Completion Report India: Housing Finance
Completion Report
Project Number: IND 30204 Loan Number: 1759-IND and 1761-IND October 2008
India: Housing Finance II Project
CURRENCY EQUIVALENTS
Currency Unit – Indian rupee/s (Re/Rs)
At Appraisal At Project Completion National Housing Bank 31 August 2000 30 June 2007 Re1.00 = $0.02179 $0.02455 $1.00 = Rs45.9 Rs40.7
ICICI Bank Limited 31 August 2000 10 October 2007 Re1.00 = $0.02179 $0.02534 $1.00 = Rs45.9 Rs39.5
ABBREVIATIONS
ADB – Asian Development Bank ADS – area development society BME – benefit monitoring and evaluation CDS – community development society CFI – community-based financial institution DSCR – debt service coverage ratio HDFC – Housing Development Finance Corporation Limited HF I – Housing Finance Project HF II – Housing Finance II Project HFC – housing finance company HFI – housing finance institution HUDCO – Housing and Urban Development Corporation Limited ICICI Bank – ICICI Bank Limited JLG – joint liability group LIH – low income household MBS – mortgage-backed securitization MFI – microfinance institution NGO – non-government organization NHB – National Housing Bank NHG – neighborhood group PCR – project completion report RBI – Reserve Bank of India RRP – report and recommendation of the President SHG – self help group SML – Share Microfin Limited SPARC – Society for Promotion of Area Resource Centre SPMS – Sri Padmavathy Mahila Abyudaya Sangam SSNS – SPARC Samudaya Nirman Sahayak TA – technical assistance UEIF – Urban and Environmental Infrastructure Facility USAID – United States Agency for International Development
NOTES
(i) The fiscal year (FY) of NHB ends on 30 June, and of the ICICI Bank ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2007 ends on 30 June 2007 for NHB and 31 March 2007 for ICICI Bank.
(ii) In this report, “$” refers to US dollars.
Vice President X. Zhao, Operations 1 Director General K. Senga, South Asia Department (SARD) Director T. Kondo, Country Director, India Resident Mission, SARD Team leader S. Singh, Financial Officer, SARD Team members R. Pande, Associate Financial Analyst, SARD N. Saini, Administrative Assistant, SARD
CONTENTS
Page
BASIC DATA i I. BACKGROUND 1 A. History 1 B. Scope of Operations 1 C. Relationship with ADB and Other lenders 2 D. Relevance of Design and Formulation 3 E. Related Technical Assistance 5 II. IMPLEMENTATION 5 A. Lending Policies 5 B. Characteristics of Subloans 6 C. Implementation and Internal Operation of Subprojects 8 D. Operational Performance of the Borrowers 12 E. Borrower’s Financial Performance 13 F. Financial Statements and Ratios 13 G. Covenants 14 H. Performance of the Asian Development Bank 14 III. EVALUATION 15 A. Loan Appraisal 15 B. Implementation 16 IV. ASSESSMENT AND RECOMMENDATIONS 16 A. Evaluation Criteria 16 B. Relevance 17 C. Effectiveness in Achieving Outcome 17 D. Efficiency in Achieving Outcome and Outputs 18 E. Preliminary Assessment of Sustainability 18 F. Overall Assessment 18 G. Impact 19 H. Lessons 20 I. Recommendations 20 APPENDIXES
1. Project Framework 21 2. Community-based Financial Institution and Non-Government Organization Subproject Profiles 28 3. Details of Refinance and Direct Finance under the Project 35 4. Policy and Institutional Action Plan 37 5. Financial Statements of National Housing Bank 40 6. Financial Statements of ICICI Bank Limited 43 7. Status of Compliance with Key Loan Covenants 46
BASIC DATA
A. Loan Identification
1. Country India 2. Loan Numbers 1759-IND, 1761-IND 3. Loan Title Housing Finance II Project 4. Borrowers National Housing Bank (NHB) and ICICI Bank Limited (ICICI Bank), the successor of ICICI Limited 5. Amount of Loan $40 million to NHB and $80 million to ICICI Bank 6. Project Completion Report Number PCR:IND 1057
B. Loan Data
1. Appraisal Date Started 5 June 2000 Date Completed 15 June 2000
2. Loan Negotiations Date Started 22 August 2000 Date Completed 25 August 2000
3. Date of Board Approval 21 September 2000
4. Date of Loan Agreements 18 December 2001
5. Date of Loan Effectiveness In Loan Agreements 18 March 2002 Actual NHB 15 February 2002 ICICI Bank 20 December 2002 Number of Extensions for Four ICICI Bank
6. Terminal Date for Commitments In Loan Agreement NHB 14 February 2006 ICICI Bank 19 December 2006 Actual NHB 30 June 2007 ICICI Bank 30 June 2007 Number of Extensions One for NHB and ICICI Bank
7. Closing Date In Loan Agreements 30 June 2007 Revised for ICICI Bank 10 October 2007 Number of Extensions None
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8. Terms to the Borrower Interest Rate As per the Asian Development Bank’s (ADB’s) market-based loan facility for US dollar loans. Maturity (number of years) 25 years Grace Period (number of years) 5 years Free Limit $2 million Repayment Terms Amortized in semiannual installments over 20 years.
9. Interest Rate for Subloans Project envisaged market-based interest rates. Actual interest rates varied across lending channels.
10. Disbursements
a. Dates
Borrower Initial Disbursement Final Disbursement Time Interval
NHB 27 March 2002 30 June 2007 5 years ICICI Bank 23 December 2002 10 October 2007 5 years
Effective Date Original Closing Time Date Interval
NHB 15 February 2002 30 June 2007 5 years ICICI Bank 20 December 2002 30 June 2007 4.5 years
b. Amount ($ million)
Name Last of the Original Revised Amount Amount Borrower Category Allocation Allocation Canceled Disbursed NHB Project 40.00 40.00 32.60 7.40 Expenditure
ICICI Bank Project 80.00 80.00 0.00 80.00 Expenditure Total 120.00 87.40 0.00 87.40
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C. Implementation Data
1. Number of Subloans NHB 2,8301 ICICI Bank 25,730 (Approximately)
2. Sectoral Distribution of Subloans
Housing Finance II Project, National Housing Bank Loan (Loan 1759–IND)
Component Sector Projected Actual Amount % Amounta % ($ million) ($ million) Part B(ii) Refinancing HFIb Up to $32 No loans to LIHs million more 6.22 88.86 than 80% Part B(iii) Supporting the CFI refinance scheme to 0.00 refinance HFC loans to CFIs for housing subloans c At least $8 At 11.14 Part A (i) Support lending million least 0.78 to LIHs for 20% qualified housing proposals through intermediaries consisting of (i) CFIs and NGOs CFI = community-based financial institution, HFC = housing finance company, HFI = housing finance institution, LIH = low income household, NGO = non-government organization. a This amount excludes front-end fees of $0.4 million. b HFI is a housing finance institution as defined in the NHB Act with the objective of providing finance for housing. c This component was incorporated vide amendment to the loan agreement dated 8 September 2006 and included together with Part B (iii) for satisfying the subloan distribution criteria.
Housing Finance II Project, ICICI Bank Limited Loan (Loan 1761–IND)
Component Sector Projected Actual Amount Amounta ($ million) ($ million) Part A(i)b Lending directly to LIHs that are 10 8.38 beneficiaries of CFIs or NGOs, or indirectly to LIHs through CFIs or NGOs as intermediaries Part A(ii)c Lending directly to LIHs that are 20 2.47
1 This figure corresponds to the loan of $7 million, which was originally disbursed under part B(ii). Subsequently, $0.78 million was reallocated from part B(ii) to part A(i), under which 576 loans were made. iv
Component Sector Projected Actual employees of public and private enterprises, or indirectly to LIHs through public and private enterprises Part A(iii) Lending indirectly to LIHs through 10 0.00 state and local bodies Part B(i) Lending directly to LIHs 40 68.35
CFI = community-based financial institution, LIH = low income household, NGO = non-government organization. a This amount excludes front-end fees of $0.8 million. b This component was revised to include direct lending to beneficiaries of CFIs or NGOs (loan agreement amendment of 3 November 2004). c The condition in the loan agreement restricting direct lending under part A(ii) to $10 million was removed (loan agreement amendment of 3 November 2004).
3. Subloans Above Free Limit ($2 million): Nil
4. Project Performance Report Ratings
NHB Ratings Development Implementation Implementation Period Objectives Progress (i) From December 2000 to May 2001 S S (ii) From June 2001 to February 2002 S U (iii) From March 2002 to December 2005 S S (iv) From January 2006 to April 2006 S PS (v) From May 2006 to August 2006 PS S (vi) From September 2006 to January 2008 S S PS = Partly Satisfactory, S = Satisfactory, U = Unsatisfactory.
ICICI Ratings Bank Development Implementation Implementation Period Objectives Progress (i) From December 2000 to May 2001 S S (ii) From June 2001 to November 2002 S U (iii) From December 2002 to February 2003 S PS (iv) From March 2003 to December 2007 S S PS = Partly Satisfactory, S = Satisfactory, U = Unsatisfactory. v
D. Data on Asian Development Bank Missionsa
Housing Finance II Project, National Housing Bank Loan (Loan 1759–IND)
No. of No. of Specialization Name of Mission Date Persons Person-Days of Membersb
Fact-Finding Mission 18 April–2 May 2000 6 90 c, j, k,
Appraisal Mission 5-15 June 2000 3 33 c, j, k
Inception Mission 29 April 2002 2 2 b, f
Review Mission (1) 7 February 2003 3 3 b, f, k
Review Mission (2) 24 April 2003 3 3 b, f, k
Review Mission (3) 4 August 2003 2 2 b, f
Disbursement 1–2 September and 15 1 3 f Mission September 2003
Review Mission (4) 21–23 October 2003 1 3 b
Disbursement 18 and 26–30 October 1 5 f Mission 2003
Review Mission (5) 7 and 13 April 2004 4 8 b, d, f, k
Disbursement 22–28 July 2004 1 7 f Mission
Mid-term Review 30 June–8 November 4 7 b, d, f, k Mission 2004
Review Mission (6) 2 February 2006 3 3 b, f, k
Review Mission (7) 13 September 2006 2 2 b, f
Review Mission (8) 11 April–14 May 2007 4 32 b, h, i, k
Project Completion 9–27 May 2008 2 6 b, k Reviewc a The mission details provided here are based on the review of project files. b a - engineer, b - financial analyst, c - counsel, d - economist, e - procurement or consultant specialist, f - control officer, g - programs officer, h - resettlement specialist , i - environment specialist, j - urban development specialist, k - onward for other categories. c The project completion review mission comprised Tetsu Ito, Senior Economist (Financial Sector) and Mission Leader; and Shalini Singh, Financial Officer. Ruchira Pande, Associate Financial Analyst, and Neha Saini, Administrative Assistant, assisted the mission. vi
Housing Finance II Project, ICICI Bank Limited Loan (Loan 1761–IND)
No. of No. of Specialization Name of Mission Date a Persons Person-Days of Members
Fact-Finding Mission 18 April–2 May 2000 6 90 c, j, k
Loan Appraisal 5–15 June 2000 3 33 c, j, k Mission
Loan Inception 13–16 February 2002 3 12 b, f, g Mission
Review Mission (1) 19 February 2003 4 4 b, k
Review Mission (2) 9–19 June 2003 2 22 b, k
Disbursement 9–19 June 2003 2 22 f, k Mission
Mid-term Review 24June–18 August 3 24 b, k Mission 2004
Review Mission (3) 30 November–3 3 12 b, k December 2004
Review Mission (4) 25 May 2006 1 1 k
Special Loan 4–5 December 2006 2 4 b, k Administration Mission
Review Mission (5) 11 April–14 May 2007 4 16 b, h, i, k
Project Completion 8–21 May 2008 2 8 b, k Review (PCR)b a a - engineer, b - financial analyst, c - counsel, d - economist, e - procurement or consultant specialist, f - control officer, g - programs officer, h - resettlement specialist , i - environment specialist, j - urban developm ent specialist, k - onward for other categories. b The project completion review mission comprised Tetsu Ito, Senior Economist (Financial Sector) and Mission Leader; and Shalini Singh, Financial Officer. Ruchira Pande, Associate Financial Analyst, and Neha Saini, Administrative Assistant, assisted the Mission.
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E. Related Loans
Housing Finance II Project, National Housing Bank Loan (Loan 1759–IND)
Item Loan No. Date of signing of Amount Loan Agreement Housing Finance (National 1549-IND 25 September 1997 $100 million Housing Bank) IND = India. Source: Asian Development Bank, Loan Financial Information System.
Housing Finance II Project, ICICI Bank Limited Loan (Loan 1761–IND)
Item Loan No. Date of signing of Amount Loan Agreement Industrial Credit and Investment 778-IND 2 May 1986 $100 million Corporation of India Limited Second Loan to Industrial 1072-IND 15 January 1991 $120 million Credit and Investment Corporation of India Limited Private Sector Infrastructure 1480-IND 14 August 1997 $150 million Facility Project Urban Environment and 1720-IND 19 May 2000 $80 million Infrastructure Facility IND = India. Source: Asian Development Bank, Loan Financial Information System .
I. BACKGROUND
A. History
1. National Housing Bank. The National Housing Bank (NHB) was established in July 1988 under the NHB Act, 1987, to function as the apex body for housing finance. NHB is wholly owned by the Reserve Bank of India (RBI). Its three primary responsibilities are regulating and supervising housing finance companies (HFCs),1 mobilizing resources for housing finance operations in the form of refinance and direct finance, and promoting development of HFCs. A major amendment to the NHB Act was made in 2000, which aimed to strengthen the regulatory and supervisory functions of NHB with respect to HFCs, including registration of HFCs with NHB. The amendment also included provisions to enable NHB (i) to directly finance housing finance projects, and (ii) to undertake mortgage-backed securitization (MBS) of housing loans.
2. ICICI Bank. The Government of India and the World Bank, among others, formed the Industrial Credit and Investment Corporation of India Limited (subsequently renamed ICICI Limited) in 1955 as a development finance institution to provide medium- and long-term project financing to Indian businesses. In the 1990s, ICICI Limited broadened its business scope by creating subsidiaries covering the complete spectrum of banking products and services . In 2002, in response to the challenges and opportunities resulting from liberalization of the financial sector, ICICI Limited merged with its commercial banking subsidiary, ICICI Bank Limited (ICICI Bank). For further details, refer to the project completion report (PCR) of the Urban and Environmental Infrastructure Facility (UEIF).2
B. Scope of Operations
3. National Housing Bank. In its role as a housing finance provider, NHB refinances HFCs, commercial banks and cooperative sector institutions. NHB also directly finances housing projects of public housing and development agencies. In addition, it has extended financial support to housing schemes of community-based financial institutions (CFIs ) and non- government organizations (NGOs). As a regulator, NHB regulates the deposit acceptance activities of HFCs, and sets prudential norms regarding their capital adequacy, asset classification, concentration of credit, income recognition, provisioning for bad and doubtful debts, etc. NHB supervises the operations of HFCs through on-site inspection and off-site surveillance. NHB has played a role in the development of a secondary mortgage market in the country. It launched the pilot MBS issues in India in August 2000, followed by 13 other MBS issues (with a total value of Rs8,630 million). NHB is also in the process of promoting a mortgage credit guarantee company.
4. ICICI Bank. At the time of approval of the Housing Finance II Project (HF II), the principal business of ICICI Limited comprised medium- and long-term project finance, corporate finance, leasing, and other types of financial and advisory services. Following the 2002 merger of ICICI Limited with ICICI Bank, the latter, as the surviving entity, became a universal bank providing a range of services, including retail banking (lending, deposits, and money- transmission services), corporate finance, project finance, rural finance, microfinance, and fee- based services. For further details, refer to the UEIF PCR (footnote 2).
1 HFCs are companies that are registered with NHB, and whose primary business (directly or indirectly) is the provision of housing finance. 2 ADB. 2007. Completion Report on Urban and Environmental Infrastructure Facility Project. Manila.
2
C. Relationship with ADB and Other Lenders
1. National Housing Bank
5. ADB operations with NHB. In 1997, prior to HF II, ADB provided a government- guaranteed loan of $100 million to NHB under the Housing Finance Project (HF I),3 for lending through government cooperatives, HFCs, CFIs and NGOs to individuals, with an emphasis on low income households (LIHs). ADB also provided advisory technical assistance (TA)4 to evaluate NHB’s operational effectiveness, develop benchmarks in key NHB operational areas, and develop NHB’s medium-term business strategy. ADB also approved two TAs related to MBS in 20015 and 2005,6 and investment in a mortgage credit guarantee company.7
6. Funding structure of NHB. Rupee borrowings comprise the bulk of NHB’s resources, with borrowings from outside India constituting about 2.3% of total debt in 2007 (ADB loans constituted 2.1%). The main sources for rupee resources include domestic bonds and debentures, some of which enjoy fiscal and/or regulatory incentives (e.g., priority sector and capital gains bonds), and borrowings from banks. The fiscal and regulatory benefits have decreased in recent years (for instance, the capital gains bonds scheme and priority sector status for bonds were withdrawn in 2006), and NHB is increasingly relying on commercial borrowings.
7. Other development partners. The United States Agency for International Development (USAID) is among NHB’s other development partners. NHB borrowed $25 million under USAID’s Housing Guarantee Program in 1990–91 to expand its refinancing operations.
2. ICICI Bank
8. In addition to the UEIF, ADB provided four other loans to ICICI Limited for various purposes, all of which were guaranteed by the Government. Following the 2002 merger, ICICI Bank’s resources have shifted predominantly to public deposits, but it continues to raise funds through (i) issuance of rupee and foreign-currency bonds; (ii) equity from global and domestic markets; and (iii) external borrowings in international markets, including from multilateral lenders. Borrowings from multilateral and bilateral agencies have been relatively small, and have declined in recent years. The World Bank, USAID, and Kreditanstalt fur Wiederaufbau (KfW) are among the other multi- and bilateral agencies that ICICI Bank has partnered with. For further details, refer to the UEIF PCR (footnote 2).
