall be paid at the registered office or the concerned regional/branch office of HUDCO, by cheque or bank draft drawn in favour of HUDCO on a scheduled bank in the town or city where such registered office/branch/regional office is situated or in any other manner as may be approved by HUDCO and shall be so paid as to enable HUDCO to realise the amount sought to be paid on or before the due date to which the payment relates. Credit for all payments by cheque/bank draft drawn will be given only on realisation thereof by HUDCO.

10.2 Inspection, Assignments etc.

(a) The borrower shall permit inspection of all books of accounts and other records maintained by him in respect of the loan, to officers of HUDCO. The borrower shall also permit similar inspection by officer of such other companies, banks, institutions or bodies as HUDCO may approve and intimate the borrower.

(b) HUDCO shall have the right to create charge over the property in favour of any company, bank, institution or body by way of security for any refinance facility or any loan availed of by HUDCO from such company, bank, institution or body. HUDCO shall also have the right to transfer or assign the mortgage over the property in favour of any company bank, institution or body in connection with any sale or transfer of the loan by HUDCO to them.

{c) HUDCO shall have the authority to make available any information contained in the loan application form and/or any document or paper or statement submitted o HUDCO by or on behalf of the borrower and/or pertaining or relating to the loan, to any rating or other agency or institution or body as HUDCO in its sole discretion may deem fit.

10.3 Service of Notice

Any notice or request or permission to be given or made under this Agreement to HUDCO or to the borrower shall be given in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand, mail or telegram to the party to which it is required or permitted to be given or made at such party's address specified below or at such other address as such party shall have designated by Notice to the party giving such notice or making such request:

For HUDCO : Housing & Urban Development Corporation Ltd. HUDCO Bhawan, IHC Complex Lodi Road, New Delhi-11 0003

For Borrower: Residential address stated in the schedule or the Property address described in the schedule.

10.4 The Borrower agrees/confirms as follows :

(a) HUDCO may return the documents of title to either/any of the borrowers notwithstanding any contrary advice/intimation from either/any of the borrowers at a later date.

(b) To keep alive the Insurance Policy/Policies assigned in favour of HUDCO b1 paying on time the premium as they fall due and produce the receipts to HUDCO as reuired in terms of Article 5.1 of this Agreement.

(c) HUDCO shall have the right to receive and adjust any payment that it may receive in connection with any Insurance Policy/Policies against the loan and alter the amortisation schedule in any manner as it may deem fit notwithstanding anything to the contrary contained in this Agreement or any other document or paper.

(d) That he has scrutinised and is satisfied with the building plan, commencement certificate and all the requisite permission pertaining to the property and that the construction is as per the approved plan and of a satisfactory quality.

Article 11

In case of Central Government employees, notwithstanding anything to the contrary contained in this agreement

(a) Any reference to own contribution the Borrower shall include the loan availed or to be availed by the Borrower from the Central Government of India on the terms and conditions contained in the indenture of mortgage referred hereunder subsisting between the borrower and the President of India.

(b) All articles having reference to the title to the property offered as security shall be read and be construed as though the phrase "subject to the first mortgage in favour of the President of India in terms of the indenture of mortgage deed dated subsisting between the Borrower and the President of India" was present in the Article.

OVERVIEW OF HOUSING LOANS OFFERED BY PROMINENT HFCs

Most of the institutions today offer quite a variety of housing loans to prospective borrowers.

Loans can be availed for the following purposes:

Purchase house/ flat. Construction of house/ flat. Extend, repair, renovate or alter a house/ flat. Purchase a plot of land meant for construction of a dwelling unit

Interest rate options:

The borrower has an option of availing the loan either at a fixed rate of interest, which stays constant throughout the loan period, or at a floating rate of interest where the interest changes (increases or decreases) depending on changes in the Bank's Term Lending Rate.

LTV is the percentage of the value of property that the lender will provide. The remaining value of the property will be the owner’s contribution (also called the margin). The usual LTV values are as shown but differ from one HFC to another.

85% for new house/ flat85% for old house/ flat 85% for purchase of a plot of land alone20% for repairs and renovation

Loan amounts

Most lenders are offering loans in the range of 10 million rupees but some go higher. Detailed description of each loan appears in the schedules comparing loans offered by major HFCs.

Tenure of loans

loan terms vary from 5,10, 15 years generally. Some HFCs are offering adjustable rate loans upto 20 or even 30 years.

Repayment:

The borrowers repay the loan in Equated Monthly Installments (EMIs) comprising principal and interest. Repayment by way of EMI commences from the month following the month in which you take full disbursement.

Eligibility and repayment capacity

You can avail a loan if you are 21 years or older and have a steady source of income. Repayment capacity takes into consideration factors such as income, age, qualifications, number of dependants, spouse's income, assets, liabilities, stability and continuity of occupation and savings history

Documents To Be Provided With Loan Application For Processing

Prospective borrowers will need to furnish the following documents along with the completed application form:

· Passport size photograph

· Proof of residence (This applies only to new or non-bank customers, and could be either a PAN identity card, voter identification card or passport)

· Sale Deed/ Agreement of Sale

· Bank account Statement or passbook, for the last six months

For employees or people in service, you also need to provide:

· Salary certificate and other information, if any, about your repayment capacity

· Form 16 or a copy of the Income Tax Returns for the last 2 years

For self employed and other IT assessees:

· IT returns for the last 3 years· Receipts of advance tax paid

· Any other information about your repayment capacity

In addition to the above mandatory documents, you are also required to furnish one or more of the following documents wherever applicable:· Letter of allotment from the housing board or society

· Copy of the approved plan

· Permission for construction

· Copy of the relative order in the case of conversion of agricultural land.

* not required where the house/flat has been constructed by an approved builder

The following schedules elucidate the product offerings of five different HFIs.

Schedule one compares loans available from different HFIs for purchase of house/flats

Schedule two compares loans available from different HFIs for Construction of house/ flat.

