This action might not be possible to undo. Are you sure you want to continue?
Loan Number: 2057 February 2008
India: Private Sector Housing Finance Project
(Dewan Housing Finance Corporation Limited)
In accordance with ADB’s public communications policy (PCP, 2005), this completion report excludes information referred to in paragraph 126 of the PCP.
CURRENCY EQUIVALENTS Currency Unit – Indian rupee/s (Rs) At Project Completion 30 November 2007 $0.0251 Rs39.76
At Appraisal 26 September 2003 $0.0118 Rs45.78
ABBREVIATIONS ACR ADB bps CRISIL DHFL DMC EROIC GDP HDFC HFC IFC LMI LTV NHB NPL PSOD RBI RRP XARR – – – – – – – – – – – – – – – – – – – asset cover ratio Asian Development Bank basis points Credit Rating Information Services of India Limited Dewan Housing Finance Corporation Limited developing member country expected return on invested capital gross domestic product Housing Development Finance Corporation Limited housing finance company International Finance Corporation low and middle income loan-to-value National Housing Bank nonperforming loan Private Sector Operations Department Reserve Bank of India report and recommendation of the President extended annual review report
NOTES (i) The fiscal year (FY) year of the Government of India ends on 31 March. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2004 ends on 31 March 2004. In this report, “$” refers to US dollars.
Vice President Director General Directors
L. Jin, Operations Group 1 R. Bestani, Private Sector Operations Department (PSOD) W. Willms, Capital Markets and Financial Sectors Division, PSOD J. Yamagata, Infrastructure Finance Division 2, PSOD C. Engstrom, Senior Investment Specialist, PSOD R. Hernandez, Investment Officer, PSOD
Team leader Team member
CONTENTS Page EXECUTIVE SUMMARY I. THE PROJECT A. Project Background B. Project Features C. Progress Highlights PROJECT EVALUATION A. Overview B. Development Impact C. ADB’s Investment Profitability D. ADB’s Work Quality E. ADB’s Additionality F. Conclusion and Overall Evaluation ISSUES, LESSONS, AND RECOMMENDATIONS A. Project Issues B. Lessons and Recommendations C. Issues to Monitor i 1 1 2 3 4 4 4 8 9 10 11 12 12 13 13
APPENDIXES 1. Basic Data 2. Project Description 3. India Housing and Mortgage Sector Overview 4. Financial Overview and Statements 5. Private Sector Development Indicators and Ratings: Financial Intermediaries
15 17 20 25 31
EXECUTIVE SUMMARY In December 2003, the Asian Development Bank (ADB) approved funding of up to $40 million equivalent in Indian rupees, consisting of two loans of up to $20 million each in Indian rupees, as presented to the Board in the report and recommendation of the President on proposed loans for the Private Sector Housing Finance Project in India in 2003 (the RRP). The Private Sector Housing Finance Project was created to promote market-based mortgage lending to underserved markets in India. The loans provided under this project were to support the expansion of two rapidly growing, well-capitalized housing finance companies (HFCs), Sundaram Home Finance Limited and Dewan Housing Finance Corporation Limited (DHFL). The focus of this extended annual review report (XARR) is DHFL (the Project). The review is based on the findings of the XARR Mission of 26–27 November 2007, as well as information gathered from legal and ADB Board documents, audited financial statements, and related operation and business reports. The mortgage finance market in India was quite underdeveloped at the time that the Project was approved; the RRP reported only about 2% of India’s gross domestic product (GDP). The market was primarily comprised of HFCs, commercial banks, and public sector banks. DHFL, founded in 1984, was the fourth largest HFC at the time the ADB loan was approved. Its target market was the lower- and middle-income (LMI) segment in predominately semi-urban and rural areas. ADB’s loan to DFHL came from ADB’s ordinary capital resources. The 10-year loan to DHFL was funded from ADB’s rupee bond issue. The evaluation criteria used for DHFL are based on the Guidelines for Preparing Performance Evaluation Reports on Nonsovereign Operations released in 2007 (the Guidelines). In this regard, ADB’s support of DHFL’s mortgage lending operations was evaluated against four criteria: (i) development impact, (ii) ADB’s investment profitability, (iii) ADB’s work quality, and (iv) ADB’s additionality. On the basis of the foregoing, the overall rating of the Project is satisfactory. The development impact of ADB’s support of DHFL is rated satisfactory. The overall development impact was evaluated against four criteria: (i) development impact; (ii) business success; (iii) economic development; and (iv) environment, social, health, and safety performance. The Project’s contribution to the housing finance sector in India, while small as a percentage of total market share, has been important. DHFL has been able to provide mortgage finance to a market segment that had access only to debt, typically from moneylenders who offered very short-term finance at high costs. Moreover, DHFL has been able to operate profitably with low levels of nonperforming loans. It has provided a good example to the market with respect to its ability to originate mortgage loans to the LMI segment. DHFL’s underwriting standards, risk management, and corporate governance structure have made it an early leader in the industry. With respect to the other evaluation criteria, DHFL’s business success is rated satisfactory. HFCs inherently have higher costs of funding. DHFL also has higher expenses than some of its peer HFCs because of increased operational costs associated with greater origination costs given the riskier client segment and geographic diversity needed to penetrate this market. With respect to economic development, no economic financial internal rate of return (expected return on invested capital, or EROIC) was presented in the RRP. Measuring EROIC prior to Project commencement and today, DHFL’s rating is partly satisfactory. DHFL has adhered to ADB environmental, social, health, and safety performance and is therefore rated satisfactory on this indicator.
The main variations from the original RRP primarily consist of projected market developments. therefore. ADB’s loan did positively affect DHFL’s profitability. specialized HFCs can offer loans to the LMI segment on a commercially profitable basis. and its monitoring and supervision. The RRP discussed the changing mortgage finance market in India in 2003 with the entrance of the commercial banks. was amended to accommodate this request. Cumulative interest received so far totals Rs187. ADB’s monitoring and supervision is rated satisfactory. HFCs also began to offer floating-rate mortgage loans. which has further reduced the availability of long-term rupee funding for HFCs. Thus. the provision of access to adequate housing supported the Government’s broader theme of improving overall human well-being and infrastructure throughout India. profitability would have been reduced by the differential rate of interest on outstanding loans as compared with the weighted average cost of capital. provided longterm funding to HFCs. ADB’s loan comprised 2%. With the downward trend in interest rates during this period. Commercial banks were more inclined to offer floating-rate loans. Additionally. With respect to monitoring and supervision.41 million ($4. In order to do so. which has resulted in maturity mismatches on the balance sheets of HFCs.and floating-rate funding. Despite the lower amount of funding that ADB provided as compared with DHFL’s total borrowings. satisfactory. HFCs had traditionally offered fixed-rate loans. HFCs must have highly trained. The Government’s 10th Five-Year Plan for 2002–2007 focused on improving overall human well-being throughout India. the National Housing Bank (NHB). First. ADB’s additionality is rated satisfactory. Growth and investment was to be led primarily by the private sector. the NHB has reduced the tenors of its funding.76 million). experienced staff. Over the past few years. PSOD staff also engaged the Credit Rating Information Services of India Limited to assist with due diligence. with the entrance of the commercial banks and the demand for floating-rate loans. borrowers also sought floating-rate loans. The market was growing as a result of rising personal incomes and was increasingly becoming more competitive. The repayment of principal began on 5 November 2007 and the final repayment is scheduled for 5 November 2014. Interest and principal payments have been made on time. This was particularly important. although more difficult. external commercial borrowings have been restricted by the Government. dated 19 July 2004. Another change in the outlook presented in the RRP was in the sources of funding for HFCs. given the urgent need to improve infrastructure in the country. in addition to encouraging GDP growth. as their source of funds was deposits. DHFL requested ADB to provide both fixed. which was perceived to be a major impediment to growth. ADB’s role and contribution is rated excellent. Two main lessons can be drawn from the Project. ADB’s Private Sector Operations Department (PSOD) staff identified and screened HFCs for development impact and profitability. As a result.ii The investment outcome of the Project is satisfactory. DHFL had limited options for raising long-term financing at optimal costs in 2003. and sound credit underwriting . The Loan Agreement agreement between DHFL and ADB. Had DHFL not had the benefit of ADB’s loan. This allowed commercial banks to undercut HFC pricing. Of DHFL’s total borrowings as of 31 March 2007. The regulator. The Project was part of an overall strategy not only to support housing finance in India but also to begin to expand this business throughout Asia. particularly in urban areas. DHFL has been somewhat delinquent in its submission of reports and information. ADB’s work quality is rated excellent. However.
iii and portfolio management policies. the Project provides a good example of targeted mortgage lending to the LMI segment. Regulators are not typically stable sources of long-term funding. which may be replicated in other countries. . In summary. relying on a government regulator as a major source of funding may not be viable over the long term. which should not be an insurmountable barrier to obtaining long-term mortgage loans. Most people in emerging market countries have a lack of credit history. since funding is not the primary reason for their existence and may tend to diminish over time. Second.