3 ADB. 1997. Report and Recommendation of the President to the Board of Directors on proposed loans for the Housing Finance Project in India. Manila. 4 ADB. 1997. Technical Assistance to India for Strengthening Housing Finance Institutions. Manila (TA No. 2833- IND, approved July 1997). 5 ADB. 2001. Technical Assistance to India for Assessing the Role of Mortgage Backed Securities. Manila. 6 ADB. 2005. Technical Assistance to the National Housing Bank and the Housing Development Finance Corporation of India for a Study on the Development of an Agency to Facilitate Issuance of Residential Mortgage- Backed Securities. Manila. 7 ADB. 2002. India Mortgage Guarantee Company. Manila. The proposed investment was for $10 million under the private sector window. This was not implemented as the RBI did not introduce the required regulatory framework at that time. ADB is now in the process of resubmitting the proposal to the Board, with a proposed investment of up to $15 million, following improvements in the regulatory environment. 3
D. Relevance of Design and Formulation
9. Project design. According to the project framework (Appendix 1), the impact of HF II was to support human development by increasing the availability and affordability of housing finance to LIHs.8 The expected outcome of HF II was to improve the living standards and quality of life of LIHs that lack access to affordable credit for housing and home-based income- generating activities. The project comprised four separate loans to the Housing and Urban Development Corporation Limited (HUDCO) ($100 million), Housing Development Finance Corporation (HDFC) ($80 million), ICICI Limited ($80 million) and NHB ($40 million). HF II consisted of three parts (A, B and C). Part A was designed to support lending to LIHs through intermediaries consisting of (i) CFIs and NGOs, (ii) public and private enterprises, and (iii) state and local bodies. Part B was designed to support lending to LIHs through slum networking and home-workplace schemes, leading to poverty reduction. Part C was designed to support lending to LIHs by (i) expanding the housing finance operations of HDFC and ICICI Limited to lend directly to LIHs through mortgage loans at market interest rates; (ii) expanding the refinance operations of NHB to housing finance institutions (HFIs) other than HDFC and HUDCO, thus enabling HFIs to increase their lending to LIHs; and (iii) supporting refinancing of HFC loans to CFIs through CFI refinance scheme of NHB. The outputs of HF II, as contained in the project framework, corresponded to these components. HF II further envisaged different lending targets for each of the Borrowers under the various components. HUDCO was solely responsible for the elements under part B above, and its withdrawal from the project resulted in these elements not being implemented.9 The parts and components relevant to NHB and ICICI are indicated in paras. 20–21 and 25 respectively.
10. HF II also incorporated a policy and institutional action plan, with some actions covenanted in the loan agreement. Actions related to raising the corporate governance standard and implementing foreclosure regulations were covenanted for NHB; making improvements to the mortgage registration system was covenanted for both NHB and ICICI.
11. Rationale for the loan. The report and recommendation of the President (RRP) for HF II10 noted that the housing shortage in India remained critical, especially for LIHs, despite policy and regulatory reforms to promote increased participation in housing finance and development. The absence of affordable credit for housing was identified as the principal constraint preventing low income families from improving their housing and living conditions. Although various CFIs and NGOs have helped low income families mobilize their savings and have extended housing loans, these efforts were insufficient in light of total LIH demand for housing finance. HF II sought to increase access by LIHs to market-based housing finance from formal and informal institutions in the housing finance sector.
12. Consistency with ADB’s strategy. HF II was consistent with ADB’s Urban Sector Strategy,11 which sought to (i) strengthen linkages between formal and informal housing finance as a means to increase availability and affordability of housing loans to LIHs; (ii) promote microcredit programs for housing loans and home-based, income-generating activities, and support low-income shelter schemes; and (iii) provide technical advice and expertise in
8 LIH was defined as a household below a threshold income (Rs7,000 in June 2002, revised annually with the changes in the consumer price index as specified in para. 14 of the Minutes of the Loan Negotiations). 9 Part C was accordingly redesignated as part B in the loan agreements for ICICI and NHB. 10 ADB. 2000. Report And Recommendation of the President to the Board of Directors on Four Proposed Loans to the Housing and Urban Development Corporation, National Housing Bank, Housing Development Finance Corporation, and ICICI for the Housing Finance II Project in India. Manila. 11 Asian Development Bank. 1998. India: Urban Sector Strategy. Manila. 4 establishment of a secondary mortgage market as a means to increase the availability of capital for housing finance.
13. Consistency with India’s development objectives. HF II was consistent with the Government’s increasing priority on housing as reflected in the 1994 national housing plan, and subsequently in the 1998 national housing and habitat policy. HF II was also consistent with targets of India’s 9th Five Year Plan, which included construction of 2 million housing units (700,000 in urban areas) annually over 5 years. The RRP noted that this target was short of the total estimated housing shortage of 40 million units at the time of appraisal. The purpose of HF II continues to be relevant today. The 2007 national urban housing & habitat policy, which was tabled in Parliament in December 2007, has affordable housing for all as its goal, with an emphasis on the urban poor. A technical group estimated the magnitude of the urban housing shortage to be around 25 million at the close of the 10th Five Year Plan (2002–2007), with 99% of the shortage pertaining to “economically weaker section” and “low income group”. The working group on rural housing for the 11th Five Year Plan estimated a rural housing shortage in 2007 of 47 million houses; families living below the poverty line accounted for at least 90% of the housing shortage.
14. Adequacy of appraisal. ADB approved project preparatory TA12 on 8 November 1999 to identify sustainable, market-based channels and institutional arrangements for the delivery of housing finance to LIHs. Building on experience and lessons from HF I, the TA consultant report proposed a project with greater emphasis on strengthening linkages between formal housing finance institutions and the informal sector, including CFIs and NGOs, to down-market housing finance to LIHs and support innovative slum improvement subprojects. In contrast to HF I, which allowed some lending to middle- and upper-income households, HF II solely targeted LIHs. Moreover, lending targets were specified in the RRP to encourage lending through more innovative channels, which would require more time for implementation. The consultant report also identified a number of policy reform measures aimed at meeting the long-term objectives of the 1998 national housing and habitat policy, which emphasizes the need for the Government to adopt the role of a facilitator, rather than a provider, of housing. The project brief was prepared based on the consultant’s report, and two loan processing missions were conducted between April 2000 and June 2000.
15. The project formulation process appears to have been deficient in some respects. For instance, the success of NHB’s CFI refinance scheme13 (launched in January 1999) was limited by capacity constraints among CFIs and NGOs, and the high intermediation cost of HFI lending through these institutions. These issues were subsequently highlighted in the HF I PCR.14 The processing mission failed to address these issues in the project design; doing so might have resulted in more rapid implementation and better achievement of outcomes of components involving CFIs and NGOs. Furthermore, the appraisal mission carried out a financial review of the Borrowers, but did not address the fact that the refinance operations of NHB lacked a system to track detailed end-borrower data (including income levels). This emerged as a major implementation bottleneck. In addition, an appropriate definition of what constitutes a LIH should have been determined at appraisal, and the income threshold adjusted appropriately for inflation from year to year (footnote 8). Moreover, in the case of the HF II ICICI Bank loan (Loan 1761-
12 ADB. 1999. Technical Assistance to India for Preparing the Housing Finance II Project. Manila (TA No. 3288-IND, approved November 1999). 13 The CFI Refinance Scheme was developed under ADB TA for Strengthening Housing Finance Institutions (footnote 4). 14 ADB. 2003. Project Completion Report on the Housing Finance Project in India. Manila. 5
IND), this threshold should have applied to the income of the borrower instead of the household, given the impracticality of assessing household income (footnote 22).
16. The discussions on the prevailing market conditions at the time of appraisal highlighted the issue of competitiveness of ADB’s dollar loans, given the decline in interest rates for rupee- denominated loans in the domestic market. However, this risk was underestimated. HDFC and HUDCO did not avail of the loan because of the cost of ADB’s funds compared to the interest rates available in the market. The signing of NHB and ICICI loan agreements was delayed because the cost of ADB funds, when swapped into rupees, appeared unattractive, particularly for lending through the CFI and NGO channel.15 Moreover, NHB’s partial cancellation of the loan in 2003 (para. 23) was also due in part to market conditions.
E. Related Technical Assistance
17. ADB did not approve any TA in conjunction with HF II.
II. IMPLEMENTATION
A. Lending Policies
18. National Housing Bank. NHB’s refinance portfolio has undergone significant changes during the last few years, with a shift in disbursements from HFCs to banks. HFCs accounted for 75% of disbursements in FY2001, followed by cooperative institutions (14%) and banks (10%); by FY2007 banks accounted for 80%, followed by HFCs (20%). The change in refinance composition reflects the recent growth in the housing finance portfolio of commercial banks. NHB’s refinance to commercial banks is mostly of 3-year tenure, which is shorter than refinance to HFCs. NHB’s refinance terms have also changed over the years in response to changes in market conditions. In addition to refinancing, NHB has also provided direct project finance to public housing and development agencies over the past few years. In conjunction with the implementation of HF II, NHB began exploring opportunities for direct lending to CFIs and NGOs and has provided assistance to some CFI projects. The refinance and lending activities of NHB underwent a major policy shift in 2003–2004 with the introduction of risk-based lending. NHB rates clients using an in-house rating model, with exposure limits and pricing based on the rating obtained. NHB is focused on the unserved and underserved segments of the society through programs such as the Golden Jubilee Rural Housing Refinance Scheme, which aims to increase housing stock in rural areas.
19. ICICI Bank. ICICI Limited began diversifying its operations from project-based lending to corporate financing at the time of appraisal. In addition, as a part of its housing finance initiative, ICICI Limited set up ICICI Home Finance Company in 1999 as a wholly-owned subsidiary for provision of housing loans. During implementation, based on opportunities in the market, ICICI Limited merged with ICICI Bank and refocused its operations on retail and commercial banking. The size of ICICI Bank’s housing finance portfolio as of 31 March 2008 was Rs585 billion, of which loans to the relatively lower income group (loans of less than Rs0.5 million) constituted 16%. The size of ICICI Home Finance Company’s housing portfolio was Rs67 billion as of 31 March 2008. ICICI Home Finance Company has recently started focusing on large ticket (non-priority sector) loans and home equity loans.
15 The delay in signing of the loan agreements resulted in temporary unsatisfactory ratings in the project performance report for the two loans. Loan 1761-IND (to ICICI Limited) also received an unsatisfactory rating for the subsequent period due to a delay in declaration of loan effectiveness, as a result of ICICI Limited’s merger with ICICI Bank. 6
B. Characteristics of Subloans
1. National Housing Bank Loan (Loan 1759-IND)
20. Specified distribution of subloans. The allocation of the loan as envisaged in the RRP is shown below.
Table 1: Lending Targets by Project Parts Component Description Amount Part B(ii) Refinancing HFIa loans to LIHs Up to $32 million (80% of loan) Part B(iii) Supporting the CFI refinance scheme to refinance At least $8 million (20% of loan) HFC loans to CFIs for housing subloans CFI = community-based financial institution, HFC = housing finance company, HFI = housing finance institution, LIH = low income household. a HFI is a housing finance institution as defined in the NHB Act, which has as its objective provision of housing finance. Source: ADB. 2000. Report And Recommendation of the President to the Board of Directors on Four Proposed Loans to the Housing and Urban Development Corporation, National Housing Bank, Housing Development Finance Corporation, and ICICI for the Housing Finance II Project in India. Manila.
21. During implementation, the CFI refinance scheme—part B(iii)—was not successful, and NHB actively explored opportunities for direct lending to CFIs and/or NGOs. Accordingly, ADB amended the loan agreement on 8 September 2006 to include—in part A(i)—support for lending by NHB to LIHs through CFIs or NGOs. Financing under part A(i) was included together with that for the CFI refinance scheme to satisfy the subloan distribution criteria.
22. Loan and subloan terms. The loan was guaranteed by the Government and was made from ADB’s market-based US dollar lending window, with a maturity of 25 years, including a grace period of 5 years. All the subloans were rupee-denominated, but the terms varied across the lending channels, as discussed in the ensuing section C. As per the subloan financing criteria in the loan agreement, ADB financed a maximum of 80% of the subloans except in the case of lending by NHB to LIHs through CFIs and NGOs—part A(i)—which was eligible for 100% ADB financing.
23. Loan utilization and subloan distribution. NHB cancelled $32.6 million16 and utilized $7.4 million of the $40 million facility. Prevailing market conditions rendered ADB loans relatively uncompetitive, leading to cancellation of $19.6 million in 2003. NHB fixed17 the rupee cost of ADB funds through a structured swap that did not allow NHB to benefit from the falling domestic rates. NHB also had to re-price and reduce the cost of its loans to HFIs in line with market conditions. In addition, the lack of a system to track data on end-borrowers under NHB’s refinance operations was an impediment to implementation of the HFI refinancing under part B(ii). Of the amount availed, $13 million (comprising a $10 million imprest advance and $3 million statement of expenditure portion) was refunded in 2004 because ineligible cases18 were found to be included (para. 31). This portion was cancelled in 2005 after NHB determined it was unable to provide an adequate stock of eligible subloans.
16 $19.6 million was cancelled effective 15 September 2003 and $ 13 million was cancelled effective 15 September 2005. 17 The interest rate was fixed for the first 5 years with some reset options thereafter. 18 Some subloans were found to be ineligible because (i) the income of the LIH exceeded the threshold, (ii) disbursements made prior to the effective date of the loan, (iii) subloans were made towards land purchases, and (iv) the amount claimed by NHB was higher than the amount disbursed by the HFC concerned. 7
24. Of the total amount disbursed, capitalization of the front-end fee was $0.4 million, disbursement under part A(i)19 was $781,981 and under part B(ii) was $6,218,019. The share of part A(i) was thus 11.2%, and did not meet the 20% target as envisaged.
2. ICICI Bank Loan (Loan 1761-IND)
25. Specified distribution of subloans. The allocation of the loan as envisaged in the RRP20 is shown below. The loan agreement was amended on 3 November 2004 to (i) remove the $10 million restriction in part A(ii) for direct lending to LIHs that are employees of public and private enterprises, and (ii) include under part A(i) direct lending to LIHs that are beneficiaries of CFI and/or NGOs.
Table 2: Lending Targets by Project Parts Component Description Amount Part A(i) Lending to LIHs through CFIs and/or NGOs $10 million Part A(ii) Lending directly to LIHs that are employees of public & private Up to $10 million enterprises Lending indirectly to LIHs through public and private enterprises At least $10 million Part A(iii) Lending indirectly to LIHs through state and local bodies $10 million Part B(i) Lending directly to LIHs $40 million CFI = community-based financial institution, LIH = low income household, NGO = non-government organization. Source: ADB. 2000. Report And Recommendation of the President to the Board of Directors on Four Proposed Loans to the Housing and Urban Development Corporation, National Housing Bank, Housing Development Finance Corporation, and ICICI for the Housing Finance II Project in India. Manila.
26. Loan and subloan terms. The loan terms are as given in para. 22. As in the case of the NHB loan (Loan 1759), all the subloans were rupee denominated, but the terms varied across the lending channels, as discussed in the ensuing section C. As per the subloan financing criteria in the loan agreement, ADB financed a maximum of 80% of the subloans21 under all parts except part A(i), which was eligible for 100% ADB financing.
27. Loan utilization and subloan distribution. ICICI Bank utilized the entire $80 million loan facility. The disbursements under various parts were part A(i): $8.38 million; part A(ii): $2.47 million; part A(iii): nil; part B(i): $68.35 million. Additionally, $0.8 million was withdrawn for capitalization of front-end fees. The difference between envisaged and actual distribution resulted from the constraints faced under the lending components of part A (paras. 38–43). The direct loans to LIHs under part B(i) were disbursed quickly, and this component enabled full utilization of the loan.
19 The entire $7 million was originally disbursed under part B(ii). Later in response to NHB’s request, ADB reallocated $781,981 towards three subloans under part A(i) from part B(ii) on 29 June 2007. 20 The loan agreement did not specify the distribution among the four components. However, the loan agreement required ICICI to submit at least two qualified housing proposals under each of the four parts of the project. 21 ICICI indicated in 2003 that, as per the prevalent market practice, it would be impractical to assess the income of the household. Based on ICICI’s request ADB redefined LIH as a subborrower instead of a household. As a result of this change, the extent of ADB reimbursement to ICICI was reduced from 80% to 72% of ICICI’s disbursements, to account for ineligible cases (household income more than the stipulated level), which were estimated at 10% of ICICI’s disbursements. 8
C. Implementation and Internal Operation of Subprojects
1. National Housing Bank Loan (Loan 1759-IND)
28. Overall. The expected outcome was 27,000 loans to LIHs for home purchase or improvements; the expected impact was that 136,000 persons would benefit from the loans. The actual outcome of the $7 million loan originally disbursed under part B(ii) for refinancing of HFI loans to LIHs was 2,830 loans; the impact was that 14,000 persons benefited.22 The $0.78 million loan that was reallocated from part B(ii) to part A(i) to support direct lending to LIHs through CFIs or NGOs, financed 576 loans benefiting 2,800 persons (footnote 23). The subloan financing criteria ensured requisite leverage by NHB.
29. Lending through CFIs and NGOs–part A(i). NHB began experimenting with direct loans to CFIs and NGOs in 2004. The $0.78 million reallocated to part A(i) supported (i) Share Microfin Limited (SML) for repairs or extensions of dwelling units of 307 women members in Hyderabad; (ii) Sri Padmavathy Mahila Abyudaya Sangam (SPMS) for individual dwelling units located in Tirupathi, Andhra Pradesh of 122 women members; and (iii) SPARC23 Samudaya Nirman Sahayak (SSNS) for a slum rehabilitation project benefiting 147 slum dwellers in Mumbai. The details of subprojects are in Appendix 2.
