ASIAN DEVELOPMENT BANK RRP: IND 30204

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

FOUR PROPOSED LOANS

TO THE

HOUSING AND URBAN DEVELOPMENT CORPORATION,

NATIONAL HOUSING BANK,

HOUSING DEVELOPMENT FINANCE CORPORATION,

AND

ICICI

FOR THE

HOUSING FINANCE II PROJECT

IN INDIA

August 2000

CURRENCY EQUIVALENTS(as of 25 August 2000)

Currency Unit – Rupee/s (Re/Rs) Re1.00 = $0.021791 $1.00 = Rs45.890

The exchange rate of the rupee is determined by the Reserve Bank of India under asystem of managed float. For the purpose of calculations in this report, a rate of $1.00 =Rs43.5 has been used. This was the rate generally prevailing at the time of appraisal of theproposed Project.

ABBREVIATIONS

ADB – Asian Development BankBME – benefit monitoring and evaluationCFI – community-based financial institutionEWS – economically weaker sectionHDFC – Housing Development Finance CorporationHFC – housing finance companyHFI – housing finance institutionHFP – Housing Finance ProjectHUDCO – Housing and Urban Development CorporationKfW – Kreditanstalt für WiederaufbauLIG – low-income groupLIH – low-income householdMBS – mortgage-backed securitiesMIG – middle-income groupNGO – nongovernment organizationNHB – National Housing BankNHHP – National Housing and Habitat PolicyNHP – National Housing PolicyPIU – project implementation unitSHG – self-help groupTA – technical assistanceUSAID – United States Agency for International Development

NOTES

(i) The fiscal year of the Government ends on 31 March.(ii) In this report, “$” refers to US dollars.

CONTENTS

Page

LOAN AND PROJECT SUMMARY ii

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. BACKGROUND 1

A. Sector Description 1B. Government Policies and Plans 3C. External Assistance to the Sector 4D. Lessons Learned 5E. ADB’s Sector Strategy 6F. Policy Dialogue 6

IV. THE PROPOSED PROJECT 8

A. Rationale 8B. Objectives and Scope 9C. Cost Estimates 14D. Financing Plan 15E. Implementation Arrangements 16F. The Borrowers 19G. Environmental and Social Measures 21H. Policy Issues 24

V. PROJECT JUSTIFICATION 26

A. Economic Analysis 27B. Financing Justification 27C. Subsidies 28D. Affordability 28E. Impact on Poverty 29F. Risks 29

VI. ASSURANCES 30

A. Specific Assurances 30B. Conditions for Loan Effectiveness 31C. Conditions for First Disbursement 32

VII. RECOMMENDATION 32

APPENDIXES 33

LOAN AND PROJECT SUMMARY

Borrowers Housing and Urban Development Corporation (HUDCO),National Housing Bank (NHB), Housing DevelopmentFinance Corporation (HDFC), and ICICI.

Guarantor India

Project Description The Project will improve the efficiency of the housingfinance sector so that it can better serve the housingneeds of low-income households. The loans will be usedas lines of credit for directing housing finance to low-income households through different lending channels,and for financing housing-related poverty reductionsubprojects. A systematic and sustainable process will bedeveloped whereby financing is made available fromformal housing finance institutions through financialintermediaries such as community-based financeinstitutions (CFIs) and nongovernment organizations(NGOs) to assure effective and efficient delivery of market-based housing finance to low-income households. All ofthe beneficiaries will be low-income households.

Classification Primary: Human Development

Environmental Category BAssessment The environmental implications of the subprojects were

reviewed and their likely impacts found to be easilymitigated. Initial environmental examinations will beundertaken for the subprojects.

Rationale In spite of the recent liberalization of the financial sectorand associated policy and regulatory reforms to promoteincreased participation in housing finance anddevelopment, the housing shortage in India remainscritical, especially for low-income households. It isestimated that India's housing shortage is as high as 40million units, suggesting that more than 200 million peopleare living in chronically poor housing conditions or on thestreets. Although “shelter for all” is the overarching goal ofthe Ninth Five-Year Plan, this was not achieved by 2000and will not be achieved by the end of the Ninth Planperiod in 2002. Since over 90 percent of the housing needis from low-income families, these families are mostdirectly impacted by unacceptable living standards and thepoor quality of life in all of India’s urban centers. Lack ofbasic services such as water supply, drainage, sanitation,and electricity also negatively impact the productivity andincomes of poor households, especially those who work intheir homes.