Report and Recommendation of the President to the Board of Directors on Proposed Loans under the Private Sector Housing Finance Project in India.4 However. ADB. All HFCs are regulated by the National Housing Bank (NHB). 2003. commercial banks became more active in the mortgage finance market. ADB’s proposed loan of $20 million local currency equivalent was not disbursed to Sundaram as the Reserve Bank of India did not approve Sundaram’s request to borrow from ADB via a swap. India has suffered from a shortage of housing for its rapidly growing population. stabilized property prices. Lower lending rates. Sundaram was later able to obtain cheaper funds from the National Housing Bank. At the time of the inception of the Project. Report and Recommendation of the President to the Board of Directors on Proposed Loans under the Private Sector Housing Finance Project in India. 2003.7 billion. primarily targeting underserved markets. (See Appendix 3 for more details on the housing and mortgage finance sector in India. represented one-third of the market. Report and Recommendation of the President to the Board of Directors on Proposed Loans under the Private Sector Housing Finance Project in India. with some focusing on regional areas in India and others targeting specific consumer segments. ADB. In December 2003. Approximately 52% of disbursements in 2002–2003 was from commercial banks. the focus of this extended annual review report (XARR) is DHFL (the Project). 2. The ADB loans were being made to support the expansion of two rapidly growing. Manila. In 2003. 3. however.1 The proceeds of the loans were to have been used for mortgage onlending. mortgage lending was a growing business in 2003.I. Basic data and the project description are provided in Appendixes 1 and 2. Despite the low number of mortgages in India. Manila (page 16). Manila (page 1). 2 Therefore. mortgage penetration rates are typically 50% of GDP or higher. 3 In developed countries. at about 8%–9%. A. the two leading HFCs. 13% in Thailand. mortgage disbursements were estimated at Rs407. The HFCs are a diverse group of finance institutions. the Board of Directors of the Asian Development Bank (ADB) approved funding of up to $40 million equivalent in Indian rupees for the Private Sector Housing Finance Project in India. 2003. Project Background THE PROJECT 1. and 17% in Malaysia. the loan to Sundaram was not disbursed. compared with mortgage penetration rates of 8% in the People’s Republic of China. mortgage finance was only 2% of GDP. The proceeds from the rupee bond issue provided funding for ADB’s entire loan to DHFL but could cover only part of the proposed funding for Sundaram. the Housing Development Finance Corporation Limited (HDFC) and LIC Housing Finance Limited. The mortgage market in India had been dominated for many years by the HFCs. As presented to the Board of Directors in the report and recommendation of the President on proposed loans for the project (the RRP). Sundaram Home Finance Limited and Dewan Housing Finance Corporation Limited (DHFL or the Company). well-capitalized housing finance companies (HFCs).) 1 2 3 4 ADB. the mortgage market was changing. rising personal incomes. In FY2003. This project was created to promote market-based mortgage lending to underserved markets in the country. 63% higher than in the previous fiscal year. Historically. . and tax incentives for home owners contributed to the increase in mortgage disbursements. Perceiving the large unmet demand and forecasts for robust growth. After Board approval. Sundaram and DHFL were each to receive a loan of up to $20 million equivalent in Indian rupees. ADB had intended to provide local currency financing to both DHFL and Sundaram through an ADB rupee bond issue and a cross-currency swap.
Additionally. Their business model included product cross-selling through large branch offices. Moreover. showing the Company’s commitment to the LMI segment. HFCs served lower. the RRP showed that core profitability was comparable in 2003 between HFCs and commercial banks. Established in 1984 by the Wadhawan family and listed on the Bombay Stock Exchange and the National Stock Exchange. fixed-rate mortgage loans because their funding primarily consisted of refinancing from the NHB and foreign commercial borrowings.5%–8. The Company was the fourth largest HFC in India in 2003. at 5. the NHB was lending at 6. they were more likely to offer floating-rate loans to borrowers to reduce asset-liability mismatches. business models. Project Features 8. DHFL was known for its strong underwriting skills and its ability to offer creative products to its customers. specifically marketed to semi-urban and rural borrowers who had very limited access to traditional sources of credit. 7.5%–6. In 2003. For larger. HFCs. such as DHFL. specialized mortgage lending skills were not widely developed. funding costs for HFCs were typically more expensive. the average size of DHFL’s loans in 2003 was $8. some HFCs. 5. Moreover. In general. and products. HFCs also traditionally offered fixed-rate products. ADB’s Private Sector Operations Department (PSOD) chose to provide funding to HFCs. the HFCs tended to offer more flexible and creative products to attract customers. Typically. to a more limited extent. external commercial borrowings from multilateral development banks. therefore. while commercial banks offered floating-rate products. floating-rate loans were offered with regularity and became popular with borrowers. Commercial banks focused predominantly on large urban areas and higher-income borrowers. Consequently. One of the most fundamental differences between HFCs and commercial banks was with respect to their sources of funding. B. Commercial banks had access to floating-rate funds from their demand deposits. borrowers in this segment had access only to moneylenders. HFCs were also considered to have stronger asset and liability management positions. on the other hand. The majority of their funds were provided through the NHB. Despite these differences. for some. With the growth of commercial bank participation in the market. HFCs also sourced floating-rate lines of credit from banks and. 6. they were considered to be better able to reach these customers and underwrite their risks. limited amounts of funding could be accessed through securitization.2 4. While some HFCs focused on urban areas. highly rated HFCs. With respect to products. Over 70% of the Company’s borrowers had self-constructed homes.0%.000. who provided very short-term loans at high interest rates. DHFL was identified by PSOD as a good candidate for ADB funding. rather than commercial banks for a variety of reasons. fixed deposits from the public. The Project entailed the provision of a 10-year loan to DHFL for the purpose of originating new mortgage loans. since their longer-term mortgage loans were matched by long-term funding from the NHB and. DHFL provided loans to individuals in the LMI segment in semi-urban and rural areas throughout India. as some provided funding to underserved customers in semi-urban and rural areas. HFCs were perceived to have a higher developmental impact.and middle-income (LMI) borrowers. which was representative of the typical markets in smaller towns and their surrounding areas. The HFCs and the commercial banks differed with respect to target markets.0%. Previously. It was a growing. could provide longer-term. The loan agreement between DHFL and ADB of 19 July 2004 . profitable HFC with low levels of nonperforming loans (NPLs). their target borrowers were more diverse. and commercial banks.
the Company has 155 locations—53 main branches.000 in semi-urban areas. The Company has effectively structured its products to respond to the rapidly changing macroeconomic scenario without changing its customer focus and longterm lending strategy. 70% of newly originated mortgage loans must be comprised of loans to the priority sector as defined by the Reserve Bank of India (RBI). Tamil Nadu.570. and continues to pursue business growth aggressively (see Appendix 4 for more details on DHFL’s financial performance). 67 service centers. shared pari passu with all the lenders.40 FY2007 15. both present and future.728.337. as Table 1 shows. C.000 in urban areas and $11. which would limit interest rate and maturity mismatches. to provide mortgage loans to Indians living in and around Dubai and other Gulf countries who wish to purchase homes in India.60 27.579. DHFL is the third largest HFC and the second largest private sector HFC in India. Its overall share of the mortgage finance market in India. fixed-rate rupee debt. is small. The covenant states that. and Kerala.685. and 35 camps—across the country. A new product. which comprises housing loans for the purchase or construction of homes.60 6. at all times. FY = fiscal year.” whereby the Company educates and markets its products to low income groups in communities in or around Gujarat.90 14. The first disbursement was made on 5 November 2004 and the final disbursement on 29 June 2005. A covenant included in the Loan Agreement ensures that DHFL continues to focus on the LMI segment. DHFL opened an office in Dubai.70 53. it had a branch network of 41 branches. at about 1.80 FY2005 7.40 FY2006 12. Progress Highlights 9. The Company continues to focus on serving the LMI segment and has steadily increased its disbursements to this segment.20 11.50 16. the reverse mortgage loan introduced in FY2007.241.028. United Arab Emirates.259. DHFL continues to offer new products to respond to customer needs. In 2003. and would not create currency risk. Currently. DHFL is also working with the NHB to formulate the first national housing price index to better regulate real estate prices.60 4. enables senior citizens to borrow against the value of their homes.000.414. Table 1: Highlights of DHFL’s Operations (Rs million) Item Loan Approvals Loan Disbursements Cumulative Disbursements FY2003 4.40 21.5%. Today. ADB’s loan to DHFL has been fully disbursed in the amount of Rs918. . DHFL also recently introduced the “cluster program. 10.186. In 2003.103.600. loans in the priority sector were limited to $22.556. In 2006. Source: Dewan Housing Finance Corporation Limited 11. however.682. home loans for women.473.40 FY2004 5. The term loan is secured by a first charge on all movable and immovable assets of DHFL. and lease rental financing. The loan was disbursed on a floating-rate basis.3 (the Loan Agreement) provides for long-term. ADB executed an amendment to the Loan Agreement to allow DHFL to draw both fixed and floating-rate disbursements from ADB (the Amendment).40 4. DHFL has maintained its current product offering.411. Subsequent to the signing of the Loan Agreement.10 DHFL = Dewan Housing Finance Corporation Limited. DHFL has achieved solid growth through the years. It has registered strong profits yearly. home improvement loans.00 38.
. Development Impact a.22 196. by providing long-term funds. Source: Dewan Housing Finance Corporation Limited. indicates that DHFL is maintaining its commitment to provide mortgage finance to borrowers in the LMI segment.772. Additionally.329. DHFL provides mortgages with tenors of up to 20 years. The Project generally achieved the development impacts set forth in the RRP. As shown in Table 1. at between $10. (iii) ADB’s work quality. thereby contributing directly to improved living conditions and quality of life.00 Note: A lakh is equal to 100. 15. Direct Company Impacts 14. Table 2: Geographic Distribution of DHFL’s Portfolio (as of 31 March 2007) Region North Central and East South West Total Amount (Rs in lakhs) 33.96 58. Moreover.5 B. (ii) ADB’s investment profitability.4 II. 2007. Manila. ADB’s loan enabled DHFL to increase its disbursements to the LMI segment in India.57 Percentage of Total 10.588. the fact that the current average loan size is still small.855. the maturity mismatch 5 ADB.90 100. Overview PROJECT EVALUATION 12. cumulative disbursements increased 223% from FY2003 to FY2007. Performance in the main categories and subcategories was rated according to ADB’s Guidelines for Preparing Performance Evaluation Reports on Nonsovereign Operations (the Guidelines). Development Impact 13. 1. Longer-term funds at reasonable rates were difficult to obtain in India in 2003. The assessment of DHFL’s development outcome is based on four categories: (i) development impact. the breadth of DHFL’s current geographic reach is impressive (Table 2).20 333. providing loans for 1. Therefore. Provision of mortgage finance by DHFL has raised home ownership rates in rural and semi-urban areas throughout India. and (iv) encouraging new HFCs to enter the market by demonstrating a viable business model. and (iv) ADB’s additionality. A.15 103. Guidelines for Preparing Performance Evaluation Reports on Nonsovereign Operations. Thus.14 30. thus stimulating construction and other industrial activities. the Company has benefited from long-term. (ii) expanding home ownership.000 rupees.000 and $15. The Company has also been involved in low income rural development projects. HFCs could raise small amounts through the corporate bond market. (iii) supporting a nonbank HFC by providing costeffective matching funds. but this was an expensive alternative and the tenor was typically shorter than what DHFL obtained from ADB. It participated in the Government’s Golden Jubilee Rural Housing project. matching funds provided by ADB. They were identified as follows: (i) providing mortgage finance.000.440 housing units in rural areas.
