Project

Report
In d iv id u a l H o u s e F in a n c in g

S u m m e r In t e r n s h ip
AT
Housing and Urban Development
Corporation Ltd.

By:
KULEIN CHAUHAN
(SHAHEED SUKHDEV COLLEGE OF
BUSINESS STUDIES)
Objective of the Study
The main objective behind the preparation of this project is to get a deep understanding
of the procedure adopted to sanction a loan for financing individual housing projects and
parameters considered by Housing and Urban Development corporation Ltd..
 ACKNOWLEDGEMENT
I take this oppurtunity to thank all those people who have directly or indirectly helped me
in completing this project.

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

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

• To provide long term finance for construction of houses for residential purposes
or finance or undertake housing and urban development programmes in the
country.
• To finance or undertake, wholly or partly, the setting up of new or satellite
town.
• To subscribe to the debentures and bonds to be issued by the State
Housing (and or Urban Development) Boards, Improvement Trusts, Development
Authorities etc., specifically for the purpose of financing housing and urban
development programmes.
• To finance or undertake the setting up of industrial enterprises of building
material.
• To administer the moneys received, from time to time, from the
Government of India and other sources as grants or otherwise for the purposes of
financing or undertaking housing and urban development programmes in the
country.
• To promote, establish, assist, collaborate and provide consultancy services
for the projects of designing and planning of works relating to Housing and Urban
Development programmes in India and abroad.

VISION

"TO BE AMONG THE LEADING KNOWLEDGE HUBS AND FINANCIAL

FACILITATING ORGANISATIONS FOR HABITAT SETTLEMENT

MISSION

"TO PROMOTE SUSTAINABLE HABITAT DEVELOPMENT TO ENHANCE

THE QUALITY OF LIFE"
 MANAGEMENT TEAM

FUNCTIONAL DIRECTORS

Chairman & Managing Director (Additional Charge)/

Director Finance

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

Email: t.prabakaran@hudco.org
Shri T Prabakaran

GOVT. NOMINEE DIRECTORS

Director, HUDCO and Additional Secy. (JNNURM) &

Mission Director (BSUP), Ministry of Housing and
Urban Poverty Alleviation

Ph: 011-23061419, Fax: 011-23061420

Email: js_jnnurm@nic.in &

Dr P K Mohanty pkmohanty_ed@yahoo.com

Part time Official Director HUDCO, Joint Secy. &

Financial Advisor, Ministry of Housing and Urban
Poverty Alleviation

Smt Sudha Krishnan

INDEPENDENT DIRECTORS

Part-time Non Official Director,

Chartered Accountant

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

Email: solankirs@rediffmail.com Fax: 25781744

Shri Raj Pal Singh Solanki
 Part-time Non Official Director,

Environmentalist & Process Engineer

Ph: 9814006928, 9417021828, 9818116060, 0186-

2221828, 3290228, Fax: 0186-2221828

Email: dineshmahajan@hotmail.com &

Shri Dinesh Mahajan dineshankur@yahoo.com

Part-time Non Official Director,

Advocate High Court Mumbai, Ex Mayor of Mumbai,

Ex Chairperson Maharashtra State Commission for
Women

Ph: 022-26455858
Smt Nirmala Samant
Prabhavalkar Email: nirmalarox@yahoo.co.in

Part-time Non Official Director,

Ph: 9820059122

Dr Radha Binod Barman

CHIEF VIGILANCE OFFICER

Chief Vigilance Officer

Ph: 24624447, Fax: 24365317

Email: cvo@hudco.org

Shri T K Sanyal

EXECUTIVE DIRECTORS
 Sr. Executive Director – (Resource Mobilisation
including PDS, Banking & Investment, NHB and
HSMI)

Email: rkkhanna@hudco.org

Shri R K Khanna

Executive Director Finance

Hyderabad Regional Office

Ph:040-23235759

Email: akaushik@hudco.org
Shri A K Kaushik

Executive Director – (SBU for value added real

estate & other housing)

Ph: 24647792, Fax: 24620019

Email: mdutta@hudco.org
Smt Manorama Dutta

Executive Director – Chennai Regional Office

Ph: 044-28529500, 044-28412711

Email: ksubued@hudco.org

Shri K Subramanian

Executive Director - Kolkata Regional Office

Email: subbu@hudco.org

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

Ph: 24620353

Email: pjayapal@hudco.org
Dr. P Jayapal

Executive Director Projects (Administration &

JNNURM)

Ph: 24627321, Fax: 24627439

Email:skchau13@hotmail.com &
skchau13@hudco.org
Shri S K Chaudhary

Executive Director Finance

Shri P K Aggarwal

Executive Director – (Internal Audit)

Ph: 24627396, Fax: 24690804

Email: vivekkumar@hudco.org

Shri Vivek Kumar

Executive Director – Finance (SBU for Emerging

Sector, Industry, Telecom & other infrastructure
projects)

Ph: 24627093

Email: mbalakrishna@hudco.org
Shri M Balakrishna
 Executive Director - (Human Resource
Development, Operations, SBU for Power &
Transport, Special Projects & DMRC)

Ph: 24647121, Fax: 24643675

Email: hkd@hudco.org
Shri H K Dubey

Executive Director -Law & Central Public

Information Officer, Nodal Officer (Public
Grievances)

Ph: 24651880, Fax: 24648428

Email: ssgaur@hudco.org
Shri S S Gaur

Executive Director - Works & Disposal

Ph: 24651675, Fax: 24648367

Email: safaya@hudco.org

Shri R K Safaya

Deputy Chief (F)/Company Secretary

Shri Harender Verma
Tele-fax: 24615534
Email: hverma@hudco.org

SECTORAL OVERVIEW
Post colonial India was traditionally a heavily planned and regulated economy with
predominantly directed investment. The financial sector was subject to a variety of
allocation and interest range regulations and only in the past decade has really progress
been made in deregulation. Housing was not considered a priority sector, and, in fact was
looked upon as a social good. In this environment, investment in low and moderate-
income (LMI) housing was directed thought the housing and urban Development
Corporation (HUDCO) a government owned entity.
India’s first private sector retail housing finance institution, the housing development and
finance corporation (HDFC), was formed in 1978.Until then there was effectively no
market rate housing finance available. HDFC steadily grew into a major force in this
sector, despite the control credit allocation structure in the country. Other private sector
competitors began to appear in 1983. In 1988, an apex institution, the national housing
bank was created

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

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

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

HUDCO As A Wholesale LMI Lender

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

• The often do not target their activities to lower income groups

• Due to poor demand assessment and project inefficiencies, large amounts of resources
have ended up locked up in unsold property and housing units.
• The inefficiencies are aggravated by pervasive state controls on most aspects of
functioning of housing agencies, and political directions on estate management
project implementation.

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

Role Of National Housing Bank

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

Objectives Of NHB

 To promote a sound, healthy, viable and efficient housing finance system to cater to
all segments of the population.
 To establish a network of housing finance outlets to adequately serve different
regions and different income groups.
 To promote savings for housing.
 To promote appropriate technologies for housing.
 To strengthen the backward and forward linkages of the housing sector with rest of
the economy.
 To augment the financial resources for the sector.

Functions Of NHB

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

Promotion & Development

Intervention through institutional credit can be made more effective by adoption of

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

Regulatory Function

The second important function of NHB is the regulatory role assigned to it. The objective
is to create the framework for an effective system of ‘responsive regulation’ in tandem
with the free market approach which would promote the credibility of the housing
finance system among the savers and investors.

Financial Function

The third important role of NHB is to provide financial assistance to the various banks
and housing finance institutions. As an apex refinance institution, the principal focus of
NHB’s programmes is to generate large scale involvement of primary lending institutions
falling in various categories to serve as dedicated outlets for assistance to the housing
sector. These institutions include scheduled banks (both commercial and cooperative),
regional rural banks, specialised housing finance institutions, Agriculture and Rural
Development Banks and the Apex cooperative housing finance societies. The National
Housing Bank (NHB) has formulated a special Rural Housing Finance Scheme to mark
the Golden Jubilee of Indian Independence.

Institutions Providing Housing Finance

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

• Commercial banks;

• Cooperative banks;
• Housing finance companies;

• Regional rural banks;

• Agriculture and rural development banks; and

• Cooperative housing finance societies

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

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

Constraints in Expanding Financial Assistance

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

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

Integration of Informal Sector with Formal Sector

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

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

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

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

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

Issues in the Development of the Housing Finance Sector

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

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

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

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

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

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

Resource Mobilization

HUDCO was established with an equity base of Rs 2 crore. Over the years, the
Government has expanded the equity base. The present authorized capital base of
HUDCO is Rs 2500 crore and paid-up capital is Rs 2001.9 crore (as on March 31,
2009). HUDCO has created a reserve of Rs 2,665.96 crore as on 31st March 2009. The
net worth of HUDCO is Rs. 4,647.46 crore. Over the years, HUDCO has further
been able to mobilise resource from institutional agencies like LIC, GIC, UTI Banking
Sector, International Assistance (Kfw, JBIC, ODA, ADB, USAID etc.) and market
borrowings through debentures, taxable and tax-free bonds as well as through public
deposits taking the overall borrowing to Rs. 19,249.32 crore

Programs

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

Projects involving self-help by the beneficiaries are promoted by encouraging sites and
services schemes, core housing, skeletal housing, shelter up gradation and so forth. In
order to provide basic facilities in the existing houses where adequate sanitary disposal
systems are not available, financial assistance for basic sanitation schemes is being
extended on liberalized terms.
HUDCO extends assistance benefiting the masses on urban and rural areas under a broad
spectrum of programs as listed below;

Housing

• Urban housing
• Rural housing
• Staff rental housing
• Repairs and renewals
• Shelter and sanitation facilities for foot path dwellers in urban areas (night shelter,
pay and use toilettes)
• Working women ownership condominium housing
• Housing through NGO’s/ CBO's;
• Housing through private builders/joint sector
• Vambay
• Land acquisition

Infrastructure

• Integrated land acquisition and development

• Basic sanitation
• Environmental improvement of slums
• Utility infrastructure
• Social infrastructure
• Economic and commercial Infrastructure

Building Technology

• Building centers for technology transfer at the grass roots

• Building material industries

Consultancy Services

• Consultancy in housing, urban development and infrastructure

Research And Training

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

Eligible Agencies

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

Housing

HUDCO assistance for urban housing started in 1970.

• Under urban housing, HUDCO has so far extended assistance for supporting 51.2
lakhs residential units
• Though HUDCO started assistance for rural housing only from 1977-78, its
contribution to rural housing for weaker section has been significant and it has
assisted in the construction of over 81.52 lakh rural houses.

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

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

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

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

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

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

HUDCO NIWAS

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

• Interest calculated on monthly reducing balance

• Waiver of last two months installments if all earlier installment are paid on time
• Free personal accident insurance and insurance of borrowers house against fire
and natural calamities.
• Low processing and administrative charges further reduction for armed/Para
military/ police forces personnel, widow or physically challenged persons.
• No prepayment penalties
• Free counseling to alternate building technologies
• Free counseling on designing the house.

Urban Infrastructure

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

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

Profitability With Social Justice

HUDCO performance can be summarized as one signifying “profitability with social

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

Year Profit before tax Net profit

1988-89 17.49 17.49

89-90 25.51 25.51
90-91 35.77 26.16
91-92 40.82 28.07
92-93 88.89 60.77
93-94 73.62 59.02
94-95 100.11 70.37
95-96 125.41 77.75
96-97 119.11 61.54
97-98 157.71 40.54
98-99- 220.43 69.71
99-00 311.00 92.65
2000-01 316.36 106.93
01-02 373.21 86.91

The HUDCO Vision -2012

To emerge as the market leader by consolidating and elevating HUDCO image in the area
of housing and urban loan infrastructure finance through market orientation involving
public private and people’s participation and wider coverage of market both by way of
reaching out the new segments and diversifying into related areas to provide new
services; while keeping its social Commitments and promoting appropriated building
technologies by means of a competent motivated, efficient workforce”.
The corporate plan 2010 envisages the formation of independent and synergetic cells or
empowered groups on the area of strategy planning. Business development, asset liability
management, risk management, Consultancy management, organizational systems and
estate development to ensure sustained business growth besides exploring new avenues
of diversification.

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

SANCTIONS AND RELEASES DURING 10TH AND 11TH PLANS

 URBAN
HOUSING INFRASTRUCTURE TOTAL

Year Sanctions Releases Sanctions Releases Sanctions Releases

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

2003-2004 3884 2719 6443 4188 10327 6907

2004-2005 4350 3045 7731 5025 12081 8070

2005-2006 4871 3410 9283 6034 14154 9444

2006-2007 5456 3819 11134 7237 16590 11056

TOTALS 22030 15421 39960 25974 61990 41395

11 PLAN 2007-2008 6110 4277 12406 8684 18516 12961

2008-2009 6843 4790 14887 10421 21730 15211

2009-2010 7664 5365 17864 12505 25528 17870

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

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

TOTAL 38815 27171 92320 64624 131135 91795

Recognition

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

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

Elevation Of HUDCO As A Schedule A Company

In the year 2001-02 witnessed HUDCO’s attainment of schedule a status. Acceding to a

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

Enhancement Of Authorized Capital Base

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

INTRODUCING HUDCO NIWAS

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

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

HUDCO NIWAS offers the following schemes:

• Individual housing finance scheme for resident Indians

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

“HUDCO NIWAS” offers loan assistant to/for:

a) Construct a house/buy a house or flat;

b) Extend or improve the existing house or flat
c) Purchase a plot from public agencies/co-op societies of government
employees/reputed developers.
d) Registration of existing house including conversion from leasehold to free hold
e) Refinancing of existing housing loans taken from other institutions
f) Loan to professionals for non residential premises;
g) Loan against residential property

Eligibility For Loan And How It Is Determined

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

regular income for servicing the loan.
b) The loan amount will not exceed 85% of the cost of the housing unit including
incidental cost like stamp duty and registration. The maximum loan amount will
be Rs. 50 lacs.
c) The actual loan amount will be determined on the basis of repayment capacity.
Repayment capacity takes into account factors such as income, age, qualification,
number of dependents, spouse’s income, assets, liabilities, stability and continuity
of occupation and savings history.

Loan Application
 a) An application for loan shall be submitted in any “HUDCO NIWAS” office in the
prescribed form along with supporting documents. This form with a list of
supporting documents is available at any “HUDCO NIWAS” office.
b) Proposed owners of the housing unit for which loan is sought will have to be co
applicants. However all co-applicants need not be co- owners.

Loan Repayment Period

1. For purchase or construction of house or flat or composite loan

2. For purchase of Plots
3. For extension /improvement of existing house or flat
4. For registration of existing house

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

a) For loan to professional for non-residential premises. A maximum period of

10 years will be allowed for repayment of loan subject to the age of the
applicant not exceeding 65 and repayment capacity.

b) For loan against residential property

A maximum period of 5 years will be allowed for repayment of loan subject to
age of the applicant not exceeding 65 years and repayment capacity.

Security For The Loan

Security for the loan is the first mortgage of the housing unit to be financed normally by
way of deposit of title deeds and or such other collateral security as may be necessary. In
some cases, interim security may be required. In all cases the applicant will be required to
provide guarantee of one individual acceptable to “HUDCO NIWAS”. In respect of other
applicants who have already availed house-building advance from their employers,
HUDCO NIWAS may accept second mortgage of housing unit subject (a) central and
state government employees-assignment of benefits under Central/State Government
Group Insurance Scheme or else the repayment of the loan is completed before
superannuating. (B) Public Sector Undertaking Employee – loan is repaid by employer
through salary deduction/ post dated cheques and repayment of loan is completed before
superannuating of employee.
In respect of house or flat purchased on power of attorney, HUDCO NIWAS may extend
loan provided alternate tangible security of adequate value is made available to HUDCO.
Alternate security can be third party mortgage, mortgage of other property owned by
applicant/co-applicant, pledge of UTI units, National Saving Certificates, LIC policies
etc. of equivalent amount.

Fees

A processing fee (non- refundable) of 0.2% of the loan amount applied for i.e. Rs. 2/per
Rs 1000/- of the loan applied for is payable subject to minimum of Rs. 250 /- at the time
of submission of application form to “HUDCO NIWAS”
a) On sanction of a loan, the loan offer is made to the applicant.
b) On acceptance of the offer on time administrative fee (non-refundable) of
0.4% of the amount of loan sanctioned is payable.