Schedule three compares loans available from different HFIs for Extend, repair, renovate or alter a house/ flat

Schedule four compares loans available from different HFIs for Purchase a plot of land meant for construction of a dwelling unit

Schedule five compares loans available from different HFIs for special NRI schemes

The five HFIs are:

Hudco Niwas

LIC housing finance ltd.

SBI housing finance

ICICI housing finance

HDFC

PERFORMANCE EVALUATION

The performance evaluation takes in to account 6 prominent players who together have more than 75% of the market share. They are:

HUDCO NIWAS

CANFIN HFL

BIRLA HOME

HDFC

LIC HFL

ICICI HFL

The comparison has been made over a period of last two years. The measure used as standard for comparison of HFCs is disbursement. All the companies have shown growth in their disbursement as well as their profit after taxes. On both criteria ICICI HFL leads the pack in terms of growth in disbursement and PAT. LIC HFL is the second on the disbursement front.

As far as HUDCO NIWAS is concerned, it has shown growth of 52% in disbursement over the last year. Since it is not the subsidiary company of HUDCO we have included profit after tax of HUDCO as a whole. Technically speaking, this PAT is not comparable with PAT of other HFCs. This is one of the limitations of our study.

In volume terms HDFC is the market leader followed by LIC HFL. But it seems the growth rate of HDFC has bottomed out. It is not growing at the same rate as the market is growing.

TRENDS IN HOUSING FINANCE SECTOR

HOUSING finance stands tall in the financial sector today. Over the last four years, the business has added story upon story on safe foundations. This has attracted new entrants.

The pace of this growth begs questions. Will the business continue to grow at the same rate over the next few years? Will the risk related to lending increase? How will the increased interest of commercial banks and the entry of new competition impact the housing finance market?

Factors Driving Growth

To find out if the housing finance business will grow at a high rate in the next few years, it is necessary to study the factors that spurred the growth. Housing finance received a boost through a combination of growing demand and rising affordability. While the demand for housing has always been there and will be for a long time to come, its increased affordability was the real key to growth.

According to HDFC, every rupee spent on housing leads to a 78 paisa increase in Gross Domestic Product (GDP). The positive fallout of real estate development on industries such as cement and steel has led the Government to provide a fiscal stimulus for housing finance over the last few years. Between 2007 and 2010, the Union Budgets provided significant tax benefits on housing loans, thereby offering fiscal stimulus to savings towards the construction sector.

Simultaneously, the general level of interest rate has fallen to a low not seen in almost 30 years. With a drop in every percentage point in interest rates on a housing loan, the affordability of a housing loan increases several fold.

Other than interest rates and tax benefits, another factor that has contributed to increased affordability is the sharp rise in income levels among sections of urban dwellers. In absolute terms, the number of people who can afford the purchase of a house has increased.

Simply put, enhanced affordability has spurred an increase in the demand for housing loans. The key to high growth rates in the housing finance business will continue to be affordability. That brings one to the question: Will the housing finance business continue to grow at the current rate?

Increasing Affordability

Tax benefits, a low interest rate regime and high salary levels among certain sections are likely to continue, thereby fuelling fast growth. For instance, the underlying message of the last Union Budget was that tax benefits for a housing loan would remain a priority, while that for investment avenues such as small savings schemes would be gradually scaled down. At the individual level, the scale-down in tax incentives for savings has nudged more people towards real estate. Regardless of what happens to the Budget proposals in Parliament, tax benefits for housing finance are likely to be structured such that it ensures investment in a house.

The Reserve Bank of India is clear about its desire to maintain a soft interest rate regime (The trend is clearly visible in the graph that follows). While the interest rate may rise due to temporary developments, there will a concerted push to nudge the interest rates lower in the near future. Low interest rates are here to stay, and thereby act as a stimulus for housing demand. The graph predicts further lowering in interest rates in the near future.

A sharp growth in select salaries has played an important role in making a house affordable. Regardless of salary levels, if one were to approach the issue from another

angle, affordability will increase if the cost of a house comes down. There is reason to believe that we are witnessing a gradual movement toward loosening restrictions that increase the cost of a house.

To get an idea of how expensive real estate in India is, consider the following conclusion in a McKinsey report released recently: "Scarcity has helped make Indian land prices the highest among all Asian nations relative to average income. To a significant extent, scarcity in India has been caused by illogical regulations. The government has begun to slowly repeal regulations that hinder real estate development, and there is reason to believe that the cost of a house relative to average income may decrease over the coming decade”.

New Dynamics

An important development in the housing finance business has been the entry of new players. The relatively low risk in a housing portfolio has spurred new entrants in the last few years. Arguably, the most significant entrant has been ICICI Home Finance. Among non-banking finance companies, Sundaram Finance and Tata Finance launched housing finance subsidiaries in the recent past, while banks are effectively competing with seasoned HFCs.

The entry of new players and the consequent increase in competition has been followed by an interesting trend. The interest rates of most housing finance companies (HFCs) move in unison, thereby suggesting that interest rate is not likely to be a competitive tool. The high level of competition has made it impossible for an HFC, with branches across the country, to charge an interest rate higher than what the competition charges. Commercial banks are an exception to the rule in the sense that they always charge lower than the competition!

Banks had subsidiaries handling housing finance, but in the recent past they seem to have taken a greater interest in building retail assets. Banks have a clear advantage in the field simply because they access the lowest cost funds in India. As things stand, a loan from a bank is less expensive than one from a housing finance company. Despite the overwhelming advantage that banks have, HFCs are unperturbed. The reasons range from a feeling that banks will lose interest in retail finance after a point to a belief that banks are not geared to servicing a big thrust into housing finance. In short, the HFCs believe banks cannot match them in a critical area — service.