DHFL began to offer more mortgage loans on a floating-rate basis. an important factor in the country’s economic and social growth. and in the real estate sector (such as in appraisal companies and in land titling or registration services). With a healthy mortgage market a country can generate additional sources of employment.and medium-sized enterprises can be obtained through a mortgage on property.5 decreases and the Company is in a stronger position to provide long-term funding to its clients. It boosts the consumption of consumer goods. . 19. Besides its role in employment generation. The majority of DHFL’s portfolio is on a floatingrate basis. As competition in the mortgage market increased and borrowers became more interested in obtaining floating-rate loans due to lower interest rates. support for the establishment of a strong primary mortgage market will hasten the development of capital markets. Jobs are created in the construction and home improvement industries. b. However. Interest rates were low in 2003 and most commercial banks were lending on a floating-rate basis. as noted. Moreover. DHFL requested ADB to provide both floating. which can help catalyze the development of a country’s capital markets. governments benefit from taxes on the properties and businesses. Thus. Capital for small. Beyond Company Impacts 17. Issuing MBS creates another source of funding for some banks and HFCs. mortgage financing has broader links to the economic development of a country. India’s capital markets activities have increased over the last 5 years.and fixed-rate funding and the Loan Agreement was therefore amended to this effect. An increase in the volume of mortgages originated in the primary market has helped boost the number of mortgage-backed securities (MBS) that have been issued in India (see Table 3). Those who buy new homes may also buy refrigerators and other items needed for their new home. DHFL’s floating-rate lending was largely matched by ADB’s floating-rate loan. The primary mortgage market must be able to produce a large volume of good quality mortgages that have been originated according to standardized documentation. The housing industry is the second largest employment generator in India. Finally. Support for the development of a primary mortgage market can lead to the creation of a secondary mortgage market. Thus. 18. The RRP indicated that fixed-rate funding would enable DHFL to lend to its borrowers on a fixed-rate basis without interest rate mismatches. mortgage lending creates one of the most important sources of capital for an individual or family. 16. ADB’s support of DHFL has helped to promote the development of housing finance in India. Longer-term funding lowers the monthly installment thereby making the loan more affordable for the borrower.
risk management.05 7 20. The expanding economy. and lower interest rates have raised demand for mortgage financing. Mortgage financing activities in India have continued to grow since 2003. 22. as evidenced by its asset growth from Rs2. ease of underwriting. An HFC or bank operating in this segment must have staff that are highly trained and located in several areas.60 15 2005 33. 6 Shanker. While DHFL does demonstrate a viable business model for the LMI market.41 billion (FY1994) to Rs36.484. Mortgage Finance: Declining Affordability and Rising Debt Burden. 24. DHFL. has created a niche market in the semi-urban and rural parts of India. DHFL has grown several times over. 21.05 5 2007 21. especially for HFCs. particularly in the LMI segment. The individual indicators are assessed in detail in the private sector development impact checklist in Appendix 5. 2002 0. DHFL’s success. however.24 billion (FY2007). DHFL has provided a good example to the broader mortgage finance market with respect to its ability to originate loans to the LMI segment. there is only one other HFC that operates in this segment.51 million to Rs. Mumbai: CRISIL Ratings.6 Table 3: Mortgage-Backed Securitization Market in India (Rs million) Item Total MBS Issued Number of Transactions MBS = mortgage-backed securities. 6 Total incremental disbursements increased from about Rs768 billion in FY2006 to Rs1 trillion in FY2007. Most HFCs and banks prefer to target the larger metro areas because of high demand from wealthier clients. for a consolidated average growth rate of 32%. may attract more competition for the Company. In the future. Business Success 23. Its underwriting standards. Rupali. The Credit Rating Information Services of India Limited (CRISIL) estimates that newly originated residential mortgage loans grew at a compounded annual rate of 33% over the last 3 years. As a result. There are early indications that public sector and larger commercial banks are slowly entering this market segment. Source: ICRA and Fitch Ratings. Compared with original RRP projections. One development impact noted in the RRP that was not readily evident was the entrance of new HFCs into the mortgage lending market. .01 million over the same period. which was already active at the time of the RRP. The LMI segment is hard to reach and the risks are at times more difficult to underwrite because of a lack of information. the mortgage market has become competitive. yielding a consolidated annual growth rate of 17%. and corporate governance structure with strong management enabled it to become an early leader in the industry. Net profits increased from Rs.40 15 2006 22. The Company’s strong distribution network has helped it develop and maintain a solid relationship with its customers and has supported its continued expansion. The contribution to private sector development is rated satisfactory overall and on several individual indicators. as well as the growth opportunities seen for mortgage issuance in semi-urban areas.48. and lower operational costs. India. 2. whose continued growth depends on better services to borrowers at often higher funding costs. 2007. rising personal incomes. Gruh Finance.80 3 2003 14.80 10 2004 29.
Return on equity (ROE) in FY2007 was 16.800 17. Key performance figures and financial ratios are summarized in Table 4.79 16.20 15.96%. an increase from 15.887 968 1.707 22.317 11. DHFL maintains a rating of AA+ from CARE for its long-term paper and a AA rating from Fitch for its fixed-deposit programs.323 2.19 8.896 15.53 8.482 336 1.492 11.818 450 83 50 417 FY 2007 3.442 27 1.147 35. HDFC.39 7.7 which estimated that net profits would be Rs400 million for FY2007.195 274 50 224 FY 2005 1.96% in FY2006.259 694 538 12.46 0.26 7.47 14.99 8.666 17.82 18.28 3.562 2.96 3.268 1.696 25.728 595 111 484 1.492 1.638 1. financial statements can be found in Appendix 4. has a lower level of NPLs.800 33.57 .97 14. sound credit appraisal standards.39 16.817 35. DHFL has exceeded expectations.059 241 1.23% of the Company’s portfolio. and rigorous servicing of the existing portfolio. Strong asset quality is a result of stringent credit guidelines.319 4 3.202 1.79 8. 26.00 n/a 8.25 8.562 15.96 8.020 963 1.61 17.net (Rs million) Other income (Rs million) Total income (Rs million) Interest and other charges (Rs million) Other expenditure (Rs million) Total expenditure (Rs million) Profit before tax (Rs million) Tax (Rs million) Gain on sale of lease hold land (Rs million) Profit after tax (Rs million) Balance Sheet Equity (Rs million) Borrowings (Rs million) Total liabilities and equity (Rs million) Housing and other loans (Rs million) Investments (Rs million) Other assets (Rs million) Total assets (Rs million) Key Financial Ratios Return on equity (%) Net interest margin (%) Capital adequacy ratio (%) Return on risk assets (%) Return on invested capital Weighted average cost of capital Debt to equity/leverage Cost of funds (%) Net profit margin (%) FY = fiscal year.610 28 1.17 16.06 0.264 4 2.067 17.653 32.301 338 67 271 FY 2006 2. Only the industry leader.08 13.293 1. FY 2004 1. Table 4: Key Financial Highlights Item Income Statement Income from operations .85 3.547 25.55 15.02 8.02 9. 25. Net NPLs for FY2007 comprised 1.175 12.469 970 224 1. It has also received a rating of P1+ for its short-term paper from CRISIL. Source: Dewan Housing Finance Corporation Limited.12 3.322 407 2.25 16.02 9. A more detailed assessment of actual performance.30 8.68 11.96 2.48 8.403 3.33 0. The quality of DHFL’s portfolio is good.403 22. DHFL’s collection-to-billing ratio for the aggregate portfolio on a monthly basis for the last 5 years has been about 96.75%.
DHFL is not expected to encounter any difficulty in meeting its payment obligations on the loan.78 is added to GDP.7 28. the mortgage finance industry contributes to many aspects of a country’s economy. according to data presented and obtained from DHFL. Since the Project consists of a corporate loan. and taxes and revenues for the government. Cumulative interest received to date totals Rs187. The repayment of principal started on 5 November 2007 and the final repayment is scheduled for 5 November 2014. The loan was specifically benchmarked to the loan made by the International Finance Corporation (IFC) to DHFL in the same year. It is estimated that for every Indian rupee invested in housing. or EROIC) can be used to assess the Project’s contribution to economic output and growth. 7 Source: Housing Development Finance Corporation Ltd. In India. Therefore. Environmental Aspects and Social Guidelines 29. 4.41 million ($4. The construction sector is the most direct link to the mortgage finance market. directly behind the agriculture industry. however. of India. DHFL has been paying the interest on the loan in a timely manner. The Project is categorized as “FI” and was expected to have minimal or no environmental impact. who inspects and examines the approved building plans and proper adherence to national guidelines and requirements. the construction sector is the second largest contributor to GDP.76 million). 31. The interest rate margin charged on ADB’s loan was based on DHFL’s AA rating for its unsecured fixed deposit program. Compliance with applicable environmental policies is satisfactory. the Project’s contribution to economic development is partly satisfactory. . it would remain in effect for two subsequent interest periods. as data is not available. The sole measurable contribution to economic development is the Project’s tax generation for the Government.8 3. In semi-urban and rural areas. As noted. most houses are built by the home owners themselves or by very small construction firms. as well as prevailing market pricing in 2003. This indirect impact cannot be measured. including employment. ADB’s Investment Profitability 30. the Project’s impact on the construction industry would be in terms of the construction materials purchased. Once the floating rate was determined. Economic Development 27. ADB’s loan to DHFL was funded by a local bond issuance and priced at a spread over the fixed-rate swap equivalent of a 1-year government security for the relevant maturity. The RRP did not give the EROIC at the start of the Project. DHFL has a system in place to ensure that the houses financed comply with the local zoning requirements and that the building plans comply with the local code and are duly approved by the municipal authorities. ADB’s investment profitability is therefore rated satisfactory. The due diligence of each mortgage loan includes a technical appraisal by a qualified civil engineer. the Guidelines indicate that the real economic rate of return (expected return on invested capital. C. The Project does not entail land acquisition and/or involuntary resettlement. This assessment has not been changed during project implementation. Rs0.