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

Loan Repayment

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

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

Disbursement Of The Loan

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

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

a) Free personal accident insurance to cover the outstanding loan amount and loan
repayment period.
b) Free insurance for house or flat proposed to be acquired/constructed against the
risks of fire and natural calamities so as to cover the loan amount and loan
repayment period.
c) No charges for repayment of loan ahead of schedule.
d) Waiver of last two monthly installments provided all installments were received
as per schedule without delay. ( if the loan repayment period is more than 5 years)
e) Priority will be given in processing housing loan application for the subscribers of
HUDCO public deposit scheme.
f) Free counseling by building material and technology wing of HUDCO on
selection of cost effective and environment friendly building material,
technologies etc.
g) Free counseling by Design Wing of HUDCO on design aspects suggesting
various options in designing including interiors.
h) Guidance to facilitate completion of legal formalities leading to quick disbursal of
the loan
i) Construction options using cost efficient methods will also be provided by
availing the services of trained professional and through building centers,
Nirmithi Kendra’s (only for fixed rate of interest).

Payment of EMI

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

Tax Benefits

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

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

Individual housing loan is rendered to a borrower for purchase of a property, which

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

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

• To cover ourselves against the business risks

• To keep a healthy portfolio which could be liquidated at a better rate in the market
(securitised), if need arises
• It is an aide to overall business development.

It is necessary to verify the employment of applicants for loan in case of salaried

employees as it may give certain vital information that the applicant would otherwise
have not disclosed. Moreover, it serves the purpose of verifying details of salary and
employment provided by the applicant.
In case of government employees there is a standard format for appraisal; there are minor
variations, like more disclosure of income, for private employees. However, a higher
degree of caution is required with regard to self-employed borrowers. A thorough
assessment of the authenticity of his income tax returns and other sources of income
coupled with verification of his credit worthiness from the references he gives during the
lending process.
Repayment Capacity
The repayment capacity is a factor of the disposable income of the borrower. It has been
universally accepted that any individual family can afford to an equated monthly
installment that does not exceed 25%-35% of its gross monthly income in case there is no
other fixed obligation to pay back existing loan/s, if any. If the prospective borrower is
already servicing a loan, the monthly installment being paid towards the existing loan
would have to be considered while determining the repayment capacity (in such cases all
installments combined together can go up to 45% including EMI of proposed loan from
HUDCO NIWAS) of the individual and accordingly the same should be taken care of.

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

• Age
• Qualification
• Nature of employment
• Past occupational history
• No. of dependents
• Family background
• Savings history
• Sources of own contribution
• Assets
• Liabilities

The maximum age for repayment of entire loan would be 65 years. However, in some
select cases, a relaxation of up to 5 years in the upper age limit can be considered.
Chairman and Managing Director- HUDCO would consider such a relaxation on the
basis of track record of the applicant and the supportive financial backing.

While a few of the elements like age mentioned above can be quantified, many of other
factors are quite subjective in nature. The appraisal officer is the best judge on these
subjective issues because he is the one who is interacting with the individual more often
than any body else. For example, the repayment capacity of a young doctor cannot be
compared with a shop floor labor. The doctor's income would be increasing over years at
a much higher rate than the labor’s income. Likewise, the loan eligibility of a qualified
MBA working with a top investment bank cannot be compared with an ordinary graduate
working with a chit fund company. Similarly, all other factors would have a bearing on
the loan amount like the number of dependents etc. More the number of dependents, the
claim on income would be more and therefore, the repayment capacity of the individual
would be limited by that extent.

Applicant And Co-Applicant

All proposed owners of the housing unit / plot for which loan is sought will have to be
co-applicants. However, all co-applicants need not be co-owners. Normal relationship
that are acceptable for co-applicants in case they are not co-owners are as follows:.

• Husband -wife
• Father- Son/Unmarried daughter
• Father- Mother -Son- Daughter in law

Income Of Applicant And Co applicant

Income from salary

In the case of salary earners, the income through salary can be easily ascertained from the
salary slip / salary certificate. While entertaining salary slip/ salary certificate, it has to be
ensured that the exact break-up of salary giving all allowances and deductions, statutory
or otherwise are indicated and the authenticity of the salary slip is verified. Usually, all
allowances appearing in the salary slip on a monthly basis may be taken as part of gross
income except for a few specifically mentioned in this section. In case of applicant
working in a small private concern, the credentials of the employer also needs to be
examined that would give a basis of establishing the individual's stability of employment
and accordingly decide the loan eligibility of the individual. Generally, following
allowances appearing in the salary slip may be considered for calculation purposes:

• Basic Salary
• Dearness Allowance
• House Rent Allowance
• Conveyance / Transport allowance (not reimbursement)
• Special allowance/ personal pay
 • Education allowance
• Medical allowance (not reimbursement)
• City Compensatory allowance, etc.

It should be noted that the salary of an individual could consist of certain reimbursements
which would normally not appear in the salary slip/ certificate such as conveyance
reimbursement, vehicle maintenance, canteen subsidy, medical reimbursement, overtime,
productivity linked incentive. All these reimbursements are voucher payments apart from
overtime and PLI. Generally, any reimbursement appearing in the salary slip / certificate
should not be taken into consideration. However, on merit of individual cases, the
appraisal officer may consider a portion of such income as part of income and
accordingly the loan eligibility may be worked out. But in such a case it has to be ensured
that the applicant is receiving these payments regularly on a monthly basis. The applicant
may be asked to produce evidence of regular receipt of these payments and the appraising
officer should verify the same through bank passbook or by any other means. In such
cases, the portion of such income to be taken should not be more than 50% of such
monthly reimbursement.

Income From Business/Profession

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

determining the income arising out of the business or profession of the applicant. Careful
examination of Income Tax Returns for the past 3 years along with computation of
income is essential. The originality of IT returns will have to be verified in all the cases
from respective IT offices. The appraising officer should also look into the following
factors:

• Nature of business
• Age of business concern
• Market trends
• Clientele of the organization
• Previous experience of the promoters
• Educational qualifications of the applicants
• Products
The appraising officer has also to carefully examine the profit & loss account and balance
sheet for the past 3 years that would give him an idea of the profile of the applicant. It
should be noted that the profit & loss account, balance sheet, IT returns etc. has to be
certified by a Chartered Accountant stating "Certified True Copy" affixing his seal that
should clearly depict his registration number.

In case of the age of business is less than 3 years and/or the IT returns for 3 yrs are not
available, the available IT returns could be considered for determining the loan eligibility.
If IT returns for the past 3 years are filed with in the same financial year, such loan cases
are required to be out rightly rejected unless the ROs are satisfied about the delayed filing
income tax returns.

Income of spouse
When both husband and wife are working and their income has been declared in the
application form with supporting documents, repayment capacity of spouse can be
considered up to 60%. However, the repayment capacity of the main applicant will
continue to be taken at 35%. In such cases, overall IIR and FOIR may go beyond between
35% and 45%. But in cases where the income of the main applicant is either nil or not
verifiable, then repayment capacity of the income of the spouse is to be taken as 35% and
not 60%.

Other Income

Apart from regular income from salary/ business/ profession, there are certain other
sources of income that an applicant might have. Depending on the nature of the income,
it may be considered for augmenting the main source of income. Generally, such income
should be added only if the requirement of loan amount is more than normal eligibility of
the applicant(s). The additional income alone cannot be the basis for loan. In cases where
additional income is irregular it has to be ignored.
The other income can be:
• Rental income
• Agricultural income
• Income/ Dividend from securities
• Depreciation
Rental Income

If the applicant is having income from rental from another property, 60% of the rental
income may be included into the main income. However, in such a case, the applicant
should be asked to submit copies of lease agreement/ rent agreement, rent receipt I Bank
statement etc. The appraising officer should be able to clearly spell out the following
details out of the requisitioned documents:
• Date of rent agreement
• Expiry date of rent agreement
• Rent per month (Including expected rent in case the property being acquired is to
be rented out)
• Owner of the property

If the applicant wishes to let out the property being financed, 60% of expected rental
income might be taken for calculating the eligibility of loan amount. However, the
expected rental income should be based on the current rentals in the market and the
concerned officer should verify from all sources that the expected rental as stated by the
applicant is reasonable as per the prevailing rates in the market. Here, it should be
ensured that the applicant should have another house already existing to live in either
through ownership or allotment of dwelling unit by the employer, and then only he can
let out the property being financed. In case of Government allotment of a housing unit to
its employee (the applicant), notional value of HRA should not be added back to the
income from salary if the applicant wishes to continue staying in the Govt. quarter and
expected rental income has been considered for loan calculation.

Agricultural Income

Agricultural income, by its very nature is cyclical in nature and it would fluctuate even if
the land holdings of the applicant remain the same and therefore, much weight age cannot
possibly be given to such income. It is also very difficult to ascertain the agricultural
income, as we would need to have proof of land ownership and receipts from the
"Mandi" or other Government agencies of the sale proceeds etc.
In case, the applicant is able to produce evidence to show his agricultural income for the
last three years either through certificates from Tehsildar or revenue authorities, receipts
from Mandi Mills regarding the sale proceeds for his produce and ownership of
agricultural land, 60% of the average of last three years can be considered.

Income from Dividend and Securities

As far as income from dividends and interests on deposits or any other income from
securities like bonds, debentures etc. are concerned, by the very nature; these incomes
fluctuate depending on the holding /investment and the market conditions. Therefore,
such income should be ignored and should not be considered for determining the loan
eligibility of an individual.

Depreciation

Depreciation is a notional charge on P & L account wherein a sunken fund is created that
is used to replace the existing asset. In all probability, depreciation fund is used for
buying a new asset at a later date; therefore, depreciation should not be added back.

Income Of Co Applicant

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

etc., 100% income of all the co-applicants could be considered.
In the case of spouse becoming co-applicant, 100% income of the spouse could be
considered regardless of the fact that whether he/she is co-owner of the property or not.

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

Pension Income
While deciding the repayment capacity, future pension income of the applicant may also
be considered which would be based on the last BASIC salary drawn before retirement.
Inclination to Pay
Once the ability to pay is established, it is required to have a view on the inclination to
pay for the applicant, which would have very crucial implications on the repayment of
loan.
The saving habits of the applicant and the repayment record of other loans, if any would
broadly decide the inclination to pay, which the applicant might have taken. For this, the
officer should check the bank statement for the last 6 months. The statement should be
checked very carefully, as it might contain regular payments made to some agency from
which the applicant might have taken a loan, which might not have been disclosed in the
application form. It should be highlighted here that the borrowing habit of the applicant is
a very important factor, which may adversely affect the repayment of loan, and therefore,
it is a critical factor in deciding the applicant's inclination to pay.

At the same time, the sources of funds must be evaluated to meet the cost of property. In
this connection, provident fund statement can be checked, saving bank pass-book
showing details of transaction, details of investment to be liquidated to meet cost of
property, loans from employer, and loans from thrift & credit society, loans from banks/
HFIs/ informal sources. What is to be ensured is that, as far as possible, the applicant
should not borrow from any other source for meeting his share of investment in the
property proposed to be purchased/constructed for which regular payments have to be
made.

Process of Interview

The first and foremost thing for conducting an interview is that the interviewer should
carefully read /study the application form, salary slip/Income tax returns and the property
papers etc. The person who is interviewing/interacting with the applicant should be well
prepared with his questions. Observations of the interviewer should be recorded in the
file for future reference.
Concept of Equated Monthly Installment (EMI)

EMI, as the name suggests, is equated monthly installments, which consists of principal
and interest components. The equated monthly installments will be based on monthly
reducing balances i.e., monthly rests. EMI is calculated in such a way that the loan
becomes self amortizing i.e. with payment of all installments, total principal and interest
thereon stands paid.
The formula for calculation of the equated monthly installment on monthly rests is given
below.
EMI = L*r (1+r) ^n
[(1+r) ^n-1]
Where,
L = Loan amount,
r = rate of interest / 12
n = number of months.

The EMI will start from the month following the month in which the disbursement of
loan will have been completed. Till such time when the loan is fully disbursed, pre-EMI
interest is payable only on the portion of the loan availed and is calculated at the same
rate at which EMI is calculated. For calculating PEMI interest for the month in which the
disbursement has been done, the computation would be done on the basis of a year of 365
days.

Repayment Plan

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

HUDCO NIWAS:
• Standard repayment plan i.e. Fixed EMI
• Step up repayment facility (SURF)
• Step down repayment facility(SDRF) / Future lower installment plan (FLIP)
• Balloon payment/ Bullet payment

Combination of more than one option may also be allowed.

Standard Repayment Plans i.e., Fixed EMI

Standard repayment plan can be made available to any applicant who has at least the
same years of service left (for salaried employees) for which he has applied for the loan.
Under this repayment plan, the EMI would be same for the entire tenure of the loan.

Step Up Repayment Facility (SURF)

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

• Applicant to be professionally qualified;

• Applicant to be around 35 to 40 years of age as this plan is ideally suited only for
young applicants who are in beginning of their career and do not have much
liability.

• First step up at the beginning of 4th year; second step up at the beginning of 8th
year and 3rd step-up at the beginning of 11th year is to be given; if necessary to
give required loan amount. However, this is not at all mandatory to give all step-
ups if only one or two step-up(s) serves the purpose of giving the required loan
amount.

• The installment to income ratio should not exceed 35% in working out the loan
eligibility on his present or projected income.
Here is an example to show as to how this step- up or graduated installment facility
works.

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

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

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

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

Therefore, the total loan eligibility as per above example, works out to Rs.3, 93, 657, say
Rs. 3,93,000 as against Rs. 2,69,579 based on standard EMI, i.e. 1.45 times of the loan
eligibility based on standard EMI.

However, if we draw an amortization schedule of the same, we would observe that there
is negative amortization. The EMI of the first month is not even sufficient to cover up the
interest portion of the EMI, leave aside the principal. Now, as we are aware that the EMI
consists of interest as well as principal, we have to decide such an EMI that covers the
entire interest amount in the beginning and a small portion of principal. At 35% IIR, the
EMI cannot be more than Rs. 3, 500. If we are assuming an interest of 13.50% p.a., the
interest for the first month should not exceed approximately Rs. 3495 to Rs. 3499. Based
on this, we have to decide an amount for which the interest for the first month falls within
this range. Accordingly, we arrive at a loan amount of Rs. 3, 11, 000, i.e. 1.15 times of
the loan eligibility based on standard EMI for which the interest for the first month is Rs.
3, 498 approximately.

Hence, lower of the two loan amounts of Rs. 3,93,000 and Rs, 3,11,000 would be the
final loan amount that means that the loan amount works out to Rs. 3, 11,00 for which the
repayment plan would be as under:
Rs. 3, 500 for the first 36 months
Rs. 4, 051 for next 48 months Rs. 4, 717 for next 96 months. It is observed here that the

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

amortization.

On the basis of standard EMI, 'he would have got Rs.2.69 lacs. Thus, by graduated
monthly installment plan, the individual is able to get Rs.42, 000 more as compared to the
standard repayment plan. In the present case, as a rough and ready estimate his loan is
1.15 times of his normal eligibility.

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

It is quite possible that some applicant nearing the age of retirement may approach us for
loan assistance. In such cases, we have to assess the level of income likely up to their
retirement. In case of pension able services, post-retirement income would be generally
the pension. If there is any other income other than the pension, such an income should
be regular in nature. It is possible that some persons might have monthly income under
various installment plans. If we happen to consider pension on retirement, an undertaking
from the borrower should be taken confirming that he won't get the pension commuted at
the time of retirement. This is very much required because we are building our repayment
on the pension income.

Example:
1. The applicant is a Government employee aged 55 years and is due to retire at the age
of 60. The present income is Rs.20, 000 and the expected pension after retirement is Rs.
8, 000.
Working:
Income -a. Rs.20, 000 for 5 years
b. Rs.8, 000 for 5 years (up to age 65). For calculation:
Income: a. Rs.8, 000 for 10 years
b. Rs.12, 000 for 5 years
ROI- 14.5% p.a. IIR- 35%.
Loan eligible -Rs.176894 EMI Rs.2800
Loan eligible -Rs.178508 EMI Rs.4200
 Rs.355402 or Rs.355000

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

Yet another way of helping such persons is to suggest the applicant to make a younger
person preferably son, who is in employment as a co-applicant. Ideally, the son and father
should be co-owners in the property and we should encourage joint ownership. In case, it
is extremely difficult to have such ownership we may still take the son as a co-applicant.
In all such cases where a son or daughter is a co-applicant we should take only 50% of
the income of such co-applicant if they are not co-owners in the property. In case the son
or daughter is a co-owner in the property we may consider up to 100% of the co-owner's
income to determine the loan eligibility. We may consider the loan eligibility for a longer
duration taking the co-applicant's age into consideration.