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Since the major source of housing finance for low-incomehouseholds is their own meager savings and family assets,the principal constraint to the ability of low-income familiesto improve their housing and living conditions is theabsence of affordable credit for housing. Although variousCFIs and NGOs have assisted low-income families tomobilize their savings and have extended loans forhousing construction and improvement, these efforts areextremely small when compared with the total housingfinance demand of low-income households. Projectresources will therefore be focused on assisting poorfamilies with one or more income earners to gain access tohousing finance from formal and informal housing financeinstitutions, especially CFIs and NGOs. In doing so, theProject will promote market-based lending, as thesefamilies would otherwise have to pay higher than marketinterest rates to money lenders to access small housingloans. For the poorest families, the Project will supportsubprojects such as slum networking and home workplaceschemes to improve their housing, income earningpotential, and access to basic infrastructure andcommunity services.

Objectives and Scope The objectives of the Project are to (i) increase access oflow-income households to market-based housing financeby increasing and broadening the finance channels of bothinformal and formal housing finance institutions (HFIs);(ii) reduce poverty by improving infrastructure and servicesin slum areas, and financing innovative low-incomehousing subprojects; and (iii) expand the lendingoperations of housing finance companies (HFCs) toinclude a greater proportion of loans to low-incomehouseholds. The overall thrust of the Project is to promotemarket-based lending without subsidies, and the targetbeneficiary group is low-income households.

The Project consists of three parts: part A: lending to low-income households through intermediaries such as CFIs,NGOs, public and private enterprises, and state and localbodies; part B: reducing poverty through slum networkingand home-workplace subprojects; and part C: increasinglending to low-income households through formal HFIs.

Cost Estimates The Project is estimated to cost $517 million equivalent, ofwhich $61 million is the foreign exchange cost and $456million equivalent is the local currency cost.

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Financing Plan ($ million)Source Foreign Local Total Percent Exchange Currency Cost ADB 61 239 300 58HUDCO 0 21 21 4NHB 0 10 10 2HDFC 0 20 20 4ICICI 0 20 20 4Beneficiaries 0 146 146 28 Total 61 456 517 100

Loan Amountand Terms Loans of $100 million to HUDCO, $80 million to HDFC,

$80 million to ICICI, $40 million to NHB, totaling $300million, from the Asian Development Bank’s (ADB) ordinarycapital resources, with a term of 25 years, including agrace period of 5 years, at an interest rate in accordancewith the ADB's market-based loan facility, an annualcommitment charge of 0.75 percent, and a front-end fee of1 percent of the loan amount.

Period of Utilization Until 30 June 2007

ImplementationArrangements The Project will be implemented through a housing finance

facility established within each of the four Borrowers. Thefacility will provide market-based housing loans to low-income households as well as subloans to CFIs, NGOs,state agencies, municipal corporations, and privatecompanies for onlending to low-income households.

Executing Agencies HUDCO, NHB, HDFC, and ICICI.

Procurement Procurement of ADB-financed facilities under the Projectwill be in accordance with ADB's Guidelines forProcurement. For procurement of goods and services to befinanced by the subloans out of the loan proceeds, theBorrowers will satisfy ADB that the procurementprocedures they apply are appropriate to thecircumstances.

Estimated Project 31 December 2006Completion Date

Project Benefitsand Beneficiaries

The major benefit of the Project will be the catalyticimpact on improving the access of low-incomehouseholds to housing finance, and the accompanyingpolicy reform agenda that will promote sustainablemechanisms for the delivery of housing finance at marketrates, strengthen the institutional capacity of HFIs in boththe formal and informal sectors, and facilitate housinginvestment. The ADB loans totaling $300 million will result

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in housing investments of about $517 million byleveraging project funds with the beneficiaries’ owninvestments, as well as investments by the Borrowers.The Project will increase the capacity of the major lendersin the public and private sectors as well as CFIs andNGOs to respond to the housing finance needs of low-income borrowers, and will directly benefit about 270,000low-income households, or over 1.3 million people. Therecycling or relending of repayment proceeds willmaximize the impact of the ADB loan, resulting in morethan 500,000 housing loans benefiting approximately 2.7million people over the loan period.