Service: The Differentiating Factor

Companies are trying to distinguish themselves through a difference in service standards. Industry officials emphasize that service quality is the key to competitive strength. At the moment, there seems to be little to choose between top housing finance companies when it comes to service. Assuming almost similar service standards, future growth is likely to be decided by access to resources. A strong brand name, such as HDFC, ICICI or LIC, is likely to command access to a lot more resources and customers. Therefore, the bigger players are likely to be the dominant players.

Access To Resources: Another Differentiator

Dewan Housing and LIC Housing Finance both run operations with a profitability level of about 20 per cent. Despite that, Dewan is unlikely to grow at LIC Housing's pace in the current environment. LIC's superior pedigree and access to resources appears to have played a critical role in larger disbursements. For example, between 2000 and 2002, Dewan's housing loan disbursement grew from Rs 163 crore to Rs 200 crore. On the other hand, between 1999 and 2001, LIC Housing's disbursements to individuals grew from Rs 945 crore to Rs 1,597 crore.

Among HFCs, most companies, big or small, are likely to register a similar level of profitability. But access to resources, may ensure that bigger companies will dominate the market and check the growth of others.

For a while securitisation promised much, but problems associated with the process have seen negligible activity. As things stand, only top-rung HFCs are really in a position to make limited use of securitisation. For the rest, it remains a distant dream.

Changing Contours

The fast-changing environment has had a telling impact on HFCs. Following heightened competition, spreads (difference between interest income and expenditure) have declined over the last couple of years. HUDCO feels that its current spread, of 1.8-2 per cent, is likely to hold firm. Competition has whittled down high margins and changed housing finance into a low margin, low-risk business.

With their geographical spread and customer knowledge, the HFCs are trying to tap new opportunities that have come up. Using their existing infrastructure to sell other financial products to retail customers has caught the fancy of the HFCs. The opening up of the insurance industry, in particular, seems to have triggered a determined move to diversify income stream.

Even here, the bigger players are in a different league. For instance, HDFC has the resource base to promote subsidiaries in most other areas of financial intermediation —

be it asset management, insurance or commercial banking. Smaller HFCs that have wide distribution networks can only hope to leverage their reach for a commission.

Broadly, the industry is evolving into distinct layers. Top-rung HFCs, such as HDFC and LIC Housing, are among the most competitive, and will continue to remain so. New entrants with powerful promoters such as ICICI Home Finance will carve up a significant market share. Smaller HFCs will continue to do well in the next few years, but inadequate resources will make it difficult to reach the top rung.

Lending Risk Unlikely To Rise

THE relatively negligible risk in housing finance is best illustrated through an example. HDFC, the market leader in housing finance, had aggregate bad loans of 0.81 per cent of its portfolio on March 31, 2009. At the other end of the spectrum, a much smaller company, Dewan Housing Finance, had aggregate bad loans of about 0.5 per cent in March 2008.

Corporation Bank, one of the soundest banks in the country, had an aggregate bad loan of 5.4 per cent of gross advances in March 2007. Among non-banking financial companies (NBFCs), a tightly run company such as Cholamandalam Finance reported in June 2008 that 1.5 per cent of assets had problems. Thus, a portfolio of housing assets seems safer than a mixed portfolio that other financial intermediaries have.

A house is generally the single largest investment an individual makes in a lifetime. Moreover, the emotional dimension of a house makes it intrinsically safer for a lender. Another factor that adds to the safety of the loan is that most borrowers have a significant level of personal money invested in a house. If they lose possession of a house, it would mean a lot of personal wealth slipping out. None of the factors that have thus far made home loans one of the safest deployment avenues is likely to change in the near future, thereby ensuring that the business remains one of the financial sectors safest.

The recently enacted Securitization Law provides wide ranging powers for foreclosure and recovery of bad assets. This will further reduce NPAs and mitigate the risk of home loans.

Prepayment Threat

Prepayments of outstanding home loans have reduced the growth rate of the housing finance industry.

A study of the housing finance industry by Crisil, the rating agency, which includes both housing finance companies (HFCs) and banks, says prepayments have been driven by borrowers switching loans from one agency to another and also due to aggressive marketing efforts undertaken by both banks and HFCs.

Even as housing finance disbursements grew by 54 per cent between April - December 2009, prepayments stood at 12-14 per cent of outstanding loans for HFCs, resulting in a portfolio growth of 36 per cent.

According to Crisil, the portfolio would have grown by 43 per cent were it not for these prepayments. Disbursements to the housing sector grew by 54 per cent to nearly Rs 31,000 crore for the period ended December, 2009.

The study is based on an analysis of the portfolios of 13 HFCs and 22 banks rated by Crisil, which together account for over 80 per cent of the housing finance industry in terms of disbursements. The study includes the major players like HDFC, LIC Home Finance Company and State Bank of India.

According to Crisil prepayments have mainly occurred because of the high rates at which the loans were contracted in the past. With the decline in interest rates several HFCs have repeatedly reduced the interest rates on their housing loans.

Banks, with their lower cost of funds, have further accentuated this decline. Several medium and small-sized HFCs, with relatively high cost of funds, have thus borne the brunt of this decline.

Future Prospects

Prospects of the housing finance industry look encouraging mainly due to the fact that the gap in demand and supply has not been corrected adequately. At the end of the Current financial year period i.e. FY10, the shortfall in dwelling units was in the region of 40 m. In terms of dwelling units the Urban Affairs and Employment Ministry has stated that cumulatively India will have to add a minimum of 6.5 m houses per year to add 33 m houses in order to bridge the current gap. At present the supply of houses stands at close to 2.5 m per year. Apart from that the Indian economy may have reached a stage where interest rates may continue to remain soft over the long-term. This is likely to ensure a steady demand for housing loans.

The housing finance industry is on solid ground and has interesting prospects. However, the industry has become over crowded, with players of all sizes. The entry of banks into the sector has further intensified competition. Only companies that have a strong brand image, large distribution network and a customer friendly approach stand to benefit in future.