Balloon Payment

In case the applicant needs a higher loan that he is otherwise not eligible for, we can
build in bullet payment in the repayment. If the applicant is in a position to make a lump
sum payment at a future date by way of assigning of FDRs, NSCs, IVPs, KVPs, Gratuity,
LlC policy etc., or out of gratuity etc., we may consider giving him a higher loan amount
on the basis of repayment at a future date. In such a case, we will have to calculate
present value of the security being offered and then assign a weight age to the present
value for increasing the loan amount subject to a maximum of 100%. In the case of lump
sum payment from gratuity (applicable in those cases only where the retirement age is
less than four years), a confirmation from the employer that the gratuity amount would
not be released to the employee without express written consent of HUDCO should
suffice. However, if they demur to give such an undertaking, the individual applicant
should be asked to give an undertaking to make payment of gratuity to HUDCO NIWAS
even though the loan agreement provides for it.

The formula for calculating present value of a cash flow expected in future is as follows:
Present value = A / [(1+r) ^ n]

Where A = Future expected cash inflow

R = Rate of discounting (It is the rate of interest at which the loan is advanced or the
coupon rate of security whichever is higher)
N = Period after which the balloon payment is receivable.
Example:
If the applicant has a FDR maturing four years from start of the EMI for Rs. 1, 00,000,
then the present value of the security would be Rs. 58,180 that is discounted at the rate of
14.5% p.a. Now, we can assign a weight age to this present value depending upon the
comfort level of the credit appraiser with the applicant. If we give a weight age of 75%,
the loan amount that can be enhanced is Rs. 43,635.

It should be very clearly noted here that balloon payment could only be incorporated in
the loan, if there is a tangible security to be offered by the applicant of loan. The credit
appraisal/ sanction note should be prepared along with the amortization chart duly
incorporating the balloon payment details.

Ratios

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

standardization, which aids in decision-making and quantifies the servicing capacity of
the applicant and security cover to the loan. Further, in the era of securitization, ratios
come as a big help if we want to securitize our assets.

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

• Installment to income ratio (IIR);

• Fixed obligation to income ratio (FOIR);

• Loan to cost ratio (LCR)

Installment to Income Ratio (IIR)

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

IIR = EMI / Gross monthly income

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

It is the ratio of monthly outflow on account of loans taken (including EMI on proposed
loan from HUDCO NIWAS) to the gross monthly income.

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

Gross monthly income

The FOIR should be in the range of 40-45%. At no point, the ratio as specified should
exceed the limit of 45% except in self-employed cases where it can go up to 55%. It
should be noted that other fixed monthly obligations consists of regular payments made
on account of loan taken from various agencies, viz., Banks/ HFCs/ Thrift and credit
society/ HBA / Other agencies, employer etc. all loans over 12 months of repayment
should be considered under other fixed monthly obligations for calculation of FOIR.

Loan to Cost Ratio (LCR)

It is the ratio of Loan amount to the total property cost.
LCR = Loan amount
Property cost
The maximum LCR should be 85%. It should be noted here that the property cost
includes the purchase price, stamp duty charges and registration expenditure.

Mode of Repayment
The applicant can repay the monthly installments in following modes:
• Post dated cheques
• Deduction at source from employer of the applicant
• Standing instructions to the bankers
In case the applicant wishes to repay through post-dated cheques, at least 36 post-dated
cheques should be taken from the applicant at the time of final disbursement. After 12
cheques have been utilized, the local branch of HUDCO NIWAS should replenish it with
12 fresh post-dated cheques.

In the case of deduction of EMI/ PEMI at source from the salary of the applicant, the
same is to be received directly at the branch office of HUDCO NIWAS. In such cases, it
has to be ensured that the deductions made by the employer are received by HUDCO on
or before the due date. Alternatively, the applicant can be advised to make two payments
against the first payment i.e. one by way of post dated cheque/ pay order/ bank draft to be
directly deposited by the applicant to HUDCO and the other by way of recovery by
deduction from the employer. It should be noted here that the recovery by way of
deduction from the salary would come only in the beginning of the next month.
Therefore, the applicant is not paying two installments in one month.

In case of personnel from armed forces, these people are very often posted at border
towns and it may not be possible for them to monitor their saving account from that place
for repayment. It is therefore, advisable in such cases to ask applicant to issue standing
instruction to his banker for directly sending the EMI to HUDCO NIWAS every month.
However, the standing instructions in such cases should be irrevocable. In addition, Post
Dated Cheques should also be taken so that in the event of non-remittance of EMI by the
Bank, cheque can be presented.

In case of outstation cheques, the cheque should be deposited in such a way that it is
presented in the bank on or before the due date. Further, in such cases, bank charges are
to be recovered from the applicant. Accordingly, the likely charges may be ascertained
form the bank and intimated to the applicant well in advance. Alternatively, the applicant
can be advised to make two payments against the first installment, one by way of post
dated cheque and second through a bank draft so that the possibility of default or short
payment or bank charges etc. are taken care of.

Post Sanction Procedure

Offer Letter
Immediately on approval of the loan by the competent authority, an offer letter (in
triplicate) communicating the loan approval in principle will be prepared and two of the
three copies would be issued to the applicant/co-applicant. Regional Chief/ Branch Head
of HUDCO NIWAS/ Law officer can issue the letter of offer. If the loan was sanctioned
with special conditions like assignment of Life Insurance Policy, hypothecation or pledge
of some securities, assignment of Group Insurance benefits, balloon payment at a future
date etc., it should be clearly mentioned in the letter of offer given to the applicant. In
case of Life Insurance Policies, it is necessary to indicate the particular policy number
and the amounts insured.
While issuing the offer letters, it is also necessary to enclose a check list of documents
relating to the property, guarantee format, instructions for filling the guarantee form, the
format of assigning the benefits under Life Insurance Policy, etc. depending upon the
conditions of offer which the borrower needs to furnish for disbursement of loan. It is
very important to ensure that the applicant is in full possession of the list of all documents
he has to deposit, leading to creation of security. These checklists should be prepared in
advance and kept ready. Obviously the nature of documents required would vary with the
type of property financed.

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

Pre disbursement Procedure

No disbursement is possible without creation of security and fulfillment of all condition

of offer. The legal officer will verify that he has received all the documents and the
borrower has satisfied all conditions, general or special as mentioned in the letter of offer
and credit appraisal note. In case, the borrower has not completed the requirements,
inform him in writing about the balance documents he should submit for creation of
security and subsequent disbursement of loan.

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

Disbursement

After the completion of legal and technical formalities and on the basis of requirements
of the funds of the borrower and/or on the basis of technical appraisal, a disbursement
memo should be prepared in triplicate and the concerned authorized signatory will
authorize disbursement. The authorized officer for approval of disbursements is Regional
Chief. Two copies are meant for accounts, one of the copies will be sent back by the
accounts to the disbursing officer with the cheque/DD and the third copy will be placed
in file.

The borrower should be informed in writing about the date of disbursement based on his /
her request.
A copy of disbursement advice should be handed over to the borrower. It is important to
note that at the time of first disbursement, the loan documents have to be executed by the
applicant/co-applicant. It is also necessary to ensure the presence of the applicant/ co-
applicant before the disbursement can actually be made and for these purpose the
applicant, co-applicant should be advised.
In respect of outright purchase cases, the cheque/draft for disbursement should be handed
over to the seller in the presence of Registrar/Sub-Registrar and borrower after ensuring
that the deed to be executed contains HUDCO payment details, etc. the draft of the sale
deed, etc. to be executed should be vetted by the Law Officer before its execution
including confirmation about the applicability of the stamp duty.
It should be noted here that a maximum period of one year is allowed for drawl of
complete loan. However, HUDCO NIWAS can consider extension of one more year at its
discretion provided the total disbursement period does not exceed two years from the date
of offer.

Recovery

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

Pre-EMI Interest
Pre-EMI interest is the interest levied on the disbursed amount prior to start of EMI. The
Pre-EMI interest would be levied till the time Emi does not start.

EMI
The due date of the EMI is the last date of the month. It has to be ensured by the branch
offices that all the payments come regularly. The bifurcation of EMI into principal and
interest shall be done every month after the bank gives credit and a credit voucher shall
be prepared for each EMI receipt only after encashment of cheques/drafts etc.

Penal interest:

Penal interest shall be levied @ 0.25% per month on the outstanding amount until the
time the defaulted amount is received. In case of default in repayment of EMI/PEMI,
incidental charges, penal interest, interest and principal have to be recovered in that order.
This would mean that penal interest would be recovered first followed by interest and
then principal amount.

Reasons For Default

A few possible reasons for default are enumerated below:

• Initial financial problem after construction/ External borrowing
• Sickness/ Marriage/ Family problems
• Builder problem/Incomplete house
• Non-deduction from salary by the employer/ remittance problem
 • Strike/ Temporary job dislocation
• Loss of employment
• Business problems
• Employed at first, now in business
• Death of borrower/ another member of family
• Natural calamity/ permanent disability
• Intentional defaulter
• Casual attitude
• Service complaints
• Negligence/ ignorance of borrower
• Postal delay
• Borrower on leave
• Cheque misplaced by HUDCO NIWAS
• Borrower absconding/ bankrupt

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

• Able and willing

• Unable but willing
• Able but unwilling
• Unable and unwilling

The first category of defaulters is non-intentional. The problem arises here only because
of certain delays/ ignorance/ negligence of borrower or problem with remittance or when
the borrower has proceeded on a long leave without maintaining proper balance in the
bank. The second category of defaulters are willing to pay but are unable to do so
temporarily because of some unforeseen circumstances like death in the family/ marriage/
sickness/ loss of employment/ problems of business etc. These defaulters can easily be
tackled with proper follow -up. The third class of defaulters is most dangerous of the lot
from company's point of view. These defaulters are habitual and intentional defaulters
who divert funds elsewhere for lucrative returns. The credit appraisal has to be very
stringent and effective which could filter these kinds of people at the time of
interviewing/ interaction with the borrower. The appraising officer has to be very clear of
these issues at the time of lending. This category requires rigorous follow-up and pressure
on the borrower. The fourth categories of defaulters, i.e. unable and unwilling are kind of
people who are absconding or have been declared bankrupt and they no longer want to
venture into earning avenues.

Building a good recovery team entails using right people, right techniques, right time and
right degree of proactive approach and reaction. It is worthwhile noting here that
precisely measured dosage of reaction is required to ensure collection of arrears and
maintaining future promptness in repayment by the borrower.

Preventive Measures Of Loan Recovery

The preventive measures for an effective recovery would require following actions:
• Developing an efficient credit evaluation system: The journey of recovery begins
with credit appraisal. The credit evaluation officer should be able to study the
overall financial strength of the borrower employing ratio analysis and other
subjective tools ensuring that there is no undue financial pressure being put on the
borrower because of the proposed loan and that the borrower would be at ease
paying the installments in time. The verification of employment and the letter
from references should be obtained and carefully studied. At the same time, the
legal officer should be able to ensure that sufficient primary security and
additional security is obtained to cover the loan amount. Further, salary, deduction
and other methods to ensure promptness such as PDCs should be taken care of.

• The legal and technical system must be in place:- The legal system should be able
to enforce correct implementation of security creation. A strong legal system acts
as a deterrent to default for fear of consequences. The technical department
should be able to ensure the end usage of funds. It should be able to ascertain that
the loan disbursed has been properly utilized in the property as per the estimates
submitted by the borrower under regulations as stipulated by local authorities. An
effective legal and technical system provides the entire necessary weapon to the
recovery department.

• There should be a proper codification system in place. Proper action codes and
follow-up response codes, reasons for default code, observation codes should be
developed which come in handy at the time of visit or follow-up.
 • There should be a focused follow-up based on repayment commencement date
and high value loans.

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

To keep him abreast of the latest recovery position.

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

Corrective Measures

As they say, prevention is better than cure, the preventive measures if taken care off
properly, the corrective I curative measures for recovery would not be required at all.
However, a few of the corrective measures are described below:-

1. Installing a recovery system:

The recovery function is a very structured function that requires people with strong
interpersonal skills who are persuasive and good negotiators and deal the situation with
firmness and tactfulness. As mentioned earlier, a precisely measured dosage of reaction is
required to ensure collection of arrears and maintaining future promptness in repayment
by the borrower. The staff and the officer designated for the purpose should be able to
clearly understand the organizational objective. The required software support for the
same would be provided and training needs of such personnel would be taken care of.

Recovery Techniques

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

installment of one particular month has not been received, a letter should be
generated on 5th of subsequent month. The letter should be polite, straightforward
and concise with an attempt to get desired response. The letter should be sent by
courier/ registered post. Different formats should be designed for different
categories of defaulters. When sending reminders, the reminders should be linked
to the original letter.

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

recovery. At the same time, it saves time and energy. While making a telephone
call, the concerned officer should have all data on hand and up to date position of
 the case. As far as possible, it should be tried that the borrower gives a promise
about payment on a specified date. The officer should leave a message for the
borrower, in case he is not available at that time. All the observations should be
properly recorded in the action sheet for future reference.

• Telegram: Telegram, as a means of recovery gives a sense of urgency to the

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

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

selectively only after the first few options as mentioned above has been resorted
to with no end result. The Officer making a personal visit should enquire as to
why there was no response to the letters, telegrams, telephone calls etc., and also
for the reasons for the default. The Officer should be polite but at the same time
very firm making the borrower aware of the additional interest and incidental
charges accruing out of non-payment of the arrears. The Officer should also be
persuasive enough to make the borrower aware of loss of creditworthiness that
may have negative impact on his all-future borrowings from us or from other
sources. He should give him an impression that the lending institutions share the
data regarding creditworthiness very frequently. The officer should try for a one
shot clearance but if the same is not possible phased manner of payment should be
suggested wherein the borrower clears at least a portion of the arrears. For
example, if two EMIs are pending in one particular account for non- payment
along with additional interest and incidental charges, the borrower may be
suggested to at least clear off one EMI immediately with a promise to clear the
outstanding at a specified future date.

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

the customer if all the above-mentioned options have been tried with no result.
The letter to be written to the employer should contain the background of the case
requesting the employer to prevail upon the employee for early payment of
arrears. We should also request for deduction at source facility and if that is
 agreed to, a request for extra deductions to clear dues in a phased manner should
be made.

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

warning the customer. The first letter should be sent as a request letter giving him
full details of the dues and the promises made by the Borrower for payment
giving current address and telephone number of the borrower. Normally, a letter
to the guarantor would result in clearing all the dues by the Borrower. However, if
there is no result of the first letter the subsequent letters should explain the
consequences to the guarantor asking the guarantor to clear all the dues.

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

only after warning the customer and the guarantor. It should be clearly understood
here that the referees and the bankers do not have any liability to the loan. We
may only request them to impress upon the borrower to clear our dues indicating
that any loan forwarded by the referee f banker might also go the same way. The
letter should be sent as a request letter giving them full details of the dues and the
promises made by the Borrower for payment.

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

various reasons and the monitoring of the same is a very important tool of
recovery wherein the exact cause of the cheque bouncing is ascertained and
adequate action is taken accordingly.

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

financed property and settle the loan. If possible, we may assist him to liquidate
the property. We can refer the property to any of our prospective customers. In
such a case, we are ensuring that the arrears in that particular account no more
exist, at the same time; we are getting a new customer to take a loan from us.
Alternatively, we can suggest the borrower to borrow from some other source and
clear our loan.

• Action on collateral securities: If there are any collateral securities along with
the primary security, we can go ahead with liquidating the same, if we are left
with no other option for recovery except the legal action.
 • Report generation and default analysis: A proper reporting format for
generation of default analysis has to be developed which should be able to give
details of number of borrowers in arrears, installments outstanding and Principle
loan outstanding in respect of borrowers in arrears.

• Legal action: This is the last resort of recovery wherein all possible options for
physical recovery have been tried time and again with no end result. The legal
action would comprise of cheque bounce notice under section 138 of the
Negotiable Instruments Act within 15 days of cheque bouncing, summary suit in
the court of law within 3 years of receipt of last EMI and /or mortgage suit.

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

by an applicant either due to dishonor of cheque or non receipt of cheque from
employer, the applicant should be immediately contacted and payment against the
dishonored cheque should be collected through bank draft I pay order I cash. In
case of dishonored cheques, the same should not be represented in the bank for
recovery. In cases where the cheques are dishonored more than twice or payment
being not received against dishonored cheques, it is necessary the referees,
bankers, guarantors and employer of the applicant be also intimated besides
taking action as per the loan agreement.