There is a basic linkage between improved housing andhuman welfare; therefore, human development will beenhanced by the increased availability of housing financefor low-income households. The Project will have animmediate impact on the welfare of low-income householdbeneficiaries who presently have to obtain finance throughthe unregulated system and pay interest rates of between5 and 10 percent per month. Thus, many impoverishedfamilies will, for the first time, have access to affordable,yet market-based housing finance. Critical urbaninfrastructure and services will be provided under the slumnetworking component of the Project, and institutionalcapacities will be strengthened to improve the livingconditions of families living in slum areas across India.

I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on four proposedloans to the Housing and Urban Development Corporation (HUDCO), the National HousingBank (NHB), the Housing Development Finance Corporation (HDFC), and ICICI for the HousingFinance II Project in India.

II. INTRODUCTION 2. Given the severity and scale of India’s housing shortage, the Government asked the1999 Country Programming Mission for technical assistance (TA) to prepare a second loanproject to address the financial, institutional, and regulatory constraints to increasing theavailability of housing finance to low-income households. Project preparatory TA1 was approvedin November 1999 with the objective of identifying sustainable, market-based channels andinstitutional arrangements for the delivery of housing finance to meet the borrowing needs oflow-income households. The loan Fact-finding Mission visited India in April 2000 and theAppraisal Mission2 in June 2000. The missions reviewed the results and recommendations ofthe project feasibility study with the Government, bilateral funding agencies, housing financeinstitutions, nongovernment organizations (NGOs), community groups, and low-incomebeneficiaries, and reached an understanding on the project scope, cost, financing,implementation arrangements, and policy reform initiatives. This report is based on thesediscussions and the reports prepared by the TA consultants. The project framework is shown inAppendix 1.

III. BACKGROUND

A. Sector Description

1. Housing Situation 3. Rapid population growth coupled with rapidly increasing urbanization and widespreadpoverty have created a serious shelter problem in India, contributing to the proliferation ofslums, increased demand for urban infrastructure and services, and declining quality of life forlow-income households. Additional key factors that have aggravated India’s critical housingsituation include institutional deficiencies, especially among state and local housing agencies,and regulatory constraints to new housing development and investment such as the Urban LandCeiling (and Regulation) Act of 1976 and the state rent control acts. In terms of the magnitudeof India’s housing shortage, the demand-supply gap in 1991 was 31 million units, according to astudy prepared by the National Building Organization.3 Urban areas account for about 30percent of the shortage. Although reliable statistical data on the existing housing deficit are notreadily available, the study concluded that the annual demand for housing across the countrywas about 4.5 million units, whereas the annual supply was about 3.5 million units. Based on anet increase of housing demand of 1 million units per year since 1991, today’s housing shortageis estimated to be as high as 40 million units. While these estimates suggest that more than 200million people across India are living in abject housing conditions or on the streets, millionsmore are without decent, safe, and affordable housing.

1 TA 3288 IND: Housing Finance II, for $405,000, approved on 8 November 1999.2 The Mission comprised J. Lynch, Urban Development Specialist and Mission Leader; A. Goswami, Counsel; and V.