Mortgage Guarantee

National Housing Bank (NHB) is in the process of setting up a mortgage guarantee company in association with some foreign housing finance firms with a view to encourage housing loans for the "non-salary informal class of the society". The company was expected to be formed by the end of this year and would become operational early next year.

The non-formal sector, which is a major chunk of the Indian housing loan market, has not yet been seriously addressed by banks or housing finance companies due to the gravity of the risks involved compared to the salaried sector.

Scheme for Guaranteeing Bonds of HFCs

Housing Finance companies depend to a great extent on refinance assistance from NHB. However, the extension of refinance assistance by NHB is constrained by various factors like NHB's own NOF, HFCs' borrowing power etc. In addition, in the present liberalized environment, the HFCs prefer to raise resources directly from market in order to eliminate the cost of intermediation. Besides NHB refinance, HFCs mainly depend upon term loans from banks and public deposits. Of late, the maturity profile of public deposits has been shortening leading to asset liability mismatches for HFCs. One way to overcome this problem is floatation of bonds/debentures having a longer maturity period of say five to seven years. To attract the investors at competitively low rates, such bonds/debentures should have sufficiently high rating. Many of the HFCs have not been able to float bonds/debentures because of the lower credit rating from the rating agencies for various reasons including the inherent mismatch between assets and liabilities. NHB's intervention in this area was considered critical and accordingly a scheme was introduced to extend guarantee to the bonds/ debentures to be floated by HFCs meeting certain laid down criteria. Under the scheme, NHB will provide top ended guarantee relating to the repayment of principal and interest which will provide necessary credit enhancement and will enable HFCs to acquire higher credit rating leading to competitive pricing of these instruments. The salient features of the scheme are as under:

Scope of the Scheme

The Scheme envisages provision of guarantee by NHB to the investors regarding repayment of principal and interest during the top end (say last two years) irrespective of the repayment schedule fixed by the HFC and the guarantee shall not exceed 67% of the total amount to be raised and the interest thereof.

Terms and Conditions for Guarantee

The HFC desirous of availing the guarantee from NHB shall comply with the following terms and conditions:

(i) The bond issue shall carry at least a rating of “AA-” from an approved rating agency. However, the Bank may consider providing the guarantee in the case of an instrument being rated 'A‘ subject to the HFC meeting the following requirements: a) NOF shall be Rs.30 crores or more b) Net NPA shall be less than 2% c) The HFC shall have earned profit during the last three years or since its inception if it is in existence for less than 3 years d) The overdue for more than 3 months should not exceed 10% of the aggregate demand for the year e) The promoters and the management of the HFC are found to be satisfactory f) The HFC shall have complied with all the provisions of the Housing Finance Companies (NHB) Directions, 1989 as amended from time to time and all the provisions of the Guidelines on prudential norms.

(ii) The maturity of the bonds/debentures shall be for a period of five years to begin with.

(iii) The market shall determine the coupon rate.

Exposure Norms

For the purpose of extending guarantee to the HFCs, exposure limits will be fixed by NHB along with the annual refinance limit. The aggregate amount of the guarantee in a year can be maximum up to the actual amount of the bond to be floated at a time or the annual refinance limit provided in a particular year, whichever is less. The overall borrowing including the amount to be mobilised through the bond/debenture issue shall not be more than 7 times the NOF of the company.

Minimum Size of Each Issue

The minimum size for each issue should be Rs.10 crores and it will be subject to the overall borrowing powers fixed under the Housing Finance Companies (NHB) Directions, 1989, as amended from time to time.

Security

The HFCs desirous of availing the guarantee will have to create a floating charge on the assets equivalent to 125% of the principal amount in favour of NHB. In case the HFC offers any other security in addition to a floating charge for its existing borrowing or is in a position to provide further security, the same shall also be asked for. In case of the HFCs, where personal or corporate guarantee has been obtained, the same shall be extended to cover the guarantee for the bonds/debentures.

Guarantee Fee

For extending the guarantee, the HFCs shall be charged 75 basis points per year of the amount to be floated as guarantee commission and this shall be payable upfront.

Creation of Reserves

The HFC shall create appropriate bond/debenture redemption reserves as may be laid down under the Companies Act from time to time

ReturnsThe HFC shall furnish such returns/information as may be laid down from time to time for the purpose of availing refinance.

SECURITISATION

MORTGAGE BACKED SECURITISATION (MBS)

Many developing/underdeveloped countries in the world have not been able to address the problem of providing adequate shelter to every citizen of the country. One of the main reasons for the problem has been the absence of long- term capital for investment in the housing sector. Traditionally, the funds for the housing sector have come from the individuals themselves from their own savings or from the financial institutions who are primarily engaged in the intermediation process of channelising funds from the savers to the borrowers. However, the funds so mobilised through the formal sector financial institutions have been much lower than what is required to tackle the housing problem. With increasing number of players entering the housing finance business and the disbursals taking quantum jump, it is necessary that the other avenues of resource mobilisation be explored and one such source could be the capital market. The process of securitisation of mortgages offers enormous scope for expanding the mortgage financing operations and probably a time tested viable market alternative for mobilising resources. The housing finance system in many developed countries, particularly USA and UK, is characterised by the presence of a strong secondary market which enables the mortgage originators to off load their loan portfolios from their balance sheets by selling them off to major players in the secondary market. This imparts greater liquidity to the system and results in larger funds flow to the housing sector.