DHFL’s performance has been good and has validated PSOD staff’s screening and appraisal. and (iii) social development. appraising. the Government noted. It noted that “there is a growing impatience in the country at the fact that a large number of our people continue to live in abject poverty and there are alarming gaps in social attainments even after five decades of planning”. Growth and investment were to be led primarily by the private sector. ADB’s performance in project screening. (ii) monitoring and supervision. management capability. CRISIL. 36. PSOD prepares quarterly Private Sector Investment Management Notes on DHFL reflecting the latest information on the Company. 2003. as well as to perform a study on the mortgage industry. a leading credit rating agency in India. which was perceived to be a major impediment to growth. 38. human development. and financial soundness. ADB’s performance related to supervision and administration is thus rated satisfactory.9 D. The 10th Plan was therefore aimed at the following objectives: high growth. in semi-urban and rural areas. was commissioned by ADB to conduct due diligence on DHFL. appraisal. (ii) pro-poor growth. The first annual review of DHFL for FY2005 and the interim results for the 9 months up to 31 December 2006 was completed in June 2006. and (iii) ADB’s role and contribution. and structuring the Project. appraisal.8 The CSP outlined three pillars of ADB’s strategy in support of poverty reduction in India: (i) good governance. Monitoring and Supervision 35. equitable growth. . Thus. particularly. and structuring is rated excellent. experienced company with good management and a relatively sound financial structure with a local currency rating of AA. Aside from the annual review. ADB’s Country Strategy and Program for 2003–2006 (the CSP) complemented the 10th Plan. The proposal was well prepared and focused. and Structuring 33. This was particularly important. and the implementation of reforms to support the development of India. DHFL’s average loan size was appropriate for the purchase of housing units at the lower end of the price range offered by private sector developers. ADB’s Role and Contribution 37. 2. ADB’s performance is rated satisfactory based upon the following three categories: (i) screening. sector experience. Manila. The Government’s 10th Five-Year Plan for 2002–2007 (the 10th Plan) emphasized that development in India must not refer solely to GDP growth. the goal of development should be more comprehensive and focused on improving overall human well-being. Screening. among lower-income households. and structuring of the Project. 1. 3. Pro-poor growth was to be achieved through fiscal consolidation (better tax administration and public resource 8 ADB. PSOD staff was responsible for screening. and was generally supported by the Board because of the large unmet demand for housing in India. Appraisal. Country Strategy and Program (2003─2006): India. DHFL was deemed to be a wellqualified. PSOD staff screened and selected banks on the basis of developmental impact. ADB’s Work Quality 32. 34. PSOD has closely monitored DHFL’s performance since the loan was approved by the Board. given the urgent need to improve infrastructure in the country.
Approximately 6. including the housing finance sector. Had DHFL not had the benefit of ADB’s loan. ADB’s loan represented 2%. also contributed to growth in the economy. the support that ADB provided helped DHFL raise additional funds from sources other than the multilateral development banks. DHFL believes that ADB’s participation also helped to raise DHFL’s profile. More broadly. DHFL has tapped the capital markets twice since ADB’s loan. particularly local currency bond issuances. ADB’s loan had a positive effect on DHFL’s profitability. Despite the lower amount of funding that ADB provided as compared with DHFL’s total borrowings. as well as to ADB’s contribution to the design and functioning of the Project to improve development impact. The Project was also consistent with ADB’s private sector strategy. thereby generating more investor appetite for DHFL bonds. Apart from the fact that it supported a company active in the financial sector.1% of the Company’s portfolio was in this region. In 2007. the Project was an integral part of the PSOD financial services strategy. 41. There had been strong interest both from ADB and from DMC governments in local currency initiatives. It also supported the high priority assigned by the Government to improving infrastructure throughout India. On 20 March 2000. 9 The Project’s links to other areas of the economy. Furthermore. the Project was important because it supported the development of India’s domestic capital markets. Additionality refers to the extent to which ADB’s financing was a necessary condition for the timely realization of the Project. E.10 The strategy refers specifically to ADB’s role in strengthening the capital markets of developing member countries (DMCs). ADB’s Board of Directors approved the Private Sector Development Strategy. 43. and providing funding for other private sector projects that would support India’s growth. DHFL has had success in reaching borrowers in the North Central and Eastern regions of India (see Table 2)— underdeveloped areas which the Government had identified as needing more support. It underlines the importance for DMCs to strengthen their financial institutions and create diversified financial markets so as to develop the domestic capacity to finance private sector–led growth. While the assessment of additionality is somewhat more subjective in this instance. ADB’s presence enhanced the Company’s credibility when it raised additional equity capital. Moreover. private sector development. ADB’s private sector development strategy in India was to focus on supporting financial sector and infrastructure projects. 39. 10. and agricultural and rural development. ADB’s performance related to its role and contribution is rated excellent. 9 ADB’s additionality is therefore rated satisfactory. creating an enabling environment for private sector infrastructure investments through reforms and public-private partnerships. ADB’s loan was the first to be financed from local currency bond proceeds. 40. infrastructure development. Thus. The provision of access to adequate housing supported the Government’s broader concern with improving overall human well-being. its profitability would have been reduced by the differential rate of interest on outstanding loans as compared with the weighted average cost of capital. 10 ADB.10 management). The Project was consistent with the strategy of both the Government and ADB. such as tax revenue generation. Of DHFL’s total borrowings as of 31 March 2007. . 44. Private Sector Development Strategy. Manila. 2000.7% of DHFL’s portfolio in 2005 was represented by loans in the Northern Central and Eastern regions. ADB’s Additionality 42.
DHFL has outperformed the original RRP projections. DHFL has participated in community programs. CRISIL. Relative to the broader housing finance market including commercial banks. A summary of the individual category ratings is provided in Table 5. often. given that such funding was less accessible to HFCs than to commercial banks. DHFL has had satisfactory business success. asset growth for DHFL on a consolidated average annual basis was 32% from FY1994 to FY2007. DHFL has performed quite well. as the borrowers were deemed difficult to reach and. Thus. While DHFL represents only 1. 46. As mentioned. as well as ADB’s strategy for private sector development in India and throughout the DMCs. its contribution to the housing sector has been important. ADB’s loan provided reasonably priced long-term funding to DHFL. Its management is respected and known for its ability to provide innovative products to the market. Therefore. the Project is rated satisfactory. DHFL has not only given people access to housing but has also educated borrowers through its extensive marketing and outreach activities. Given its size. which leads the HFC market in size and performance and is also one of the primary competitors to the commercial bank market. . DHFL has been somewhat hampered by the inherent funding disadvantages associated with HFCs. It has demonstrated that a company can successfully target a market segment that has been traditionally underserved by banks and other HFCs. overall. that have helped provide housing to the rural poor. partly because of the higher costs of operating in semi-urban and rural areas. Conclusion and Overall Evaluation 45.5% of the total mortgage market in India today. but also to DHFL’s successful efforts to penetrate the semi-urban and rural areas of India. too risky to underwrite. In addition. ADB’s role in the Project was consistent with the Government’s priorities.11 F. however. 47. DHFL is one of the most well-established HFCs in India. thereby reaching more customers. Its expenses. which was important factor. the Project’s contribution to development impact is excellent. the Company is considered a second-tier HFC. Commercial banks have also been able to gain an increasingly larger share of the market as a result of their ease of access to funding and their ability to cross-sell products. 48. Net profits have yielded a consolidated annual growth rate of 17%. particularly as measured against HDFC. its cost of funds has been higher and longer-term funding has become more difficult to obtain. Due diligence was augmented through work done by India’s leading credit rating agency. such as the Government’s Golden Jubilee Rural Housing Project. the original mission team identified and screened the Project very well. With these goals in mind. Measured against its peer group of HFCs. This growth rate is attributed not only to growth in the housing market. In conclusion. As discussed. are higher than those of its peer group.
and Structuring 2. The main variations from the original RRP pertain primarily to projected market developments. The market was growing as a result of rising personal incomes and was increasingly becoming more competitive. LESSONS. The regulator. Source: Asian Development Bank. HFCs had traditionally offered fixed-rate loans. Monitoring and Supervision 3. Environment. Social. Health. in the process producing maturity mismatches on the balance sheets of HFCs. Another change in the outlook presented in the RRP was with respect to sources of funding for HFCs.and floating-rate funding. with the entrance of the commercial banks and the increased demand for floating-rate loans. This allowed commercial banks to undercut HFC pricing. as follows: (i) The RRP identified that the mortgage finance market in India was changing in 2003 with the entrance of the commercial banks. NHB.12 Table 5: Evaluation of the Dewan Housing Finance Corporation Limited Project Item A. (ii) . Over the past few years. particularly in urban areas. Development Impact 1. borrowers also sought floating-rate loans more often. ADB Work Quality 1. Business Success 3. Commercial banks were more inclined to offer floating-rate loans. However. DHFL accordingly requested ADB to provide both fixed. ADB’s Role and Contribution D. Appraisal. The Loan Agreement was amended to accommodate this request and all of DHFL’s disbursements were done on a floating-rate basis. Economic Development 4. provided long-term funding to HFCs. With interest rates on a downward trend during this period. HFCs also began to offer floating-rate mortgage loans. as their source of funds was deposits. ADB Additionality ADB = Asian Development Bank. Government restrictions on external commercial borrowings have also further reduced the availability of funding for HFCs. ADB Investment Profitability C. NHB has reduced the term of its funding to about 5 years. A. AND RECOMMENDATIONS 49. and Safety Performance B. Private Sector Development 2. Project Issues ISSUES. Screening. Partly Unsatisfactory Satisfactory Satisfactory Excellent x X x x x x x x x x x III.
13 B.52% in the first half of 2006–2007.76% in 2004–2005. Relying on a government regulator as a major source of funding may not be viable over the long term. Mortgage Industry Restrictions. are under 2%. One of the most important lessons that can be learned from the Project is that mortgages for customers in the LMI segments can be commercially viable. 8 January. some commercial banks pursued aggressive growth strategies. HFCs were under more intense competitive pressure from the growth of commercial bank activity in the mortgage business. The Loan Agreement does have standard and comprehensive financial covenants. among five of the leading HFCs. restrictions on LTVs can reduce the likelihood and severity of future NPLs. is becoming apparent. as they have been in DHFL. but. NPLs increased slightly. property prices in urban areas doubled in some neighborhoods. Lessons and Recommendations 50. Mortgage Market Growth. standard mortgage industry guidelines could have been included in the Loan Agreement. Issues to Monitor 53. the risks can be adequately contained. As a result. As India’s housing market continues to grow and mature. 2008. since funding is not the primary reason for their existence and may tend to diminish over time. Gross NPLs were at 1. . and Tarun Bhatia. but other covenants pertaining specifically to the mortgage industry. Prices were also bolstered by some speculative activity in the market in from mid-2005 to about early 2006. it will be important to monitor the market. if underwritten and priced appropriately. they improved in 2007 and. 52. With demand outpacing housing supply.2% by March 2007.) 11 12 The Economic Times. Funding Sources. and sound credit underwriting and portfolio management policies to successfully generate business in this market segment. however. An analysis undertaken by CRISIL indicates that the incremental net profitability margins of some HFCs declined to 1. Regulators are not typically stable sources of long-term funding. Lower core profitability for some HFCs. This borrower segment can be more risky. As a result. Housing Finance Companies Face Profitability Pressure. C. From 2003 to 2006. Another lesson to be learned is the need to carefully assess the long-term viability of sources of funding for a project. CRISIL Sounds Caution in Retail Loans. 2007. offering loans as high as 100% of the cost of the property. In response. Commercial Viability of Underserved Segments.11 54. HFCs or commercial banks must have highly trained and experienced staff.7% in 2008. Nayak. With respect to recommendations. Prashant. gross NPLs in this sector have increased although they are still low. could have been included as well. many commercial banks eased their lending standards as they pursued heightened demand in the market spurred by low interest rates and rising personal incomes. 51. During the rapid expansion of the mortgage market from about 2003 to 2006. to further reduce risk for ADB. Mumbai: CRISIL Ratings. Thus. such as limiting DHFL’s ability to offer loans on a higher loan-to-value (LTV) basis. as compared with 1. which is suppressing ROE. some HFCs moderately relaxed lending standards.8% in 2005 and had increased to 2. CRISIL projects a further increase to about 2.12 (See Appendix 3 for more details. While NPL levels have been low in India’s mortgage industry.