V. Subramanian, Investment Officer. 3 National Building Organization. 1997. Prominent Facts on Housing. New Delhi.

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4. One critical indication of the housing shortage in urban areas is the proliferation ofslums. In the 23 Indian cities with populations in excess of 1 million, approximately 28 percent ofthe urban population live in slums. Since 1981, the slum population has been increasing at arate of about 7 percent per year, more than twice as high as the average annual urbanpopulation growth rate over the same period. The health and environmental implications ofhouseholds’ lack of access to potable water, sanitation facilities, adequate drainage, and propersolid waste collection and disposal services are overwhelming, especially for women andchildren who spend proportionally more time at home than men. It is estimated that upward of25 percent of slum residents are home-based workers, mostly women. For these families,access to decent living conditions and basic urban infrastructure and services is extremelyimportant, as they are primary factors of production as well as productivity. 5. In terms of investment requirements to meet India’s housing shortage, the 33 million unittarget of the Ninth Five-Year Plan (1997-2002) was estimated to require over Rs1,500 billion($37.5 billion). However, not more than 25 percent of funding required to meet India’sstaggering housing deficit is expected to flow from formal sources such as banks; financialinstitutions; government-directed insurance companies; and central, state, and localgovernments.4 With the exception of government-sponsored housing programs, formal housingfinance institutions (HFIs)5 are reluctant to lend to low-income households because of factorssuch as the relatively high transaction and servicing costs, irregular and unsubstantiated incomesources, and the absence of collateral in the form of title to real property. Consequently, theremaining funding requirements will derive from informal sources that largely consist ofindividual efforts with the help of community-based financial institutions (CFIs),6 NGOs,employer financing, and moneylenders. Since most of the housing needs of the middle- andupper-income groups will be met through more formal channels, the shortfalls of the Ninth Planwill mainly impact low-income households. Therefore, increasing funding through the informalsector is an essential and integral means to meet the housing needs of low-income families inIndia.

2. Housing Finance 6. The formal housing finance sector in India had its beginnings in the 1960s when theGovernment, through its various schemes for public and low-cost housing, was the soleprovider of housing finance. The Government implemented many of its schemes through statehousing boards that allocated serviced land and housing to individuals based on social welfareobjectives, not commercial considerations. The 1970s marked two significant developments inthe housing finance sector. A public sector housing company, HUDCO, was established in1970, and the first private housing finance company (HFC),7 HDFC, was established in 1977.HUDCO served as the principal institution to finance Government-supported housing programs,whereas HDFC introduced mortgage financing to India and has become the largest and mostsuccessful HFC in the country. 7. The late 1980s heralded a number of important events, beginning with the formation ofNHB in 1988 as an apex bank for housing finance. NHB’s responsibilities include establishing

4 Government of India. 1998. National Housing and Habitat Policy. Ministry of Urban Affairs and Employment, New

Delhi. 5 HFIs include any organization, public or private, that is established with the primary intention of facilitating housing

finance. 6 CFIs are registered or unregistered agencies involved in savings and credit activities with direct participation and

control by a community, such as a neighborhood or a common occupation or place of employment. 7 HFCs are public or private sector nonbank finance companies with the primary objective of providing housing

finance.

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guidelines for HFIs to ensure sound financial management, refinancing mortgage loans madeby qualified HFIs, and mobilizing formal sector resources into housing finance. The draftNational Housing Policy (NHP), calling for the removal of many legal and regulatory constraintsin the housing sector, was also tabled in Parliament in 1988, and ultimately adopted in 1994.Also in the late 1980s, the Government directed insurance companies, commercial banks,provident funds, and other agencies to invest a part of their incremental resources in housing.Based on the success of HDFC, a number of new HFCs were subsequently established duringthe 1980s to enter into the mortgage lending market. 8. The 1990s witnessed significant changes in housing policy starting with the NHP, whichenvisaged the Government’s role as a facilitator of housing activity, rather than one of provider;this position was reiterated and elaborated in the National Housing and Habitat Policy (NHHP)of 1998. As a result, Government contributions to housing finance have fallen to less than 9percent, compared with 23 percent four decades ago. The liberalization of the financial sectorhas also accounted for an increase in mortgage lending by formal finance institutions nottraditionally in the housing sector, most notably commercial banks and nonbank financialinstitutions. Based on data from the National Sample Survey Organization, however, the shareof formal sector housing finance varies from only about 22 percent for new houses in urbanareas to less than 8 percent for additions and alterations in rural areas. By comparison, informalsources contribute as much as 79 percent of the finance for new construction in urban areasand 88 percent in rural areas. Another important event in the late 1990s, which has significantimplications for the future development of India’s housing finance sector, was the structuring ofa pilot mortgage securitization issue that is expected to raise about Rs600 million ($14 million).