Penalties for Default

Additional interest: Additional interest is levied @ 2.5% per month on the outstanding
amount. The regional office would have no discretion to waive off additional interest in
any case what so ever. The discretion to reduce or waive the additional interest in
deserving cases lies with the HUDCO NIWAS Corporate Office.

Incidental charges: Incidental charges are levied in order to recover the cost incurred for
recovery in making a telephone call, writing a letter, sending a telegram, making personal
visits, man hours, etc. It should be a justified amount internally worked out as per the
actual cost incurred. It should be recorded and levied uniformly. It should act as a
deterrent to the borrower from delaying payments.
 Bulk Loans

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

Rate of Interest
Rate of interest Repayment Period (yrs.)
9.50% Up to 5
9.75% 6 to 10
10.00% 11 to 15

Repayment of Loan

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

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

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

The EMII EQI would be allowed for a fixed term of up to 13 years i.e. 156 months or 52
quarters. In addition to this, a period of 2 years (24 months or 8 quarters) is allowed for
payment of Pre- EMI interest.

It needs to be mentioned that in case state government, etc. opt for EQI, the ultimate
interest incidence would be higher as compared to EMI route.

Security for the Loan

Security for the loan would be either Government guarantee or Bank Guarantee or
Mortgage of property including pass through arrangement of the individual mortgages
held by the employers for the entire loan. An undertaking from the State Governments /
Para statals of State Governments / Public Sector Undertakings for payment of total
amount of EMI every month irrespective of recovery from the salary of concerned
employees has also to be taken. The Government would retain individual mortgage in
such cases. In addition, the borrowers will also give an undertaking for making budgetary
provisions every year. Further, the borrower will also take insurance cover for the entire
loan amount and benefits of such insurance cover will have to be assigned in favor of
HUDCO.
The format of Government guarantee will require "mutatis mutandis changes depending
upon the facts of the case I terms and conditions of loan". Accordingly, necessary
changes, if any, required will have to be carried out by the concerned law officer at
HUDCO Branch Offices.

Documentation

a) Loan agreement

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

Processing And Administrative Charges

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

application. Sanction letter:

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

letter.

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

Utilization of Loan

A certificate will have to be obtained from the borrower regarding utilization of loan
amount for giving House Building Advance to their employees. In addition, list of their
employees who have availed House Building Advances will have to be obtained from the
borrower indicating name, address of the property, cost of house / flat, loan amount, gross
salary etc.

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

Sanction Note for Bulk Loans

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

Non-Resident Indian (NRI)

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

1. Non-Resident Indian Nationals (i.e. Indian passport holders only) who stay abroad
employment or for carrying on business or vocation outside India or for any other
purpose in circumstances indicating an indefinite period of stay abroad;
Or
2. Government servants who are posted abroad on duty with Indian Missions and sir
other agencies set up abroad by the Government of India where the officials draw I
salaries out of Government resources;
Or

3. Government servants deputed abroad on assignments with foreign Government

Regional/International agencies like the World Bank, International Monetary Fund (I
World Heath Organization (WHO) etc.;
Or
4. Officials of the State Governments and Public Sector Undertakings deputed abroad;
temporary assignments or posted to their branches or offices abroad.
Purpose of Loan

HUDCO NIWAS offers loan assistance to NRI's to:

• Construct a house;
• Buy a house or flat;
• Purchase a plot- from Public Agencies.

Eligibility for loan and how it is determined:

a) An applicant must be in service or engaged in any profession or business with
income for servicing the loan.
b) The loan amount will not exceed 85% of the cost of housing unit including
incidental costs like stamp duty and registration. The maximum loan amount will
be Rs. 50 lacs for purchase or construction of house/flat or
extension/improvement and Rs. 15 lacs for purchase of plot.
c) The actual loan amount will be determined on the basis of repayment capacity.
Repayment capacity takes into account factors such as income, age,
qualifications, number of dependents, spouse's income, assets, liabilities, stability
and continuity of occupation, savings history, and alternate employment prospects
on return to India.

Loan Application

a) An application for loan shall be submitted in any "HUDCO NIWAS" -Office in the
prescribed form along with supporting documents.
b) Proposed owners of the housing unit for which loan in sought will have to be co-
applicants. However, all co-applicants need not be co owners.
d) The applicant can also appoint a power of attorney in India and the power of
attorney should be executed as per the draft provided by HUDCO. This draft is
available at any HUDCO NIWAS Office.
Rate of Interest

Fixed rate scheme

Purpose of Loan Loan limit Rate of Interest Repayment
period (yrs.)
Construction/purchase/composite 100,00,000 9.75%/10.00% Upto 5/10
loan
Purchase of plot 100,00,000 9.75%/10.00% Upto 5/10
Extension/improvement 100,00,000 9.75%/10.00% Upto 5/10

Floating rate scheme

Purpose of Loan Loan limit Rate of Interest Repayment
period (yrs.)
Construction/purchase/composite 100,00,000 9.50% Upto 20
loan
Purchase of plot 100,00,000 9.50% Upto 20
Extension/improvement 100,00,000 9.50% Upto 20

Loan Repayment Period

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

period will not extend beyond the age of 65 years of the applicant. However,
"HUDCO NIWAS" will endeavor to determine the repayment period to suit the
convenience of the applicant.

• The repayment period is up to 10 years for purchase of plots but the period will
not extend beyond the age of 65 years of the applicant.

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

which should not extend beyond the age of 65 years of the applicant.
Security for the Loan
Security for the loan is the first equitable mortgage of the housing unit to be financed
normally by way of deposit of title deeds and or such other collateral security as may be
necessary. Title of the property should be clear, marketable & free from encumbrance. In
all cases the applicant will be required to provide guarantee of one individual acceptable
to HUDCO NIWAS. Lien on borrower's other assets in India may also be required.
Collateral or Interim security could be assignment to HUDCO of life insurance policies,
the surrender value of which is at least equal to the loan amount, and such other
investments that are acceptable to HUDCO such as NSCs, UTI Units, etc.

Fee
A one-time fee of 1.25% of the loan amount applied for is to be paid when the application
form is submitted to HUDCO NIWAS.
REGIONAL DISTRIBUTION OF OPERATIONS
HUDCO NIWAS has divided the country wide business into 6 zones viz: east zone, north
zone, northeast zone, northwest zone, south zone and west zone.

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

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

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

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

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

.
 Details of HUDCO NIWAS application including individual and bulk
loan
as on 31
may 2010
(Rs in crores)
CUMULATIVE CURRENT YEAR
Zonal office Offices No of No of loan Repayment No of No of loan Repayment
application Amount disbursed Amount Amount application Amount disbursed Amount Amount
East zone Bhuwaneshwar 220527 1115.04 180482 912.74 8.28 17 0.49 18 0.52 7.72
Calcutta 2153 27.14 1040 21.43 5.31 113 2.45 103 2.19 3.15
Patna 98 2.96 86 2.54 0.25 3 0.06 3 0.07 0.12
Ranchi 109 3.49 65 2.11 0.24 3 0.07 4 0.09 0.19
222887 1148.63 181673 938.82 14.08 136 3.07 128 2.87 11.18

North zone Dehradun 38 0.86 34 0.7 0.14 4 0.09 2 0.07 0.14

Delhi 1956 67.44 1588 54.36 21.92 11 0.38 9 0.22 12.76
Jaipur 50145 103.16 50114 102.42 3.69 1 0.02 4 0.03 3
Lucknow 236 5.51 176 3.94 1.52 5 0.11 10 0.17 0.89
52375 176.97 51912 161.42 27.27 21 0.6 25 0.49 16.79

North East Guwahati 28919 430.95 18245 283.42 31.19 52 1.35 60 1.62 17.71
zone Kohima 36 1.21 16 0.34 0 0 0 2 0.04 0
28955 432.16 18261 283.76 31.19 52 1.35 62 1.66 17.71

North West Chandigarh 17982 413.06 17848 409.19 23.1 12 0.39 3 0.06 9.17
zone Jammu&Kashmir 10 0.17 8 0.14 0.03 0 0 0 0 0.02
409.
17992 413.23 17856 33 23.13 12 0.39 3 0.06 9.19

214.
South zone Bangalore 22576 251.75 21765 9 22.12 32 1 24 1.37 10.89
calicut 487 10.22 452 8.59 1.17 23 0.4 39 0.38 0.99
516.
Chennai 18161 532.27 18185 17 138.84 242 7.86 341 6.93 120.62
 82.1
Hyderabad 2504 89.95 2360 3 33.16 41 1.73 66 1.68 22
13.2
Kochi 708 14.77 650 4 2.02 2 0.04 2 0.02 0
440.
Trivendrum 31275 442.26 31247 09 6.49 28 0.74 50 0.7 3.68
Vijayawada 364 12.09 357 9.31 1.74 37 1.51 40 1.13 1.58
Vishakhapatnam 295 8.45 274 7.5 0.3 4 0.09 14 0.44 0.29
1291
76370 1361.76 75290 .93 205.84 409 13.37 576 12.65 160.05

10.7
West zone Ahmedabad 613 11.08 596 9 5.5 2 0.04 0 0 4.78
16.7
Bhopal 1178 19.9 1096 1 2.64 2 0.05 2 0.02 1.47
353.
Mumbai 14391 407.29 12709 99 6.05 1 0.02 2 0.03 2.85
Raipur 64 1.58 54 1.27 0.39 4 0.1 2 0.04 0.38
382.
Total 16246 439.85 14455 76 14.58 9 0.21 6 0.09 9.48

Details of HUDCO NIWAS application on bulk loan

as on 31 may 2010
 (Rs in
crores)
CUMULA
TIVE CURRENT YEAR
No of No of
Zonal office Offices schemes No of loans No of No of No of loan
disb
urse Amo
application approved Amount d unt schemes application Amount disbursed Amount
180
East zone Bhuwaneshwar 4 220000 1100 000 900 0 0 0 0 0
Calcutta 1 1000 2 0 0 0 0 0 0 0
Ranchi 0 0 0 0 0 0 0 0 0 0
180
5 221000 1102 000 900 0 0 0 0 0

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

500
Jaipur 1 50000 100 00 100 0 0 0 0 0
Lucknow 0 0 0 0 0 0 0 0 0 0
500
1 50000 100 00 100 0 0 0 0 0

173
North East Guwahati 6 27587 395 47 260 0 0 0 0 0
zone Kohima 0 0 0 0 0 0 0 0 0 0
173
6 27587 395 47 260 0 0 0 0 0

175
North West Chandigarh 4 17500 400 00 400 0 0 0 0 0
zone Jammu&Kashmir 0 0 0 0 0 0 0 0 0 0
175
4 17500 400 00 400 0 0 0 0 0
 192
South zone Bangalore 3 19651 183 97 158 0 0 0 0 0
calicut 0 0 0 0 0 0 0 0 0 0
140
Chennai 4 14000 400 00 400 0 0 0 0 0
300 410.
Trivendrum 1 30000 410.68 00 68 0 0 0 0 0
Vijayawada 0 0 0 0 0 0 0 0 0 0
Vishakhapatnam 0 0 0 0 0 0 0 0 0 0
632 968.
8 63651 993.68 97 68 0 0 0 0 0

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

Bhopal 0 0 0 0 0 0 0 0 0 0
120
Mumbai 2 13700 388 00 337 0 0 0 0 0
Raipur 0 0 0 0 0 0 0 0 0 0
 ANALYSIS

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

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

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

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

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

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

Opportunities

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

• With expectations of adequate monsoon, the demand for housing is expected to

rise consistently. Of a shortage of 40 million units, considerable demand is from
the semi-urban and rural areas.

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

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

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

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

Threats

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

Strengths

• The main strength of the company is that it accepts a second mortgage, which
is usually not accepted by other HFC’S. As a result customers who have already
taken the HBA from their department can get additional loan from HUDCO.
• The company has wide network of branches including one in Nagaland and other
far of places, thus having access to large number of people.
• The company provides a lot of flexibility as loan is given to a person at a place
where he is working even if the property for which the loan is taken is situated at
a different place.
• The transparent working helps in making the goodwill of the company as no
hidden costs are involved.
• Personal attention is given to each and every customer enabling them to
understand the complexities of the calculation and procedure involved.
• The company also gives free consultancy services for the cost effective methods
of construction.
• The company also enables customers to change the branch easily in case of their
transfers and thus is usually preferred by people having transferable jobs.
• As a result of its social mandate, HUDCO also does rural housing finance.

Weaknesses

• The company does a good business in Delhi and NCR. However there is only one
office in the whole region catering to the needs of many people.
• The company is lacking on the technological front as a result paperless work is
not possible, which in turn increases the workload of employees and also services
to be provided to the valued customer.
• The publicity and advertisement campaign of the company can be improved to
increase the awareness among the general public.
• There is no slab in case a person takes a loan in fixed rate; As a result people
taking loan for shorter period are not benefited.
• The rate of interest is comparatively higher than the market rates.
• The decision-making is centralized which in turn increases the response time.
 CRITICAL ANALYSIS OF HUDCO NIWAS

Financial Overview

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

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

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

Reducing the Cost of Funds

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

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

Marketing Overview

The housing finance industry, encompassing banks and housing finance companies
(HFCs), has exhibited an average growth rate of around 35% in the last fiscal. This year
too, a robust growth is expected. However, the high growth potential of the sector has
invited numerous players bringing with them furious competition. HFCs, domestic banks-
public as well as private and even foreign banks have joined the bandwagon and are
aggressively marketing their products. The last six months or so has seen a series of rate
cuts by almost all the companies. Currently, the interest rates vary between 8.25%-9.50%
for fixed and floating rates and for different loan terms. Companies are now offering the
basic home loan product with top ups like free insurance, innovative schemes like home-
saver and promising enhanced service quality coupled with all round advertising force to
capture a share of this burgeoning market. In such a situation, a flat rate of 9.5% and
hardly any aggression in marketing is going to make a dent in the business of HUDCO
NIWAS.

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

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

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

HUDCO NIWAS is known more in the government employees’ circles and lower or
lower middle income groups. It has low brand recall and is not seen as high quality
service providers or as product innovators. There is a need to change the customer
perception. One way to accomplish the change is to project HUDCO NIWAS as a
provider of “complete housing solution” and not just a home loan scheme. It should
become a one-stop shop providing all kinds of housing solutions under one roof.
Developing the advisory and consultancy services in housing and housing finance to help
in locating the appropriate property and house. It needs to develop business relationships
with real estate developers to achieve this objective. Besides this, it has to provide
advisory service in housing finance as regards type of interest rate (fixed, floating, both),
manner of payment, term of loan, etc.
HUDCO NIWAS also needs to improve its services markedly. According to the survey
earlier mentioned in the project, customers give a lot of emphasis on the time taken for
sanction of the loan. The average number of days taken by HUDCO NIWAS is 7-10
days, which is considerably higher than what the major players take (3-4 days). The other
point to take heed of is that the customer should be asked to visit the office as
infrequently as possible during the sanction and disbursement process. In this way,
customer satisfaction can be enhanced.

Advertising

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

Radio

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

Television

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

Print

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

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

Word of Mouth

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

Improving Internal Processes at HUDCO NIWAS

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

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

Rigorous training, implementation of the code of conduct and higher standards of

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

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

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

The organizational objective of HUDCO is different from HUDCO NIWAS. The

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

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

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

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

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

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

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

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

Article 1 -Definitions
1.1 In this Agreement unless the context otherwise requires:

(a) The term "Schedule" means the Schedule written after Article 11 of this Agreement.
(b) The term "Loan" means the loan amount provided for in Article 2.1 of this Agreement
and the
Schedule.
(c) The term "Repayment" means the repayment of the principal amount of loan interest
thereon, commitment and/or any other charges, premium fees or other dues payable in
terms of this Agreement to HUDCO; and means in particular, amortisation provided for
in Article 2.6 of this Agreement.
(d) The term "Prepayment" means premature repayment as per the terms and conditions
laid down by HUDCO in that behalf and in force at the time of prepayment.

(e) The expression "Rate of interest" means the rate of interest referred to in Article 2.2 of
this Agreement.
(f) The expression "Concessional rate of interest" means the concessional rate of interest
arrived at by suitably adjusting the rate of interest or the increased rate of interest as per
provisions to Article 2.2 as the case may be to give effect to the interest concession, the
borrower is entitled to according to the rules of HUDCO in that behalf as in force from
time to time.
(g) The expression "Equated Monthly Instalment" (EM) means the amount of monthly
payment necessary to amortise the loan with interest over the period of the loan.
(h) The expression "Pre Equated Monthly Instalment Interest" (PEMII)means interest at
the rate indicated in Article 2.2, on the loan from the date/respective dates of
disbursement to the date immediately prior to the date of commencement of EMI.
1.2 The term "Borrower" wherever the context so requires shall mean and be
construed as "Borrowers" and the masculine gender wherever the context so
requires shall mean and be construed as the feminine gender.
1.3 Subject to context thereof the expression "Property" shall mean and include land.