it will be important to monitor DHFL’s financial position. DHFL’s position in its niche segment is strong in view of the continued growth in the market. There are signs that the unprecedented growth in the mortgage market is slowing. some mortgage lenders are starting to tighten standards. However. Compliance with ADB Financial Covenants. should commercial banks. The growth rate for 2006–2007 was 18% and the growth rate for 2007–2008 is projected to be at about 10% (footnote 13).14 55. ADB will continue to closely monitor DHFL’s compliance with the financial covenants as set forth in the Loan Agreement. CRISIL notes that for those HFCs like DHFL that operate in niches or specific regions where larger HFCs do not operate and banks are not competitive. profitability is unlikely to deteriorate substantially in the medium term. 56. 57. it has become more difficult for home borrowers to obtain mortgage financing. the risk of delinquencies will increase. begin to aggressively enter the LMI segment. Additionally. . The Company is not expected at this time to have difficulties meeting its obligations to ADB. As affordability has deteriorated due to higher interest rates and property prices. Should interest rates rise rapidly without income growth or higher prepayments13. DHFL is current in its principal and interest payments to ADB. which will further suppress market growth and lead to more comfortable growth levels. 13 HDFC notes that between 10% and 12% of its loan portfolio has traditionally been prepaid every year. as well as public banks. The RBI has taken several measures to reduce bank exposure to real estate and to curb non-prudent commercial bank lending.
2. 8. Investment Identification Country Loan Number Loan Type Type of Business Project Title Name of Borrower Amount of Approved ADB Assistance Extended Annual Review Report Number India 7189/2057 Local Currency Financing Housing Finance Loans under the Private Sector Housing Finance Project Dewan Housing Finance Corporation Limited Direct loan of up to $20 million equivalent in Indian rupees 1007 ADB = Asian Development Bank. 1. 6. 3. Investment Data Concept Clearance Approval Date of Board Approval Signing Date of Loan Agreement Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions Loan Closing Date (end of availability period) In Loan Agreement Actual Number of Extensions Disbursements Initial Disbursement 5 November 2004 Effective Date 19 July 2004 Amount Disbursed: Rs918. 2. Loan Repayment Initial Repayment Date Final Repayment Date 5 November 2007 5 November 2014 bps = basis points. B. 6. 4. A. 1. 5. 5. LIBOR = London interbank offered rate. . 7.600. 4.000 15 April 2003 19 December 2003 19 July 2004 19 July 2004 19 July 2004 None 19 July 2006 19 July 2006 None Final Disbursement 29 June 2005 Time Interval 238 days 7.15 Appendix 1 BASIC DATA Dewan Housing Finance Corporation Ltd. 3.
risk management. India resident mission Senior Investment Specialist. head.16 Appendix 1 C. Financial Sector and Private Sector. project specialist Senior restructuring specialist Senior restructuring specialist Senior counsel Investment Officer. of Persons 4 No. financial sector and private sector. capital markets. of Person-Days 5 Specialization of Members Head. Investment Officer Name of Mission Loan Reconnaissance Due Diligence Loan Negotiations Investment Administration Investment Administration Investment Administration Extended Review Annual 26–31 Jan 2004 19–20 Apr 2004 12 Aug 2004 25 Apr 2006 12–13 Sep 2006 1 1 1 2 2 6 2 1 1 1 26–27 Nov 2007 2 2 Sources: Asian Development Bank mission authorization requests and back-to-office reports. India resident mission. Senior Investment Specialist Investment Officer and Head. . Data on Asian Development Bank Missions Date 28 Apr–2 May 2003 No. head.
In 2006. The term loan is secured by a first charge on all the movable and immovable assets of DHFL. about 18% of whom are women. (See Figure A2. Shareholders Grievance. ADB provided long-term. 67 service centers. Kapil Wadhawan.1 for DHFL’s organizational chart. Mr. among others. Over 70% of DHFL’s borrowers have homes they built themselves. assumed daily management of the Company in October 2000 after the death of his father. Rakesh Wadhawan is Chairman of the Board. Wadhawan is widely recognized as a mortgage finance expert in India. The Project 1. DHFL had eight Directors on its Board —seven nonexecutive Directors and a full-time Managing Director. in FY2007. (See Appendix 4 for more details on DHFL’s financial performance. He leads a company with over 500 staff members. United Arab Emirates. DHFL was established in 1984 by the Wadhawan family and is listed on the Bombay Stock Exchange and the National Stock Exchange. DHFL introduced a “cluster program” whereby the Company is able to focus. registering good profits year on year. Kapil Wadhawan. As of 31 March 2007. Five Directors are independent and are from the finance. Wadhawan is the only executive Director on the Board. the Board of Directors of the Asian Development Bank (ADB) approved a loan of up to $20 million equivalent in Indian rupees to Dewan Housing Finance Corporation Limited (DHFL or the Company). DHFL has achieved solid growth through the years.) DHFL management recognizes the importance of staff training to the maintenance of high credit quality. DHFL has a good management record. . On 18 December 2003. Yet. and 35 camps—across the country. There are three Directors each on the Audit and Remuneration and Compensation Committees. The terms and conditions of the loan are shown in Appendix 1. Remuneration and Compensation. and no currency risk. both present and future. according to a review of key processes and systems and customer acquisition strategy. Today. DHFL is the third largest housing finance company and the second largest in the private sector. to provide mortgage loans to Indians living in and around Dubai and other Gulf countries wishing to purchase homes in India. 4. 3. and Finance Committees. The Company’s staff members are widely dispersed over many locations and must uniformly underwrite a population that is generally perceived to present more risk. a segment that has been traditionally underserved. fixed-rate debt to enable DHFL to fund its mortgage loans with limited interest rate and maturity mismatches. 5.) DHFL has effectively structured its products to respond to the rapidly changing macroeconomic conditions without changing its customer focus. DHFL has been able to maintain low levels of nonperforming loans and will be introducing an internal credit scoring system within the next year to aid staff in determining the credit risk of individuals. The Company provides loans to individuals in the lower. Mr. For instance. It continues to pursue business growth aggressively. DHFL has four Board Committees—Audit. banking. 2. Vice Chairman and Managing Director. DHFL opened an office in Dubai. DHFL has a rating of AA+ from CARE for its long-term paper and a AA rating from Fitch for its fixed deposits. ADB’s loan supported the expansion of DHFL’s mortgage lending operations in India. and insurance sectors. as is typical of markets in the smaller towns and their surrounding territories. DHFL has also received a rating of P1+ for its short term paper from CRISIL. The Company has 155 locations—53 main branches. shared pari passu with all the lenders. All are independent.Appendix 2 17 PROJECT DESCRIPTION A.and middle-income (LMI) segment.
Source: Dewan Housing Finance Corporation Ltd. Investment income was £40. DHFL is a widely held company.319. Today.00 FIIs= foreign institutional investors. and market to low income groups in Gujarat.1 million.830 8.975 Percentage 21.13%. Deewan Kuldeep Singh Wadhawan and promoted by the Wadhawan family. In 2003. Caledonia had an investment of only 2. (Table A2 presents DHFL’s shareholding structure as of 30 September 2007. including Varun Shipping. once again.707 60. DHFL is also helping to formulate the first national housing price index.087 66. Caledonia Investment PLC has a global investment portfolio.323 million and a return on equity of 10.67%. and Alok Industries. Tamil Nadu. and Kerala.82 13.961 495. the Union Bank of India (9%).) The five largest shareholders are Wadhawan family members.68 15.25 32.1 million.234 9. B. and profit after losses/gains was £137.51 100.40 0.819. DHFL.780. Table A2: DHFL Shareholding Structure (as of 30 September 2007) Category Promoters Promoters Acting in Concert Bodies Corporate UTI and Mutual Funds FIIs/NRI Banks Resident Individuals Total Number of Shares 12. DHFL was founded by the late Mr. it had investments totaling £71.177. NRI = nonresident Indians. .863. As of 31 March 2007.8 million in India.18 Appendix 2 educate. UTI = Union Trust of India. to better regulate real estate prices.2% in DHFL as of 31 March 2007. Caledonia was listed on the London Stock Exchange in 1960 and.6 million invested in companies in the People’s Republic of China.501 9. Shareholders 6. 8.522. Profit after tax was £136. who own 35. It was acquired by the Cayzer family in 1951 to hold diverse investments and renamed Caledonia Investments Ltd.23 0. but converted its preferential shares into equity in August 2007.5%.11 16. renamed in 1981. the family owned 45% of DHFL.7 million. The other primary shareholders of the publicly listed company were the Unit Trust of India (14%). and Caledonia Investments PLC (Caledonia) with 11. and smaller institutional investors (32%). and £13. 7. Caledonia was incorporated in 1928 as the Foreign Railways Investment Trust Ltd.655 19. It had total equity of £1.