30. Although the loan utilization targets under Part A(i) were not achieved, this component made significant contributions by (i) bringing underserved segments of society, particularly those with no regular incomes and lack of physical access to the banking system, into the formal financial system; and (ii) establishing a linkage between formal and informal institutions in the financial sector.
31. Housing finance institution loan refinancing–part B(ii). Implementation of part B(ii), based on the statement of expenditure procedure under free limit, proved to be challenging. NHB disbursed the project funds to the ultimate borrowers through 11 HFCs, and subsequently collected the subloan information. A number of discrepancies were found in the information submitted by NHB and detailed reviews revealed that a number of cases were ineligible (footnote 19), leading ultimately to a refund of a part of the disbursed amount. The HFCs that are subborrowers under the loan and the ADB loan amount are shown in Appendix 3. LIC Housing Finance Limited accounted for 34% of the refinancing under part B(ii).
32. NHB’s refinance to the HFCs are at interest rates based on NHB’s cost of funds, prevailing market interest rates and, after 2003–2004, also on the credit of the specific HFC. The rates for refinance extended out of ADB funds were the same as the rates for other refinancing. HFCs determined the rates of lending to the end-borrowers. Information on interest rates on HFC subloans to the target segment could not be obtained.
33. According to a benefit monitoring and evaluation (BME) study24 of the NHB loan conducted in 2006, penetration of loans by HFCs to LIHs is generally poor. All LIH loans issued by surveyed HFC branches were covered under the NHB refinance facility. LIHs accounted for only about 2.2% of all loans and a mere 0.9% of overall approvals by the branches surveyed. The study suggests that there is no targeted approach to include LIHs under the policies of
22 As in the case of the expected impact, the assumption of 5 persons per household has been made. 23 Society for Promotion of Area Resource Centre. 24 ADB. 2006. Benefit Monitoring and Evaluation Report for the Housing Finance II Project. Manila (Loan 1759-IND).
9
HFCs, and that credit quality considerations deter HFCs from substantive lending to LIHs. The report indicates that 14% of sampled HF II beneficiaries had incomes higher than the stipulated threshold, despite reviews by ADB and NHB to exclude ineligible borrowers.
34. CFI refinance scheme –part B(iii). NHB’s CFI refinance scheme was not successful due to the risks and constraints faced by the HFCs (i.e., higher credit risk, limited delivery channels, inadequacy of collateral, discontinuous and uncertain income streams of the ultimate beneficiaries, and high transaction costs).
35. Policy and institutional action plan. The implementation status of the plan with respect to NHB is in Appendix 4, Table A4.1. NHB generally undertook actions towards achieving the policy objective, although actions were delayed in some cases . Although NHB could not expand the refinance window for HFC lending to CFIs, it began direct lending to CFIs and/or NGOs to build linkages with the informal sector. The NHB Act was amended in 2000 to include provisions related to recovery of housing loan dues, but these provisions were not made operational as a consequence of enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, which provided simple procedures for mortgage foreclosure.
36. To improve the mortgage registration system, NHB and ICICI Bank formed a working group and submitted a draft report to the Government in 2006. The recommendations of the draft report included that (i) states reduce the stamp duty for equitable mortgages, (ii) the Government consider making registration of equitable mortgages compulsory, (iii) registration charges be reduced to facilitate and encourage registration; and (iv) state governments notify additional areas where equitable mortgage may be used. The project completion review mission could not obtain information on the status of implementation of the draft report, however. With respect to India’s MBS market, it may be noted that after the pilot securitization by NHB, there have been several issuances by market participants. However, the MBS market has had limited success and the number of issues has decreased in recent years, due in part to legal and regulatory hurdles and a lack of long-term investors. In addition, MBS issues in In dia do not typically meet the “true sale” criteria under the Basle II norms.25 A study is being undertaken as part of ADB TA (footnote 6) to NHB and HDFC that will include recommendations for policy and regulatory development and establishment of an agency to enable issuance of “true sale” residential MBSs.
2. ICICI Bank Loan (Loan 1761-IND)
37. Overall. The expected outcome was 58,600 loans to LIHs for home purchase or improvements; the expected impact was that 293,000 persons would benefit from the loans. The actual outcome and impact were 25,730 loans benefiting 129,000 persons (footnote 23). The subloan financing criteria ensured requisite leverage by ICICI Bank.
38. Lending through CFIs and NGOs, and to their beneficiaries–Part A(i). Although ICICI Bank had identified working through CFIs and/or NGOs as one of its strategies to achieve financial inclusion, progress under this component was very slow. In the first 2 years of implementation, ICICI Bank established a partnership model that involved direct endingl to members of CFIs and/or NGOs through a partnership arrangement, but did not envisage bulk lending to CFIs and/or NGOs on its own books due to inherent scalability and sustainability
25 The MBS issues would therefore not qualify for off-balance sheet treatment for capital adequacy purposes, as originators retain the junior tranches. 10 limitations.26 The partnership model separates the CFI risk from the risk of the portfolio, and pricing is on the basis of the risk of the underlying assets rather than the intermediary’s rating. Moreover, the exposure of ICICI Bank is not limited by the capital base of the CFIs and/or NGOs.
39. The loan was channeled through two subprojects, SML and Kerala government’s Kudumbashree program. The subloans to members of SML for $0.455 million were approved in June 2005. The subloans (totaling $7.93 million) to several community development societies (CDSs) in Kerala organized under the Kudumbashree program were approved in November 2006. The CDSs acted as a channeling agency; security for the CDS subloans included a guarantee and a mortgage over the land and property of individual CDS borrowers. The details of subprojects are in Appendix 2. The subprojects covered 10,730 female subborrowers (2,830 in the case of SML, and 7,900 for Kudumbashree).
40. As in the case of the NHB loan, this component made a significant contribution by bringing an underserved segment of society into the formal financial system. Further, ICICI Bank was the first to offer housing loans under the Kudumbashree program; subsequently other banks also started lending to the target population.
41. However, the interest rate of the subloans to the Kudumbashree subproject CDSs (fixed at 7.25% for 80% of the loans and 8.75% for 20% of the loans, for a 10-year repayment schedule, including a 6-months moratorium),27 does not appear to adequately factor in the risk premium and subproject cost of operations. The CDSs retained a margin of 1% or less, which is insufficient to cover their cost of operations. The present subloan terms call into question the subproject’s long-term financial viability. ICICI Bank began lending for housing finance under the Kudumbashree program in FY2005, with the bulk of the lending occurring in FY2006 and FY2007, with a slowdown in the last year. ICICI Bank is now concentrating on strengthening the financial management capacity of the CDSs, implementing data tracking systems for individual borrowers, and improving collections.28
42. Lending through public and private enterprises, and to their employees–Part A(ii). From the time of project approval, the demand for bulk loans by employers had decreased significantly, with employees preferring to borrow directly from commercial lenders. The reasons for this included a reduction in market interest rates, changes in the tax treatment of employee loans,29 increased mobility of employees, and expansion of mortgage finance markets. ICICI Bank consequently partnered with companies to provide direct individual loans to employees under its “work-site arrangement”, wherein employers provided employee information, access to their premises for holding spot camps, and sometimes an agreement for repayment via monthly salary debits. ADB disbursed only $2.47 million (against an RRP target of $20 million) under this component, with participation by 1,040 LIHs.
43. Lending through state and local bodies–Part A(iii). During loan appraisal, HUDCO was lending to state and local bodies to finance construction of low-cost dwelling units. HF II therefore included state and local bodies as another credit delivery channel. ICICI Bank worked
26 ADB accordingly amended the loan agreement in November 2004 to include direct loans to beneficiaries of CFIs and NGOs under part A(i). 27 Other banks offered similar rates, although some were floating interest rates, with current rates of up to 9%. 28 As of March 2007 overdues under the Kudumbashree program were Rs4.55 million (against a total outstanding of Rs369.66 million); in March 2008, overdues were Rs21.71 million (against a total outstanding of Rs363.33 million). 29 Since the time of project processing, subsidized interest rates on employers’ loans have been subject to taxes, making it unattractive for employers to provide subsidized staff loans. 11
on several proposals for assistance to housing board and state housing corporations in Andhra Pradesh, Karnataka, Rajasthan and Tamil Nadu, and attempted to develop good bankable structures to meet the housing needs of LIHs. However, ICICI Bank did not lend any funds under this component, mainly due to the poor financial track record of these entities.30 Moreover, during the implementation period, the states ceased to borrow for the purpose of providing housing finance.
44. Lending directly–Part B(i). Disbursement under this component was rapid, and ICICI Bank met the RRP component target of $40 million in about 2 years of implementation. Total disbursement under this component was $68.35 million.
45. Disbursements under the direct lending components—parts A(ii) and B(i)—totaled $70.82 million, and benefited over 15,000 LIHs. Details of these components are given in Appendix 3. Most of the subloans were on a floating rate basis, with a current interest rate on 59% of the subloans at 11%–13%. The subloans were generally of long tenure (61% had a tenure of more than 16.7 years). The income distribution (Appendix 3) indicates that direct lending did not reach households with incomes below Rs5,000 per month; 97% of the targeted beneficiaries were salaried, and 3% self-employed. In most cases (77%), the primary applicant was male but co-applicant was female; only 10% of primary applicants were female. Most of ICICI Bank’s business in this segment is in the smaller cities or rural areas, because the house prices are high in urban areas. The western states of Maharashtra and Gujarat accounted for 45% of loans, and southern states for 19%. Although some states with poorer socio-economic indicators (such as Madhya Pradesh and Uttar Pradesh) accounted for 20% of the subloans, the eastern and north-eastern states were not included.
46. A constraint faced in distribution of subloans in this category was the assessment of creditworthiness of the borrower due to the lack of banking practice and income documentation, which is needed for underwriting. ICICI Bank has experienced high delinquency (about 2.5%) among LIH borrowers, compared to its overall housing finance portfolio (delinquency of 1%). This may be attributed to lower ability of LIHs to withstand income shocks, and their higher vulnerability to inflation increases (LIH incomes have not kept pace with inflation). Interest rate increases over the past few years have impacted floating rate loans, resulting in higher equated monthly installments or longer loan tenures. The rise in delinquency in the lower income category over the last 2 years caused ICICI Bank to change tsi credit norms to improve borrower quality.
47. Policy and institutional action plan. The status of implementation of the plan relevant to ICICI Bank is in Appendix 4, Table A4.2. ICICI Bank took all the actions included in the plan. ICICI Bank has set up systems and procedures for lending to members of CFIs and/or NGOs, and is undertaking ongoing improvements (e.g., CDSs in Kerala). With respect to improving the mortgage registration system, ICICI Bank established a working group as envisaged, outlined the terms of reference and facilitated meetings. These efforts yielded a draft report that was presented to the Government (para. 36).
30 The project required that the subborrowers have an adequate financial position and financial control, so that operations are sustainable and there is a good audit trail for verification of end use. 12
D. Operational Performance of the Borrowers
1. National Housing Bank
a. Organization, Management, and Staffing
48. NHB is managed by a board of directors comprising nominees from the RBI, central government and state governments, and other professionals. According to the recent budget announcement, RBI will transfer its holding in NHB to the Government. NHB’s activities are divided into seven departments based on identifiable work areas. The functions of regulation and supervision and HFC promotion and development are carried out by different departments under different general managers, reducing the potential for conflict of interest.31 NHB had 67 staff (including professionals) as of 30 June 2007, a decline from 84 in 2004; the high attrition may have resulted from the NHB salary structure, which is relatively uncompetitive with market rates.
b. Personnel Administration
49. NHB staff includes professionals from diverse disciplines, including economics, finance, law, civil engineering, urban and town planning, architecture, business administration, and chartered accountancy. NHB conducts human resource development programs regularly to upgrade staff skills to meet market needs.
c. Lending Operations
50. The operational framework for the activities under the NHB Act is determined by the board of directors as per the provisions of the Act. For lending operations, NHB has developed a refinance policy and project finance policy, detailed appraisal norms and mechanisms, an internal credit rating model, and conducts on-site and off-site monitoring. The implementation experience under HF II and discussions with senior management of NHB, however, suggests that the information and data collection and management system of NHB, under projects such as the HF II, is weak, and would require strengthening if NHB is to play an effective role in meeting development objectives.
d. Other Operations
51. Other NHB operations include regulating and supervising 43 registered HFCs, and promoting and developing the housing sector by guiding investment through close interactions with the Government regarding policy. NHB’s promotional initiatives include development of the MBS market. NHB also provides support to HFCs by way of equity participation in HFCs and guaranteeing HFC bonds. NHB carries out training programs and capacity-building exercises for officials in the housing finance sector. NHB has renewed its focus on inclusive financial delivery for housing and is working on some initiatives in these areas (para. 90).
31 However, HFC equity participation which is part of the HFC promotion and development activity is under the executive director in charge of regulation and supervision. TA for Strengthening Housing Finance Institutions (TA No. 2833–IND, footnote 4) suggested complete separation of activities in order to eliminate any perception of a conflict of interest. 13
2. ICICI Bank
52. ICICI Bank’s operational performance in terms of key aspects of organization, personnel administration and operations are described in the UEIF PCR (footnote 2).
E. Borrower’s Financial Performance
1. National Housing Bank
53. NHB’s outstanding loans and advances increased from Rs45 billion in 2001 to Rs196 billion in 2007. The composition of loans and advances also changed: in 2001 refinance to HFCs as a percent of total loans and advances outstanding was 83%, and to banks 3%; in 2008 the proportions were 25% and 71%, respectively. NHB consistently had no non-performing assets. With respect to income recognition, asset classification, and debt provisioning, NHB follows prudential norms prescribed by the RBI for commercial banks.
2. ICICI Bank
54. A description of ICICI Bank’s loan portfolio is contained in the UEIF PCR (footnote 2).
F. Financial Statements and Ratios
1. National Housing Bank
55. Balance sheets. NHB’s assets grew from Rs75 billion in 2001 to Rs215 billion in 2007, representing a compound annual growth rate of 19%. The growth in assets was driven by opportunities in the refinance business created in particular by aggressive growth in commercial bank housing finance. NHB’s borrowings in recent years have increasingly been on commercial terms, with the reduction in fiscal and regulatory benefits. There has also been an increase in the short-term borrowing in the form of commercial papers and borrowings from banks. As a result, NHB’s short-term liquidity (less than 1 year) was affected in 2007, with liabilities exceeding assets by Rs43,298 million, compared to Rs3,169 million in 2006 (Appendix 5, Table A5.1).
56. Income statements. NHB’s income increased consistently over the last few years as a result of increased interest income (compound annual growth rate of 16% during 2001–2007). In recent years, profitability has been adversely affected by a decrease in the interest spread resulting from increased reliance on commercial borrowings. Profits have been variable during the review period, although profits increased in the last 2 years as result of an increase in income (Appendix 5, Table A5.2).
57. Key ratios. The return on average equity and average assets of NHB showed a declining trend until 2005, before increasing in subsequent years. The capital adequacy ratio of NHB was 22.58% in 2007, while the debt–equity ratio increased from 4.00 in 2002 to 11.35 in 2005, before decreasing marginally to 10.14 in 2007 (Appendix 5, Table A5.3).
2. ICICI Bank
58. Discussions regarding ICICI Bank’s financial statement and ratios for the period 2001 to 2006 are in UEIF PCR. Updated statements and ratios for the year 2007 are in Appendix 6. ICICI Bank’s financial performance continues to be satisfactory. 14
G. Covenants
59. National Housing Bank loan (Loan 1759-IND). A statement describing the status of compliance of covenants is in Appendix 7, Table A7.1. NHB is generally in compliance with the covenants, subject to the following observations. There were delays in submission of auditors’ reports on the use of loan proceeds, the adequacy of accounting and internal control procedures and the status of compliance with financial covenants. The debt–equity ratio, one of the covenanted financial ratios, was within the stipulated limit during the review period. The debt service coverage ratio (DSCR), the other covenanted financial ratio, was above the stipulated threshold of 1.1 until FY2006. However, in FY2007, the DSCR was 0.70, indicating non- compliance with respect to this ratio. A low DSCR resulted mainly from a higher consolidated debt-service requirement. NHB has shifted towards short-term borrowings, such as commercial papers, some of which were repayable during FY2007. In addition, NHB repaid a substantial amount of outstanding capital gains bonds in FY2007, due to the exercise of a put option.32
60. ICICI Bank loan (Loan 1761-IND). A statement describing the status of compliance of covenants is in Appendix 7, Table A7.2. ICICI Bank is generally in compliance with the covenants, subject to the following observations. ICICI Bank did not meet the requirement that it submit at least two qualified housing proposals under each of the four parts of the project, as it did not submit any eligible projects under part A(iii) (para. 43). Further, there were delays in submission of auditors’ reports on the use of loan proceeds and related matters, adequacy of ICICI Bank’s accounting and internal control procedures, and compliance with financial covenants. The covenanted financial ratios were, however, within the stipulated threshold.
H. Performance of the Asian Development Bank
61. ADB conducted regular review missions and participated in tripartite review meetings with the Borrowers and the Department of Economic Affairs to review the performance of commitments and disbursements and to suggest steps for improved utilization. Overall, ADB’s performance was satisfactory.
62. National Housing Bank loan (Loan 1759-IND). ADB responded to market realities by making necessary changes in implementation arrangements to facilitate disbursements through the CFI and NGO channel. HF II was complemented by the private sector operations of ADB involving NHB, especially with respect to two TAs on MBS (paras. 5 and 36). NHB, however, commented that HF II could have been used more flexibly. In addition, the ADB funds were too costly to affordably meet the borrowing needs of LIHs. Moreover, the studies and documentary requirements were burdensome.
63. ICICI Bank loan (Loan 1761-IND). ADB responded adequately to market realities and changes in market conditions by making necessary changes in implementation arrangements that enabled full utilization of loan. ICICI Bank found that the ADB loan brought focus to and showed opportunities in the LIH segment of the market, which may not have been realized without the loan. Although the delinquencies were higher among LIHs, the ADB loan helped supplement ICICI Bank’s resources. Moreover, ICICI Bank valued the learning that the ADB loan brought in terms of the use of non-financial metrics—such as the socioeconomic impact of the project—in evaluating loan performance.