Securitisation- Concept & Rationale:

The process of converting mortgage loans together with future receivables into negotiable securities or assignable debt is called securitisation. The securitisation process involves packaging designated pool of mortgages and receivables and selling these packages to the various investors in the form of securities which are collateralised by the underlying assets and their associated income streams. Alternatively, securitisation could be described as a special retail dominated system of raising funds. In India, the originator in his books keeps the housing loans extended by the various categories of institutions only. A typical housing loan is kept alive in the books for a period of fifteen years and during the initial years; the principal repayment is very small. Under these circumstances, the recycling of funds is slow and it is not possible to cover more and more households in the immediate future. Securitisation is an off-balance sheet financing technique with the objective of mobilising resources at a comparatively lower cost through a wider investor base, by removing loan assets from the balance sheet of the loan originator. Securitisation actually involves conversion of mortgages into securities, which are tradable debt instruments. The securities, which are backed by the mortgages, are then freely traded in the market thereby giving rise to a secondary market. In this process, saver's surpluses are chanellised to meet borrower’s deficit. This also facilitates inter-regional and inter-sectoral flow of funds. One of the objectives of securitisation is to mobilise resources at a lower cost and make borrowings more affordable for the home-seekers. This is achieved through specialisation and diversification. Specialisation promotes efficiency and reduces the transaction costs. With the supply of housing finance expanding across the range of

lenders, the interest rate on mortgage loans tends to decline making the loans cheaper with the resultant increase in demand. With larger volumes to manage, economies of scale operate leading to a reduction in cost of funds. Similarly, with securitisation and development of the mortgage market, the risks associated with mortgage financing get diversified among increased number of actors resulting in more efficient allocation of risk. May be then we can look for soft loan structure. The interest rate housing loan today predominantly-depends on the cost of funds to the financing institution. The cost of funds to the commercial bank is relatively cheap when compared with the cost of funds to the housing finance companies. The banking system alone is not sufficient to cater to the needs of the population. Besides, housing finance is only one of their activities. The NHB has been working towards introduction of Mortgaged Backed Securities and the development of a, secondary mortgage market in the country, for quite some time now.

The Background

The financial sector and capital markets reforms have reached an advanced stage in India with a perceptible inclination towards market- orientation in resource mobilisation. The economic environment of the country is now in a position to increasingly offer a level playing field for all the economic agents in the market. On the strategic plane, interest rates on mortgage loans have been deregulated. In the above backdrop it has been perceived that development of mortgage backed securities market in tandem with capital market would cater to the need for market orientation of housing finance system in the country. The Government, in its capacity as a facilitator and enabler, has been showing positive orientation in its policies towards the housing sector and Mortgage Securitisation since 1990’s. As securitisation has been recognised by the Government as an important source of raising funds for the housing sector, the National Housing and Habitat Policy (1998) provides appropriate thrust to NHB to play a lead role in MBS in its capacity as the apex institution in the sector.

Structuring an MBS Issue

The various steps involved in the process are:

Identification of the pool of Assets on the basis of the Pool selection criteria

Valuation of the pool of assets and determining the consideration for the agreement.

Acquisition of the Housing Loans by the NHB. The housing loans selected would be the ones identified in accordance with the pool selection criteria.

Registration of the Deed of Assignment and payment of Stamp duty in accordance with the Stamp Duty laws of the respective states in which the properties are located.

Creation of Trust by NHB and the Transfer of the loans and advances by NHB to such trust.

Issue of PTCs to investors

Credit Enhancements

Appointment of Servicing and Paying Agent.

Pool Servicing.

This could be illustrated by the recent CFHL MBS Issue:

Overview of the transaction The transaction involves the assignment of retail housing loans from CFHL (the

originator) to NHB. The loans, repayable in Equated Monthly Installments (‘EMIs’) will then by packaged and offered to the investors as Pass Through Certificates (PTCs) by NHB. The housing loans, which constitute the receivables to be securitised, will be held by a Special Purpose Vehicle in the nature of a Trust, declared of trust (described in detail hereunder) would be legally effected as on the deemed date of allotment of the PTCs, i.e., 15th May 2001.

The structure of the transaction has been diagrammatically represented below:

Borrowers (Properties located in:)

Karnataka Maharashtra Tanil Nadu

CF

HL

Originator

Seller Custodian

Servicing & Paying Agent

Investors Market

Investors CFHL

NHB

Settlor of Trust Registrar &

Transfer Agetn

Trustee

Special Purpose Vehicle Trust

Loans

EMIs Monthly Payouts

Rated Class APTCs

UnratedClass B PTCs

Declaration of Trust

Initial

Continuing

Important Issues to be considered in an MBS Issue

A. Default Risk

Investors in securitised instruments take a direct exposure on the performance of the underlying collateral and have no recourse to the originator. Hence they seek additional comfort in the form of credit enhancement. It refers to the various means that attempt to buffer investors against losses on the asset collateralising their investment. These losses may vary in frequency, severity and timing, and depend on the asset characteristics, how they are originated and how they are administered. The credit enhancements are often essential to secure a high level of credit rating and for low cost funding. By shifting the credit risk from a less-known borrower to a well-known, strong, and larger credit enhancer, credit enhancements correct the imbalance of information between the lender(s) and borrowers. They are either external (Third party) or internal (structural or cash flow driven).

External Credit Enhancements:

They include Insurance, Third party Guarantee and Letter of Credit.

Insurance

Full Insurance is provided against losses on the assets. This is tantamount to 100% guarantee of a transaction’s principal and interest payments. The issuer of the insurance looks to an initial premium or other support to cover credit losses.

Third Party Guarantee

This method involves a limited/ full guarantee by a third party to cover losses that may arise on the non-performance of the collateral.

Letter of Credit

For structures with credit ratings below the level sought for the issue, third party provides a letter of credit for a nominal amount. This may provide either full or partial cover of the issuer’s obligations.