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

Article 2: Loan, Interest, etc

2.1 Amount of Loan

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

2.2 Interest
(a) The rate of interest applicable to the said loan will be both fixed rate and floating rate
in ratio of 1:1 , so as to reduce the risk of borrower. .
Provided further that from time to time HUDCO may in its sole discretion increase the
rate of interest suitably and prospectively if unforseen or exceptional or extraordinary
changes in the money market conditions take place during the period of the agreement
and hence- forth the rate of interest increased as aforesaid shall be applicable to the said
loan under floating rate HUDCO shall be the sole judge to determine whether such
conditions exist or not.
(b) The Borrower shall reimburse or pay to HUDCO such amount as may have been paid
to payable by HUDCO to the Central or State Government on account of any tax levied
on interest (and/or other charges including PEMII) on the loan by the Central or State
Government. The reimbursement or payment shall be made by the borrower as and when
called upon to do so by HUDCO.
2.3 Computation of Interest
The EMI comprises of principal and interest calculated on the monthly rests at the rate
applicable, if any, and is rounded off to the next rupee. Interest and any other charges
shall be computed on the basis of a year of three hundred and sixty five days.
2.4 Details of Disbursement
The loan shall be disbursed in one lumpsum or in suitable instalments to be decided by
HUDCO with reference to the need or progress of construction (which decision shall be
final and binding on the borrower). The borrower hereby acknowledge the receipt of the
loan disbursed as indicated in the Receipt hereinbelow.
2.5 Mode of Disbursement
All payments to be made by HUDCO to the borrower under or in terms of this
agreement shall
be made by cheque duly crossed and marked II A/c payee only" and the collection
charges, if any, in respect of all such cheques will have to be borne by the borrower and
the interest on HUDCO loan will begin to accrue in favour of HUDCO as and from the
date of delivery/despatch of the cheque irrespective of the time taken for
transit/collection/realisation of the cheque by the borrower or his bank.
2.6 Amortisation
(a) Subject to Article 2.2 the borrower will amortise the loan as stipulated in the Schedule
subject however that in the event of delay or advancement of disbursement for any reason
whatsoever, the date of commencement of EMI shall be the first day of month following
the

month in which, the disbursement of the loan will have been completed and consequently
the due date of payment of the first EMI shall in such a case be he last day of the said
following month.
(b) In addition to (a) above, the borrower shall pay to HUDCO PEMII every month, if
applicable. The borrower shall also make balloon payment, as required.
(c) Notwithstanding what is stated in Article 2.6 (a) above and in the Schedule, HUDCO
shall have the right at any time or from time to time to review and reschedule the
repayment terms of the loan or of the outstanding amount thereof in such manner and to
such extent as HUDCO may in its sole discretion decide. In such events the borrower
shall repay the loan or the outstanding amount thereof as per the revised Schedule as may
be determined by HUDCO in its sole discretion and communicated to the borrower by
HUDCO in writing.
(d) The borrower shall in his own accord send to HUDCO a statement of his income
every year from the date hereof. However, HUDCO shall have the right to require the
borrower to furnish such information/documents concerning his employment, trade,
business or profession at any time and the borrower shall furnish such
information/documents immediately.
2.7 Delay in Payment of EMI, PEMII etc.
a) One notice,reminder or intimation will be given to the borrower regarding his
obligation to pay EMI or PEMII regularly payment of EMI/PEMII
(b) The delay in payment of EMI or PEMII shall render the borrower liable to pay
additional interest at the rate of 30 per cent per annum or at such higher rate as per rules
of HUDCO in that behalf as in force from time to time. In such event, the borrower shall
also be liable to pay incidental charges and costs to HUDCO.
2.8 Pre-Payment

HUDCO may, in its sole discretion and on such terms as to pre-payment charges, etc., as
it may prescribe, permit acceleration of EMIS or prepayment at the request of the
borrower.
2.9 Terminal Date for Disbursement
Notwithstanding anything to the contrary contained herein HUDCO shall cancel further
dis-bursement of the loan, if the loan shall not have been fully drawn within 12 months
from the date of the letter of offer.
2.10 Alteration and Re-Scheduling of Equated Monthly Instalments
If the loan is not totally drawn by the borrower within a period of 12 months from the
date of offer, the EMI may be altered and re-scheduled in such manner and to such extent
as the HUDCO may, in its sole discretion, decide and the repayment of the amount
already drawn will be made as per the said alteration and re-scheduling, notwithstanding
anything stated in Article 2.6 and the Schedule.
2.11 Liability of Borrower to be Joint and Several

The liability of the borrower to repay the loan together with interest, etc. and to observe
the terms and conditions of this Agreement and any Agreements, documents that have
been or may be executed by the borrower with HUDCO in respect of this loan or any
other loan or loans is joint and several.
Upon the borrower opting for any scheme or accepting any offer from his employer
providing for any benefit for resigning or retiring from the employment prior to
superannuation, or upon the employer terminating his employment for any reason or
upon any reason whatsoever, then notwithstanding anything to the contrary contained in
this agreement or any letter or document, the entire outstanding principal amount of loan
as well as any outstanding interest and the other dues thereon shall be payable by the
borrower to HUDCO from the amount or amounts receivable by him from the employer
under such scheme or offer, or any terminal benefit, as the case may be. Provided,
however, in the event of the said amount or amounts being insufficient to repay the said
sums of HUDCO in full, the unpaid amount remaining due to HUDCO shall be paid by
the borrower in such manner as HUDCO may in its sole discretion decide and payment
will be made by the borrower accordingly notwithstanding anything stated in Article 2.6
and the Schedule.
The borrower hereby irrevocably authorises HUDCO to communicate with and receive
the said amount from his employer directly.

Article 3 –Security
3.1 Security for the Loan by Mortgage of Property
The borrower agrees and undertakes that the principal sum of the loan, interest, and other
charges and any other dues under this Agreement shall be secured by mortgage of the
property described in the Schedule (hereinafter referred to as "the property") and
HUDCO shall have the right to decide, in its sole discretion, the type of mortgage or any
other security and/or additional security it may require and the borrower shall be bound to
execute the mortgage accordingly and furnish any such other or additional security as
required by HUDCO.
The borrower shall comply with the following :
(a) To give a declaration to the effect that the borrower has a clear and marketable title to
the property offered as security, free from reasonable doubts and encumbrances, and that
the borrower indemnifies and keeps HUDCO saved and harmless against any risk
whatsoever.
(b) To execute a demand promissory note in favour of HUDCO for the amount of the
loan.
(c) To any execute any such agreement/s document/s, undertaking/s that may be required
now or thereafter at any time during the pendency of this loan/ or any other loan or loans
granted by HUDCO hereafter.

Article 4- Conditions Precedent to Disbursement Of the Loan

(a) Utilisation of Borrower-s Contribution
The borrower assures HUDCO that he has prior to receiving the disbursement of the loan
this day as aforesaid utilised his own contribution i.e. cost of the property less HUDCO
loan.
(b) Title
The borrower assures HUDCO that he has aboslute, clear and marketable title to the
property to be mortgaged by him as security for the loan and that the said property is
absolutely unencumbered and free from any liability whatsoever.
4.2 Other Conditions for Disbursement
The obligation of HUDCO to make any disbursements under the Loan Agreement shall
also be subject to the conditions that:
(a) Non-existence of Event of Default
No event of default as defined in Article 7 shall have happened.
(b) Evidence for Utilisation of Disbursement
Such disbursement shall at the time of request there for be needed immediately by the
borrower for the purpose of purchase or construction of the property as the case may be
and the borrower shall produce such evidence of the proposed utilisation of the proceeds
of the disbursement as is found satisfactory by HUDCO.

(c) Extra-ordinary Circumstances

No extra-ordinary or other circumstances shall have occurred which shall make it
improbable for the borrower to fulfil his obligation under the Agreement.
(d) Utilisation of Prior Disbursement
The borrower shall have satisfied HUDCO about the utilisation of the proceeds of any
prior disbursements.
(e) Pending Legal Proceedings
The borrower shall have furnished a declaration to effect that there is no action, suit,
proceedings or investigation pending or to the knowledge of the borrower threatened by
or against the borrower before any court of Law or Government authority or any other
competent authority which might have a material effect on the financial and other affairs
of the borrower or which might put into question the validity or performance of this loan
agreement or any of its terms and conditions.

Article 5 –Covenants
5.1 Particular Affirmative Covenants
(a) Utilisation of Loan
The borrower shall utilise the entire loan for the purchase/construction of the property as
indicated by him in his application and for no other purpose whatsoever.

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

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

(d) Maintenance of property

The borrowers shall maintain the property in good order and condition and will make all
necessary additions and improvements thereto during the pendency of the loan.
(e) To notify change in employment etc.
The borrower shall notify any change in his employment, business or profession within
seven days of the change.
(f) Compliance with rules etc. and payment of maintenance charges etc.
The borrower shall duly and punctually comply with all the terms and conditions for
holding the property and all the rules an9 regulations, bye-laws etc., of the concerned Co-
operative Society, Association, Limited Company or any other Competent Authority, and
pay such maintenance and other charges for the upkeep of the property as also any other
dues etc. as may be payable in respect of the said property or the use thereof.
(g) Loss or damage by uncovered risks
The borrower shall promptly inform HUDCO of any loss or damage to the property
which the borrower may suffer due to any force majure or act of God such as flood,
storm, typhoon, tempest, earthquake etc. against which the property may not have been
insured.
(h) Insurance
Notwithstanding what is herein before stated, HUDCO shall get the house/flat including
constructions/structure insured against fire, earthquake, cyclone, flood, storm, typhoon
and riots and HUDCO shall be the sole beneficiary under the policy, for a value
equivalent to the loan amount outstanding or cost of house/flat, whichever is less and the
cost of such policy shall be borne by HUDCO. In case any portion of the cost of the
house/flat remains uncovered in the insurance policy to be taken by HUDCO, the
borrower shall obtain additional policy as his cost covering all risks as stated above. How
ever the borrower has to pay half the cost in this scheme.

5.2 Notify additions, alterations etc.

The borrower shall notify and furnish details of any additions or alterations in the
property or the user of the property, which might be proposed to made during the
pendency of the loan.
5.3 HUDCO's right to inspect
The borrower agrees that the HUDCO or any-person authorised by it shall have free
access to the property for the purpose of inspection/supervising and inspecting the
progress of construction and the accounts of construction to ensure proper utilisation of
the loan.
The borrower further agrees that HUDCO shall have free access to the property for the 1
purpose of inspection at any time during the pendency of loan. .
Negative Covenants
Unless HUDCO SHALL OTHERWISE AGREE:
(a) Possession
The borrower shall not let out or otherwise howsoever part with the possession of the
property or any part thereof.
(b) Alienation
The borrower shall not sell, mortgage, lease, surrender or otherwise however alienate the
property or any part thereof.
(c) Agreements and Arrangements
The borrower shall not enter into any Agreement or Arrangement with any person,
institution or local or Government body for the use, occupation or disposal of the said
property or any part thereof during the pendency of the loan.
(d) Change of use
The borrower shall not change residential use of the property. If the property is used for
any purpose other than residential purpose, in addition to any other action which HUDCO
might take, HUDCO shall be entitled to charge, in its sole discretion, such higher rate of
interest as it might fix in the circumstances of the case.
(e) Merger
The borrower shall not amalgamate or merge his property with any other adjacent
property nor shall he create any right of way or any other easement on the property.
(f) Surety or Guarantee
The borrower shall not stand surety for anybody or guarantee the repayment of any loan
or the purchase price of any asset.
(g) Leaving India
The borrower shall not leave India for employment or business or for long term stay
abroad without fully repaying the loan then outstanding together with interest and other
dues/ charges including prepayment charges as per the rules of HUDCO then in force.

Article 6 -Borrower's Warranties

6.1 The Borrower hereby warrants and undertakes to HUDCO as follows:

(a) Confirmation of loan application
The borrower confirms the accuracy of the information given in his loan application
made to HUDCO and any prior or subsequent information or explanation given to
HUDCO in this behalf.
(b) Disclosure of material changes
That subsequent to the said loan application there has been no material change which
would affect the purchase/construction of the property or the grant of the loan as
proposed in the loan application.
(c) Charges and encumbrances
That there are no mortgages, charges, lispendens or liens or other encumbrances or any
right of way, light or water or other easements or right of support on the whole or any
part of the property.
(d) Litigation
That the borrower is not a party to any litigation of a material character and that the
borrower is not aware of any facts likely to give rise to such litigation or to material
claims against the borrower.

(e) Disclosure of defects in property

That the borrowers is not aware of any document, judgement or legal process or other
changes of any latent or patent defect affecting the title of the property or of any material
defect in the property or its title which has remained undisclosed and/or which may affect
HUDCO prejudicially.
(f) Public schemes affecting borrower's property
That the borrower's property is not included in or affected by any of the schemes of
Central/State Government or of the Improvement Trust or any other public body or local ,
authority or by any alignment, widening or construction of road under any scheme of the
Central/State Government or of any Corporation, Municipal Committee, Gram
Panchayat, etc.
(g) Infringement of local laws
That no suit is pending in the Municipal Magistrate's Court or any other Court of Law in
respect of the property to be mortgaged with HUDCO nor has the borrower been served
with any Notice for infringing the provisions of Municipal Act or any Act relating to
local bodies or Gram Panchayats or Local Authorities or any other process under any of
these Acts.
(h) Disclosure of facts
That the borrower has disclosed all facts relating to his property to HUDCO and has
made available to them all the title deeds in his possession.

(i) Due payments of public and other demands

That the borrower has paid all public demands such as Income Tax and all other taxes
and revenues payable to the Government of any State or to any local authority and that at
present there are no arrears of such taxes and revenues due and outstanding.
j) It shall be the borrower's obligation to keep himself acquainted with the rules of
HUDCO, herein referred to, in force from time to time.

Article 7 -Remedies Of HUDCO

If one or more of the events specified in this Article (hereinafter called "events of
default") shall have happened, then, HUDCO by a written notice to the borrower may
declare the principal of and all accrued interest on the loan that may be payable by the
borrower under or in terms of this Agreement and/or any other Agreements, documents
subsisting between the borrower and HUDCO, as well as all other charges and dues to be
due and upon such declaration the same shall become due and payable forthwith and the
security in relation to all loans shall become enforceable, notwithstanding anything to the
contrary in this Agreement or any other Agreements or documents.
7.1 Events of Default
(a) Payment of Dues
Default shall have occurred in payment of EMls and/or PEMII and in payment of any
other amount due and payable to HUDCO in terms of this Agreement and/or in terms of
any other Agreements, documents that may be subsisting or that may be executed
between the borrower and HUDCO hereafter.

(b) Performance of Covenants

Default shall have occurred in the performance of any other covenants, conditions or
agreements on the part of the borrower under this Agreement or any other Agreements
between the borrower and HUDCO in respect of this loan and for any other loan and such
default shall have continued over a period of 30 days after notice thereof shall have been
given to the borrower by HUDCO.
(c) Supply of misleading information
Any information given by the borrower in his loan application to HUDCO for financial
assistance is found to be misleading or incorrect in any material respect or any warranty
referred to in Article 6 is found to be incorrect.
(d) Inability to pay Debts
If there is reasonable apprehension that the borrower is unable to pay his debts. or
proceedings for taking him into insolvency have been commenced.
(e) Depreciation of Security
If the property given as security depreciates in value to such an extent that in the opinion
of HUDCO, further security to the satisfaction of HUDCO should be given and such
security is not given in spite of being called upon to do so.
(f) Sale or disposal of Property
If the borrower's property which is given as security for the loan is sold, disposed of,
charged, encumbered or alienated.
(g) Attachment or Distraint on mortgaged Properties
If an attachment or distraint is levied on the mortgaged property or any part thereof
and/or certificate proceedings are taken or commenced for recovery of any dues from the
borrower.
(h) Failure to furnish information/documents
If the borrower fails to furnish information/documents as required by HUDCO under the
provisions of Article 2.6 (d).
7.2 Bankruptcy or Insolvency
If the borrower shall become Bankrupt or insolvent, the principal of and all accrued
interest on the loan and any other dues shall thereupon become due and payable
forthwith, anything in this Agreement to the contrary notwithstanding.
7.3 Notice to HUDCO on the happening of an event of Default
If any event.of default or any event which after the notice or lapse of time or both would
constitute an event of default shall have happened, the borrower shall forthwith give
HUDCO notice thereof in writing specifying such event of default, or such event.
7.4 Expenses of preservation of assets of the borrower and of collection
All reasonable costs incurred by HUDCO after an event of default has occurred in
connection with: (i) Preservation of the borrower's assets (whether now or hereafter
existing) or (ii) Collection of amounts due under this Agreement or (iii) Litigation, may
be charged to the borrower and reimbursed as HUDCO shall specify.