9. Despite the relatively recent and rapid evolution of the formal housing finance sector inIndia, the informal sector continues to play a significant and sustained role in the provision ofhousing finance, particularly to low-income households. Although the informal sector accountsfor more than 80 percent of housing finance in India, its unregulated nature makes it difficult toascertain how much comes from household savings versus loans from different sources suchas family members, friends, employers, suppliers’ credits, moneylenders, CFIs, and NGOs.Surveys suggest that household savings, including incremental stockpiling of building materials,represent the principal means by which low-income households finance housing constructionand improvements. Besides loans from family members and friends, the most preferred sourceof credit is from CFIs, including self-help groups and NGOs. Interest rates from these sourcesrange from 15 to 18 percent per annum for loans up to five years, which are significantly lowerthan rates charged by moneylenders who charge 5 to 10 percent per month. Borrowing fromreputable CFIs and NGOs also provides low-income households with the means to establishcredit as well as open savings accounts. The majority of CFIs are commercially viable andfinancially sustainable, achieving high rates of cost recovery in the upper 90th percentiles,largely due to community and peer group pressure, as well as the borrower’s desire to accessadditional credit in the future. However, CFIs and NGOs suffer from a problem also faced bytheir borrowers: lack of access to sustainable, longer-term sources of credit for relending as wellas expanding their operations. The roles and responsibilities of key participants in housingfinance, and the organization and functioning of the housing market in India are described inAppendix 2. B. Government Policies and Plans

10. India has traditionally assigned a relatively low priority to housing finance in policyformulation compared with other sectors. Housing finance constitutes a small percentage ofgross domestic product and the share of mortgage finance in total housing investment isestimated to be only about 10 percent. However, the 1994 NHP marked a significant transition

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in the Government’s position on housing policy by stressing the importance of housing as anintegral part of the national strategy for poverty reduction and employment generation in thecontext of overall economic development. It advocated increased participation by the privatesector and emphasized that the role of government agencies was to create conditions for theexpansion of housing supply by removing legal and regulatory constraints and supportingappropriate infrastructure investments. The policy also recognized the need for the continuationof Government-supported programs for vulnerable sections of society. In accordance with theincreased priority for housing, the Government formulated the NHHP in 1998 to promote thecreation of an enabling environment and to encourage the nongovernment sector to take upland assembly, housing development, and infrastructure investments. The central theme of theNHHP is the development of strong public-private partnerships for tackling housing andinfrastructure problems. In emphasizing an enabling environment, the role of Government isdefined to provide fiscal concessions and to carry out legal and regulatory reforms. For housingschemes, the policy marks a shift away from purely subsidized schemes to schemes wherecosts can be recovered with minimal subsidies. The policy also emphasizes the importance ofsecuritization in the development of a dynamic and sustainable housing finance system in India.

11. Based on the NHHP, a number of housing investment incentives were provided in thecentral budgets of 1998/99 and 1999/2000: (i) deductions for interest on housing loans wereraised from Rs30,000 to Rs100,000; (ii) commercial banks were required to invest 3 percent ofincremental deposits in housing versus 1.5 percent previously; (iii) company depreciationallowances were raised from 20 percent to 40 percent on new housing stock provided to theiremployees; and (iv) foreclosure and transfer of property laws were amended to facilitate theforeclosure of mortgages. In addition, the targets of the Ninth Plan were modified in the finalplan document to include a special action plan for the construction of 2 million housing units(700,000 in urban areas) annually over five years. The overall housing target of 10 million units,including 3.5 million units in urban areas, over the NHHP period, however, falls far short ofmeeting the total estimated housing shortage of 40 million units.

12. Recent Government actions are indicative of the steps being taken implement policyreforms in line with the continuing policy dialogue with the Asian Development Bank (ADB). TheUrban Land Ceiling (and Regulation) Act has been repealed at the central level allowing statesto repeal the act within their respective jurisdictions. Parliament has passed amendments to theNHB Act to enable registered HFIs to foreclose on defaulting loans. Several states haveinitiated actions to amend their rent control acts in line with model legislation prepared by thecentral Government. NHB has expanded the national housing finance system by increasing thenumber of HFCs eligible for refinancing from 26 to 29. NHB is also in the process of launchingthe first pilot issue of mortgage-backed securities (MBS), the initial step in establishing asecondary mortgage market.