Internal Credit Enhancements

Credit Trenching (Senior/Subordinate Structure) Over-Collateralisation Cash Collateral

Spread Account Triggered Amortisation

B. Call and extension risk.

The cash flow related risks in securities are called Call and Extension risks. Call/extension risks of a security are a result of borrower’s ability to prepay the underlying assets in a transaction. These prepayments are then passed through to the investors (essentially, exercising a call on the securities). The investors are said to have written a call option on the assets. Of course, investors get compensated for this option with higher spreads than comparable securities. During pricing of these securities an expected prepayment rate is assumed to analyze the cash flows and, in the future, if the prepayment rate falls below such expected rate, extension risk arises! Prepayment risk is more prominent and applicable in longer term, prepayable and high balance assets such as mortgage loans. For example, automobile loans are short term 3-5 year maturity and borrowers don’t have much incentive to prepay other than when they sell the automobile. An automobile loan for $15,000 at 12% per annum for 5 years will have a monthly payment of $334. The same loan at 10% per annum will result in a monthly payment of $319, a difference of only $15 per month, not enough to cause a borrower to refinance (or prepay). Thus, these types of loans are not sensitive to interest rates.

Benefits Of MBS

Securitisation accomplishes the basic objective of cheaper fund generation through the twin mechanism of specialization and diversification. Since it gives rise to a number of specialist agents in the system, transaction costs are reduced to a great extent due to enhanced efficiency (however, in the initial stages when the market is growing, the transaction costs will be higher in view of the investments required to imbibe specialization but as the market grows and the specialization becomes more pronounced and disciplined, the transaction costs will be down). The risk also begins to get diversified among the increased number of participants and among sectors. The intermediaries begin to access a vast pool of funds whereby reducing the cost of intermediation. Besides, the off balance sheet practice can also reduce the portfolio risk effectively and lower the mortgage rates. By integrating the housing finance system with the broader financial market, securitization exposes the housing finance sector to the overall economic environment and the macro financial system. As securitization promotes the use of wholesale markets, different types of economies of scale will also be obtained. Quantity of funds can also be varied significantly with out the interest rate undergoing any changes. In the longer run, international capital markets can also be potentially penetrated to supplement retail finance. Securitization helps the primary lending institutions to maintain capital adequacy, improve liquidity and restructure their debt to equity ratio. By enabling the primary lending institution (PLI) to obtain a better credit rating, securitization effectively reduces the funding cost. MBS transaction is also aimed at producing matched transactions of assets and liabilities. It is thus a good instrument in the management of gap between the interest sensitive assets and liabilities.

Constraints and Challenges

Despite reasonable development in the financial sector, the Indian economy still suffers from the absence of well-defined accounting, taxation and regulatory framework, the market was not mature enough to incorporate a sophisticated market driven device like securitisation. Imperfections still exist in the primary mortgage market in the form of lack of standardisation and non-uniform underwriting norms having adverse impact on investors psyche. The intermediary, i.e. NHB,, however can combat this, to a certain extent, by providing the necessary cushion depending on the originating institution’s quality of appraisal techniques of mortgages and its record of incidence of default. MBS being a highly intricate exercise necessitates a thoroughly selective and specialised approach. Besides, India also lacks trained professionals for making the endeavour a success.

Legal bottlenecks

In India, there exists a plethora of agencies for legal approvals involving time and cost. This multiplicity in legislations governing land and construction activities gives rise to inherent inefficiencies. Thus, there exists a need for national level legislative reforms. Besides, the inter-state variances in stamp duty and registration charges on transfer of immovable property create distortion in the system and generate high transaction cost for transfer of the same. Since the MBS market cannot be viewed in isolation from the bond market, the prevailing high stamp duty in various states will hamper the creation of MBS in India by adding to the costs of securitisation of housing mortgage loans and making the transfer of MBS costly. Considering the sensitivity of the sector and its proneness to distortions, mortgage insurance will enhance the confidence of the financing institutions as well as the investor community. On similar lines, an implicit government guarantee would also provide credibility to the system. In order to induce institutional investors to invest in MBS, investment in such products could be declared as approved investments under the Insurance Act as also for the provident funds.

Capital market impediments

The Secondary Market for mortgages is lacking in depth. Since the ‘pass-through certificates’ (PTCs) are not defined as a ‘Security’ under SCRA, 1956, this adversely affects the scope for listing and tradability of PTCs at Stock Exchanges. The stamp duty on primary isues of MBS is not uniform across states, which could impede the de-materialization process and act as a significant barrier to trading.

Regulatory issues

There is no supervisory provision to determine whether a sale of assets qualifies as a sale for “regulatory purposes” and thus, can be excluded from the originator’s balance sheet for capital adequacy purposes. There is also lack of standard practices defining extent of

recourse, relationship between issuer and seller; repurchase obligations; extent of investment in own MBS etc.

Other issues

In order to promote marketability of the MBS to make it acceptable to a varied range of potential investors, rating of MBS has to be made mandatory. A friendly taxation treatment would be highly appreciated to enhance the flow of funds for the sector. In the USA, SPVs are exempted from tax.

IMPACT OF SECURITISATION LAW

The indian financial system has been reeling under the burden of bad assets. The existing laws were inadequate and very time-consuming. It can be said that they were more inclined towards the borrowers. Eventually, the government took a significant step of promulgating the securitisation ordinance in june, 2002 in a bid to rectify this anomaly. The ordinance with some changes was passed in the parliament in december 2002 and the securitisation law came into force. The law basically provides sweeping powers to the lenders to take over and manage the assets of delinquent borrowers without recourse to a high court. Recently the ministry of finance announced the expansion of the scope of the law to include housing finance companies too. The MoF will shortly release a notification to this effect. This act will, supposedly prove to be effective in cleaning the balance sheets of banks and other financial institutions.

The housing finance sector does not suffer from high NPA levels. In fact, it has the lowest level among other financial services. Currently, this level is pegged at around 2%. Even this low magnitude of bad assets would come down after the implementation of this law. This is the present view in the industry. However, competition has increased manifold in this sector and trend will continue in the near future. There will be a tendency of the HFCs to slacken credit norms to capture more market. Concurrent with this, NPA levels are slated to rise. But they can be effectively managed with the securitisation law. Hence, the enforcement of this law closes a gap in the legal-economic framework enhancing the ongoing reform process. The end result would bring credit to hitherto under serviced people who were thought to be less credit-worthy and were given a pass by the HFCs.