HR Dept. the designations are the following: 1.Figure A2. IT Dept. Senior Manager 4. GM-Zones Credit Dept. Manager 5. General Manager / Head of the Department 2. Project Finance Dept. Accounts Dept. Marketing Dept.1: DHFL Organization Structure (as of 1 March 2007) Vice Chairman Managing Director Kapil Wadhawan Executive Secretary Chief Executive Officer Secretary Chief Operating Officer Finance Dept. Assistant Manager 6. AGM Credit Admin. Officer Source: Dewan Housing Finance Corporation Ltd. Corp. AGM Administration Note: In each department. Audit and Inspection Dept. Plan Dept. Appendix Appendix 5 2 19 19 . Assistant General Manager 3. and Receivables AGM Technical South West North. Center and East Company Secretary and Legal New Product Dev’t.
there was a housing shortage of 31. CRISIL Ratings. Thus. the housing stock is under pressure. Manila. Report and Recommendation of the President to the Board of Directors on Proposed Loans under the Private Sector Housing Finance Project in India. 4. Overview.1 million units. A builder may require more than 50 approvals. There are over 45 HFCs currently registered with the NHB. These costs are in the form of stamp duties. It is dominated by three players—HDFC. Housing Finance Companies. With the adoption of the Housing and Habitat Policy in 1998. commercial banks. The housing finance sector in India was dominated by direct government participation for a number of years. The largest HFCs are HDFC and LIC Housing Finance Corporation Limited. An Overview. Third.20 Appendix 3 INDIA HOUSING AND MORTGAGE SECTOR OVERVIEW 1. . at a deficit of 24 million units. the NHB was established to regulate HFCs. A number of issues have prevented and continue to challenge the growth of affordable housing stock in India. the legal framework. Only recently have there been nationwide builders that are able to undertake large construction projects. and the State Bank of India. and protracted approval processes or lengthy litigation. Mumbai. implementation at the state level has been sporadic. some of which can be as high as 15% of the value of the property. while there has been some impetus for reform at higher levels. India has one of the most severe housing shortages today in Asia. In 1988. as noted.3 With the greater involvement of commercial banks.1 million units. Mortgage Finance: A Safe Haven for Lenders?. over 70% of new housing units are built by the informal building sector. 2007. the mortgage market has become increasingly competitive. 2003. In 1977. With a rapidly urbanizing and growing population. Market Structure. urbanization has increased at a rapid pace. As noted. high transaction costs associated with registering a home have prevented home purchases. 2007. thereby allowing the financial sector to directly participate in the market. Second. New Delhi.5% of the market. First. HFCs traditionally had a large market share until commercial banks entered the market about 5 years ago and started to lend aggressively. Finally. and public sector banks. It has 219 locations with several distribution channels at 1 2 3 National Housing Bank. Housing stock is unable to keep pace with demand.1 India is remarkable for its low mortgage penetration of about 4% of gross domestic product (GDP). The shortage is most acute in the rural areas of India. The mortgage market in India today comprises HFCs. the Housing Development and Finance Corporation Limited (HDFC) was established to provide retail mortgage lending. banks began to focus on rapidly building their mortgage portfolios and now have the larger market share. In 2003. Approximately 25 are licensed to accept public deposits. thus delaying the approval process in some areas to between 120 and 450 days and prohibiting formal construction. ICICI Bank. ADB. Over 60% of people in Mumbai live in slums. 5. HDFC is the market leader. the Housing and Urban Development Corporation (HUDCO). consisting of about 100 laws (some of which date from the 19th century). while urban areas lack an estimated 7. The first housing finance company (HFC). Compounding this issue. providing funding to about 75% of the market. HUDCO provides funds to developers and also refinances primary institutions in the public sector. 2 With rising demand for mortgages and growing incomes. has created an artificial scarcity of land through poor planning and zoning. regulation of real estate is at the state level. 3. 2. the Government recognized that it should withdraw from direct participation and become a facilitator of the industry. The National Housing Bank (NHB) estimates that as of 31 March 2007. the HFCs made up 45. was established in 1971.
and Tarun Bhatia. for funds. some smaller HFCs and public sector banks have higher NPLs. however. refinance from NHB.76% in 2004–2005. Prashant. An analysis undertaken by CRISIL indicates that the incremental net profitability margins of some HFCs declined to 1. 7. private sector banks still have a higher yield than HFCs and public sector banks. Private banks earn more interest spread than both public sector banks and some HFCs. interest earned on competing government instruments was more attractive than that offered by HFCs. These deposits do not have deposit insurance. 6. with access to low-cost savings and current accounts. NHB has also curtailed the tenor of its funds. the Government withdrew the exemption on withholding taxes that had been previously offered to HFCs that used international borrowings. the sources of funding for HFCs have included deposits. Lower core profitability for some HFCs (and banks). Some of the larger HFCs have been able to gain access to multilateral and bilateral agencies. Additionally. HFCs have a higher yield than banks on average funds deployed because banks must maintain a large share of their deposits in government securities and cash to meet regulatory requirements. Housing Finance Companies Face Profitability Pressure. as interest rates declined (until recently). costly. 2007. HFCs are prohibited by the NHB from offering checking accounts. the costs of funds for public deposits were higher because of higher administration costs. profitability has not deteriorated. Banks have a natural competitive advantage over HFCs in terms of funding sources. LIC has 116 locations with several mortgage desks in its parent company offices. Dewan Housing Finance Corporation Limited (DHFL) is the market leader for providing mortgages to rural and semi-urban borrowers. since their operating expenses tend to be lower. Furthermore. and their own capital. The greatest challenge for HFCs has been obtaining and sourcing funds at reasonable costs and at adequate tenors. 8. Public deposits were traditionally a major source of funding for HFCs. HFCs are only allowed to raise term deposits for a tenor of between 1 and 7 years. as compared with 1.52% in the first half of 2006– 2007. 4 Nayak. and shorter in tenor. is becoming apparent. In November 2003. as well as the syndicated bank market.Appendix 3 21 each location. the Reserve Bank of India (RBI) issued a notification preventing financial intermediaries from borrowing from external commercial sources. CRISIL notes that for HFCs like DHFL that operate in niches or specific regions where larger HFCs do not operate and banks are not competitive. . however. With respect to deposits. Mumbai: CRISIL Ratings. LIC has aligned itself with state-owned providers of residential units and has corporate tie-ups with state-owned corporate housing. which are a natural source of funding for bank retail portfolios. which is suppressing return on equity (ROE). institutional borrowings (both domestic and international). However. resulting in higher provisioning costs and therefore lower overall net profitability.4 As Table A3 shows. Additionally. Thus. However. commercial banks. Funding has become increasingly more limited.
1% 1. This has widened liquidity and interest rate gaps. a HDFC was excluded from the analysis of HFCs because its size is almost twice that of other selected HFCs. rather than new. Rupali. HFCs have taken a variety of actions to improve profitability.1% 5 0. are below retail prime lending rates. Salary increases for individuals in metropolitan areas have averaged about 20% per year over 5 Shanker.2% 9.4% 0.6% 40. Mortgage Finance: Declining Affordability and Rising Debt Burden. 9.1% 5 0.4% 1.7% 40.1% 0. in some instances.7% 8.5%) 1. CRISIL estimates that newly originated residential mortgage loans grew at a compounded annual rate of 33% over the last 3 years.0% 1.7% 0. HFCs have been lending at rates below their retail prime lending rates. . Current Trends.8% 5 0. SLR = statutory liquidity ratio.5% 0. Couples with combined incomes are also boosting demand for adequate housing.0% 2.7% 6. HDFC's operating expenses. Smaller HFCs have been providing funds at curtailed interest rates to be competitive in the market.0% 0.6% 6.5% 10.0% (0. The expanding economy and lower interest rates have increased demand for mortgage financing.5) Average Yield/Total Funds Deployed All inclusive cost of borrowings (including estimated impact of operating expenses incurred to source deposits and other funds) Interest Spread Fee income/Funds deployed Operating expenses/Funds deployed Net Profitability Margin Estimated lagged delinquencies on individual housing loans (2-year lag) Loss given default Total loss on NPLs Duration of housing loan Annualized credit cost (i.1% 5.0% 9.1% 0.6%) ( ) = negative. 10.8% 7. CRISIL Ratings.0% 10. increasing the costs for existing. NPL = nonperforming loan.4% 0.1% Private Sector Banks 11.2% 8.5% 10. portfolio yields.4% (0. Mortgage financing activities in India have continued to grow. CRR = cash reserve ratio requirements. borrowers.5% 8.1% HFCsa 11.e.22 Appendix 3 Table A3: Profitability Comparison for HFCs on Fresh Disbursals Item Yield on housing loans Yield on housing loans (adjusted for loss of income on NPLs) Yield on SLR and CRR (SLR at 7.. Other HFCs have focused on high-yield products.2%) 4.4%) 2. Some HFCs have opted for short-term borrowing against long-term lending to improve margins.2% 40. 2007. Some of these banks and HFCs have passed on the higher funding costs to their borrowers by extending loan terms and increasing internal rates of return (IRR).5% 0. spread over loan duration) Net Profitability Margin after Credit Losses PSU Banks 10. despite the challenges mentioned above.0% 10. 5 Total incremental disbursements increased from about Rs768 billion in 2005–2006 to Rs1 trillion in 2006–2007.2% (0. As a result.8% (0. Source: CRISIL. all inclusive of borrowing costs and credit costs are superior to those of smaller HFCs and would have skewed the numbers.0% 1.