Article 8 -Waiver

Waiver not to impair the Rights of HUDCO

No delay in exercising or omission to exercise, any right, power to remedy accuring to

HUDCO upon any default under this Agreement, mortgage deed or any other Agreement
or document shall impair any such right, power or remedy or shall be construed to be a
waiver thereof or any acquiescence in such default, or shall the action or inaction of
HUDCO in respect of any default; or any acquiescence by it in any default, affect or
impair any right, power of HUDCO in respect of any other default.

Article 9 -Effective Date of Agreement

Agreement to become Effective from the date of Execution

The Agreement shall have become binding on the borrower and HUDCO on and from the
date of execution hereof. It shall be in force till all the monies due and payable to
HUDCO under this Agreement as well as all other agreements, documents that may be
subsisting/executed between the borrower and HUDCO are fully paid.
 Article 10 -Miscellaneous
Place and Mode of Payment by the Borrower

All monies due and payable by the borrower to HUDCO under or in terms of this
Agreement shall be paid at the registered office or the concerned regional/branch office
of HUDCO, by cheque or bank draft drawn in favour of HUDCO on a scheduled bank in
the town or city where such registered office/branch/regional office is situated or in any
other manner as may be approved by HUDCO and shall be so paid as to enable HUDCO
to realise the amount sought to be paid on or before the due date to which the payment
relates. Credit for all payments by cheque/bank draft drawn will be given only on
realisation thereof by HUDCO.

10.2 Inspection, Assignments etc.

(a) The borrower shall permit inspection of all books of accounts and other records
maintained by him in respect of the loan, to officers of HUDCO. The borrower shall also
permit similar inspection by officer of such other companies, banks, institutions or bodies
as HUDCO may approve and intimate the borrower.

(b) HUDCO shall have the right to create charge over the property in favour of any
company, bank, institution or body by way of security for any refinance facility or any
loan availed of by HUDCO from such company, bank, institution or body. HUDCO shall
also have the right to transfer or assign the mortgage over the property in favour of any
company bank, institution or body in connection with any sale or transfer of the loan by
HUDCO to them.
{c) HUDCO shall have the authority to make available any information contained in the
loan application form and/or any document or paper or statement submitted o HUDCO
by or on behalf of the borrower and/or pertaining or relating to the loan, to any rating or
other agency or institution or body as HUDCO in its sole discretion may deem fit.

10.3 Service of Notice

Any notice or request or permission to be given or made under this Agreement to

HUDCO or to the borrower shall be given in writing. Such notice or request shall be
deemed to have been duly given or made when it shall be delivered by hand, mail or
telegram to the party to which it is
required or permitted to be given or made at such party's address specified below or at
such other address as such party shall have designated by Notice to the party giving such
notice or making such request:

For HUDCO : Housing & Urban Development Corporation Ltd. HUDCO Bhawan, IHC
Complex Lodi Road, New Delhi-11 0003
For Borrower: Residential address stated in the schedule or the Property address
described in the schedule.
10.4 The Borrower agrees/confirms as follows :
(a) HUDCO may return the documents of title to either/any of the borrowers
notwithstanding any contrary advice/intimation from either/any of the borrowers at a later
date.
(b) To keep alive the Insurance Policy/Policies assigned in favour of HUDCO b1 paying
on
time the premium as they fall due and produce the receipts to HUDCO as reuired in terms
of Article 5.1 of this Agreement.
(c) HUDCO shall have the right to receive and adjust any payment that it may receive in
con- nection with any Insurance Policy/Policies against the loan and alter the
amortisation schedule in any manner as it may deem fit notwithstanding anything to the
contrary contained in this Agreement or any other document or paper.
(d) That he has scrutinised and is satisfied with the building plan, commencement
certificate and all the requisite permission pertaining to the property and that the
construction is as per the approved plan and of a satisfactory quality.

Article 11
In case of Central Government employees, notwithstanding anything to the contrary
contained in this agreement

(a) Any reference to own contribution the Borrower shall include the loan availed or to be
availed by the Borrower from the Central Government of India on the terms and
conditions contained in the indenture of mortgage referred hereunder subsisting between
the borrower and the President of India.
(b) All articles having reference to the title to the property offered as security shall be
read and be construed as though the phrase "subject to the first mortgage in favour of the
President of India in terms of the indenture of mortgage deed dated subsisting between
the Borrower and the President of India" was present in the Article.
 OVERVIEW OF HOUSING LOANS OFFERED
BY PROMINENT HFCs

Most of the institutions today offer quite a variety of housing loans to prospective
borrowers.

Loans can be availed for the following purposes:

• Purchase house/ flat.

• Construction of house/ flat.
• Extend, repair, renovate or alter a house/ flat.
• Purchase a plot of land meant for construction of a dwelling unit

Interest rate options:

The borrower has an option of availing the loan either at a fixed rate of interest, which stays
constant throughout the loan period, or at a floating rate of interest where the interest changes
(increases or decreases) depending on changes in the Bank's Term Lending Rate.

LTV is the percentage of the value of property that the lender will provide. The remaining value
of the property will be the owner’s contribution (also called the margin). The usual LTV values
are as shown but differ from one HFC to another.

85% for new house/ flat

85% for old house/ flat
85% for purchase of a plot of land alone
20% for repairs and renovation

Loan amounts

Most lenders are offering loans in the range of 10 million rupees but some go higher. Detailed
description of each loan appears in the schedules comparing loans offered by major HFCs.
Tenure of loans

loan terms vary from 5,10, 15 years generally. Some HFCs are offering adjustable rate loans upto
20 or even 30 years.

Repayment:

The borrowers repay the loan in Equated Monthly Installments (EMIs) comprising
principal and interest. Repayment by way of EMI commences from the month following
the month in which you take full disbursement.

Eligibility and repayment capacity

You can avail a loan if you are 21 years or older and have a steady source of income. Repayment
capacity takes into consideration factors such as income, age, qualifications, number of
dependants, spouse's income, assets, liabilities, stability and continuity of occupation and savings
history
 Documents To Be Provided With Loan Application For Processing

Prospective borrowers will need to furnish the following documents along with the completed
application form:

· Passport size photograph

· Proof of residence
(This applies only to new or non-bank customers, and could be either a PAN identity card, voter
identification card or passport)

· Sale Deed/ Agreement of Sale

· Bank account Statement or passbook, for the last six months

For employees or people in service, you also need to provide:

· Salary certificate and other information, if any, about your repayment capacity

· Form 16 or a copy of the Income Tax Returns for the last 2 years

For self employed and other IT assessees:

· IT returns for the last 3 years· Receipts of advance tax paid

· Any other information about your repayment capacity

In addition to the above mandatory documents, you are also required to furnish one or
more of the following documents wherever applicable:· Letter of allotment from the
housing board or society

· Copy of the approved plan

· Permission for construction

· Copy of the relative order in the case of conversion of agricultural land.

* not required where the house/flat has been constructed by an approved builder
The following schedules elucidate the product offerings of five different HFIs.

• Schedule one compares loans available from different HFIs for purchase of house/flats

• Schedule two compares loans available from different HFIs for Construction of house/
flat.

• Schedule three compares loans available from different HFIs for Extend, repair,
renovate or alter a house/ flat

• Schedule four compares loans available from different HFIs for Purchase a plot of land
meant for construction of a dwelling unit

• Schedule five compares loans available from different HFIs for special NRI schemes

The five HFIs are:

• Hudco Niwas

• LIC housing finance ltd.

• SBI housing finance

• ICICI housing finance

• HDFC
 PERFORMANCE EVALUATION

The performance evaluation takes in to account 6 prominent players who together have
more than 75% of the market share. They are:

• HUDCO NIWAS

• CANFIN HFL

• BIRLA HOME

• HDFC

• LIC HFL

• ICICI HFL

The comparison has been made over a period of last two years. The measure used as
standard for comparison of HFCs is disbursement. All the companies have shown growth
in their disbursement as well as their profit after taxes. On both criteria ICICI HFL leads
the pack in terms of growth in disbursement and PAT. LIC HFL is the second on the
disbursement front.

As far as HUDCO NIWAS is concerned, it has shown growth of 52% in disbursement

over the last year. Since it is not the subsidiary company of HUDCO we have included
profit after tax of HUDCO as a whole. Technically speaking, this PAT is not comparable
with PAT of other HFCs. This is one of the limitations of our study.

In volume terms HDFC is the market leader followed by LIC HFL. But it seems the
growth rate of HDFC has bottomed out. It is not growing at the same rate as the market is
growing.
 TRENDS IN HOUSING FINANCE SECTOR

HOUSING finance stands tall in the financial sector today. Over the last four years, the
business has added story upon story on safe foundations. This has attracted new entrants.

The pace of this growth begs questions. Will the business continue to grow at the same
rate over the next few years? Will the risk related to lending increase? How will the
increased interest of commercial banks and the entry of new competition impact the
housing finance market?

Factors Driving Growth

To find out if the housing finance business will grow at a high rate in the next few years,
it is necessary to study the factors that spurred the growth. Housing finance received a
boost through a combination of growing demand and rising affordability. While the
demand for housing has always been there and will be for a long time to come, its
increased affordability was the real key to growth.

According to HDFC, every rupee spent on housing leads to a 78 paisa increase in Gross
Domestic Product (GDP). The positive fallout of real estate development on industries
such as cement and steel has led the Government to provide a fiscal stimulus for housing
finance over the last few years. Between 2007 and 2010, the Union Budgets provided
significant tax benefits on housing loans, thereby offering fiscal stimulus to savings
towards the construction sector.

Simultaneously, the general level of interest rate has fallen to a low not seen in almost 30
years. With a drop in every percentage point in interest rates on a housing loan, the
affordability of a housing loan increases several fold.

Other than interest rates and tax benefits, another factor that has contributed to increased
affordability is the sharp rise in income levels among sections of urban dwellers. In
absolute terms, the number of people who can afford the purchase of a house has
increased.

Simply put, enhanced affordability has spurred an increase in the demand for housing
loans. The key to high growth rates in the housing finance business will continue to be
affordability. That brings one to the question: Will the housing finance business
continue to grow at the current rate?
 Increasing Affordability

Tax benefits, a low interest rate regime and high salary levels among certain sections are
likely to continue, thereby fuelling fast growth. For instance, the underlying message of
the last Union Budget was that tax benefits for a housing loan would remain a priority,
while that for investment avenues such as small savings schemes would be gradually
scaled down. At the individual level, the scale-down in tax incentives for savings has
nudged more people towards real estate. Regardless of what happens to the Budget
proposals in Parliament, tax benefits for housing finance are likely to be structured such
that it ensures investment in a house.

The Reserve Bank of India is clear about its desire to maintain a soft interest rate
regime (The trend is clearly visible in the graph that follows). While the interest rate may
rise due to temporary developments, there will a concerted push to nudge the interest
rates lower in the near future. Low interest rates are here to stay, and thereby act as a
stimulus for housing demand. The graph predicts further lowering in interest rates in the
near future.

INTEREST RATE TRENDS

14.00%

13.00%

12.00%
11.50%

10.00% 10.75%
INTEREST RATES

8.00%
8.25%

6.00% 7.50%

4.00%

2.00%

0.00%

2000
2001
2002 S1
YEAR 2003
2004
A sharp growth in select salaries has played an important role in making a house
affordable. Regardless of salary levels, if one were to approach the issue from another
angle, affordability will increase if the cost of a house comes down. There is reason to
believe that we are witnessing a gradual movement toward loosening restrictions that
increase the cost of a house.

To get an idea of how expensive real estate in India is, consider the following conclusion
in a McKinsey report released recently: "Scarcity has helped make Indian land prices the
highest among all Asian nations relative to average income. To a significant extent,
scarcity in India has been caused by illogical regulations. The government has begun to
slowly repeal regulations that hinder real estate development, and there is reason to
believe that the cost of a house relative to average income may decrease over the coming
decade”.

New Dynamics

An important development in the housing finance business has been the entry of new
players. The relatively low risk in a housing portfolio has spurred new entrants in the last
few years. Arguably, the most significant entrant has been ICICI Home Finance. Among
non-banking finance companies, Sundaram Finance and Tata Finance launched housing
finance subsidiaries in the recent past, while banks are effectively competing with
seasoned HFCs.

The entry of new players and the consequent increase in competition has been followed
by an interesting trend. The interest rates of most housing finance companies (HFCs)
move in unison, thereby suggesting that interest rate is not likely to be a competitive tool.
The high level of competition has made it impossible for an HFC, with branches across
the country, to charge an interest rate higher than what the competition charges.
Commercial banks are an exception to the rule in the sense that they always charge lower
than the competition!

Banks had subsidiaries handling housing finance, but in the recent past they seem to have
taken a greater interest in building retail assets. Banks have a clear advantage in the field
simply because they access the lowest cost funds in India. As things stand, a loan from a
bank is less expensive than one from a housing finance company. Despite the
overwhelming advantage that banks have, HFCs are unperturbed. The reasons range from
a feeling that banks will lose interest in retail finance after a point to a belief that banks
are not geared to servicing a big thrust into housing finance. In short, the HFCs believe
banks cannot match them in a critical area — service.
Service: The Differentiating Factor

Companies are trying to distinguish themselves through a difference in service standards.

Industry officials emphasize that service quality is the key to competitive strength. At the
moment, there seems to be little to choose between top housing finance companies when
it comes to service. Assuming almost similar service standards, future growth is likely to
be decided by access to resources. A strong brand name, such as HDFC, ICICI or LIC, is
likely to command access to a lot more resources and customers. Therefore, the bigger
players are likely to be the dominant players.

Access To Resources: Another Differentiator

Dewan Housing and LIC Housing Finance both run operations with a profitability level
of about 20 per cent. Despite that, Dewan is unlikely to grow at LIC Housing's pace in
the current environment. LIC's superior pedigree and access to resources appears to have
played a critical role in larger disbursements. For example, between 2000 and 2002,
Dewan's housing loan disbursement grew from Rs 163 crore to Rs 200 crore. On the
other hand, between 1999 and 2001, LIC Housing's disbursements to individuals grew
from Rs 945 crore to Rs 1,597 crore.

Among HFCs, most companies, big or small, are likely to register a similar level of
profitability. But access to resources, may ensure that bigger companies will dominate the
market and check the growth of others.

For a while securitisation promised much, but problems associated with the process have
seen negligible activity. As things stand, only top-rung HFCs are really in a position to
make limited use of securitisation. For the rest, it remains a distant dream.

Changing Contours

The fast-changing environment has had a telling impact on HFCs. Following heightened
competition, spreads (difference between interest income and expenditure) have declined
over the last couple of years. HUDCO feels that its current spread, of 1.8-2 per cent, is
likely to hold firm. Competition has whittled down high margins and changed housing
finance into a low margin, low-risk business.

With their geographical spread and customer knowledge, the HFCs are trying to tap new
opportunities that have come up. Using their existing infrastructure to sell other financial
products to retail customers has caught the fancy of the HFCs. The opening up of the
insurance industry, in particular, seems to have triggered a determined move to diversify
income stream.
Even here, the bigger players are in a different league. For instance, HDFC has the
resource base to promote subsidiaries in most other areas of financial intermediation —
be it asset management, insurance or commercial banking. Smaller HFCs that have wide
distribution networks can only hope to leverage their reach for a commission.

Broadly, the industry is evolving into distinct layers. Top-rung HFCs, such as HDFC and
LIC Housing, are among the most competitive, and will continue to remain so. New
entrants with powerful promoters such as ICICI Home Finance will carve up a significant
market share. Smaller HFCs will continue to do well in the next few years, but
inadequate resources will make it difficult to reach the top rung.

Lending Risk Unlikely To Rise

THE relatively negligible risk in housing finance is best illustrated through an example.
HDFC, the market leader in housing finance, had aggregate bad loans of 0.81 per cent of
its portfolio on March 31, 2009. At the other end of the spectrum, a much smaller
company, Dewan Housing Finance, had aggregate bad loans of about 0.5 per cent in
March 2008.