32 The capital gains bonds, issued during 2002–2006, had a maturity of 5 years with a put option at the end of 3 years. Since no further tax benefit was available at the end of 3 years, investors exercised the put option to take advantage of other investment opportunities in the market at prevailing higher interest rates. 15
III. EVALUATION
A. Loan Appraisal
1. Distribution of Subloans
a. National Housing Bank Loan (Loan 1759-IND)
64. There were substantial differences between the distribution envisaged in the RRP and the actual subloan distribution. The suitability of some components as lending channels, such as the CFI refinance scheme, does not seem to have been realistically assessed at the time of appraisal. NHB began experimenting with lending directly to CFIs and/or NGOs in conjunction with HF II implementation, but utilization under this component was minimal, as the number of viable CFI and NGO housing finance projects remains limited. NHB has thus far identified 4–5 CFIs and NGOs (in addition to SSNS, SML and SPMS) as possible borrowers. Capacity building of the intermediaries, such as CFIs and NGOs, should perhaps have preceded or accompanied lending through these channels, possibly through TA.
65. NHB’s refinancing of HFI loans to LIHs under part B(ii) was solely through HFCs. At the time of appraisal, HFCs constituted a large part of NHB’s refinance. However, the market scenario changed during the project period, with an increasing share of commercial banks in housing finance. If NHB had also directed refinance to LIHs through the commercial banks, then utilization under part B(ii) might have been increased,33 leading to improved achievement of development objectives.
b. ICICI Bank Loan (Loan 1761-IND)
66. There were substantial differences between the distribution envisaged in the RRP and the actual subloan distribution. Despite ICICI Bank’s efforts, targets with respect to components under part A were not met (paras. 38–43). The suitability of some components (such as state and local bodies) as lending channels does not appear to have been realistically assessed at appraisal. Also, capacity building of CFIs and/or NGOs should perhaps have preceded or accompanied lending through these channels, possibly through TA.
67. Higher-than-targeted lending under part B enabled full use of the loan and contributed to the project’s goal of promoting market-based lending to LIHs. However, the project also sought to reach underserved LIHs, which would have been best achieved through the underutilized CFI and NGO component, which could reach borrowers without regular incomes. Nevertheless, the Borrower’s experience with respect to building linkages with informal institutions may serve as a useful foundation for devising future ADB interventions in the sector.
2. Covenants
68. NHB and ICICI Bank complied with most of the covenants (paras. 59 and 60), although there are some areas that required timely or better compliance. In particular, for FY2007, NHB is in non-compliance with respect to the DSCR provision. ADB will continue to monitor this ratio and seek suitable steps for NHB to ensure compliance with this provision.
33 This would, however, be subject to overcoming any implementation problems due to the lack of systems for tracking data on end-borrowers. 16
3. Quality of Appraisal
69. ADB adequately assessed the general economic situation and the housing finance sector. The project impact was consistent with and relevant to the country’s and ADB’s development objectives. Moreover, the design included various components and policy and institutional action plans to achieve the project impact and outcome. However, some factors were not suitably analyzed at appraisal (paras. 15 and 16), including (i) the prevailing market interest rate vis-à-vis the cost of ADB’s funds, (ii) risks and constraints faced in lending through some of the channels, and (iii) suitability of NHB’s refinance operations for directing credit to LIHs.
B. Implementation
70. National Housing Bank loan (Loan 1759-IND). Part B(ii) of the loan was delivered by NHB to LIHs through HFCs as a part of its refinance scheme, which does not specifically target any income category, but is based on credit assessment of HFCs. Lack of an appropriate information system on end-borrowers led to implementation problems. In order to avoid similar problems in the lending of subloan repayments net of loan repayments, NHB may consider measures to build the required database at the HFI level to facilitate better achievement of project objectives. Although the volume of lending to LIHs through CFIs and NGOs under part A(i) was small, this component constituted an important seed activity in NHB’s operations.
71. ICICI Bank loan (Loan 1761-IND). ICICI Bank’s increased focus on home loans coincided with the aim of HF II to expand market-based housing finance for LIHs. This was reflected in rapid disbursement via direct lending. ICICI Bank has in place the necessary infrastructure for loan sourcing, servicing and collection. Higher delinquencies among the LIHs may, however, impact the future growth of this business. The partnership model developed by ICICI Bank for linkages with the informal sector (CFIs and NGOs) is expected to address key issues with respect to scalability and replicability. However, to expand lending in an orderly and sustainable manner to CFI and NGO subprojects (such as the Kudumbashree project), the capacity of the CDSs needs to be strengthened. Interest rates would also need to be more closely aligned with market interest rates for housing loans, by factoring in the risk premium and cost of operations for the targeted segment of borrowers, to ensure sustainability of operations.
IV. ASSESSMENT AND RECOMMENDATIONS
A. Evaluation Criteria
72. The four core criteria and subcriteria adopted for assessment are as follows:
(i) Relevance: (a) adequacy of assessment of problems, opportunities and lessons; (b) consistency of the project’s impact, outcome, and outputs with the government’s development strategy; and (c) choice of modality, instruments and design.
(ii) Effectiveness: (a) achievement of outcome; (b) loan utilization and its catalytic role; and (c) contribution of policy and institutional reforms.
(iii) Efficiency: (a) subloans repayment performance; and (b) alignment of subloans’ interest rate to market interest rate.
17
(iv) Sustainability: (a) availability of adequate demand for project’s services; (b) prospect of the Borrower’s housing finance operations targeting LIHs; and (c) presence of appropriate policy and institutional environment to mainstream the activities supported under the project.
B. Relevance
73. National Housing Bank loan (Loan 1759-IND). The NHB loan is rated “partly relevant”. The expected outcome was consistent with the Government’s development priority and ADB’s country strategy. However, the assessment of the appropriateness of using NHB’s refinance operations as a key channel for directing credit to LIHs was inadequate. Although the problems with the CFI refinance scheme were also not envisaged at approval, the inclusion of direct lending to CFIs during implementation improved the relevance of the design.
74. ICICI Bank loan (Loan 1761-IND). The ICICI Bank loan is rated “relevant”. As in the case of the NHB loan, the expected outcome was consistent with the strategies of India and ADB. Further, the biggest component—lending directly to LIHs—was in line with ICICI Bank’s growing emphasis on housing finance. Although the constraints in lending indirectly to LIHs through CFIs and NGOs had not been adequately envisaged at approval, direct lending to members of CFIs and NGOs during implementation enabled ICICI Bank to lend under the partnership model. The design did include some components that were not relevant, such as lending through state and local bodies, and public and private enterprises.
C. Effectiveness in Achieving Outcome
75. National Housing Bank loan (Loan 1759-IND). The NHB loan is rated “ineffective”. Utilization was very poor (18%) and the outcome in terms of number of loans to LIHs was far below the expected level. Moreover, BME shows that some of the subloans under this component were not made to LIHs. Also, refinancing of HFC loans to LIHs was limited, and this component also does not appear to have catalyzed lending to LIHs by HFCs. Inclusion of direct lending to CFIs and NGOs constituted a key seed activity in building the linkages between the formal and informal sector, as envisaged in the policy and institutional action plan. However, this activity is currently small because of constraints in terms of the number of viable CFIs and NGOs with the capacity for housing finance operations.
76. ICICI Bank loan (Loan 1761-IND). The ICICI Bank loan is rated “effective”. The loan was fully utilized, although only about half the target number of subloans were made, indicating that the average subloan was double the envisaged size.34 The loan brought focus to ICICI Bank’s direct lending operations to the LIH segment. Further, as envisaged in the policy and institutional action plan, ICICI Bank built linkages with the informal sector. The Kudumbashree program demonstrated the model, and also played a catalytic role, leading to other banks entering the segment in Kerala. However, utilization under the CFI and NGO component was lower than envisaged in the RRP.
34 The larger average loan size is, due in part to the following (i) direct lending, which envisaged a larger loan amount as compared to other components, exceeded the RRP target; and (ii) increasing housing costs necessitated housing loans larger than the RRP estimate that did not incorporate any increases in housing costs during the implementation period. 18
D. Efficiency in Achieving Outcome and Outputs
77. National Housing Bank loan (Loan 1759-IND). The NHB loan is rated “less efficient”. To the extent that the project completion review mission could verify, it appears that repayment performance of the end-borrowers is satisfactory.35 The interest rates on the refinance to HFCs reflect the rates of interest prevailing in the market. However, risk-based lending to HFCs was introduced only in 2003–2004. Further, NHB’s lending policies with respect to CFIs and NGOs have been evolving and the rates at which the loans were made to CFIs and NGOs in 2004– 2005 may not have adequately factored in the credit risk-premium for CFIs and NGOs.
78. ICICI Bank loan (Loan 1761-IND). The ICICI Bank loan is rated “less efficient”. ICICI Bank’s direct lending portfolio to LIHs showed higher delinquency compared to its overall housing loan portfolio. Also, the overdues of the Kudumbashree program have been increasing. The interest rates for direct lending were market-determined at origination. However, the interest rates for Kudumbashree program, set in consultation with the Kerala government, did not adequately factor in the risk-premium of lending to LIH segment and the cost of operations of the CDS (para. 41).
E. Preliminary Assessment of Sustainability
79. National Housing Bank loan (Loan 1759-IND). This loan is rated “less likely” to be sustainable. There is a huge housing shortage among LIHs. Moreover, a key constraint faced by LIHs in improving their housing condition is access to affordable credit, indicating a large unmet demand by LIHs for housing credit. However, uncertainties exist with respect to directing credit to LIHs using NHB’s refinance operations, as (i) the decrease in subsidized funding available to NHB is likely to impact the institution’s ability to offer refinance at competitive rates, thereby potentially affecting the refinance business in the medium to long term;36 (ii) the presence of HFCs in the LIH segment is limited; and (iii) the lack of information under refinance operations on end-borrowers, makes it difficult to implement policies targeting LIHs.
80. ICICI Bank loan (Loan 1761-IND). This loan is rated “likely” to be sustainable. There is a large unmet demand by LIHs for housing credit. ICICI Bank’s strategy is to be present in all asset classes since it imparts size and contributes to experience in different segments that may lead to future opportunities. Accordingly, ICICI Bank plans to maintain or expand its existing LIH portfolio. Although the higher delinquency of the LIH portfolio may impact future growth, ICICI Bank has addressed this through tightening of credit norms and appropriate loan pricing. With respect to the Kudumbashree subproject, ICICI Bank is currently undertaking steps to strengthen CDS capacity, implement systems to track individual borrower-level data, and improve collections. This is likely to assist the future operations of the subproject.
F. Overall Assessment
81. The overall rating reflects weighted averages of the individual ratings for four criteria: relevance (20%), effectiveness (30%), efficiency (30%), and sustainability (20%). Individual criterion ratings are in whole numbers from 0 to 3, in increasing order of project performance.
35 According to NHB, unlike commercial bank portfolios, the portfolio of HFCs grew at a much slower pace and has a lower delinquency than do commercial banks. Specific data on the subloans of HFCs to LIHs was, however, not available. With respect to the CFI and NGO subprojects, NHB reported regular repayments by the CFIs and NGOs. However, in the case of SPMS, repayment by the members to the self help groups was 95%. 36 NHB officials were, however, of the view that refinancing needs of the HFCs would continue. 19
82. National Housing Bank loan (Loan 1759-IND). Overall, the NHB loan is rated “unsuccessful”, as shown below.
Table 3: Overall Performance Assessment Criteria Weight (%) Rating Value Weighted rating Relevance 20 1 0.2 Effectiveness 30 0 0.0 Efficiency 30 1 0.3 Sustainability 20 1 0.2 Overalla 0.7 a Highly successful = 2.7; successful (S) 2.7 > S = 1.6; partly successful (PS) 1.6 > PS = 0.8; unsuccessful < 0.8. Source: Asian Development Bank, Project Completion Review Mission.
83. ICICI Bank loan (Loan 1761-IND). Overall, the ICICI Bank loan is rated “successful”, as shown below.
Table 4: Overall Performance Assessment Criteria Weight (%) Rating Value Weighted rating Relevance 20 2 0.4 Effectiveness 30 2 0.6 Efficiency 30 1 0.3 Sustainability 20 2 0.4 Overalla 1.7 a Highly successful = 2.7; successful (S) 2.7 > S = 1.6; partly successful (PS) 1.6 > PS = 0.8; unsuccessful < 0.8. Source: Asian Development Bank, Project Completion Review Mission.
G. Impact
84. National Housing Bank loan (Loan 1759-IND). A survey under the BME study conducted by ADB for Part B(ii) of the NHB loan indicated that the subborrowers improved their living conditions through doubling of per capita living space, and better water and toilet facilities. There was, however, a decline in the sanitation facilities (waste collection and street cleaning), possibly because many beneficiaries moved to the urban periphery, where such facilities are inferior to those available in the main cities. The review mission conducted in April–May 2007 reported improvement in basic living conditions of sample beneficiaries in the three CFI subprojects (Appendix 2). In the case of SML and SPMS, the beneficiaries also benefited from CFI membership that included income generating activities.
85. ICICI Bank loan (Loan 1761-IND). ICICI Bank carried out sample surveys37 under part B(i) for the HF II benefit impact assessment. The results of the sample survey submitted in 2004 indicate that the project beneficiaries’ living and economic conditions had improved primarily due to more living space; new construction; and better facilities such as better quality and supply of water, sanitation, health facilities, etc. However, in the cities of Mumbai and Indore, the respondents’ commuting time to their places of work had increased. Nonetheless, the majority of the beneficiaries reported they were satisfied, since it enabled them to own a property under favorable living conditions. The results of the 2007 survey indicate that a majority of the respondents rated various facilities such as water supply, electricity, sanitation, and health as good or excellent, with about 25%-37% reporting improvement in the facilities compared to where they previously lived. Overall, about 82% of the respondents reported
37 The survey contained in the 2004 report comprised 151 subloans in the cities of Mumbai, Nasik and Indore. The survey in 2007 of the ICICI Bank home loan under the HF II project examined 55 subloans in Jaipur and Cochin. 20 satisfaction with the loan. ICICI Bank has so far not submitted BME reports under part A(i). The field visits of various missions, however, supported the conclusions regarding improvement of living conditions of beneficiaries.
H. Lessons
86. The existing procedures under NHB’s refinance operations are not suited for directing credit to LIHs based on income criteria. Capacity development of NHB in terms of developing refinancing guidelines and procedures that enable tracking of requisite information on end- borrowers should precede any similar interventions in the future.
87. Higher delinquency among the LIH segment, as reported by ICICI Bank, is likely to pose a challenge to the future growth of the housing finance business for the LIH segment. In addition to better credit norms, availability of products such as mortgage insurance and title insurance would help in delinquency management.
88. The establishment of linkages between the formal financial system and informal institutions (i.e., CFIs and NGOs) is at an experimental stage for housing finance; this contrasts with the current microfinance scenario for income generation and livelihood purposes, which has a different purpose and product structure.38 However, CFIs and NGOs are an important channel for reaching people without regular incomes and those in rural areas, and it would be worthwhile to develop the capacity of these channels for housing finance. Direct lending by NHB to CFIs and NGOs, albeit still small, constitutes an important activity. With direct experience in this area, NHB may be well placed to address the constraints in lending through CFIs and NGOs and create an enabling environment for increasing penetration of housing. ICICI Bank’s Kudumbashree program demonstrated the partnership model for housing finance and led to other banks entering the segment in Kerala. However, scalability and sustainability issues— such as CDS capacity development and low rates of interest—still need to be addressed.
89. To develop the housing finance market, including lending through CFIs and/or NGOs, it is important that existing issues related to uncertainties in land titles be addressed. This would involve, among others, reforms at the state level for conversion of presumptive titles to conclusive titles, availability of information on land parcel maps and records of rights. ADB may consider supporting activities in these areas.
I. Recommendations
90. NHB has a renewed focus on inclusive financial delivery for the housing sector, and NHB management is of the view that studies need to be conducted in areas such as a risk facility for second loss coverage and credit enhancement, a micro-securitization framework, title insurance, housing microfinance, and a secured transactions registry. Furthermore, NHB plans to support the housing finance operations of regional rural banks, use the public-private partnership to promote housing projects to low income groups, and support housing policy reforms at the state level. ADB may consider support to NHB in these areas with the following caveats: (i) a realistic and effective monitoring and evaluation framework should be discussed and agreed upon with NHB upfront; and (ii) given past experience, financial intermediation loan modality should be used selectively, and the suitability of such a modality for achieving the desired outcome should be carefully assessed.
38 Microfinance loans for productive purposes are much smaller than loans for housing finance, and the loans are typically repayable within a year in weekly installments. Appendix 1 21
PROJECT FRAMEWORK
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms 1. Goal
Support human · Approximately · Quarterly reports; · The Government development by 270,000 housing annual reports and continues to place a increasing the availability loans benefiting evaluations, loan high priority on and affordability of over 1.3 million documentation, addressing the housing finance to low- people are disbursed review missions. housing finance needs income households through formal and of LIHs and on (LIHs). informal housing promoting sectoral finance institutions. policy reforms.
2. Purpose
Improve the living · At least 270,000 LIHs · Project completion · The relationship standards and quality of obtain loans for home report (PCR) between the cost of life of LIHs that lack purchase or Asian Development access to affordable improvement by Dec Bank (ADB) funds and credit for housing and 2006. market interest rates home-based, income- results in financially generating activities. viable lending modalities. · At least 14,000 LIHs · PCR · Borrowers establish obtain microcredit to and expand linkages finance home with financial workplace intermediaries to improvements by channel housing loans Dec 2006. to LIHs.