CRISIL estimates that the average mortgage loan installment (IIR) has increased from about 42% to between 47% and 59% of monthly income (footnote 9). As a result. The most evident trend is the deterioration in affordability.8 HFCs have generally been more prudent lenders.7 Thus. Loans over 60% IIR increased from 1% in March 2004 to 9% in March 2006.5 years. Movements in interest rates and increases in property prices have started to affect the mortgage market. the affordability index has declined from 4.Appendix 3 23 the last 2 years (footnote 6). Section II). and changes in the macroeconomic environment and property sector. (28 November. property prices were also relatively steady. Consequently. some banks and HFCs have offered mortgage loans at higher loan-to-value (LTV) ratios to accommodate more borrowers. . 2007.6 Until the past year and a half to 2 years. 6 7 8 9 Shanker. CRISIL Ratings. their NPLs are generally low. among other factors. There has been a steep escalation in home prices in metropolitan areas over the last 2 years. India. 2007. Home Loan Disbursements May Slow Down in 2008. Tax concessions for owner-occupied homes. Several trends have emerged as a result of the competitive environment for mortgage lending. also contributed to the growth rate. 11. Home prices have increased at a compounded annual growth rate of between 30% and 40%. 12. Although salaries have increased by an average of 20% per year over the last 2 years. Rupali. Market commentary noted that some banks were offering loans with LTVs of up to 90% and 100%. some buyers will simply not be able to afford homes and others will have a higher debt burden upon obtaining a mortgage loan. The affordability index is calculated as the property cost divided by the average net annual income.5 times in certain urban areas. Interest rates on new homes have increased by 175–200 basis points over the last 1. Lenders have also extended the tenor of the mortgage loans to allow borrowers to reduce their monthly payments. A lower affordability index indicates that a property is more affordable to the buyer. Some of these trends have led to a higher risk profile for certain HFCs and banks operating in this sector. Business Standard. page 2. The average LTV on total outstanding loans increased to 75% at the end of March 2007 from 70% at the end of March 2004.9 Higher interest rates have also contributed to larger debt burdens for new borrowers. Mortgage Finance: Declining Affordability and Rising Debt Burden.4 times to up to 5. as well as for existing borrowers who have floating-rate loans.
and Tarun Bhatia.24 Appendix 3 13. Prashant. Additionally. Mumbai: CRISIL Ratings. loans offered over the last 3 years compose 71% of India’s total outstanding portfolio.10 Should interest rates rise rapidly without income growth or prepayments. Banks and HFCs have tightened underwriting and monitoring standards to further reduce risk. Housing Finance Companies Face Profitability Pressure. 14. The growth rate for 2006–2007 was 18% and the growth rate for 2007–2008 is projected to be at about 10%. some mortgage lenders are starting to tighten standards. as well as higher prepayment rates. it has become more difficult for home borrowers to obtain mortgage financing despite lenders’ past efforts to relax underwriting standards. 2007.. Nayak. The current level of nonperforming loans (NPLs) in the market is quite low. 10 11 HDFC notes that between 10% and 12% of its loan portfolio has traditionally been prepaid every year. The aforementioned risks can be mitigated by rising personal incomes as the economy continues to expand. the risk of delinquencies will increase. There are signs that the unprecedented growth rate in mortgage financing has already slowed.11 As the affordability index has deteriorated with higher interest rates and property prices. and have thus not had a chance to age (mortgage loans typically will default after the third year). However. . The RBI has taken several measures to reduce bank exposure to real estate and to curb non-prudent commercial bank lending. This move will further suppress market growth and lead to more comfortable growth levels. which are customary in the Indian market.
of lease rent finance and nonresidential property loans. DHFL offers longer-term mortgage loans. Nonresidential home loans are extended to doctors.01 million (2006–2007).855.13% of cumulative approvals.8. B. Dewan Housing Finance Corporation Limited (DHFL or the Company) is a profitable company that has grown rapidly since inception.322.87% consisted of housing loans.7 and A4. DHFL’s loan portfolio was Rs33.000. 1 Cumulative loan approvals and disbursement from inception up to 31 March 2007 reached Rs58.1.22 196.000. Portfolio 2. at between $10. Net profits have increased from Rs48.000 and $15. . DHFL’s portfolio is well distributed geographically throughout India. providing borrowers with funding for up to 20 years.57 Percentage of Total 10.588. DHFL’s financial statements are provided in Tables A4.20 333. architects. As of 31 March 2007. About 85. Portfolio Growth and Concentration.9 million.329.772.5% and 26. and the remaining 14.Appendix 4 25 FINANCIAL OVERVIEW AND STATEMENTS A. as evidenced by its asset growth from Rs2.0 million. respectively.5% to Rs3.5%. Overview 1.41 billion (1993–1994) to Rs36.51 million (1993–1994) to Rs484.15 103.14 30. The current average loan size is small.020 million.6 billion and Rs53. Consolidated average growth rate on assets and net profits over the last few years (from 2003–2004 to 2006–2007) was 28.13%. 3. Source: Dewan Housing Finance Corporation Limited.90 100.00 Note: A lakh is equal to 100. DHFL’s net profit had grown by 16% to Rs484.24 billion (2006–2007). as can be seen from Table A4.96 58.4 billion. The Company provides loans primarily in semi-urban and rural areas.1: Geographic Distribution of DHFL Lending (as of 31 March 2007) Region North Central and East South West Total Amount (Rs in lakhs) 33. As of 31 March 2007. respectively. and operating income had increased by 46. and other professionals. Portfolio Characteristics. 1 Lease rental financing refers to loans advanced to the lessor in the form of discounted lease rentals. Cumulative disbursements comprised 91. Table A4.
59 100. and United States.79 64.22 100. 7. E. and 8. expecting that interest rates would continue to move downward.0% for LTVs of 80%–85%. Klopfer. DHFL’s loan-to-value (LTV) ratios are shown in Table A4.00 2005–2006 21.2 The weighted average LTV ratio as of 31 March 2007 was 68%.87 9. United Kingdom. at 1. London.3% for LTVs of 50%–60%. compare well to those of other HFCs. Note: A lakh is equal to 100.2: Loan-to-Value Ratios (%) (as of 31 March 2007) Loan-to-Value Ratio ≤ 60 61–75 75–85 >85 Total 2004–2005 23. 4.7% for LTVs of 60%–65%.2. In 2003. Housing Finance International 17 (1).23% in FY2007. As seen from Table A4. 3. The data covered Australia.3% for LTV of 65%–70%.73 333. At the time the report and recommendation to the President (RRP) was prepared.8% for LTVs of 40%–50%.17 26. DHFL has adhered to the prudential guidelines for NPLs issued by NHB and has made adequate provision for the assets on which installments are 2 Higher LTV-ratio loans result in a higher frequency of default and a higher severity of loss. over 64% of DHFL’s portfolio as of 31 March 2007 was comprised of floating-rate loans. land in the rural and semi-urban areas is already owned by the borrower.51 100. 6. and net NPLs. Asset Quality and Collection Efficiency 6.00 2006–2007 35.48%.000. Consequently. DHFL’s portfolio has accordingly altered to contain a higher percentage of floating-rate loans than in 2003. Source: Dewan Housing Finance Corporation Limited.21 100. Table A4.84 214.772. at 1.444. commercial banks had started to originate mortgage loans and were doing so on a variable-rate basis. 5. . 2002.327.9% for LTVs of 70%–75%. The default probabilities were found to be 2.0% for LTVs of 75%–80%.33 13.64 7. Gross nonperforming loans (NPLs). Germany.26 Appendix 4 4. Typically. the Netherlands.2% for LTVs below 40%. 3. Spain. A Mortgage Insurer’s Look at Basel II and Residential Mortgage Credit Risk.57 Percentage of Total 35.86 31.00 DHFL = Dewan Housing Finance Corporation Limited. DHFL’s actual LTV ratios are more conservative than traditional LTVs in the housing industry. C. A study published by Housing Finance International shows that default probabilities increase more rapidly for LTV ratios over 80%.00 Source: Dewan Housing Finance Corporation Limited. Over 70% of DHFL’s loans are provided to borrowers who use the funds to purchase a house. HFCs began to follow commercial banks and offered floating-rate loans. rather than land.7% for LTVs of 85%–90%. Thus. Table A4. 2.11 30. most HFCs offered fixed-rate loans and were able to obtain fixed-rate funding. 4.3: Interest Rate Mix in the DHFL Portfolio (as of 31 March 2007) Item Fixed-rate loans Floating-rate loans Total Amount (Rs in lakhs) 119. Borrowers were interested in these loans.74 38.59 33.37 28. as evidenced by international data.3.
as described in Appendix 3.386 0.39 31-Mar-07 333. and fixed deposits to fund growth.Appendix 4 27 overdue for more than 3 months and on other assets. D. Profitability. Demand during the Year D.4: Collection Efficiency Item A.272 96. In 2007. Overdue Loans at the End of the Year (D−E) H.300 44. Overdue Loans at the Beginning of the Year C.269 554 20. DHFL now raises funds largely from banks and financial institutions. Recoveries as % of Total Demand (E/D) G.105 20. long-term funding from multilateral financial institutions is no longer available. 31-Mar-04 121. Housing Loan B. Thus. its gross spread has been typically higher than the industry’s. loans that were more than 90 days overdue amounted to Rs438. Since DHFL’s target market of lower.11 918 0.69%. Overdue Loans % (G/A) Source: Dewan Housing Finance Corporation Limited. as they have for all HFCs. DHFL’s funding costs were higher than the industry average in 2003. In the past. the higher funding costs were mitigated by the competitive rates on long-term funds borrowed from multilaterals.914 97. multilateral institutions.886 97. New application software was installed to improve information flow to branches and to further support the collection system. Diversification of funding sources and optimization of the tenor and interest rates and timing of borrowings were some of the measures taken by the Company to contain the cost of borrowed funds with reference to its interest rate benchmarks.and middle-income (LMI) borrowers is inherently a more risky segment.413 25.71 million. Rising interest rates. DHFL’s collection efficiency has improved since FY2004 despite the growth in disbursements. Recoveries During the Year F. The weighted average coupon of the loans in DHFL’s portfolio as of 31 March 2007 was 11. banks.54 31-Mar-05 152.659 20. Funding costs have also increased for DHFL. 10. The Government has controlled access to external commercial borrowings since 2003.008 31.382 46. DHFL has used the NHB.927 655 24. long-term funding sources for HFCs have become more limited over the past 3–4 years. 7. Table A4. As of 31 March 2007. as required. forced the financial regulator to raise key benchmark rates of banks and financial institutions.068 24.773 918 45. Liquidity 9.4. DHFL further strengthened its information technology infrastructure and systems to support its operations.82 796 0. Total Demand (B+C) E. DHFL has been largely successful in containing its cost of borrowings.004 96. However.794 796 31. however.804 30.83 655 0.01 1. .42 8. as well as asset prices.52 31-Mar-06 233. as seen from Table A4.
28 E. DHFL increased its capital in FY2007 by issuing 6. which represented an increase from FY2006 where DHFL's Tier 1 capital adequacy ratio was 10. DHFL reported a capital adequacy ratio of 11. Appendix 4 Capital Adequacy 11. . For FY2007. Capital adequacy is well within the NHB guidelines.41% and 13.05% for Tier I capital and 14.06% for total capital. which set a 12% minimum capital adequacy ratio for total capital.33% for total capital.5 million 1% redeemable preference shares of Rs10 each to ICICI Bank Ltd.