Corporation Bank, one of the soundest banks in the country, had an aggregate bad loan of
5.4 per cent of gross advances in March 2007. Among non-banking financial companies
(NBFCs), a tightly run company such as Cholamandalam Finance reported in June 2008
that 1.5 per cent of assets had problems. Thus, a portfolio of housing assets seems safer
than a mixed portfolio that other financial intermediaries have.

A house is generally the single largest investment an individual makes in a lifetime.

Moreover, the emotional dimension of a house makes it intrinsically safer for a lender.
Another factor that adds to the safety of the loan is that most borrowers have a significant
level of personal money invested in a house. If they lose possession of a house, it would
mean a lot of personal wealth slipping out. None of the factors that have thus far made
home loans one of the safest deployment avenues is likely to change in the near future,
thereby ensuring that the business remains one of the financial sectors safest.

The recently enacted Securitization Law provides wide ranging powers for foreclosure
and recovery of bad assets. This will further reduce NPAs and mitigate the risk of home
loans.
Prepayment Threat

Prepayments of outstanding home loans have reduced the growth rate of the housing
finance industry.

A study of the housing finance industry by Crisil, the rating agency, which includes both
housing finance companies (HFCs) and banks, says prepayments have been driven by
borrowers switching loans from one agency to another and also due to aggressive
marketing efforts undertaken by both banks and HFCs.

Even as housing finance disbursements grew by 54 per cent between April - December
2009, prepayments stood at 12-14 per cent of outstanding loans for HFCs, resulting in a
portfolio growth of 36 per cent.

According to Crisil, the portfolio would have grown by 43 per cent were it not for these
prepayments. Disbursements to the housing sector grew by 54 per cent to nearly Rs
31,000 crore for the period ended December, 2009.

The study is based on an analysis of the portfolios of 13 HFCs and 22 banks rated by
Crisil, which together account for over 80 per cent of the housing finance industry in
terms of disbursements. The study includes the major players like HDFC, LIC Home
Finance Company and State Bank of India.

According to Crisil prepayments have mainly occurred because of the high rates at which
the loans were contracted in the past. With the decline in interest rates several HFCs have
repeatedly reduced the interest rates on their housing loans.

Banks, with their lower cost of funds, have further accentuated this decline. Several
medium and small-sized HFCs, with relatively high cost of funds, have thus borne the
brunt of this decline.
Future Prospects

Prospects of the housing finance industry look encouraging mainly due to the fact that the
gap in demand and supply has not been corrected adequately. At the end of the Current
financial year period i.e. FY10, the shortfall in dwelling units was in the region of 40 m.
In terms of dwelling units the Urban Affairs and Employment Ministry has stated that
cumulatively India will have to add a minimum of 6.5 m houses per year to add 33 m
houses in order to bridge the current gap. At present the supply of houses stands at close
to 2.5 m per year. Apart from that the Indian economy may have reached a stage where
interest rates may continue to remain soft over the long-term. This is likely to ensure a
steady demand for housing loans.

The housing finance industry is on solid ground and has interesting prospects. However,
the industry has become over crowded, with players of all sizes. The entry of banks into
the sector has further intensified competition. Only companies that have a strong brand
image, large distribution network and a customer friendly approach stand to benefit in
future.
 Mortgage Guarantee

National Housing Bank (NHB) is in the process of setting up a mortgage guarantee

company in association with some foreign housing finance firms with a view to
encourage housing loans for the "non-salary informal class of the society". The company
was expected to be formed by the end of this year and would become operational early
next year.

The non-formal sector, which is a major chunk of the Indian housing loan market, has not
yet been seriously addressed by banks or housing finance companies due to the gravity of
the risks involved compared to the salaried sector.

Scheme for Guaranteeing Bonds of HFCs

Housing Finance companies depend to a great extent on refinance assistance from NHB.
However, the extension of refinance assistance by NHB is constrained by various factors
like NHB's own NOF, HFCs' borrowing power etc. In addition, in the present liberalized
environment, the HFCs prefer to raise resources directly from market in order to
eliminate the cost of intermediation. Besides NHB refinance, HFCs mainly depend upon
term loans from banks and public deposits. Of late, the maturity profile of public deposits
has been shortening leading to asset liability mismatches for HFCs. One way to overcome
this problem is floatation of bonds/debentures having a longer maturity period of say five
to seven years. To attract the investors at competitively low rates, such bonds/debentures
should have sufficiently high rating. Many of the HFCs have not been able to float
bonds/debentures because of the lower credit rating from the rating agencies for various
reasons including the inherent mismatch between assets and liabilities. NHB's
intervention in this area was considered critical and accordingly a scheme was introduced
to extend guarantee to the bonds/ debentures to be floated by HFCs meeting certain laid
down criteria. Under the scheme, NHB will provide top ended guarantee relating to the
repayment of principal and interest which will provide necessary credit enhancement and
will enable HFCs to acquire higher credit rating leading to competitive pricing of these
instruments. The salient features of the scheme are as under:

Scope of the Scheme

The Scheme envisages provision of guarantee by NHB to the investors regarding

repayment of principal and interest during the top end (say last two years) irrespective of
the repayment schedule fixed by the HFC and the guarantee shall not exceed 67% of the
total amount to be raised and the interest thereof.
Terms and Conditions for Guarantee

The HFC desirous of availing the guarantee from NHB shall comply with the following
terms and conditions:

(i) The bond issue shall carry at least a rating of “AA-” from an approved rating agency.
However, the Bank may consider providing the guarantee in the case of an instrument
being rated 'A‘ subject to the HFC meeting the following requirements:
a) NOF shall be Rs.30 crores or more
b) Net NPA shall be less than 2%
c) The HFC shall have earned profit during the last three years or since its inception if
it is in existence for less than 3 years
d) The overdue for more than 3 months should not exceed 10% of the aggregate
demand for the year
e) The promoters and the management of the HFC are found to be satisfactory
f) The HFC shall have complied with all the provisions of the Housing Finance
Companies (NHB) Directions, 1989 as amended from time to time and all the
provisions of the Guidelines on prudential norms.

(ii) The maturity of the bonds/debentures shall be for a period of five years to begin with.

(iii) The market shall determine the coupon rate.

Exposure Norms

For the purpose of extending guarantee to the HFCs, exposure limits will be fixed by
NHB along with the annual refinance limit. The aggregate amount of the guarantee in a
year can be maximum up to the actual amount of the bond to be floated at a time or the
annual refinance limit provided in a particular year, whichever is less. The overall
borrowing including the amount to be mobilised through the bond/debenture issue shall
not be more than 7 times the NOF of the company.

Minimum Size of Each Issue

The minimum size for each issue should be Rs.10 crores and it will be subject to the
overall borrowing powers fixed under the Housing Finance Companies (NHB)
Directions, 1989, as amended from time to time.
Security

The HFCs desirous of availing the guarantee will have to create a floating charge on the
assets equivalent to 125% of the principal amount in favour of NHB. In case the HFC
offers any other security in addition to a floating charge for its existing borrowing or is in
a position to provide further security, the same shall also be asked for. In case of the
HFCs, where personal or corporate guarantee has been obtained, the same shall be
extended to cover the guarantee for the bonds/debentures.

Guarantee Fee

For extending the guarantee, the HFCs shall be charged 75 basis points per year of the
amount to be floated as guarantee commission and this shall be payable upfront.

Creation of Reserves

The HFC shall create appropriate bond/debenture redemption reserves as may be laid
down under the Companies Act from time to time

Returns
The HFC shall furnish such returns/information as may be laid down from time to time
for the purpose of availing refinance.
 SECURITISATION
MORTGAGE BACKED SECURITISATION (MBS)
Many developing/underdeveloped countries in the world have not been able to address
the problem of providing adequate shelter to every citizen of the country. One of the main
reasons for the problem has been the absence of long- term capital for investment in the
housing sector. Traditionally, the funds for the housing sector have come from the
individuals themselves from their own savings or from the financial institutions who are
primarily engaged in the intermediation process of channelising funds from the savers to
the borrowers. However, the funds so mobilised through the formal sector financial
institutions have been much lower than what is required to tackle the housing problem.
With increasing number of players entering the housing finance business and the
disbursals taking quantum jump, it is necessary that the other avenues of resource
mobilisation be explored and one such source could be the capital market. The process of
securitisation of mortgages offers enormous scope for expanding the mortgage financing
operations and probably a time tested viable market alternative for mobilising resources.
The housing finance system in many developed countries, particularly USA and UK, is
characterised by the presence of a strong secondary market which enables the mortgage
originators to off load their loan portfolios from their balance sheets by selling them off
to major players in the secondary market. This imparts greater liquidity to the system and
results in larger funds flow to the housing sector.

Securitisation- Concept & Rationale:

The process of converting mortgage loans together with future receivables into negotiable
securities or assignable debt is called securitisation. The securitisation process involves
packaging designated pool of mortgages and receivables and selling these packages to the
various investors in the form of securities which are collateralised by the underlying
assets and their associated income streams. Alternatively, securitisation could be
described as a special retail dominated system of raising funds. In India, the originator in
his books keeps the housing loans extended by the various categories of institutions only.
A typical housing loan is kept alive in the books for a period of fifteen years and during
the initial years; the principal repayment is very small. Under these circumstances, the
recycling of funds is slow and it is not possible to cover more and more households in the
immediate future. Securitisation is an off-balance sheet financing technique with the
objective of mobilising resources at a comparatively lower cost through a wider investor
base, by removing loan assets from the balance sheet of the loan originator. Securitisation
actually involves conversion of mortgages into securities, which are tradable debt
instruments. The securities, which are backed by the mortgages, are then freely traded in
the market thereby giving rise to a secondary market. In this process, saver's surpluses are
chanellised to meet borrower’s deficit. This also facilitates inter-regional and inter-
sectoral flow of funds. One of the objectives of securitisation is to mobilise resources at a
lower cost and make borrowings more affordable for the home-seekers. This is achieved
through specialisation and diversification. Specialisation promotes efficiency and reduces
the transaction costs. With the supply of housing finance expanding across the range of
lenders, the interest rate on mortgage loans tends to decline making the loans cheaper
with the resultant increase in demand. With larger volumes to manage, economies of
scale operate leading to a reduction in cost of funds. Similarly, with securitisation and
development of the mortgage market, the risks associated with mortgage financing get
diversified among increased number of actors resulting in more efficient allocation of
risk. May be then we can look for soft loan structure. The interest rate housing loan today
predominantly-depends on the cost of funds to the financing institution. The cost of funds
to the commercial bank is relatively cheap when compared with the cost of funds to the
housing finance companies. The banking system alone is not sufficient to cater to the
needs of the population. Besides, housing finance is only one of their activities. The NHB
has been working towards introduction of Mortgaged Backed Securities and the
development of a, secondary mortgage market in the country, for quite some time now.

The Background

The financial sector and capital markets reforms have reached an advanced stage in India
with a perceptible inclination towards market- orientation in resource mobilisation. The
economic environment of the country is now in a position to increasingly offer a level
playing field for all the economic agents in the market. On the strategic plane, interest
rates on mortgage loans have been deregulated. In the above backdrop it has been
perceived that development of mortgage backed securities market in tandem with capital
market would cater to the need for market orientation of housing finance system in the
country. The Government, in its capacity as a facilitator and enabler, has been showing
positive orientation in its policies towards the housing sector and Mortgage Securitisation
since 1990’s. As securitisation has been recognised by the Government as an important
source of raising funds for the housing sector, the National Housing and Habitat Policy
(1998) provides appropriate thrust to NHB to play a lead role in MBS in its capacity as
the apex institution in the sector.

Structuring an MBS Issue

The various steps involved in the process are:

• Identification of the pool of Assets on the basis of the Pool selection criteria

• Valuation of the pool of assets and determining the consideration for the
agreement.

• Acquisition of the Housing Loans by the NHB. The housing loans selected would
be the ones identified in accordance with the pool selection criteria.

• Registration of the Deed of Assignment and payment of Stamp duty in accordance

with the Stamp Duty laws of the respective states in which the properties are
located.

• Creation of Trust by NHB and the Transfer of the loans and advances by NHB to
such trust.
 • Issue of PTCs to investors

• Credit Enhancements

• Appointment of Servicing and Paying Agent.

• Pool Servicing.

This could be illustrated by the recent CFHL MBS Issue:

Overview of the transaction

 The transaction involves the assignment of retail housing loans
from CFHL (the originator) to NHB. The loans, repayable in
Equated Monthly Installments (‘EMIs’) will then by packaged and
offered to the investors as Pass Through Certificates (PTCs) by
NHB. The housing loans, which constitute the receivables to be
securitised, will be held by a Special Purpose Vehicle in the nature
of a Trust, declared of trust (described in detail hereunder) would
be legally effected as on the deemed date of allotment of the PTCs,
i.e., 15th May 2001.
 The structure of the transaction has been diagrammatically
represented below:

Borrowers (Properties located in:) Initial

Karnataka Maharashtra Tanil Nadu Continuing

Loans
Monthly Payouts
EMIs
Originato C Market
Servicing & Investors
r F
Paying Agent Investors
H Seller Custodian CFHL
L
Rated Unrated
Class A Class B
PTCs PTCs

Settlor of N Special Purpose Vehicle

Trustee
Trust Trust
Registrar & H
Transfer Agetn B

Declaration of Trust
Important Issues to be considered in an MBS Issue

A. Default Risk

Investors in securitised instruments take a direct exposure on the performance of the

underlying collateral and have no recourse to the originator. Hence they seek additional
comfort in the form of credit enhancement. It refers to the various means that attempt to
buffer investors against losses on the asset collateralising their investment. These losses
may vary in frequency, severity and timing, and depend on the asset characteristics, how
they are originated and how they are administered. The credit enhancements are often
essential to secure a high level of credit rating and for low cost funding. By shifting the
credit risk from a less-known borrower to a well-known, strong, and larger credit
enhancer, credit enhancements correct the imbalance of information between the
lender(s) and borrowers. They are either external (Third party) or internal (structural or
cash flow driven).

External Credit Enhancements:

They include Insurance, Third party Guarantee and Letter of Credit.

Insurance

Full Insurance is provided against losses on the assets. This is tantamount to 100%
guarantee of a transaction’s principal and interest payments. The issuer of the insurance
looks to an initial premium or other support to cover credit losses.

Third Party Guarantee

This method involves a limited/ full guarantee by a third party to cover losses that may
arise on the non-performance of the collateral.

Letter of Credit

For structures with credit ratings below the level sought for the issue, third party provides
a letter of credit for a nominal amount. This may provide either full or partial cover of the
issuer’s obligations.
Internal Credit Enhancements

• Credit Trenching (Senior/Subordinate Structure)

• Over-Collateralisation
• Cash Collateral
• Spread Account
• Triggered Amortisation

B. Call and extension risk.

The cash flow related risks in securities are called Call and Extension risks.
Call/extension risks of a security are a result of borrower’s ability to prepay the
underlying assets in a transaction. These prepayments are then passed through to the
investors (essentially, exercising a call on the securities). The investors are said to have
written a call option on the assets. Of course, investors get compensated for this option
with higher spreads than comparable securities. During pricing of these securities an
expected prepayment rate is assumed to analyze the cash flows and, in the future, if the
prepayment rate falls below such expected rate, extension risk arises! Prepayment risk is
more prominent and applicable in longer term, prepayable and high balance assets such
as mortgage loans. For example, automobile loans are short term 3-5 year maturity and
borrowers don’t have much incentive to prepay other than when they sell the automobile.
An automobile loan for $15,000 at 12% per annum for 5 years will have a monthly
payment of $334. The same loan at 10% per annum will result in a monthly payment of
$319, a difference of only $15 per month, not enough to cause a borrower to refinance (or
prepay). Thus, these types of loans are not sensitive to interest rates.