· At least five slum · PCR · Housing and Urban networking Development subprojects are Corporation (HUDCO) prepared and improves its financed by Dec institutional capacity to 2007. structure, appraise, and manage innovative housing subprojects. 3. Outputs
3.1 Linkages · At least 49,000 loans · HUDCO, Housing · HUDCO, National established between totaling $40 million to Development Housing Bank (NHB), housing finance LIHs are channeled Finance Corporation HDFC, and ICICI institutions (HFIs) and through CFIs and (HDFC), and ICICI establish appropriate community-based NGOs. lending records and CFI lending windows, financial institutions quarterly project marketing strategies, (CFIs) and · Approximately $20 reports, field and disbursement nongovernment million additional evaluations, ADB procedures to organizations (NGOs) to leveraging loan disbursement increase lending to onlend to LIHs. contributed by LIH requests, review CFIs. 22 Appendix 1
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms beneficiaries. missions. · Adequate effective demand and CFI absorptive capacity exists for housing loans. 3.2 Linkages · At least 46,000 loans · HUDCO, HDFC, and · HUDCO, HDFC, and established between totaling $75 million to ICICI lending records ICICI establish HFIs and public and/or LIHs are channeled and quarterly project appropriate lending private enterprises to through public/private reports, field windows, marketing onlend to LIHs. enterprises. evaluations, ADB strategies, and loan disbursement disbursement · Approximately $38 requests, review procedures to million additional missions. increase lending to leveraging public and private contributed by LIH enterprises. beneficiaries. · Public and private · Approximately $15 enterprises willing and million additional able to support leveraging housing loan contributed by programs for HUDCO, HDFC, and employees. ICICI.
3.3 Linkages · At least 23,000 loans · HUDCO, HDFC, and · HUDCO, HDFC, and established between totaling $38 million to ICICI lending records ICICI establish HFIs and state and/or LIHs are channeled and quarterly project appropriate lending local bodies to onlend to through state and reports, field windows, marketing LIHs. local bodies. evaluations, ADB strategies, and loan disbursement disbursement · Approximately $18 requests, review procedures to million additional missions. increase lending to leveraging state and local bodies. contributed by LIH beneficiaries. · State and local bodies willing and able to · Approximately $8 support housing loan million additional programs. leveraging contributed by HUDCO, HDFC, and ICICI. Appendix 1 23
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms 3.4 Innovative slum · At least five slum · HUDCO lending · HUDCO develops networking subprojects networking records and quarterly capacity to structure, are prepared, financed, subprojects totaling project reports, field appraise, and finance and implemented $10 million are evaluations, ADB slum networking prepared, financed, loan disbursement subprojects. and implemented. requests, review missions. · Grant sources of · Approximately $5 financing are identified million additional to supplement loan leveraging funds. contributed by slum dwellers as well as · Sustainable municipal authorities partnerships are and private established among enterprises. communities, CFIs, NGOs, and local authorities.
3.5 Microcredit · A total of $5 million is · HUDCO lending · HUDCO establishes programs are channeled through records and quarterly partnerships and established to support worker cooperatives project reports, field lending cooperatives home workplace lending. to onlend to LIHs for evaluations, ADB and societies. improvements to loan disbursement home workplaces, requests, review · Grant sources of resulting in a missions. financing are identified minimum of 10 to supplement loan subprojects. funds.
· Approximately $3 million additional leveraging contributed by LIH beneficiaries as well as cooperatives and government. 3.6 HFI lending directly · At least 65,000 loans · HUDCO, HDFC, and · HUDCO, HDFC, and to LIH is increased and totaling $144 million ICICI lending records ICICI commit to sustained. are directly and quarterly project expanding direct channeled to LIHs by reports, field lending to LIHs. HFIs. evaluations, ADB loan disbursement · Appropriate screening · Approximately $72 requests, review criteria and lending million additional missions. procedures are in leveraging by LIH place to ensure that beneficiaries. housing loans are directed to LIHs.
24 Appendix 1
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms 3.7 Refinancing · Approximately $29 · NHB refinancing · NHB develops provided for HFI lending million equity records and quarterly appropriate to LIHs. contribution by HFIs. project reports, field refinancing evaluations, ADB guidelines and · At least 27,000 loans loan disbursement procedures to ensure to LIHs totaling $50 requests, review that only loans to LIHs million are refinanced missions. are refinanced. by NHB. · NHB operationalizes · At least $8 million is its refinancing used to refinance program for HFC HFC lending to CFIs. lending to CFIs.
· Approximately $10 million equity is contributed by NHB. 4. Activities · HUDCO, HDFC, and · HUDCO, HDFC, and 4.1 Linkages ICICI lending records ICICI develop established between and quarterly project sufficient HFIs and CFIs and/or reports, field in-house capacity, NGOs to onlend to LIHs. evaluations, ADB expertise, and loan disbursement commitment for CFI requests, review lending. missions. · CFI lending windows Start: Jan 2001. · Lending to CFIs is operationalized and Complete: July 2001. financially viable given marketed to CFIs Responsibility: cost of ADB funds vis- HUDCO, à-vis domestic sources HDFC, and ICICI. of capital.
· Appropriate CFI rating Start: Jan 2001. criteria and lending Complete: July 2001. procedures Responsibility: developed. HUDCO, HDFC, and ICICI. · HUDCO, HDFC, and 4.2 Linkages ICICI develop established between · HUDCO, HDFC, and sufficient in-house HFIs and public and/or ICICI lending records capacity, expertise, private enterprises to and quarterly project and commitment for onlend to LIHs: reports, field lending to public and evaluations, ADB private enterprises. · Lending program Start: Jan 2001. loan disbursement marketed to public and Complete: July 2001. requests, review private enterprises Responsibility: missions. HUDCO, HDFC, and ICICI. · Lending to public and · Participation criteria Start: Jan 2001. private enterprises is and appropriate Complete: July 2001. financially viable given lending, monitoring, Responsibility: cost of ADB funds vis and reporting HUDCO, à-vis domestic Appendix 1 25
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms procedures HDFC, and ICICI. sources of capital. developed.
· HUDCO, HDFC, and 4.3 Linkages ICICI develop established between sufficient in-house HFIs and state and/or capacity, expertise, local bodies to onlend to and commitment for LIHs: · HUDCO, HDFC, and lending to state and
ICICI lending records local bodies. · Lending program Start: Jan 2001. and quarterly project marketed to state and Complete: July 2001. reports, field · Lending to state and local bodies Responsibility: evaluations, ADB local bodies is HUDCO, HDFC, and loan disbursement financially viable given ICICI. requests, review cost of ADB funds vis
missions. à-vis domestic sources of capital. · Participation criteria Start: Jan 2001. and appropriate Complete: July 2001. lending, monitoring, Responsibility: and reporting HUDCO, procedures developed HDFC, and ICICI · HUDCO develops 4.4 Innovative slum · HUDCO lending sufficient in-house networking subprojects records capacity, expertise, are prepared, financed, and quarterly project and commitment to and implemented: reports, field prepare, finance, and evaluations, ADB implement slum loan disbursement networking requests, review subprojects. missions. · Grant funds are · HUDCO works with Start: Jan 2001. available from CFIs, municipal Complete: Jan 2005. government programs, authorities, private Responsibility: HUDCO bilateral funding enterprises, and slum agencies, and private communities to sector sources. structure viable subprojects.
· Appropriate Start: Jan 2001. mechanisms in place Complete: Jan 2005. to ensure community Responsibility: HUDCO participation from subproject design through implementation. 4.5 Microcredit · HUDCO lending · HUDCO develops programs are records and quarterly sufficient in-house established to support project reports, field capacity, expertise, home workplace evaluations, ADB and commitment to lending: loan disbursement partner with worker requests, review cooperatives for missions. microcredit lending. 26 Appendix 1
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms
· HUDCO establishes Start: Jan 2001. · Grant funds are partnerships with Complete: Jan 2005. available from worker cooperatives Responsibility: HUDCO government programs, and develops bilateral funding appropriate lending agencies, and private guidelines, sector sources. procedures, and monitoring systems. 4.6 HFI lending directly · HUDCO, HDFC, and · HUDCO, HDFC, and to LIHs is increased ICICI lending records ICICI develop and sustained: and quarterly project sufficient in-house reports, field capacity, expertise, · Institutional Start: Jan 2001. evaluations, ADB and commitment to commitment to Complete: July 2001. loan disbursement increase direct marketing and Responsibility: HUDCO, requests, review lending to LIHs. expanding lending to HDFC, and ICICI. missions. LIHs. · Lending to LIHs is financially viable · Appropriate criteria Start: Jan 2001. given cost of ADB established to screen Complete: July 2001. funds vis-à-vis borrowers and Responsibility: HUDCO, domestic sources of minimize credit risk. HDFC, and ICICI. capital. · Reporting systems developed to Start: Jan 2001. document borrower Complete: July 2001. incomes, loan sizes, Responsibility: HUDCO, house location, HDFC, and ICICI. collateral, etc.
4.7 Refinancing · NHB develops provided for HFI lending · NHB refinancing sufficient in-house to LIHs: records and quarterly capacity, expertise,
project reports, field and commitment to Start: Jan 2001. · Procedures and evaluations, ADB refinancing HFI systems established Complete: July 2001. loan disbursement loans to LIHs. to facilitate timely Responsibility: NHB. requests, review · NHB develops refinancing of HFI missions. sufficient in-house lending to LIHs. capacity, expertise, and commitment to · Reporting Start: Jan 2001. Complete: July 2001. refinancing HFI requirements loans to CFIs. developed to ensure Responsibility: NHB. that only LIH loans · Refinancing is are refinanced. financially viable
Start: Jan 2001. given cost of ADB · Refinancing window funds vis-à-vis for HFI lending to Complete: July 2001. Responsibility: NHB. domestic sources of CFIs operationalized. capital.
Appendix 1 27
Design Summary Targets Project Monitoring Risks/ Assumptions Mechanisms 5. Inputs 5.1 Financial · Borrowing · ADB Loan $300 million · HUDCO, NHB, HDFC, institutions comply · Beneficiary $146 million with ADB financial contribution and ICICI lending records and quarterly guidelines and · HUDCO contribution $21 million project reports; field procedures to · NHB contribution $10 million evaluations; ADB account for the · HDFC contribution $20 million sources and uses of $20 million loan disbursement · ICICI contribution requests; review funds, and to missions; PCR. monitor project impacts and benefits. 5.2 Capacity Building
· TA provided to Start: Jan 2001. · TA progress reports; · Qualified consultants expand lending to Complete: Jan 2005. review missions. are recruited; CFIs and NGOs, to Institutional Focus: counterpart structure slum HUDCO and NHB. commitment and networking contributions are subprojects, and to realized. examine how mortgage securitization can expand the domestic capital market for housing finance. Source: ADB. 2000. Report and Recommendation of the President to the Board of Directors on Four Proposed Loans to the Housing and Urban Development Corporation, National Housing Bank, Housing Development Finance Corporation, and ICICI for the Housing Finance II Project in India. Manila.
28 Appendix 2
COMMUNITY-BASED FINANCIAL INSTITUTION AND NON-GOVERNMENT ORGANIZATION SUBPROJECT PROFILES
A. National Housing Bank Loan (Loan 1759-IND)
1. Share Microfin Limited
a. Scope of operations
1. Share Microfin Limited (SML) is a microfinance institution that began operations in January 2000 with the objective of providing financial services to the poor. It provides financial and other support services to 1.3 million poor women living in rural areas. SML has a network of 462 branches across 10 states with a staff of 3,022 (as of 31 March 2008). Based on specific criteria, including an income ceiling of Rs350 per month, women are formed into groups of five called a joint liability group (JLG). SML provides JLG members small value (up to Rs15,000), collateral-free loans. These members have the opportunity to increase their incomes with assistance provided by SML for planning income-earning activities, loans, savings avenues, etc. SML provides housing loans only to members who have gone through loan cycles and reached an income-earning capacity of about Rs2,500-3,000 per month. However, the housing finance activities of SML remain very small. SML also provides training to empower JLG members to make decisions on group liability, selection of income-earning activity, etc. It seeks to help women build productive microenterprises, thereby contributing to the development of sustainable communities.
b. Details of Subloan
2. The Housing Finance II Project (HF II)1 supported SML under two loans: the National Housing Bank (NHB) loan and ICICI Bank Limited (ICICI Bank) loan.2 Under the NHB loan, in April 20053 NHB extended a loan of Rs3.8 million ($83,712) to SML for repairs and renovation of the existing houses of 307 poor women who were senior eligible members of the JLGs in various parts of Andhra Pradesh.
3. Under HF II the maturity of SML loans to members was 1 year, while the maturity of the loan from NHB to SML was 5 years. The interest rate on the loan from NHB to SML is 7% per annum (fixed with 3 years reset clause), while SML can onlend the funds to its members at a rate not exceeding 13%. The loan from NHB to SML is secured by a charge created in a manner and to the satisfaction of NHB, over SML book debts created out of the aforementioned financial assistance.
c. Financial Viability
4. SML sources its funds from a few commercial banks and financial institutions, but is looking to further expand its resource base. SML’s strength in terms of its outreach and excellent financial track record can be leveraged to provide inclusive financial services to the
1 ADB. 2000. Report And Recommendation of the President to the Board of Directors on Four Proposed Loans to the Housing and Urban Development Corporation, National Housing Bank, Housing Development Finance Corporation, and ICICI for the Housing Finance II Project in India. Manila. 2 Loans 1759-IND and 1761-IND, respectively. 3 ADB retroactively approved the subloan to SML in June 2007 and reallocated the amount from housing finance institution (HFI) loan refinancing—part B(ii)—to lending through community-based financial institutions (CFIs) and non-government organizations (NGOs)—part A(i). Appendix 2 29
poor. The gross loan portfolio of SML increased from $3.5 million in 2001 to $91.7 million in 2007, while its return on equity increased by approximately 12% during the same period. However, SML is constrained by issues of acceptable collateral in providing loans of longer tenors.
5. Regarding repayment performance, SML reported 100% recovery of the SML loan under HF II from its members. NHB did not provide confirmation of recycling of repayments as envisaged under HF II to the project completion review mission.
d. Impact
6. The review mission (conducted intermittently in April–May 2007) observed that the economic profile of beneficiaries matched that targeted under the loan. Further, the review mission also noted that subsequent to their membership with SML, members reported benefits such as (i) a steady and improved income-stream, (ii) small savings in post office and life insurance, (iii) a reduction in the school dropout rate of their children, (iv) emotional support from male members, and (v) improved self-confidence and unity among the residents. In addition, the members benefited from the subproject assistance because it enabled them to obtain loans with lower interest rates than were available from alternate informal sources (i.e., private money lenders).
2. Sri Padmavathy Mahila Abyudaya Sangam
a. Scope of operations 7. Sri Padmavathy Mahila Abyudaya Sangam (SPMS) is a federation of women self help groups (SHGs) managed by its members and assisted by Dhan Foundation, a non-government organization (NGO). It provides a comprehensive range of services such as technical support for construction, community organization, insurance schemes, training, and health and income- generation schemes for low-income groups. It has a membership of more than 9,500 women organized into 778 SHGs. Members are women slum dwellers with incomes ranging from Rs3,000 to Rs6,000. SPMS’s criteria for granting housing loans4 are set at two levels, for SHGs and SHG members. SHGs must have healthy operational processes, a repayment track-record and good governance. The commitment of members is ensured through requirements specifying a minimum period of membership, a history of regular savings, regular attendance at group meetings and rights to land tenure. b. Details of Subloan 8. Under the NHB loan, in August 2004,5 NHB extended a loan of Rs4.4 million ($95,524) to SPMS to partly meet construction costs of new dwelling units for 122 members. The beneficiaries belonged to SHGs located in the slums under the Tirupati Urban Development Authority. The individual members constructed their own house on plots they owned, following a design proposed by SPMS in consultation with the members. 9. Under HF II the maturity of the loan from NHB to SPMS is 15 years, whereas the individual members repay to the SHGs on a monthly basis over a period of 12 years. The loan from NHB to SPMS carries an interest rate of 6.5% (fixed with a 3-year reset clause), and is
4 Housing finance loans comprised about 47% of the overall loan portfolio of SPMS in 2007. However, the project completion review m ission could not obtain growth figures for the housing finance portfolio during 2001–2007. 5 ADB retroactively approved the subloan to SPMS in June 2007 and reallocated the amount from HFI loan refinancing—part B(ii)—to lending through CFIs and NGOs—part A(i). 30 Appendix 2 backed by security of Dharakasthu patta (an applicable land document evidencing rights to occupation)6 provided by the state urban planning authority. As per the project proposal submitted by SPMS to NHB, SPMS proposed to onlend to SHGs at 9%–10% per annum, who would further lend to their members at 12% per annum, as per their norms. The project completion review mission was informed that the actual end-borrower rates on SPMS loans is 15% on a reducing balance basis.
c. Financial viability
10. Apart from the loan from NHB, SPMS has been mobilizing funds in the form of loans from institutions including HDFC, HUDCO and the Rabobank foundation (the Netherlands) in order to meet the credit requirement of its SHGs. During 2007–2008, SPMS borrowed Rs1.3 million from the National Bank for Agriculture and Rural Development and Rs.1.0 million from Kalanjiam Development Financial Services.
11. The review mission conducted in April–May 2007 observed that SPMS managed the debt servicing schedule of its members within the scheduled timeframe of NHB and regularly met its obligations to NHB. NHB confirmed to the project completion review mission that the debt-servicing performance of SPMS to NHB was 100%. The current status of repayment collection from SPMS members to SHGs is 95%, and from SHGs to SPMS is 100%.
d. Impact 12. The project completion review mission observed that the beneficiaries moved from temporary to permanent housing structures with the help of the loan from NHB. In addition, some members also benefited from additions to their productive income-earning assets (e.g., in a random sample from the Jeevakona cluster office, two households were renting out house extensions for use as shops).
3. SPARC Samudaya Nirman Sahayak
a. Scope of Operations
13. The Society for Promotion of Area Resource Centre (SPARC) was founded in 1984 as a trust by a group of professionals with work experience in welfare-oriented NGOs. It is involved in a number of community development programmes for housing, transit, and infrastructure projects in about 50 towns and cities across India. SPARC works in alliance with the National Slum Dwellers Federation (an association of slum dwellers in various localities) and Mahila Milan (a collective of microcredit and savings groups active in slum localities). Within this alliance, SPARC designs and develops strategies to enable its partners to undertake administrative tasks and mobilize funds for its work.