There were expectations in the industry that the law would also address the issue of securitisation as a new financial instrument, more so with respect to mortgage backed securitisation. However, all the hopes came a cropper. The law provides no framework to facilitate and regulate mortgage backed securitisation. Neither have any hints been given to such an effect.

ASSET LIABILITY MANAGEMENT

The Government of India embarked on a structural reform process in 1991, which aimed at enhancing the productivity and efficiency of the economy as a whole and also to increase international competitiveness. It was also felt that the full potential of the economic reforms in the real sectors of the economy could not be realised without a simultaneous reform of the financial sector. Therefore, in order to promote a diversified, efficient and competitive financial sector with the ultimate objective of improving the allocative efficiency of available resources, increasing the return on investments and promoting an accelerated growth of the real sector of the economy, the financial sector reforms were introduced.

Since the advent of these reforms, the financial sector in India has witnessed major changes and it is expected that the changes will be more rapid in the coming years. Increased competition from non traditional institutions, new information technologies and declining processing costs, the erosion of product and geographic boundaries and less restrictive governmental regulations have all played a role in facilitating the changes that are taking place in the scenario of world banking. There is no doubt that these developments have made the financial institutions more efficient but at the same time have also made them more vulnerable. The basic principle of any business is about taking risk and gaining reward. In fact risk is associated with all activities undertaken for the purpose of generating profit. In all these activities, a trade off becomes necessary for survival and profitability.

The financial institutions in India especially the banking sector were not worried about certain risk aspects as they were functioning under the administered interest rate regime. They were used to accepting deposits at rates which were determined by the Reserve Bank of India and lending at rates which were again stipulated by the Reserve Bank. While fixing the interest rates, the Reserve Bank ensured that the banks are left with some spread. Liquidity was ensured, as the banks were required to statutorily invest a very high portion of their demand and time liabilities in approved securities under the statutory liquidity ratio. In addition the banks were also required to keep with the Reserve Bank a cash balance equivalent to 10% of their net demand and time liabilities under the cash reserve ratio requirement. Thus, there was no interest rate risk or liquidity risk to be managed. The only risk the bankers were faced with was the credit risk. Here again, before the prudential norms were introduced in 1992, the banks used to recognise the income from their lending without even receiving it.

The deregulation of interest rates on advances was first introduced in October 1988 and thereafter there has been a progressive deregulation of interest rates on advances as well as deposits. The banks have been given freedom to determine their own interest rates. There has been a gradual reduction in the statutory reserve requirements since then and

the banking sector has been opened up to more competition, diversification of activities, more transparency etc.

Housing Finance System

The housing finance system in India could be divided into two phases viz. the one before the setting up of the National Housing Bank in 1988 and the one after the setting up of the National Housing Bank. Prior to 1988, there were only few specialised institutions catering to a small area. The first all India level institution to lend to individuals for housing came in 1977. Before the setting up of NHB, the housing finance companies were under the regulatory purview of the RBI and after the establishment of NHB, the regulatory powers over the housing finance companies was transferred to it. The housing finance companies are basically non-banking financial companies and the Reserve Bank only used to prescribe the maximum interest rate payable on the deposits and never prescribed the interest rates for their lending. Thus as far as the non-banking financial companies are concerned, the interest rates were never administered and with successive reductions in the interest rates, these companies are faced with greater interest rate risk now than before.

As far as liquidity is concerned, these companies were required to invest only a small percentage of their deposits in approved securities/deposits. The prescription regarding this has undergone several changes over the years. The housing finance companies today are required to invest 12.5% of their public deposits in approved securities/ deposits with NHB or invest in bonds of NHB. Since the housing finance companies are not allowed to accept demand deposits, there is no prescription of cash reserve ratio and the statutory reserve requirements as mentioned above is lower than that of the banking system. At the same time with a very volatile interest rate regime, the housing finance companies are prone to liquidity risk.

One of the biggest risks facing the housing finance system in India is the asset-liability mismatch. The housing loans are made available to the individual for a period of 15 years and the average period for which it remains in the books of the HFCs is around 8-10 years. As against this, the housing finance companies raise their resources from the public by way of fixed deposits, medium term loans from the banking system /other institutions and refinance from NHB. As at the end of March 2001, refinance from NHB constituted about 8% of the borrowings of the HFCs and these funds have a maturity co-terminus with the repayment schedule prescribed by the HFCs to their borrowers. In this sense, the refinance from NHB has the same duration as that of the housing loans. The term loan from the banking system, which is on an average for a period of five years and constituted approximately 25% of the borrowings and the deposit from the public accounted for 23% and this is a medium/short term resource. The remaining 44% of the resources were by way of borrowings from other institutions/sources. Liabilities of matching maturity are often difficult to find and for which there is growing competition. On the other hand, until the housing finance system has acquired sufficient maturity, stability and resilience, it may be risky to expose short-term deposits to long term

lending. It calls for a judicious mix of assets and liabilities especially in the case of housing finance companies.

Asset Liability Management

The housing finance institutions are therefore required to have sound risk management practices. Asset Liability Management is one tool, which provides a comprehensive and dynamic framework for measuring, monitoring and managing the various risks in financial business. Asset-Liability Management can be defined as the process of adjusting the liabilities of a financial institution to meet loan demands, liquidity needs and safety requirements. Asset Liability Management is a good example of risk measurement and an analysis of the assets and liabilities of an institution can provide an estimate of the potential impact of the changes in the interest rates on the profitability. ALM can also be defined as assessing the impact of changing profile of various risks on the balance sheet and actively altering the structure of the asset and liability portfolios to optimize the profit position of the financial institution. In other words it is the management of total balance sheet dynamics with regard to its size and quality based on conscious alteration of asset-liability structure to maximize profits.