728 868 595 111 484 3.323 2.195 393 274 50 224 1.7: Profit and Loss Statement (Rs.482 93 199 15 29 1.079 185 4 2. Depreciation 5.818 598 450 83 50 417 2.523 2612 130 225 4 39 3.180 1.487 98 172 6 19 1.038 125 17 2.339 166 18 3.121 82 144 8 14 1. Preferred Share and Tax 3.369 453 328 72 256 2004─2005 Actual Plan 1.189 130 4 3.376 619 442 98 344 2006─2007 Actual Plan 3. Proposed Dividend and Dividend Tax 2.363 79 27 1. Income 1.574 104 19 1. Expenditure 1. 10 0 213 224 54 5 197 256 114 4 153 271 54 5 251 310 143 0 274 417 57 5 282 344 149 19 316 484 60 5 335 400 Appendix 4 29 . Profit Before Tax Less: Provision for Taxation 8. Income from Operations 2. million) 2003─2004 Actual Plan 1. Provision for Contingencies Total 6.697 1. Appropriation 1.322 116 215 19 57 2.469 970 67 108 8 41 1.010 727 513 113 400 Item A. Fees and Other Services 3. Payment and Provision of Employees 3.648 154 16 2.029 113 197 6 31 2.527 83 28 1. Other Income Total B.301 468 338 67 271 2. Net interest income 7. Operational and Other Expenses 4. Add exceptional item(Capital gain) Profit after Tax C. Retained earnings Total Source: Dewan Housing Finance Corporation Ltd.Table A4.818 2.782 551 398 88 310 2005─2006 Actual Plan 2. Interest 2.638 1.059 82 122 11 27 1.268 1.
569 2. Appendix 4 Item A. Current Assets.805 116 13.091 4 0 34.112 128 10.343 218 1. Other Loans 4. Net Worth 2.719 386 25.240 138 32.202 1.091 193 168 306 874 2 0 20.112 301 13. Loan Funds 4.000 27.666 186 963 1.788 2.259 433 27. Deferred Tax Assets Total ( ) = negative.461 257 160 295 989 2 0 27. Loans.420 1. Miscellaneous Expenditures 8.912 110 238 694 725 3 (5) 12.904 3. Secured Loans 5.8: Balance Sheet (Rs million) 2003─2004 Actual Plan Source of Fund 1.397 1.989 306 15. Investments 6.877 2.535 364 20.757 2.850 0 (38) 36.543 529 34.088 3.653 800 28.513 0 (24) 25.168 4.732 1. Tier .293 3.896 0 13.888 332 152 323 1.648 500 15.418 3.805 1.293 446 28. Unsecured Loans 6.605 313 12.143 6 (12) 17.933 123 19. Source: Dewan Housing Finance Corporation Ltd. and Advances 7.757 444 18.30 Table A4.768 1.000 20. 2004─2005 Actual Plan 2005─2006 Actual Plan 2006─2007 Actual Plan 1.681 138 177 344 653 3 0 15.707 450 20.2 Bonds 3.783 200 968 1.317 0 8. Current Liabilities and Provisions Total B. Securitized Home Loans 5.527 1. Housing Loans 3.928 11.758 1.788 129 25.183 1.908 371 17. Net Fixed Assets 2.470 440 36.240 2.933 1.710 2. Application of Fund 1.928 .
which is typically a more difficult segment in which to underwrite and 1. In general. Total incremental disbursements have increased from approximately Rs768 billion in 2005– 2006 to Rs1 trillion in 2006–2007. mortgage loan disbursements in India totaled approximately $22 billion. DHFL. In financial year 2006–2007. With respect to DHFL.1. The Credit Rating Information Services of India estimates that newly originated residential mortgage loans grew at a compounded annual rate of 33% over the last 3 years.2 Contribution to expanded mortgage lending with good portfolio and sub-borrower performance. DHFL remains one of the few lenders that target the lower and middle income (LMI) market segment in India.1 Private sector expansion and institutional impact: 1. now the second largest HFC. Ratingsa Justifications Satisfactory Mortgage finance is a highly developmental activity that has many linkages to the broader economy with respect to the provision of jobs.1 Contribution to an increased private sector share and role in the economy. However. Satisfactory . job creation as a result of its mortgage finance activities is in predominately semi-urban and rural areas. such as the construction industry and the consumer goods sector. Wider Sector and Economy Impact Beyond Intermediaries and Sub-Borrowers 1. while salary increases for individuals in metro areas has been approximately 20% per annum.1. While having a small share in the broader mortgage market containing commercial banks and public sector banks. private sector mortgage lending has increased in India since this project was approved as a result of growing demand and income levels.Appendix 5 31 PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: FINANCIAL INTERMEDIARIES Indicator 1. The RRP notes that the property sector can contribute up to 15% of a wealthy country’s GDP. and to sustainable jobs or self-employment. DHFL operates in over 150 locations in second and third tier cities in India. DHFL is the leader in the LMI market segment.
2 below. Competition in the LMI market remains limited. and/or relative to size of sub-portfolios. as this segment does not typically take loans against their homes to start new businesses.32 Appendix 5 Indicator Ratingsa 1. mortgage financing in . such as HDFC. and technologies) in ways that are replicated by other banks and in the financial system.3 Contribution to institutional change by: i) improved supply and access generally to formal mortgage lending. local-currency products) and/or contribution to increased competition in key sub-borrower markets. are slowly entering this market segment. albeit on a limited basis. As one of the first participants in the housing market in India. ii) influencing a more enabling environment for mortgages via lobby activity. to encourage more proactive pro-poor housing policies. DHFL’s ability to originate market loans in this segment with low levels of nonperforming loans has served as a model for those companies that have sought to enter this market.3 Innovation: Contribution to new ways of offering effective banking services to mortgages (including new products. or otherwise in which the participant bank(s) become more engaged. there are some early indications that public sector and larger commercial banks. Satisfactory Justifications originate loans. For instance. See 2. People living in the second and third tier cities only had access to money lenders who lent in small amounts at exorbitant interest rates. contribution to notable upstream or downstream link effects to sub-borrowers’ businesses in their industries or the economy. DHFL has been a pioneer in offering innovative “inclusive” products for its customers. Additionally. the National Housing Bank (NHB). Satisfactory 1. However. DHFL is a deposit taking housing finance company. Introduction of these products are valuable for the entire mortgage market in India. given the difficult nature of originating loans to these customers. Linkages to borrower’s businesses are also limited. services.4 Linkages: Contribution to local savings and deposits mobilization via networks of participant bank(s).1. policy dialogue. Moreover. Excellent 1. However.2 Competition: Contribution to new competition in mortgage business among local banks (including new product and service offerings. DHFL has provided access to formal mortgage lending to areas which have been ignored by the larger commercial banks. For over 20 years. DHFL’s origination skills have often served as a model for other banks. Excellent 1. Abundant opportunities for commercial banks and HFCs in the upper and middle class income segments have also contributed to the lack of competition in the LMI segment. DHFL has just introduced to the market a “reverse mortgage.” which allows senior citizens over the age of 60 to obtain loans against the value of their homes. DHFL has maintained an active dialogue with its regulator.
and in ESHS spheres. The training that DHFL provides to its local employees greatly increases their skills base. transparency.5 Catalytic element: Contribution to mobilization of other local or international financing to mortgages.Appendix 5 33 Indicator Ratingsa 1.5% of the total mortgage market in India today. Excellent 2. DHFL has demonstrated that LMI loans can be originated and securitized. By doing so. As noted. risk management. DHFL has mobilized financing through the use of securitization. and by positive demonstration to market providers of debt and risk capital to mortgages. and monitoring by the bank(s).2 Demonstration and new standards-setting potential: . 1. DHFL has achieved business success in a difficult market by developing strong underwriting criteria and risk management practices combined with good management. Excellent Overall Project Rating Satisfactory . and corporate governance structure with strong management have made it an early leader in this industry. (ii) contribution via the participant bank(s) to improved sub-borrower skills in operation of their businesses. stakeholder relations.7 Wide demonstration of new standards: Contribution to raised standards in the financial sector or in sub-borrower industries and sectors in corporate governance. regulation: Contribution to improved laws. e. It maintains a constant dialogue with its regulator. DHFL provides extensive training to its branches and service center employees. DHFL was one of the first HFCs in the market. While DHFL currently comprises 1. Excellent Satisfactory Excellent Justifications second and third-tier cities does encourage new construction and supports the consumer goods industry. Its underwriting standards. DHFL is the only entity which is undertaking the onlending of mortgages.As evident in affected and achieved standards in corporate governance and transparency. There are no participating banks in this project.g. 1. and stakeholder relations. It has established itself as an industry leader in this market segment. credit screening. to provide input on regulations impacting HFCs.6 Affected laws. frameworks. Given the wide geographic coverage of DHFL and its customer base. Participant Banks and Sub-borrower impact 2. its contribution to the housing sector has been significant. via good appraisal. the NHB. regulation.1 Skills with wider impact potential: (i) Contribution to improved mortgage credit approach at all stages in the participant bank(s) in ways that will be replicated by other providers of mortgage finance and banking service. and inspection affecting formal mortgage lenders and banking services in the local financial system. It has demonstrated that a company can successfully target a market segment that has been traditionally underserved by banks and other 2. DHFL has provided an excellent example to the market with respect to its ability to originate loans to the LMI segment. DHFL provides a broad framework of policies with respect to “Know Your Customer”. and appraisal systems that are followed on a uniform basis.
. Source: Asian Development Bank Staff. health and safety. The rating is not an arithmetic mean of the individual indicator ratings. Relative to the broader housing finance market containing commercial banks. partly satisfactory. Consider already manifest actual impact (positive or negative) and the potential impact and risk to its realization. PSD = private sector development. DMCs = developing member countries. social. Thus. DHFL has outperformed original RRP projections. and unsatisfactory. a Ratings scale: excellent. are higher than its peer group and can be partially attributed to the higher costs of operating in semi-urban and rural areas. overall. NHB = National Housing Bank. Asset and net profit growth has been strong. Justifications Measuring DHFL against its peers group of HFCs. Therefore. cost of funds has been higher and obtaining longer-term funding has grown more difficult. as well as ADB strategy for private sector development in India and throughout DMCs. ADB’s role in the Project was consistent with Government priorities. Expenses. LMI = low and middle income. which have no fixed weights. DHFL has been somewhat hampered by the inherent funding disadvantages associated with HFCs. satisfactory.34 Appendix 5 Indicator Ratingsa HFCs. ADB = Asian Development Bank. ADB’s loan provided reasonably priced long-term funding to DHFL. which was important given that HFC’s access to such funding was more limited than commercial banks. DHFL has performed satisfactorily with respect to business success. however. DHFL has performed quite well. RRP = report and recommendation of the President. ESHS = environmental. SME = small and medium enterprise. DHFL = Dewan Housing Finance Corporation Limited.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.