Benefits Of MBS

Securitisation accomplishes the basic objective of cheaper fund generation through the
twin mechanism of specialization and diversification. Since it gives rise to a number of
specialist agents in the system, transaction costs are reduced to a great extent due to
enhanced efficiency (however, in the initial stages when the market is growing, the
transaction costs will be higher in view of the investments required to imbibe
specialization but as the market grows and the specialization becomes more pronounced
and disciplined, the transaction costs will be down). The risk also begins to get
diversified among the increased number of participants and among sectors. The
intermediaries begin to access a vast pool of funds whereby reducing the cost of
intermediation. Besides, the off balance sheet practice can also reduce the portfolio risk
effectively and lower the mortgage rates. By integrating the housing finance system with
the broader financial market, securitization exposes the housing finance sector to the
overall economic environment and the macro financial system. As securitization
promotes the use of wholesale markets, different types of economies of scale will also be
obtained. Quantity of funds can also be varied significantly with out the interest rate
undergoing any changes. In the longer run, international capital markets can also be
potentially penetrated to supplement retail finance. Securitization helps the primary
lending institutions to maintain capital adequacy, improve liquidity and restructure their
debt to equity ratio. By enabling the primary lending institution (PLI) to obtain a better
credit rating, securitization effectively reduces the funding cost. MBS transaction is also
aimed at producing matched transactions of assets and liabilities. It is thus a good
instrument in the management of gap between the interest sensitive assets and liabilities.

Constraints and Challenges

Despite reasonable development in the financial sector, the Indian economy still suffers
from the absence of well-defined accounting, taxation and regulatory framework, the
market was not mature enough to incorporate a sophisticated market driven device like
securitisation. Imperfections still exist in the primary mortgage market in the form of lack
of standardisation and non-uniform underwriting norms having adverse impact on
investors psyche. The intermediary, i.e. NHB,, however can combat this, to a certain
extent, by providing the necessary cushion depending on the originating institution’s
quality of appraisal techniques of mortgages and its record of incidence of default. MBS
being a highly intricate exercise necessitates a thoroughly selective and specialised
approach. Besides, India also lacks trained professionals for making the endeavour a
success.

Legal bottlenecks

In India, there exists a plethora of agencies for legal approvals involving time and cost.
This multiplicity in legislations governing land and construction activities gives rise to
inherent inefficiencies. Thus, there exists a need for national level legislative reforms.
Besides, the inter-state variances in stamp duty and registration charges on transfer of
immovable property create distortion in the system and generate high transaction cost for
transfer of the same. Since the MBS market cannot be viewed in isolation from the bond
market, the prevailing high stamp duty in various states will hamper the creation of MBS
in India by adding to the costs of securitisation of housing mortgage loans and making
the transfer of MBS costly. Considering the sensitivity of the sector and its proneness to
distortions, mortgage insurance will enhance the confidence of the financing institutions
as well as the investor community. On similar lines, an implicit government guarantee
would also provide credibility to the system. In order to induce institutional investors to
invest in MBS, investment in such products could be declared as approved investments
under the Insurance Act as also for the provident funds.

Capital market impediments

The Secondary Market for mortgages is lacking in depth. Since the ‘pass-through
certificates’ (PTCs) are not defined as a ‘Security’ under SCRA, 1956, this adversely
affects the scope for listing and tradability of PTCs at Stock Exchanges. The stamp duty
on primary isues of MBS is not uniform across states, which could impede the de-
materialization process and act as a significant barrier to trading.
Regulatory issues

There is no supervisory provision to determine whether a sale of assets qualifies as a sale

for “regulatory purposes” and thus, can be excluded from the originator’s balance sheet
for capital adequacy purposes. There is also lack of standard practices defining extent of
recourse, relationship between issuer and seller; repurchase obligations; extent of
investment in own MBS etc.

Other issues

In order to promote marketability of the MBS to make it acceptable to a varied range of

potential investors, rating of MBS has to be made mandatory. A friendly taxation
treatment would be highly appreciated to enhance the flow of funds for the sector. In the
USA, SPVs are exempted from tax.
 IMPACT OF SECURITISATION LAW
The indian financial system has been reeling under the burden of bad assets. The existing
laws were inadequate and very time-consuming. It can be said that they were more
inclined towards the borrowers. Eventually, the government took a significant step of
promulgating the securitisation ordinance in june, 2002 in a bid to rectify this anomaly.
The ordinance with some changes was passed in the parliament in december 2002 and the
securitisation law came into force. The law basically provides sweeping powers to the
lenders to take over and manage the assets of delinquent borrowers without recourse to a
high court. Recently the ministry of finance announced the expansion of the scope of the
law to include housing finance companies too. The MoF will shortly release a notification
to this effect. This act will, supposedly prove to be effective in cleaning the balance
sheets of banks and other financial institutions.

The housing finance sector does not suffer from high NPA levels. In fact, it has the
lowest level among other financial services. Currently, this level is pegged at around 2%.
Even this low magnitude of bad assets would come down after the implementation of this
law. This is the present view in the industry. However, competition has increased
manifold in this sector and trend will continue in the near future. There will be a tendency
of the HFCs to slacken credit norms to capture more market. Concurrent with this, NPA
levels are slated to rise. But they can be effectively managed with the securitisation law.
Hence, the enforcement of this law closes a gap in the legal-economic framework
enhancing the ongoing reform process. The end result would bring credit to hitherto
under serviced people who were thought to be less credit-worthy and were given a pass
by the HFCs.

There were expectations in the industry that the law would also address the issue of
securitisation as a new financial instrument, more so with respect to mortgage backed
securitisation. However, all the hopes came a cropper. The law provides no framework to
facilitate and regulate mortgage backed securitisation. Neither have any hints been given
to such an effect.
 ASSET LIABILITY MANAGEMENT
The Government of India embarked on a structural reform process in 1991, which aimed
at enhancing the productivity and efficiency of the economy as a whole and also to
increase international competitiveness. It was also felt that the full potential of the
economic reforms in the real sectors of the economy could not be realised without a
simultaneous reform of the financial sector. Therefore, in order to promote a diversified,
efficient and competitive financial sector with the ultimate objective of improving the
allocative efficiency of available resources, increasing the return on investments and
promoting an accelerated growth of the real sector of the economy, the financial sector
reforms were introduced.

Since the advent of these reforms, the financial sector in India has witnessed major
changes and it is expected that the changes will be more rapid in the coming years.
Increased competition from non traditional institutions, new information technologies and
declining processing costs, the erosion of product and geographic boundaries and less
restrictive governmental regulations have all played a role in facilitating the changes that
are taking place in the scenario of world banking. There is no doubt that these
developments have made the financial institutions more efficient but at the same time
have also made them more vulnerable. The basic principle of any business is about taking
risk and gaining reward. In fact risk is associated with all activities undertaken for the
purpose of generating profit. In all these activities, a trade off becomes necessary for
survival and profitability.

The financial institutions in India especially the banking sector were not worried about
certain risk aspects as they were functioning under the administered interest rate regime.
They were used to accepting deposits at rates which were determined by the Reserve
Bank of India and lending at rates which were again stipulated by the Reserve Bank.
While fixing the interest rates, the Reserve Bank ensured that the banks are left with
some spread. Liquidity was ensured, as the banks were required to statutorily invest a
very high portion of their demand and time liabilities in approved securities under the
statutory liquidity ratio. In addition the banks were also required to keep with the Reserve
Bank a cash balance equivalent to 10% of their net demand and time liabilities under the
cash reserve ratio requirement. Thus, there was no interest rate risk or liquidity risk to be
managed. The only risk the bankers were faced with was the credit risk. Here again,
before the prudential norms were introduced in 1992, the banks used to recognise the
income from their lending without even receiving it.

The deregulation of interest rates on advances was first introduced in October 1988 and
thereafter there has been a progressive deregulation of interest rates on advances as well
as deposits. The banks have been given freedom to determine their own interest rates.
There has been a gradual reduction in the statutory reserve requirements since then and
the banking sector has been opened up to more competition, diversification of activities,
more transparency etc.

Housing Finance System

The housing finance system in India could be divided into two phases viz. the one before
the setting up of the National Housing Bank in 1988 and the one after the setting up of
the National Housing Bank. Prior to 1988, there were only few specialised institutions
catering to a small area. The first all India level institution to lend to individuals for
housing came in 1977. Before the setting up of NHB, the housing finance companies
were under the regulatory purview of the RBI and after the establishment of NHB, the
regulatory powers over the housing finance companies was transferred to it. The housing
finance companies are basically non-banking financial companies and the Reserve Bank
only used to prescribe the maximum interest rate payable on the deposits and never
prescribed the interest rates for their lending. Thus as far as the non-banking financial
companies are concerned, the interest rates were never administered and with successive
reductions in the interest rates, these companies are faced with greater interest rate risk
now than before.

As far as liquidity is concerned, these companies were required to invest only a small
percentage of their deposits in approved securities/deposits. The prescription regarding
this has undergone several changes over the years. The housing finance companies today
are required to invest 12.5% of their public deposits in approved securities/ deposits with
NHB or invest in bonds of NHB. Since the housing finance companies are not allowed to
accept demand deposits, there is no prescription of cash reserve ratio and the statutory
reserve requirements as mentioned above is lower than that of the banking system. At the
same time with a very volatile interest rate regime, the housing finance companies are
prone to liquidity risk.

One of the biggest risks facing the housing finance system in India is the asset-liability
mismatch. The housing loans are made available to the individual for a period of 15 years
and the average period for which it remains in the books of the HFCs is around 8-10
years. As against this, the housing finance companies raise their resources from the
public by way of fixed deposits, medium term loans from the banking system /other
institutions and refinance from NHB. As at the end of March 2001, refinance from NHB
constituted about 8% of the borrowings of the HFCs and these funds have a maturity co-
terminus with the repayment schedule prescribed by the HFCs to their borrowers. In this
sense, the refinance from NHB has the same duration as that of the housing loans. The
term loan from the banking system, which is on an average for a period of five years and
constituted approximately 25% of the borrowings and the deposit from the public
accounted for 23% and this is a medium/short term resource. The remaining 44% of the
resources were by way of borrowings from other institutions/sources. Liabilities of
matching maturity are often difficult to find and for which there is growing competition.
On the other hand, until the housing finance system has acquired sufficient maturity,
stability and resilience, it may be risky to expose short-term deposits to long term
lending. It calls for a judicious mix of assets and liabilities especially in the case of
housing finance companies.

Asset Liability Management

The housing finance institutions are therefore required to have sound risk management
practices. Asset Liability Management is one tool, which provides a comprehensive and
dynamic framework for measuring, monitoring and managing the various risks in
financial business. Asset-Liability Management can be defined as the process of adjusting
the liabilities of a financial institution to meet loan demands, liquidity needs and safety
requirements. Asset Liability Management is a good example of risk measurement and an
analysis of the assets and liabilities of an institution can provide an estimate of the
potential impact of the changes in the interest rates on the profitability. ALM can also be
defined as assessing the impact of changing profile of various risks on the balance sheet
and actively altering the structure of the asset and liability portfolios to optimize the
profit position of the financial institution. In other words it is the management of total
balance sheet dynamics with regard to its size and quality based on conscious alteration
of asset-liability structure to maximize profits.

The scope of the ALM presently is restricted to managing the market risks viz. interest
rate risk, liquidity risk and currency risk. Not all the HFCs are currently facing the
currency risk. This risk arises only when the resources are raised in foreign currency and
required to be paid back in foreign currency. It should however be remembered even a
credit risk could ultimately lead to liquidity risk and therefore an integrated approach to
risk management is needed.

The prime objective of ALM is to maximize the net interest income (NII) or net interest
margin (NIM) and the market value of equity (MVE). Profits can be maximized either by
increasing the income or by lowering the cost or both. In order to achieve this and with
fierce competition, the financial institutions tend to take increased risks. This will lead to
a greater volatility of NII/NIM or the MVE. Therefore, in order to maximize the NII, the
financial institution needs to analyze the composition of its assets and liabilities by taking
into account the rate and the volume.

ALM Techniques

The generally followed ALM Techniques are:

• Gap Analysis
• Duration Gap Analysis
• Simulation Method
• Value at Risk
Gap Method

Under the Gap analysis method, the various assets and liabilities are grouped under
various time buckets based on the residual maturity of each item or the next repricing
date, if on floating rate, whichever is earlier. Then the gap between the assets and
liabilities under each time bucket is worked out. Since the objective is to maximise the
NII, it will be sufficient if this is done only with respect to rate sensitive assets and
liabilities. If the rate sensitive assets equal the rate sensitive liabilities, it is known as the
Zero Gaps or matched book position. If the rate sensitive assets are more than the rate
sensitive liabilities, it is referred to as positive gap position and if the rate sensitive assets
are less than the rate sensitive liabilities, it is known as negative gap position. The
decision to hold a positive gap or a negative will depend on the expectation on the
movement of interest rates. The effect of an upward movement or a downward movement
in the interest rate on the NII will also depend on the position taken. These effects are
given in the table below:

GAP Interest Rates Interest income Interest NII

Position Change in Change in expenses
Change in Change in
Positive Zero Increase Increase Increase
Positive Decrease Decrease Decrease Decrease
Negative Increase Increase Increase Decrease
Negative Decrease Decrease Decrease Increase
Zero Increase Increase Increase None
Zero Decrease Decrease Decrease None

Each HFC is required to set the prudential limits on l gaps under each of the time buckets
after working out the effect on its NII based on their views on interest rate movements
and having a bearing on total assets, earning assets or equity.

Duration Method

The Gap method discussed above however, ignores the time value of money. This
deficiency is sought to be removed by the Duration Method. Under the duration method,
the effect of a change in the interest rate on NII is studied by working out the duration
gap and not the gap based on residual maturity. First, timing and the magnitude of the
cash flows need to be ascertained and calculated. Then by using appropriate discounting
factor, the present value of each of the cash flows needs to be worked out. Then, calculate
the time-weighted value of the present value of the cash flows. The sum of the time-
weighted value of the cash flows divided by the sum of the present values will give the
duration of a particular asset.

Illustration:
Duration of a 5-year bond carrying a coupon of 9% if the present interest rate is 10%

Year Cash Discount Discounted Weight Weighte

Flow factor value given d
present
value
1 9 0.909 8.181 1 8.181
2 9 0.826 7.434 2 14.868
3 9 0.751 6.759 3 20.277
4 9 0.683 6.147 4 24.588
5 109 0.621 67.689 5 338.445
96.210 406.359
Duration = 406.359/96.210 = 4.22 years

The duration gap is the composite duration of liabilities and the multiple of the difference
between composite duration of the assets and the composite duration of the liabilities and
the asset-surplus ratio.

Symbolically, this is given by the following equation:

DS = DL + (A/S) x (DA-DL)

Where
DS = Duration Gap
DA = Duration of Assets
DL = Duration of Liabilities
A = Assets
S = Surplus or Gap (Assets-Liabilities)

The next step is to calculate the effect of a rate change on the market value of the
asset/liability. This worked out by using the following formula:

Change in the market value of asset/liability = -D.r *current market value

(1+r)
Where
D = Duration of assets/liabilities
r = current interest rate
The market value of equity is then arrived at by subtracting the market value of the
liabilities from the market value of the assets.

Since one of the objectives is to ensure that there is no reduction in the value of the firm
due to interest rate fluctuations, the attempt should be to maintain the duration gap as
zero.

Simulation Method

Under this method, the effect on the NII or market value of equity is worked out as
explained above under various alternative interest rate scenarios.

Value at Risk

This method is used to estimate the change in the value of assets and liabilities due to
change in the interest rates so as to indicate the economic value of the portfolio using the
well known statistical techniques of mean and the deviation. This method helps in
calculating the networth of a financial institution and the long-term risk implications. The
concept of standard deviation is used to measure the risk. To calculate the value at risk,
we need to ascertain the market value of the portfolio. Then we need to arrive at the
standard deviation, which is obtained, from the historical data and the statistical
multiplier corresponding to 1% probability.

Illustration

The value at risk of Rs.500 crores portfolio at standard deviation of 6% will be calculated
as follows:

500 x 0.006 x 3 = 9

Note: According to the Basle norm 1% of one year is 3 days.

This means that the price of the portfolio may decline by at least Rs.9 crores one out of
100 days or three out of 365 days and on the other days, the price may decline but by less
than Rs. 9 crores.

The last two methods described above require sophisticated modelling and historical data.
CONCLUSION

The risk management process involves identification of the risks, deciding the
appropriate exposure level to the risks and developing the strategies to manage the risk.
Asset Liability Management is one such tool for managing the risks. NHB has recently
issued the guidelines for putting in place a system of Asset Liability Management in
HFCs and these guidelines are to be made operational with effect from the current year.
Any risk management system requires data, which are accurate and available on time.
Thus efforts should be made to capture the data from the various branches on time.
 REFERENCES
• NHB annual report
• NHB-report on trend and progress in housing
• NHB-Quarterly Newsletter
• NHB Guidelines
• Annual reports of HUDCO, HDFC, ICICI HFL, Can Fin HFL, LIC HFL, Birla
Home Finance, and SBI.
• Housing Finance International
• Leading Economic & Financial Dailies
• Websites of HFCs