The scope of the ALM presently is restricted to managing the market risks viz. interest rate risk, liquidity risk and currency risk. Not all the HFCs are currently facing the currency risk. This risk arises only when the resources are raised in foreign currency and required to be paid back in foreign currency. It should however be remembered even a credit risk could ultimately lead to liquidity risk and therefore an integrated approach to risk management is needed.

The prime objective of ALM is to maximize the net interest income (NII) or net interest margin (NIM) and the market value of equity (MVE). Profits can be maximized either by increasing the income or by lowering the cost or both. In order to achieve this and with fierce competition, the financial institutions tend to take increased risks. This will lead to a greater volatility of NII/NIM or the MVE. Therefore, in order to maximize the NII, the financial institution needs to analyze the composition of its assets and liabilities by taking into account the rate and the volume.

ALM Techniques

The generally followed ALM Techniques are:

Gap Analysis Duration Gap Analysis Simulation Method Value at Risk

Gap Method

Under the Gap analysis method, the various assets and liabilities are grouped under various time buckets based on the residual maturity of each item or the next repricing date, if on floating rate, whichever is earlier. Then the gap between the assets and liabilities under each time bucket is worked out. Since the objective is to maximise the NII, it will be sufficient if this is done only with respect to rate sensitive assets and liabilities. If the rate sensitive assets equal the rate sensitive liabilities, it is known as the Zero Gaps or matched book position. If the rate sensitive assets are more than the rate sensitive liabilities, it is referred to as positive gap position and if the rate sensitive assets are less than the rate sensitive liabilities, it is known as negative gap position. The decision to hold a positive gap or a negative will depend on the expectation on the movement of interest rates. The effect of an upward movement or a downward movement in the interest rate on the NII will also depend on the position taken. These effects are given in the table below:

GAP Position Change in

Interest Rates Change in

Interest income Change in

Interest expenses Change in

NII

Positive Zero Increase Increase IncreasePositive Decrease Decrease Decrease DecreaseNegative Increase Increase Increase DecreaseNegative Decrease Decrease Decrease IncreaseZero Increase Increase Increase NoneZero Decrease Decrease Decrease None

Each HFC is required to set the prudential limits on l gaps under each of the time buckets after working out the effect on its NII based on their views on interest rate movements and having a bearing on total assets, earning assets or equity.

Duration Method

The Gap method discussed above however, ignores the time value of money. This deficiency is sought to be removed by the Duration Method. Under the duration method, the effect of a change in the interest rate on NII is studied by working out the duration gap and not the gap based on residual maturity. First, timing and the magnitude of the cash flows need to be ascertained and calculated. Then by using appropriate discounting factor, the present value of each of the cash flows needs to be worked out. Then, calculate the time-weighted value of the present value of the cash flows. The sum of the time-weighted value of the cash flows divided by the sum of the present values will give the duration of a particular asset.

Illustration: Duration of a 5-year bond carrying a coupon of 9% if the present interest rate is 10%

Year Cash Flow

Discount factor

Discounted value

Weight given

Weighted present value

1 9 0.909 8.181 1 8.1812 9 0.826 7.434 2 14.8683 9 0.751 6.759 3 20.2774 9 0.683 6.147 4 24.5885 109 0.621 67.689 5 338.445

96.210 406.359Duration = 406.359/96.210 = 4.22 years

The duration gap is the composite duration of liabilities and the multiple of the difference between composite duration of the assets and the composite duration of the liabilities and the asset-surplus ratio.

Symbolically, this is given by the following equation:

DS = DL + (A/S) x (DA-DL)

WhereDS = Duration GapDA = Duration of AssetsDL = Duration of LiabilitiesA = AssetsS = Surplus or Gap (Assets-Liabilities)

The next step is to calculate the effect of a rate change on the market value of the asset/liability. This worked out by using the following formula:

Change in the market value of asset/liability = -D.r *current market value (1+r)WhereD = Duration of assets/liabilities r = current interest rate

The market value of equity is then arrived at by subtracting the market value of the liabilities from the market value of the assets.

Since one of the objectives is to ensure that there is no reduction in the value of the firm due to interest rate fluctuations, the attempt should be to maintain the duration gap as zero.

Simulation Method

Under this method, the effect on the NII or market value of equity is worked out as explained above under various alternative interest rate scenarios.

Value at Risk

This method is used to estimate the change in the value of assets and liabilities due to change in the interest rates so as to indicate the economic value of the portfolio using the well known statistical techniques of mean and the deviation. This method helps in calculating the networth of a financial institution and the long-term risk implications. The concept of standard deviation is used to measure the risk. To calculate the value at risk, we need to ascertain the market value of the portfolio. Then we need to arrive at the standard deviation, which is obtained, from the historical data and the statistical multiplier corresponding to 1% probability.

Illustration

The value at risk of Rs.500 crores portfolio at standard deviation of 6% will be calculated as follows:

500 x 0.006 x 3 = 9

Note: According to the Basle norm 1% of one year is 3 days.

This means that the price of the portfolio may decline by at least Rs.9 crores one out of 100 days or three out of 365 days and on the other days, the price may decline but by less than Rs. 9 crores.

The last two methods described above require sophisticated modelling and historical data.

CONCLUSION

The risk management process involves identification of the risks, deciding the appropriate exposure level to the risks and developing the strategies to manage the risk. Asset Liability Management is one such tool for managing the risks. NHB has recently issued the guidelines for putting in place a system of Asset Liability Management in HFCs and these guidelines are to be made operational with effect from the current year. Any risk management system requires data, which are accurate and available on time. Thus efforts should be made to capture the data from the various branches on time.

REFERENCES

NHB annual report NHB-report on trend and progress in housing NHB-Quarterly Newsletter NHB Guidelines Annual reports of HUDCO, HDFC, ICICI HFL, Can Fin HFL, LIC HFL, Birla

Home Finance, and SBI. Housing Finance International Leading Economic & Financial Dailies Websites of HFCs