C. External Assistance to the Sector

13. External assistance to India’s housing sector is summarized in Appendix 3. In addition toADB’s involvement in the sector, external assistance has come from Germany, Japan,Netherlands, United Kingdom, United States, and the World Bank. Germany has extendedseveral lines of credit through Kreditanstalt für Wiederaufbau (KfW) to HUDCO and HDFC forlow-income housing schemes and the establishment of rural building centers throughout thecountry. The United Kingdom has extended grant assistance for habitat improvement projects insix cities nationwide. Under its Housing Guarantee Program, the United States Agency forInternational Development (USAID) began lending to HDFC in 1983 to help HDFC expand itsoperations as the first private sector housing finance organization in India. USAID also enteredinto an agreement with NHB under which NHB borrowed $25 million of an authorized $40

5

million to expand its refinancing operations. In addition, the USAID Housing Finance SystemExpansion Program from 1992 to 1996 laid the groundwork for establishing financial linkagesbetween formal and informal housing finance institutions by assessing the housing financeoperations of key CFIs and NGOs in the country.

14. Although ADB’s involvement in India’s housing sector has been relatively recent, it isnow the major international lender in the sector and plays a leading role in supporting theGovernment’s policy and institutional reform agenda. ADB’s first loan for housing was a $20million line of credit to HDFC under the Karnataka Urban Infrastructure Development Project,8

which targeted lending for low-income housing and slum improvement schemes. ADB has alsosupported two TAs for capacity building: Strengthening Housing Finance Institutions9 and theongoing Restructuring State Level Housing Finance Institutions.10 The Housing FinanceProject11 (HFP) represented a major intervention in the sector by supporting (i) lending to HFIs,HFCs, CFIs, and households; (ii) lending for slum improvement and low- income subprojects;and (iii) expanding the national housing finance system by injecting equity and debt capital tostrengthen existing HFCs and establish new ones. The HFP was implemented through a $100million line of credit for each of the three Borrowers: HUDCO, NHB, and HDFC. The HFP wasextremely fast disbursing in that, after taking the first drawdown in December 1997, all threeBorrowers had completely drawn down their loans by December 1999.

D. Lessons Learned

15. The HFP provided many lessons, which serve as the foundation for the proposedProject as well as ADB’s future role in the sector. First, the HFP highlighted the importance ofestablishing minimum onlending targets for each of the different lending channels andsubprojects. The fast-disbursing nature of the HFP is largely attributed to the Borrowersonlending funds through more traditional or familiar channels rather than adopting innovativelending schemes that require more time for project design, appraisal, and implementation.Second, the channeling of funds from HFCs to CFIs was not a preferred lending modality forHFCs, as HFCs were unfamiliar with CFIs and such loans often need to be reported as“unsecured” on HFCs’ balance sheets due to the absence of collateral. This experiencesuggests that a specialized HFI with a social mandate, such as HUDCO, is best suited todownmarket housing finance through CFIs. Third, the HFP did not stipulate that the proceedsfrom the repayments of loans financed with project proceeds should be re-lent for similarpurposes; such a stipulation could have increased the multiplier effect of targeted lending.Fourth, required Borrower contributions were not clearly defined to ensure maximum leveragingof ADB funds. Fifth, most lending for slum networking and low-income housing subprojects weresimply directed to state slum improvement and housing boards, thereby mitigating the need forthe Borrowers to appraise subprojects and monitor the use of funds. Sixth, many of the policyreform measures under the HFP were not within the purview of the three Borrowers; thishighlights the need to ensure that recommended policy reforms can be undertaken orimplemented by the borrowing institutions. Lastly, the HFP permitted 50 percent of the loanproceeds to be lent to middle- and upper-income households. The rapid disbursement rate ofthe HFP and the removal of Government-defined interest rate ceilings for different loan sizessuggests that financially viable and sustainable lending programs targeted entirely to low-income households can be supported.

8 Loan 1415/1416-IND: Karnataka Urban Infrastructure Development Project, for $105 million, approved on 14

December 1995.9 TA 2833-IND: Strengthening Housing Finance Institutions, for $600,000, approved on 24 July 1997.10 TA 3067-IND: Restructuring State Level Housing Institutions, for $500,000, approved on 11 September 1997.11 Loan 1549/1550/1551-IND: Housing Finance Project, for $300 million, approved on 25 September 1997.