14. SPARC Samudaya Nirman Sahayak (SSNS) is a non-profit construction company set up by SPARC and the federations to assist poor communities. It was created in 1998 to manage formal issues (e.g., financial and technical assistance) related to construction. SSNS aims to develop new strategies to enable the poor to access affordable housing and infrastructure. The federations along with SPARC negotiate for land and support the local communities to manage
6 The Government of Andhra Pradesh allowed mortgaging of plots of land by SHG members for the purpose of obtaining housing loans from financial institutions, enabling borrowers to create an equitable mortgage as collateral or security in favor of SPMS. These mortgages are in turn to be charged to NHB by declaration under Section 16 A of the NHB Act, 1987. Appendix 2 31
and participate in construction.
b. Details of Subloan 15. Under the NHB loan, in April 2004,7 NHB extended a loan of Rs27.6 million ($602,745) to SSNS towards meeting the partial cost of construction of 147 tenements free of cost, and development of additional flats (2,787 square meters) and commercial units (159 square meters) for free sale at Dharavi, Mumbai. The member families of the Bharat Janata Colony were living in pucca8 and semi-pucca structures erected on land owned by Mumbai Municipal Corporation. The member families formed a cooperative housing society, Bharat Janata Cooperative Society, to acquire permanent structures free of cost, along with leasehold title to property under the slum rehabilitation scheme. The subproject comprised construction of five seven-story buildings, including three buildings for rehabilitation of 147 existing slum-dwellers under the Slum Rehabilitation Act (SRA).9 The remaining two buildings, consisting of 50 residential tenements and five shops, formed the commercial component intended for sale in the market to nearby residents. The cost of construction was to be recovered by the sale of the two buildings and transfer of development rights granted by the State Slum Rehabilitation Authority. 16. The subproject is currently under implementation. The rehabilitation buildings have been completed and beneficiaries have occupied their homes. The work relating to the commercial component will be taken up after the Maharashtra government finalizes its policy regarding resettlement of slum dwellers in Dharavi. 17. The loan by NHB to SSNS carried an interest rate of 6.5% (fixed with a 3-year reset clause), with a bullet repayment at the end of 5 years. The loan is secured by lien noted in the records of Slum Rehabilitation Authority on the transferable development rights (TDRs)10 and the free sale construction. NHB’s loan disbursements to SSNS are routed through a dedicated escrow account with a commercial bank to account for project funds and ensure appropriate end use and a recovery mechanism. c. Financial Viability 18. The project completion review mission could not obtain financial data for SSNS. d. Impact 19. The rehabilitation part of the subproject was completed successfully and all the beneficiaries had shifted to the new dwellings before the review mission in April–May 2007. According to the review mission, the beneficiaries of the NHB subloan perceived that the positive impacts included: (i) acquisition of permanent structures with attached kitchen, bathroom, their own water supply and independent toilet facilities; (ii) improvements in sanitation and drainage conditions, with no stagnant water present inside the structures during the monsoon; (iii) a greater sense of security in the buildings, which have a proper entrance, and
7 ADB retroactively approved the subloan ot SSNS in June 2007 and reallocated the amount from HFI loan refinancing—part B(ii)—to lending through CFIs and NGOs—part A(i). 8 A pucca house is one, which has walls made of burnt bricks, stones , cement concrete, timber, etc. and roof made of tiles, galvanised corrugated iron sheets, asbestos cement sheet, reinforced brick concrete, reinforced cement concrete, timber, etc. 9 According to the SRA, any agency that constructs tenements of rehabilitated slum -dwellers in Dharavi is entitled to receive 1.33 times the constructed area for sale in the market, to enable recovery of the project cost. 10 In addition to the area for free sale, 2,454 square meters of TDRs were generated to be disposed off by SSNS. 32 Appendix 2 gates that can be locked; (iv) privacy for families, especially women; and (v) better overall living conditions and quality of life for slum-dwelling families. 20. Benefits notwithstanding, beneficiaries, particularly large families, were constrained by the small size of the living space available in the permanent structures. In addition, the unhealthy surrounding environment of the Dharavi slums, the poor approach road and community toilets in front of the buildings were noted as problems.
B. ICICI Bank Loan (Loan 1761-IND)
1. Share Microfin Limited11
a. Details of Subloan
21. ADB assisted Share Microfin Limited (SML) under both the NHB and ICICI Bank loans. Under the latter, ICICI Bank extended a loan of Rs19.77 million ($454,692) in June 2005, covering 2,830 female subborrowers. ICICI Bank and SML formed a partnership12 for extension of housing finance directly to the microfinance clients organized by SML. The security for this loan is the mutual guarantee given by the beneficiary groups and a first default liability guarantee given by SML to ICICI Bank, amounting to around 8% of the outstanding loan portfolio.
22. Housing loans are repayable in 52 weekly installments along with a flat rate of interest of 15% per annum over a period of 1 year by SML members. ICICI Bank charges SML 8.75% per annum. The income of SML is the difference between 15% and 8.75%, out of which the loan administration costs are met. Further, SML collects weekly repayments from its members and remits funds to ICICI Bank on a monthly basis.
b. Financial Viability
23. At the time of the review mission (April–May 2007), SML reported that all the beneficiaries had fully repaid the ICICI Bank subloan. ICICI Bank did not provide any updated information on the recycling of repayments as envisaged under the project and the repayment performance of the end-borrowers.
2. Kudumbashree, Kerala
a. Scope of Operations
24. Kudumbashree is a state-level poverty reduction program launched by the Kerala government in 1998. It is designed as a state–community partnership, wherein poor women are organized as a SHG for income generation activities, community health, education, and thrift, among other purposes. Kudumbashree functions under a three-tiered structure. At the lowest level are the neighborhood groups (NHGs), constituted of 15–40 poor women. About 8–15 NHGs are federated at ward levels into area development societies (ADSs), which are federated
11 Refer to paras.1, 4, and 6 for details regarding the scope of operations, financial aspects of the institution and impact of the SML loan. 12 ICICI Bank disbursements to SML are held in a bank account, and then disbursed by SML to individual beneficiaries on behalf of ICICI Bank. ICICI Bank records each individual subloan as a direct loan, and not a loan to SML. Appendix 2 33
at the Panchayat level. These ADSs are further federated into a community development society (CDS), which is a registered society under the Charitable Societies Act.
25. There are 991 CDSs, 16,000 ADSs, and 185,000 NHGs covering about 3.65 million families. The cumulative financial assistance availed by NHG members from financial institutions as of 31 March 2008 was Linkage Banking: Rs5,540.6 million; Housing Scheme (Bhavanashree): Rs1,862.2 million; and Micro enterprise: Rs300.0 million.
b. Details of Subloans
26. ICICI Bank’s subloans are channeled to poor female members of Kudumbashree by leveraging the community–state partnership structure. Under HF II, the approved subproject was for Rs350 million (approximately $7.93 million equivalent) towards ICICI Bank’s subloans to 145 community development societies (CDSs) organized under the Kudumbashree program.13
27. The CDS is the subborrower on record, and in effect acts as a channeling agency to transfer the loans to ultimate beneficiaries. The loans are intended for new construction or repairs of existing houses. The maximum loan amount to the CDS borrower is Rs50,000, or 95% of the project cost, whichever is lower. The loan has a tenor of 10 years inclusive of a 6- month moratorium. The loan is disbursed to the CDS with a guarantee from individual CDS borrowers. The title deed of each guarantor is collected by the CDS and mortgaged to ICICI Bank. The CDS borrower and the house that is constructed are insured. The facility to the CDS is additionally secured by a charge on the receivables from the CDS beneficiaries. The interest rate on the loans was initially 7.25%, set in consultation with the Kerala government, and later revised to 8.75% (applicable to about 20% of the loans). The subloans covered rural areas in all 14 districts of Kerala, benefiting 7,900 households and 31,000 members.
28. Under HF II, the monthly household incomes of beneficiaries was set at less than Rs7,300. The CDS members are poor women employed predominantly in agricultural and allied activities with no documentary record of actual income. However, Kudumbashree program’s nine-point criteria14 for eligibility indicate that the members would fall well below the income limit of HF II. ICICI Bank’s selection criteria for individuals include (i) NHG, ADS and CDS recommendations; (ii) completion of at least 6 months of NHG activity; (iii) ownership of land with an area of at least 60.7 square meters (1.5 cents); (iv) age between 18–50 years; and (v) possession of clear and marketable title deed.
c. Financial Viability
29. ICICI Bank has a robust system for scrutinizing loan applications for conformity to the established loan parameters. Any deviations are recorded for approval at the delegated level. Because ICICI Bank’s borrower on record is the CDS (and not its members), accounting information at the CDS level is integrated into the formal accounting system. At present, manual
13 ICICI Bank’s total outstanding assistance under the Kudumbashree program as of 31 March 2008 included a housing loan (Rs 363.33 million), income generation loan (Rs2.63 million), and term loan (Rs 6.88 million). 14 A family is identified as an LIH if it meets any four of the following nine criteria: (i) owns no land or less than 404.7 square meters (10 cents) of land; (ii) does not have a house or has a dilapidated house; (iii) does not have a sanitary latrine; (iv) lacks access to safe drinking water within 300 meters; (v) is a household headed by a women, or includes a widow, divorcee, abandoned women or unwed mother; (vi) no one in the family is regularly employed; (vii) the family belongs to a socially disadvantaged group (scheduled caste and/or tribe); (viii) the family includes a mentally or physically challenged, or chronically ill member; or (ix) the family has an illiterate adult member. 34 Appendix 2 records of individual-level data are kept by the CDS, and record keeping varies across the CDSs. ICICI Bank is currently in the process of establishing systems and databases for tracking individual-level data and bringing record keeping into uniformity across the CDSs.
30. Each CDS is responsible for identifying NHGs and borrowers, undertaking loan documentation, facilitating disbursement, monitoring, and loan repayment, with each CDS repaying ICICI Bank to the extent monies are received from beneficiaries. Delays occur at times due to the specific circumstances of the beneficiaries. ICICI Bank’s overall housing portfolio to Kudumbashree, with Rs363.33 million outstanding as of 31 March 2008, had total overdues of Rs21.71 million.
31. Financial management of the subproject by ICICI Bank is sound and adequate. However, CDSs lack structured formats or institutionalized frameworks to ensure sound financial management and monitoring of repayment performance over a 10-year repayment period. Also, the current portfolio is small enough for supervisors in CDSs to have firsthand knowledge and control over subloan performance. For a larger portfolio over a longer timeframe, CDS capacity with respect to financial management, internal control, and monitoring of recovery performance needs to be strengthened. Based on the suggestions by the review mission conducted in December 2006 on the need for capacity enhancement of CDSs, ICICI Bank has undertaken some steps such as training of field executives for assisting CDSs with management, and training of selected CDS officials, and has further initiated steps for better CDS bookkeeping systems.
d. Impact
32. Field visits to a sample of beneficiaries indicated they had constructed new houses or renovated and extended existing houses, which suggested an improvement in living conditions. However, one beneficiary was delinquent and mentioned that her obligation under the loan was proving to be an excessive financial burden for the family.
33. The linkage between ICICI Bank and the Kudumbashree program has contributed to capacity building of the CDSs. ADB played an important role by providing useful inputs and feedback to ICICI Bank on the need for capacity building.
Appendix 3 35
DETAILS OF REFINANCE AND DIRECT FINANCE UNDER THE PROJECT
A. Housing Finance II Project, National Housing Bank Loan (Loan 1759-IND)
Table A3.1: Housing Finance Companies Refinanced under Part B(ii)
Name of the Housing Finance Asian Equivalent $ Amounta Company Development Bank ($ million) Loan amount (Rs million) Bank of Baroda Housing Finance Ltd 26.90 0.59 Cent Bank Housing Finance Ltd 46.56 1.02 CanFin Homes Finance Ltd 34.35 0.75 CorpBank Homes Finance Ltd 2.83 0.06 Dewan Housing Finance 27.03 0.59 Gruh Homes Finance Ltd 3.34 0.00 LIC Housing Finance Ltd 96.48 2.11 PNB Housing Finance Ltd. 26.60 0.58 ViBank 2.20 0.05 Weizmann Homes Ltd 11.70 0.26 DHFL–Vysya 6.79 0.15 Total 284.79 6.22 a 1$ = Rs45.80. Source: National Housing Bank.
B. Housing Finance II Project, ICICI Bank Limited Loan (Loan 1761-IND)
Table A3.2: Terms of Lending under Parts A(ii) and B(i)
Percent lent as fixed and floating Type Percent of subloans Fixed 2.50 Floating 97.50 Rate of interest of subloansa Rate of interest Percent of subloans Below 9% 6 Above 9% and below 11% 10 Above 11% and below 13% 59 Above 13% 25 Tenure of the subloansb Tenor Percent of subloans <100 months 10 100–200 months 29 200–300 months 27 300–400 months 33 >400 months 1 a As of May 2008. b This includes revisions till May 2008. Source: ICICI Bank Limited. 36 Appendix 3
Table A3.3: Income Distribution of Subborrowers under Parts A(ii) and B(i)
Income (Rs per month) Percent of subborrowers < 5,000 0 5,000–6,000 26 6,000–7,000 40 7,000–8,000 32 >8,000 2 Source: ICICI Bank Limited.
Table A3.4: Geographical Distribution of the Subloans under Parts A(ii) and B(i)
State Percent of subloans Andhra Pradesh 4.70 Gujarat 15.83 Karnataka 2.64 Kerala 6.03 Madhya Pradesh 11.31 Maharashtra 29.15 Punjab 3.97 Rajasthan 3.45 Tamil Nadu 5.55 Uttar Pradesh 9.15 West Bengal 6.43 Others 1.80 Source: ICICI Bank Limited.
Appendix 4 37
POLICY AND INSTITUTIONAL ACTION PLAN
A. Housing Finance II Project, National Housing Bank Loan (Loan 1759-IND)
Table A4.1: Status of Policy and Institutional Action Plan Relevant to the National Housing Bank
Policy Action needed Status objective Strengthening Expand refinancing window for HFC NHB’s CFI refinance window linkages lending to CFIs and streamline refinancing did not elicit any proposals from between formal operations HFCs. NHB therefore started and informal direct lending to CFIs and sectors NGOs. Raise NHB must prepare a time-bound action NHB reports corporate corporate plan to adopt and implement corporate governance matters through its governance governance provisions regarding board published annual report and standards for composition, the establishment of an accounts. The report indicates public independent audit committee, a board that its board of directors meets institutions remuneration committee, accounting and regularly as stipulated in the financial reporting, and corporate governing statute. It has governance compliance reporting as part constituted an audit committee of its annual report. comprising non-executive directors and an executive committee, which also meets regularly. The board has also constituted a risk management advisory committee, comprising its chairman, senior staff and external experts. Implement The working committee of NHB shall have NHB Act was amended in 2000, foreclosure submitted a final report to NHB by 31 and provides for appointment of regulations and March 2002 on (a) procedures for recovery officers and provisions mortgagee power of sale without procedures for the recovery of intervention of courts; (b) procedures, housing loan dues from administrative support, funding and defaulting borrowers. The powers of Housing Finance Institution Housing Finance Institutions Debt Recovery Appellate tribunals; and (c) Debt Recovery Appellate preservation of mortgage power of sale Tribunal (Financial and without court intervention given judicial Administrative Power) Rules, review. 2002, were notified through the Government’s notification dated NHB Board shall have approved the Draft 7 May 2002. The Securitisation Regulations by 31 July 2002. and Reconstruction of Financial Assets and Enforcement of NHB shall have submitted the Draft Security Interest Act 2002 was Regulations for notification by 31 Dec enacted and provides for easy 2002 procedures relating to mortgage foreclosure. NHB is of the view that the Securitisation Act facilitates mortgage foreclosure 38 Appendix 4
Policy Action needed Status objective by HFIs ; NHB is consequently not pursuing establishment of debt recovery tribunals for HFCs, as per the amended NHB Act provisions. Improve NHB shall, in cooperation with ICICI NHB has complied with this mortgage Limited, have taken all necessary covenant in principle by registration measures satisfactory to ADB for the facilitating the establishment system establishment of a working group on and participation in the working mortgage registration. The working group group. The draft report shall have submitted to the guarantor its prepared by the working group recommendations by 31 December 2002. could not be finalized, and was presented to the guarantor in January 2006. The project completion review mission was unable to get an update on the status of the report. Expand the Lessons learned from the pilot issue A feasibility study, capital market require documentation and analysis in the comprehensive business plan for housing context of other mortgage-backed and implementation plan and finance securities (MBS) markets in Asia and investor prospectus are being elsewhere in order to define the requisite prepared under ADB TA1 with reform measures to develop India's MBS the aim of assisting in the market. development of a mechanism for issuance of “true sale” residential MBSs through establishment of a credit enhancement agency and/or secondary mortgage institution. The feasibility study will include recommendations for policy and/or regulatory development and for establishment of the agency. CFI = community-based financial institution, HFC = housing finance company, NGO = non-government organization, NHB = National Housing Bank.