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E. ADB’s Sector Strategy

16. In India, ADB’s overall strategic focus is to assist the Government in achieving itsobjectives of increasing employment and reducing poverty by supporting improved economicefficiency and higher levels of sustainable economic growth. This is to be achieved throughsupport for structural reforms, promotion of increased competition and greater private sectorparticipation, development of a supportive regulatory environment, strengthening of institutionalcapacities, and enhancing resource mobilization through financial sector and capital marketreforms.

17. ADB is integrating social welfare concerns into its strategy, with particular emphasis onpoverty reduction, by supporting the development of urban infrastructure, including the provisionfor housing finance, and developing sustainable mechanisms for the financing and delivery ofessential social services at the municipal level. ADB’s Urban Sector Strategy12 for India isdefined according to the two urban subsectors of infrastructure and housing. For housing,ADB's strategic goals in India are to (i) strengthen linkages between formal and informalhousing finance as a means to increase the availability and affordability of housing loans to low-income households; (ii) promote microcredit programs for housing loans and home-based,income-generating activities, and support low-income shelter schemes; and (iii) providetechnical advice and expertise in the establishment of a secondary mortgage market as ameans to increase the availability of capital for housing finance.

F. Policy Dialogue

18. ADB, through its lending and TA program, has been engaged in policy dialogue with theGovernment on a wide range of issues in the housing and financial sectors.13 Under the HFP,the policy dialogue focused on (i) removing major legal and regulatory impediments todeveloping a sustainable housing sector; (ii) promoting greater cost recovery and communityparticipation for slum improvement and low-income housing subprojects; (iii) strengtheningfinancial management capacities of state-level housing institutions; (iv) supporting market-based lending to low-income households; and (v) expanding the national housing financesystem. Throughout implementation of the HFP and support for related TA activities, ADB hascontinued in its policy dialogue with the Government and progress has been made in severalkey areas.

19. The existing situation and agreed upon policy reform measures to be linked to theProject are presented in a time-bound action plan contained in Appendix 4, the Policy andInstitutional Action Plan. The plan incorporates reforms that focus on establishing a conduciveenvironment for housing investment, setting up appropriate and sustainable mechanisms forhousing finance, and strengthening institutional capacities of formal and informal sector HFIs.Some reforms require support from institutions other than the Borrowers. For such cases, theGovernment as Guarantor of the loan will be responsible for supporting the reforms. The criticalissues, which form the basis of the ongoing and long-term policy dialogue between ADB,Borrowers, and Government, are summarized in the following sections.

12 Asian Development Bank. 1998. India: Urban Sector Strategy. Manila.13 ADB’s support for developing India’s capital markets through Loan 1408-IND: Capital Market Development

Program, for $250 million, approved on 25 November 1995; and TA 3473-IND: Development of Secondary DebtMarket, for $600,000, approved on 28 July 2000 are also directly relevant to the housing sector, particularly inaddressing the legal, regulatory, and financial reforms required for the securitization of home mortgages.

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1. Legislative and Regulatory Reforms

20. Since approval of the HFP in 1997, the Government has initiated a number of importantlegislative and policy reform measures, many of which are designed to remove constraints toincreased private sector investment in India's housing sector. Parliamentary approval of the Billto Amend the NHB Act in May 2000 represents significant legislative reform, which clarifiesforeclosure provisions and authorizes the NHB to play a major role in promoting mortgagesecuritization. In January 1999, the Government repealed the Urban Land Ceiling (andRegulation) Act of 1976, which served as a key impediment to private development of land inurban areas; several states are now taking steps to pass separate legislation repealing the actin their respective jurisdictions. In an effort to address the negative effects of India's RentControl Act on the development of new housing and maintenance of existing units, theGovernment has also prepared model rent control legislation that exempts new rental units fromrent controls, permits rent revisions based on market trends, and expedites the judicial processfor settling disputes. Several states and union territories are preparing new legislation in linewith the model act.

2. Subsidized Housing Schemes

21. Up to now the Government has maintained the policy of heavily subsidizing slumimprovement and low-income housing projects implemented through state slum improvementboards, state housing boards, and municipal corporations. This is also the case for housing loanschemes to low-income families. These highly subsidized schemes have increased the burdenon state finances and have hindered the development of sustainable slum improvementsubprojects. Given the poor condition of state finances, many states are becoming reluctant toissue loan guarantees and are instead issuing comfort letters. From a financial perspective, thisshift suggests that more rigorous project appraisal and due diligence criteria must be applied toproposed subprojects so that they are structured to ensure adequate levels of cost recovery.