1 ADB. 2005. Technical Assistance to the National Housing Bank and the Housing Development Finance Corporation of India for a Study on the Development of an Agency to Facilitate Issuance of Residential Mortgage- Backed Securities. Manila. Appendix 4 39
B. Housing Finance II Project, ICICI Bank Limited Loan (Loan 1761-IND)
Table A4.2: Status of Policy and Institutional Action Plan Relevant to ICICI Bank Limited Policy Action needed Status objective ICICI Limited will develop in-house ICICI Bank’s Rural, departments and expertise for microcredit Microbanking & Agri Business lending. Group has developed such expertise through its experience. ICICI Limited will prepare rating criteria for ICICI Bank has developed a Strengthen CFIs based on their repayment capacities system for vetting all proposals linkages and lending track records. from a risk perspective by its between formal risk management team. and informal sectors Standardize and streamline processing ICICI Bank has formulated procedures for loans to CFIs to promote procedures that are adapted as greater efficiency and predictability. per specific needs and circumstances of the CFIs. Operationalize innovative financing ICICI Bank has implemented a structures such as escrow accounts, risk sharing agreement with guarantee funds, and revolving funds. CFIs. ICICI Limited must prepare a time-bound ICICI Bank has put in place a Raise action plan to adopt and implement sound corporate governance corporate corporate governance provisions regarding structure that comprises an governance board composition, the establishment of independent and professional standards for an independent audit committee, a board board of directors, board- public remuneration committee, accounting, and appointed committees for audit, institutions financial reporting, and corporate governance, remuneration, governance compliance reporting as part credit, fraud monitoring and risk of the annual report. management. ICICI Limited will (i) establish a working ICICI Bank established the group on mortgage registration with working group, outlined the representatives from the central terms of reference and government, selected state governments, facilitated meetings, Improve NHB, HUDCO, Reserve Bank of India, culminating in the preparation mortgage professionals and other relevant partners; of draft report. The draft report registration (ii) outline terms of reference for the was presented to the guarantor system working group; and (iii) formulate a time- in January 2006. ICICI Bank bound action plan for submission of the stated that there has been no working group’s recommendations on further update on mortgage registration to the Government. implementation of the draft recommendations. CFI = community-based financial institution, HUDCO = Housing and Urban Development Corporation Limited, ICICI Bank = ICICI Bank Limited, NHB = National Housing Bank.
40
FINANCIAL STATEMENTS OF NATIONAL HOUSING BANK
Table A5.1: Balance Sheet of National Housing Bank Appendix 5 (Fiscal Year Ending 30 June) (Rs million)
Item 2001 2002 2003 2004 2005 2006 2007 Assets Cash and Bank Balances 9,680 10,172 23,277 31,139 49,634 21,579 9,720 Investments (net of provisions) Government of India dated securities 993 241 1,457 8,514 122 18 19 Stocks, Shares, Bonds, Debentures, and Securities of Housing Finance Institutions/Building Material Co. 143 151 119 107 107 58 58 Stocks, Shares, Bonds, Debentures, and Securities of Other Institutions 2,858 1,396 2,294 185 2,247 4,167 2,805 Loans and Advances (net of provisions) Housing Finance Institutions 37,420 41,988 51,506 52,980 52,552 50,789 49,498 Scheduled Banks 1,456 2,114 9,382 22,594 67,125 105,189 138,791 State Co-operative Agriculture Rural Development Banks/ 4,641 5,354 5,221 4,951 3,430 2,839 1,981 Land Development Banks Others 1,620 2,594 2,725 2,314 1,928 5,090 5,719 Less Provisions for Nonperforming Assets - - - - 277 274 271 Fixed Assets (net) 277 273 318 346 259 243 234 Other Assets 15,462 6,544 6,597 7,943 9,841 6,191 6,460 Total Assets 74,549 70,825 102,897 131,075 186,967 195,888 215,014
Liabilities Capital 3,500 3,500 4,500 4,500 4,500 4,500 4,500 Reserves 8,572 9,667 10,880 12,061 12,013 12,877 13,891 Balance of Net Profit 7 7 7 6 7 0 0 Bonds and Debentures 28,922 30,519 60,105 82,467 123,670 114,655 90,833 Subordinated Debts - - 4,000 4,000 4,000 4,000 4,000 Borrowings From Reserve Bank of India 8,750 2,500 2,650 895 869 842 816 From Other Sources in India 9,287 8,553 6,300 12,900 26,619 44,313 85,036 From Other Sources outside India 5,599 6,728 6,265 5,430 4,974 4,782 4,105 Current Liabilities and Provisions 4,475 4,262 4,018 4,382 5,520 5,993 8,209 Other Liabilities 5,438 5,089 4,172 4,432 4,795 3,926 3,626 Total Liabilities 74,549 70,825 102,897 131,075 186,967 195,888 215,014 - = not available, Rs = rupees. Sources: National Housing Bank annual reports. Table A5.2: Profit and Loss Account of National Housing Bank (Fiscal Year Ending 30 June) (Rs million)
Item 2001 2002 2003 2004 2005 2006 2007 Income 6,651 7,935 8,572 8,528 10,378 12,043 14,516 Interest Income 5,900 7,461 6,856 7,439 9,456 11,712 14,255 Investment Income (revaluation and/or sale of investments) 594 189 383 546 145 237 153 Noninterest Income (commission, brokerage, gain on foreign exchange transactions, and provisions written back) 157 285 1,334 544 776 93 108 Expenditure 5,333 6,139 7,276 6,951 9,324 10,554 12,654 Interest and Other Expenses on Borrowing 5,155 5,935 5,390 6,108 8,112 9,799 12,132 Operating Expenses (employee and others) 178 204 292 247 255 212 186 Provisions on Loans and Investments (net) - - 1,594 596 957 543 336 Profit before Depreciation and Tax 1,319 1,796 1,296 1,577 1,054 1,489 1,862 Depreciation 16 13 19 21 25 23 24 Profit before Tax 1,302 1,784 1,278 1,557 1,029 1,466 1,838 Provision for Tax (income tax, wealth tax, deferred tax, and fringe benefit tax) 94 697 70 375 589 602 695 Profit after Tax 1,208 1,087 1,207 1,181 440 864 1,143 - = not available, Rs = rupees. Sources: National Housing Bank annual reports.
A ppendix 5 41 42 Table A5.3: Key Ratios and Performance Indicators of National Housing Bank Appendix 5 Item 2001 2002 2003 2004 2005 2006 2007 Return on Average Equity (%) 10.54 8.61 8.45 7.39 2.66 5.10 6.39 Return on Average Assets (%) 1.72 1.5 1.39 1.01 0.28 0.45 0.56 Debt Equity Ratio (%) - 4.00 6.56 8.42 11.35 11.33 10.14 Capital Adequacy Ratio (%) 16.83 20.16 27.96 30.05 22.48 22.32 22.58 Debt-Service Coverage Ratio (%) - 1.79 8.18 1.25 2.23 1.20 0.70 Number of Employees 73 79 74 84 80 78 67 - = not available. Source: National Housing Bank.
FINANCIAL STATEMENTS OF ICICI BANK LIMITED Table A6.1: Balance Sheet of ICICI Bank Limited (Rs million)
Item 2001 2002 2003 2004 2005 2006 2007 Net Worth 83,227 65,986 72,833 83,606 129,000 225,560 246,633 Equity Capital 7,848 6,130 6,127 6,164 7,368 8,898 8,993 Preference Share Capital 3,500 3,500 3,500 3,500 3,500 3,500 3,500 Reserves and Surplus 71,879 56,355 63,207 73,942 118,132 213,162 234,139 Deposits - 320,851 481,693 681,086 998,188 1,650,832 2,305,102 Borrowings 598,350 492,187 343,024 307,402 335,445 385,219 512,560 Borrowings in India from Reserve Bank of India, other banks 497,341 419,428 284,107 229,661 198,740 169,609 134,176 and institutions, bonds and debentures Borrowings outside India 101,008 72,759 58,917 77,741 136,705 215,610 378,384 From multilateral and/or bilateral credit agencies 21,473 25,214 25,418 24,404 24,949 23,821 22,702 From international banks, institutions, and consortiums 52,226 29,348 27,948 35,112 80,042 123,777 177,127 Bonds and Notes 27,310 18,198 5,551 18,226 31,714 68,013 178,555 Current Liabilities and Provisions 52,561 162,076 170,569 180,195 213,962 252,279 382,286 Other Liabilities Total Liabilities 734,137 1,041,099 1,068,120 1,252,289 1,676,594 2,513,890 3,446,581
Fixed Assets including Leased Assets (net) 51,104 42,393 40,607 40,564 40,380 39,807 39,234 Other Assets 3,144 41,583 75,205 78,634 87,989 126,575 164,899 Investments (net of provisions) 111,516 358,911 354,623 427,429 504,874 715,474 912,578 Government and other approved securities - - 255,830 299,780 344,820 510,740 676,648 Debentures and bonds - - 56,900 55,490 28,540 18,040 24,628 Shares - - 16,420 16,840 19,150 20,580 19,373 Others - - 25,473 55,319 112,364 166,114 191,930 Advances (net) 492,548 470,349 532,794 620,955 914,052 1,461,631 1,958,656 Current Assets 75,825 127,863 64,890 84,706 129,300 170,402 371,213 Cash and balances with Reserve Bank of India - 17,745 48,861 54,080 63,449 89,344 187,069 Balances with banks and money at call and short notice - 110,119 16,029 30,626 65,851 81,059 184,144 Total Assets 734,137 1,041,099 1,068,120 1,252,289 1,676,594 2,513,890 3,446,581 - = not available, Rs = rupees. Sources: ICICI Bank Limited annual reports.
Appendix 6
43 44
Appendix 6 Table A6.2: Profit and Loss Account of ICICI Bank Limited (Rs million)
Item 2001 2002 2003 2004 2005 2006 2007 Income 92,981 27,266 125,269 119,590 128,260 187,676 289,235 Interest Income 60,579 21,519 93,681 88,940 94,099 137,845 229,943 Investment Income (revaluation and/or sale of investments) 13,984 2,911 4,924 12,246 5,460 6,963 815 Noninterest Income (commission, exchange and 7,777 2,671 8,020 12,644 22,356 34,750 49,748 brokerage, and foreign exchange transactions) Income from Subsidiary Companies and/or Joint Ventures 1,081 0 1,094 1,262 1,881 3,387 4,485 Other Income (including lease income and sale of assets) 9,560 165 17,549 4,497 4,464 4,731 4,244 Expenditure 83,233 23,727 112,428 95,197 97,085 150,472 247,306 Interest and Other Expenses on Borrowing 64,954 15,589 79,440 70,152 65,709 95,974 163,585 Operating Expenses (employee and others) 4,064 5,585 15,057 20,318 27,088 38,557 61,458 Provisions and Contingencies (excluding Taxes) 14,215 2,553 17,931 4,727 4,288 15,941 22,264 Profit before Depreciation and Tax 9,747 3,539 12,841 24,393 31,176 37,204 41,928 Depreciation 3,975 641 5,059 5,394 5,904 6,238 5,448 Profit before Tax 5,773 2,898 7,781 18,998 25,272 30,966 36,480 Provision for Tax (income tax and wealth tax) 1,224 315 (4,280) 2,627 5,220 5,565 5,378 Profit after Tax 4,548 2,583 12,062 16,371 20,052 25,401 31,102 Proposed Dividends (equity + preference) including 4,937 486 5,187 6,138 7,231 8,658 10,543 Corporate Dividend Tax ( ) = negative, Rs = rupees. Sources: ICICI Bank Limited annual reports. Table A6.3: Key Ratios and Performance Indicators of ICICI Bank Limited (Rs million, unless otherwise specified)
Item 2001 2002 2003 2004 2005 2006 2007 Capital Adequacy Ratio (%) 11.57 11.44 11.10 10.36 11.78 13.35 11.69 Debt Equity Ratio (%) 5.73 4.28 4.28 7.50 5.35 3.76 1.46 Earnings per Share (Rs) 8.13 11.61 19.68 26.66 27.60 32.50 34.84 Net Interest Margin (%) 3.55 2.67 1.40 1.80 2.40 2.40 2.60 Interest Spread (%) 2.90 2.20 1.30 1.90 2.30 2.20 2.30 Number of Employees - 7,700 10,600 13,609 18,000 25,384 33,321
Growth in Advances (net) (%) - (5) 12.00 15.00 38.00 46.00 34.00 Growth in Retail Advances (%) - 116.00 85.00 54.00 52.00 48.00 39.15 Share of Retail Loan Portfolio In Total Loan Portfolio (%) 3.20 9.40 22.80 31.90 60.90 62.90 65.20 Nonperforming Assets (NPAs) Gross NPA - 53.25 58.39 40.14 34.32 22.68 4.68 Net NPA - 27.21 31.51 20.37 19.83 10.75 20.19 Net Customer Assets - 575.26 640.51 710.02 978.94 1,520.07 2,053.74 % of Net NPA to customer assets - 4.73 4.92 2.87 2.03 0.71 0.98 - = not available, ( ) = negative, Rs = rupees. Sources: ICICI Bank Limited annual reports. Appendix 6 45 46 Appendix 7
STATUS OF COMPLIANCE WITH KEY LOAN COVENANTS
Table A7.1: Housing Finance II Project, National Housing Bank Loan (Loan 1759- IND) S. No. Covenant Reference Status of Compliance in Loan Agreement Sector 1. The Guarantor and NHB shall execute the Schedule 4, Complied. Policy and Institutional Action Plan as para. 1 agreed to by the Government, NHB and ADB to the extent that actions thereunder are applicable to or the responsibility of the Guarantor or NHB. Working Group on Mortgage Registration 2. NHB shall, in cooperation with ICICI Schedule 4, Complied. Limited, have taken all necessary measures para. 14 satisfactory to ADB for the establishment of a working group on mortgage registration. The working Group shall have submitted to the Guarantor its recommendations by 31st December 2002. NHB Act Regulations 3. The Working Committee of NHB shall have Schedule 4, There was deviation submitted a final report to NHB by 31st para. 17 from the covenant (see March 2002 on (a) procedures for status on Policy and mortgagee power of sale without Institutional Action intervention of courts;(b) procedures, Plan) but with the administrative support, funding and powers concurrence of ADB. of Housing Finance Institution Debt Complied. Recovery Appellate tribunals; and (c) preservation of mortgage power of sale without court intervention given judicial review.
NHB Board shall have approved the Draft Schedule 4, Complied. Regulations by 31st July 2002. para. 18
NHB shall have submitted the Draft Schedule 4, Complied. Regulations for notification by 31st Dec para. 19 2002. Environmental and Social Is sues 4. NHB shall ensure and cause Qualified Schedule 4, Complied. Enterprises to ensure (i) that all Qualified para. 2 Housing Proposals are in compliance with the applicable environmental and social guidelines of ADB; and (ii) that any Qualified Housing Proposal requiring involuntary resettlement shall be undertaken in accordance with ADB's Involuntary Resettlement Policy and ADB's Handbook Appendix 7 47
S. No. Covenant Reference Status of Compliance in Loan Agreement on Resettlement 1998, as amended from time to time. Financial 5. NHB shall at all times make adequate Section Complied. provision to protect itself against any loss 5.02 resulting from changes in the rate of exchange between Rupees and the currency in which NHB's outstanding money obligations will be met. NHB may swap the proceeds of the Loan for Rupees, and shall establish a Rupee account for the deposit of such proceeds . 6. NHB shall ensure that all local currency Section Complied. funds and other resources which are 5.03 required for the Project by Qualified Enterprises for the carrying out of their respective Qualified Housing Proposals shall be available to such Qualified Enterprises promptly as needed. 7. NHB shall maintain records and accounts Section Complied. adequate to record the progress of the 5.04 Project and of each Qualified Housing Proposal (including the cost thereof), and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of NHB. 8. NHB shall have its accounts, the Rupee Section Complied. accounts and financial statements audited 5.06 (a) annually, in accordance with appropriate auditing standards consistently applied, and promptly after their preparation but in any event not later than 9 months after the close of the Financial Year to which they relate, furnish to ADB (i) certified copies of such audited accounts and financial statements; and (ii) the auditors' reports containing their opinion, inter alia, on the use of the Loan proceeds, on the status of compliance by NHB with the covenants and with ADB's Loan Disbursement Handbook as amended from time to time, including the Imprest Account. 9. NHB shall maintain a ratio of the Section Complied. consolidated debt to the consolidated equity 5.10 not higher than 12:1. 10. NHB shall ensure that the consolidated Section Ratio for FY2007 is internal cash generation for each FY shall 5.11 below the stipulated 48 Appendix 7
S. No. Covenant Reference Status of Compliance in Loan Agreement be at least 1.1 times the consolidated debt- threshold. service requirement for that FY. Not Complied. Other Reporting Requirements 11. NHB shall furnish to ADB all such reports Section Complied. and information ADB shall reasonably 5.05 (a) request concerning(i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof;(ii) the Project(iii) the Qualified Enterprises, the Qualified Housing Proposals, and the Subloans;(iv) the administration, operations and financial condition of NHB; and (v) any other matters relating to the purposes of the Loan. 12. NHB shall furnish to the ADB quarterly Information submitted reports on the execution of the Project and Section in response to specific on the operation and management of the 5.05 (b) requests from ADB. NHB until the full utilization of the Loan and Partially Complied. semiannually thereafter. Predisbursement 13. NHB shall establish immediately after the Section Complied. effective date an Imprest Account at a prime 3.02 (c) (i) rated commercial bank subject to the guidelines of Reserve Bank of India and satisfactory to ADB. 14. Notwithstanding any other provision of the Section Complied. Loan Agreement, no withdrawals shall be 3.02 (f) made from the Loan Account until (i) ADB shall have received the NHB's management approval of a time bound action plan, in form and substance acceptable to ADB to ensure NHB's implementation of and compliance with corporate governance standards satisfactory to ADB, including (a) establishment of a board audit committee with specified composition, powers and functions; (b) codes of conduct and ethics as laid down by NHB's Board; and (c) incorporation of corporate governance sections in the annual report of NHB; and (ii) ADB shall have received an opinion from an auditor acceptable to ADB, in form and substance satisfactory to ADB, which certifies that NHB is in compliance with Prudential Norms, and debt service coverage and debt/equity ratios as specified in Secs. 5.10 and Sec. 5.11. Appendix 7 49
S. No. Covenant Reference Status of Compliance in Loan Agreement Others 15. The Loan is made for the financing by NHB Section Complied. under Parts A(i), B(ii) and (iii) of the Overall 3.01(a) Project of specific Qualified Housing Proposals. 16. Without prejudice to Secs 3.01(a) above, Section Complied. NHB shall observe subloan financing criteria 3.01(b) that include maximum ADB financing of 80 percent of the Subloans provided by NHB under Part B of the Overall Project. 17. Without prejudice to Secs. 3.01 (a and b) Section Not complied, but with above, NHB shall ensure that (i) no more 3.01(c) concurrence of ADB. than 80 per cent of Loan proceeds or such other percentage as ADB agrees, are used to refinance lending for Qualified Housing Proposals from HFIs under Part B(ii) of the Overall Project; and (ii) at least 20 per cent of Loan proceeds or such other percentage as ADB agrees, are to finance or refinance HFC lending to CFIs and NGOs under Parts A(i) and Part B (iii) of the Overall Project. 18. Notwithstanding any other provisions of this Section Complied. Loan Agreement and without prejudice to 3.02 (c) (iii) the liabilities and obligations of NHB under Sec 5.02, no withdrawals shall be made from the Loan Account until ADB is satisfied with the detailed arrangements for the establishment of the Imprest Account and ADB has, prior to any deposit into the Imprest Account, has been notified by NHB of a swap or other arrangements required to meet the provisions of Sec 5.02. ADB shall notify NHB of its acceptance or not of such arrangements and shall thereafter notify NHB of the availability of Loan proceeds no later than 3 Banking Days before the expiry of the 13 Banking Days stipulated in Sec. 2.02. 19. Notwithstanding any other provision of this Section Complied. Loan Agreement, the Borrower shall submit 3.04 (a) to the Bank for approval (i) at least two Qualified Housing Proposals under Part B(ii) of the Overall Project; and (ii) at least two Qualified Housing Proposals under Parts A(i) or B(iii) of the Overall Project. 50 Appendix 7
S. No. Covenant Reference Status of Compliance in Loan Agreement 20. Each subloan shall carry interest at an Section Complied. appropriate rate and shall be made on 4.01 terms whereby NHB shall obtain, by a written agreement with the Qualified Enterprise in form acceptable to ADB, rights adequate to protect the interests of ADB and NHB. 21. NHB shall ensure that subloans are made to Section Complied. those Qualified Enterprises that (a) are not 4.04 delinquent or otherwise in arrears in repayment of other debt obligations known to NHB; and (b) made available audited accounts satisfactory to ADB. 22. NHB shall, promptly as required, take all Section Complied. action within its powers to maintain its 5.09 (a) corporate existence, to carry on its operations and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the project or in the conduct of its business 23. Except ADB and the NHB may otherwise Section Complied. agree, NHB shall not sell, lease or 5.09 (c) otherwise dispose of any of its assets, except in the ordinary course of its business. 24. Prior to establishing or acquiring any Section Complied. subsidiary which may have an adverse 5.09 (d) effect on the Project, NHB shall inform ADB of any such action. 25. NHB shall ensure that none of its Section Complied. subsidiaries shall perform the obligations of 5.12 NHB under the Loan Agreement for the Project without the prior approval of ADB. 26. NHB undertakes that (i) if NHB shall create Section Complied. any lien on any assets as security for any 5.13 debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest and other charges on, the loan and NHB, in creating or permitting the creation of any such lien, will make express provision to that effect; and (ii) if any such statutory lien shall be created on any assets of NHB as security for any debt, NHB shall grant to ADB an equivalent lien satisfactory to ADB. 27. NHB shall cooperate with ICICI Limited in Schedule 4 BME information Appendix 7 51
S. No. Covenant Reference Status of Compliance in Loan Agreement implementing a benefit monitoring and para 5 submitted evaluation (BME) system of the Project. The intermittently. The BME information shall be provided in the submitted information first quarterly report of each calendar year. did not cover beneficiaries under Part A (i). Partially Complied. 28. NHB shall maintain for Parts A (i), B (ii) and Schedule 4 The project completion (iii) of the Overall Project proper lending para 10 review mission could records which shall include ADB access to not obtain the data of Qualified Enterprises, which obtain requested information refinancing from NHB, documenting the relating to the number and size of mortgage loans refinance operations refinanced and household income levels of under Part B(ii) in a LIH mortgagees, in detail and format fully satisfactory form, satisfactory to ADB. indicating inadequate records and documentation under this Part. Partially Complied. 29. By 31 April 2002, NHB shall ensure that it is Schedule 4 Complied. in compliance with corporate governance para 16 standards specified in Sec. 3.03 (f) (i). Subloan Criteria 30. Without limiting the generality of other Schedule 4 Sections of the Loan Agreement:
(a) NHB to ensure that the use of Loan Complied. proceeds shall be for refinancing of mortgage loans to LIHs for qualified housing proposals under Parts A (i), Part B (ii) and (iii) of the Overall Project.
(b) NHB shall provide refinance under Complied. subloans through Subloan Agreements acceptable to ADB including an appropriate rate commensurate with maturity risk perceptions, market conditions and project requirements.
(c) NHB shall ensure that subloan Relending certificate repayments, net of loan repayments, for FY2007 not shall be relent through the same received from NHB. lending channels and to the same Partially Complied. beneficiary groups specified under 52 Appendix 7
S. No. Covenant Reference Status of Compliance in Loan Agreement Parts A(i), B (ii) and (iii) of the Overall Project during the term of the Loan and that such relending information shall be provided to ADB.
(d) NHB shall submit to ADB for approval Complied. a detailed disbursement plan for the first year of the Project, keeping the Guarantor duly informed.
(e) NHB shall ensure that its refinancing Complied. of HFI mortgage loans to LIHs under Part B (ii) of the Overall Project are to HFIs other than HUDCO and HDFC.
(f) NHB shall ensure that only state Complied. slum improvement boards, State apex cooperative housing societies, State Housing improvement development authorities evidenced by NHB to have adequate financial position and financial controls satisfactory to ADB, shall be eligible for Subloan under Part B (ii) of the Overall Project.
(g) NHB shall ensure that there are no Complied. Subloans based only on comfort letters by the State instead of State Guarantees unless such comfort letters are issued in compliance with criteria approved by the Guarantor and acceptable to ADB. ADB = Asian Development Bank, CFI = community-based financial institution, FY = financial year, HDFC = Housing Development Finance Corporation Limited, HFC = housing finance company, HFI = housing finance institution, HUDCO = Housing and Urban Development Corporation Limited, LIH = low income household, NGO = non- government organization, NHB = National Housing Bank. Appendix 7 53
Table A7.2: Housing Finance II Project, ICICI Bank Limited Loan (Loan 1761- IND) S.No. Covenant Reference Status of in Loan Compliance Agreement Sector 1. The Guarantor and ICICI Bank shall execute Schedule 4, Complied. the Policy and Institutional Action Plan as para. 1 agreed to by the Government, ICICI Bank and ADB to the extent that actions thereunder are applicable to or the responsibility of the Guarantor or ICICI Bank. Working Group on Mortgage Registration 2. The Working Group of ICICI Bank shall have Schedule 4, Complied. submitted to the Guarantor recommendations para. 14 in accordance with its terms of reference in Section 3.02 (d) (iii) by 31 December 2002. Environmental and Social Issues 3. ICICI Bank shall ensure and cause Qualified Schedule 4, Complied. Enterprises to ensure (i) that all Qualified para. 2 Housing Proposals are in compliance with the applicable environmental and social guidelines of ADB; and (ii) that any Qualified Housing Proposal requiring involuntary resettlement shall be undertaken in accordance with ADB's Involuntary Resettlement Policy and ADB's Handbook on Resettlement 1998, as amended from time to time. Financial 4. ICICI Bank shall at all times make adequate Section ICICI Bank provision to protect itself against any loss 5.02 confirmed that it resulting from changes in the rate of stays within the exchange between Rupees and the currency overall positions as or currencies in which ICICI Bank's approved by its outstanding money obligations will be met. management. ICICI Bank may swap the proceeds of the Complied. Loan for Rupees. Such swap transaction, or any other arrangement to protect ICICI Bank against any loss resulting from changes in the rate of exchange between Dollars and Rupees, will be undertaken in accordance with arrangements satisfactory to ADB and in compliance with all regulatory requirements for such transactions. 5. ICICI Bank shall ensure that all local currency Section Complied. funds and other resources which are required 5.03 for the Project by Qualified Enterprises for the carrying out of their respective Qualified Housing Proposals shall be available to such Qualified Enterprises promptly as needed. 54 Appendix 7
S.No. Covenant Reference Status of in Loan Compliance Agreement 6. ICICI Bank shall maintain records and Section Complied. accounts adequate to record the progress of 5.04 the Project and of each Qualified Housing Proposal (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of ICICI Bank. 7. ICICI Bank shall have its accounts and Section The auditors’ reports financial statements audited annually, in 5.06 (a) under part (ii) were accordance with appropriate auditing submitted with standards consistently applied, and shall delays, after follow- promptly after their preparation but in any ups by ADB. event not later than 9 months after the close Partially Complied. of the Financial Year to which they relate, furnish to ADB (i) certified copies of such audited accounts and financial statements; and (ii) the auditors' reports containing their opinion, inter-alia, on the use of the Loan proceeds, on the adequacy of ICICI Bank’s accounting and internal control procedures, on the status of compliance by ICICI Bank with the financial covenants of the Loan Agreement and with ADB's Loan Disbursement Handbook dated January 2001, as amended from time to time. 8. Except as ADB may otherwise agree, ICICI Section Bank shall undertake its operations so as to 5.10 ensure that it shall : and Section (i) conform to interest cover whereby 5.11 Complied. ICICI Bank's profit before interest, provision for bad and doubtful debts, depreciation and other noncash charges for the relevant current financial year are at least 1.1 times the interest and commitment charges payable by it for the relevant financial year; (ii) conform to Reserve Bank of India Complied. (RBI) stipulations on Statutory Liquidity Ratio, and Capital Adequacy Ratio as amended from time to time; (iii) conform to Asset Liability Complied. Management-liquidity management guidelines of RBI; and share with ADB the internal norms and risk management guidelines adopted by its management, along with status of conformity to such guidelines; and Appendix 7 55
S.No. Covenant Reference Status of in Loan Compliance Agreement (iv) maintain a debt to equity ratio of not Complied. more than 12:1. ICICI Bank shall maintain a ratio of the consolidated debt to consolidated equity as stipulated by the Regulator. Others 9 ICICI Bank shall furnish to ADB quarterly Section Information reports on the execution of the Project and on 5.05 (b) submitted in the operation and management of ICICI Bank response to specific until the full utilization of the Loan and request from ADB. semiannually thereafter. Partially Complied. 10. ICICI Bank shall cooperate with NHB in Schedule 4 BME information implementing a benefit monitoring and submitted evaluation (BME) system of the Project, in intermittently. Also, accordance with ADB’s Benefit Monitoring did not cover and Evaluation Handbook. ICICI Bank shall beneficiaries under provide ADB with BME information in the first Part A (i) quarterly report of each calendar year. Partially Complied. 11. ICICI Bank shall assign a Project Manager Schedule 4 Complied. who is responsible for Project supervision, monitoring, accounting, and reporting. 12. ICICI Bank shall carry out independent Schedule 4 Complied. Project impact evaluations at the end of 2 years after the Effective Date and at the end of 4 years after the Effective Date. 13. ICICI Bank shall keep ADB informed of any Section Complied. amendment of the ICICI Bank documents 5.01(c) which may substantially affect the Project. 14. ICICI Bank shall, promptly as required, take Section Complied. all actions within its powers to maintain its 5.09 (a) corporate existence, to carry on its operations and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business. 15. ICICI Bank shall at all times conduct its Section Complied. business in accordance with sound 5.09 (b) administrative, financial, environmental and social practices, and under the supervision of competent and experienced management and personnel. 16. Except as ADB and ICICI Bank may Section Complied. otherwise agree, ICICI Bank shall not sell, 5.09 (c) lease, or otherwise dispose of any of its assets, except in the ordinary course of its business. 56 Appendix 7
S.No. Covenant Reference Status of in Loan Compliance Agreement 17. Prior to establishing or acquiring any Sec 5.09 (d) Complied. subsidiary which may have an adverse effect on the Project, ICICI Bank shall inform ADB of any such action. Subloan Criteria 18. Without limiting the generality of other Schedule 4 Sections of the Loan Agreement:
(a) ICICI Bank shall provide subloans Interest rates under through Subloans Agreements the Kudumbashree acceptable to ADB, including an subproject did not appropriate rate commensurate with adequately factor in maturity, risk perceptions, market the risk-premium for conditions and project requirements. lending to LIH segment. However, ICICI Bank’s rates were not very different from the rates offered by other banks that followed ICICI Bank into this segment in Kerala. Complied.
(b) ICICI Bank shall submit to ADB for Complied. approval a detailed disbursement plan for the first year of the Project and shall keep the Guarantor duly informed.
(c) ICICI Bank shall ensure that subloan Last report received repayments, net of loan repayments, was in November shall be relent through the same 2005. lending channels and to the same Partially Complied. beneficiary groups specified under Parts A and B (i) of the Overall Project during the term of the Loan and that such relending information shall be provided to ADB.
(d) ICICI Bank shall ensure that eligibility Complied. criteria for CFI and NGO Qualified Enterprises under Part A of the Overall Project shall include but not limited to the lending experience, operational capacity, technical expertise, outreach potential, target communities' Appendix 7 57
S.No. Covenant Reference Status of in Loan Compliance Agreement knowledge, reputation and loan repayment track record of Qualified Enterprises.
(e) ICICI Bank shall ensure that subloans Refer (a) above. to Qualified Enterprises constituting Complied. CFI or NGOs under Part A of the Overall Project are at interest rates that shall include a spread to cover loan processing expenses and a risk premium based on an assessment of the credit rating of the recipient CFI or NGO.
(f) ICICI Bank shall ensure that subloans Refer (a) above. to CFI or NGO Qualified Enterprises Complied. under Part A of the Overall Project are onlent to subborrowers at interest rates that include a spread to cover loan processing expenses and a risk premium for the CFI or NGO.
(g) ICICI Bank shall ensure that no more Condition dropped in than 50 percent of lending under Part A response to market (ii) of the Overall Project shall be direct conditions, vide housing loans to Qualified Enterprise amendment letter employees who represent LIHs. dated 3 November 2004.
(h) ICICI Bank shall ensure that only such ICICI Bank has not State housing boards that have extended any undertaken or are undertaking reform subloans to State measures in accordance with ADB's Housing Boards. Technical Assistance on Restructuring State Level Housing Institutions shall be eligible for Subloans under Part A of the Overall Project.
(i) ICICI Bank shall ensure that only such ICICI Bank has not State slum improvement boards, State extended any apex cooperative housing societies, subloans to such State housing improvement trusts, entities. agricultural cooperative rural development banks, and municipal development authorities evidenced by ICICI Bank to be of adequate financial position and financial controls satisfactory to ADB, shall be eligible for 58 Appendix 7
S.No. Covenant Reference Status of in Loan Compliance Agreement Subloans under Part A of the Overall Project.
(j) ICICI Bank shall ensure that there are ICICI Bank has not no subloans based only on comfort extended any letters by the State instead of State subloans based on guarantees unless such comfort letters comfort letter by the are issued in compliance with criteria state under this approved by the Guarantor and project. acceptable to ADB. 19. Without limiting the generality of the foregoing Section provisions of Section 4.01 and in addition to 4.02 any other provisions which a prudent lender would request, each Subloan agreement shall include provisions to the effect that:
(a) the Qualified Enterprise shall carry out Complied. and operate the Qualified Housing Proposal with due diligence and efficiency and in accordance with sound administrative, social and environmental practices, including maintenance of adequate accounts and records;
(b) the proceeds of the Loan shall, if used Complied. for procurement of goods and services, be only from member countries of ADB in accordance with procedures acceptable to ADB, of goods produced in, and services supplied from, such countries, and the goods and services financed out of the proceeds of the Loan shall be used exclusively in the carrying out of the Qualified Housing Proposal;
(c) ADB and ICICI Bank shall each have Complied. the right to inspect such goods, the Qualified Enterprise, the Qualified Housing Proposal, and any relevant records and documents;
(d) ADB and ICICI Bank shall each be Complied. entitled to obtain all such information as each shall reasonably request relating to the Subloan, the goods and services financed out of the proceeds Appendix 7 59
S.No. Covenant Reference Status of in Loan Compliance Agreement of the Loan, the Qualified Housing Proposal, the Qualified Enterprise and other related matters; and
(e) ICICI Bank shall be entitled to suspend Complied. or terminate further access by the Qualified Enterprise to the use of the proceeds of the Loan upon failure by the Qualified Enterprise to perform its obligations under its agreement with ICICI Bank. 20. ICICI Bank shall ensure that Subloans are Section Complied. made to those Qualified Enterprises that (a) 4.04 are not delinquent or otherwise in arrears in repayment of other debt obligations known to ICICI Bank; (b) are in compliance with Section 3.01(a); and (c) make available audited accounts satisfactory to ICICI Bank and ADB. 21. ICICI Bank shall ensure that none of its Section Complied. subsidiaries shall perform the obligations of 5.12 ICICI Bank under the Loan Agreement for the Project without the prior approval of ADB. 22. (a) ICICI Bank shall undertake that, except as Section Complied. ADB may otherwise agree, (i) if ICICI Bank 5.13 (a) shall create any lien on any of its assets as security for any debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest and other charges on, the Loan and ICICI Bank, in creating or permitting the creation of any such lien, will make express provision to that effect; and (ii) if any statutory lien shall be created on any assets of ICICI Bank as security for any debt, ICICI Bank shall grant to ADB an equivalent lien satisfactory to ADB.
(b) The provisions of paragraph (a) of this Section Complied. Section shall not apply to (i) any lien created 5.13 (b) on property, at the time of purchase thereof, solely as security for the payment of purchase price of such property; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date. ADB = Asian Development Bank, CFI = community-based financial institution, ICICI Bank = ICICI Bank Limited, LIH = low income household, NGO = non-government organization, NHB = National Housing Bank.