3. Market-Based Lending Rates

22. At present HUDCO lending to economically weaker section (EWS)14 households is at aGovernment-mandated ceiling of 10.5 percent. ADB has continually emphasized the need torationalize HUDCO’s interest rates to better align them with the market. This effort has beensupported by KfW, which has stressed the importance of raising interest rates to minimizesubsidies as well as market distortions. HUDCO agrees that rates should be increased, but theEWS lending rate is set by an empowered committee of the Government. Based on its policyobjective of minimizing subsidies in the sector, ADB will continue to discuss this issue with theGovernment so that HUDCO’s EWS lending rate could, over time, move toward market levels.Similarly, onlending of funds to CFIs should be market-based to minimize market distortions andpromote long-term financial viability and sustainability of these financial intermediaries.

14 For purposes of designating beneficiaries of housing and related poverty reduction assistance, the Government

classifies households according to income levels. EWS households represent the poorest of the poor with monthlyincomes less than Rs2,500 ($65).

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4. Role of State and Local Housing Agencies

23. Although central Government policy has become more amenable to the needs of low-income households, state and local housing agencies such as state housing boards, slumimprovement boards, and municipal urban development authorities, continue to be major publicproviders of housing. To this extent, they have not assumed the role of facilitator as called for inthe NHP or the NHHP. This is mainly due to the traditional role of these agencies as publichousing developers, the substantial number of employees involved, and the lack of institutionalwill and capacity to change. As part of the Restructuring State Level Housing Institutions TA,ADB is providing capacity-building assistance to state housing boards in Gujarat, Kerala,Madhya Pradesh, Tamil Nadu, and West Bengal. The transition of the housing sector from onethat is highly regulated to an increasingly market-oriented one will pose significant challengesfor these agencies. Their operational and financial performance in an environment of increasingcompetition will determine whether they will survive in their present form.

5. Expanding the Capital Market for Housing Finance

24. After a great deal of effort by NHB and HDFC, the mechanics of mortgage securitizationare being tried out through the first pilot issue of MBS. Although securitization is one of the bestways to raise capital and manage the risks of fixed-rate lending, its viability depends primarilyon the cost of shedding various risks, including credit, liquidity, interest rate, and prepaymentcompared with other forms of debt and equity fund-raising. As major financial institutions suchas ICICI enter the housing finance market, ADB will continue to emphasize the issues of riskmanagement and the potential role of mortgage securitization in expanding the capital marketfor housing finance.

IV. THE PROPOSED PROJECT

A. Rationale

25. In spite of the recent liberalization of the financial sector and associated policy andregulatory reforms to promote increased private sector participation in housing finance anddevelopment, the housing shortage in India remains critical, especially for low-incomehouseholds. Although “shelter for all” is the overarching goal of the Ninth Five-Year Plan, thishas not been achieved by 2000 and will not be achieved by the end of the Ninth Plan period in2002. Since over 90 percent of the housing need is that of low-income families, these familiesare the ones who are most directly impacted by low living standards and poor quality of life in allof India’s urban centers, as well as its small towns and villages. Lack of basic services, such aswater supply, drainage, sanitation, and electricity, also impacts negatively on the productivityand incomes of poor households, especially those who work in their homes.

26. Since the major source of housing finance for low-income households is their ownmeager savings and family assets, the principal constraint to improving housing conditions forthese families is their lack of access to market-based housing finance. Although various CFIsand NGOs have helped low-income families to mobilize their savings and extended loans forhousing construction and improvement, these efforts are extremely small when compared withthe total housing finance demand of low-income households. Based on internationalexperience, it has been found that once low-income families obtain sufficient income, theirhighest priority becomes improving their house or building a new one. Project resources will,therefore, be focused on assisting poor families with one or more income earners to gainaccess to housing finance from formal and informal housing finance institutions, especially CFIsand NGOs. In doing so, the Project will promote market-based lending, as these families would

9

otherwise have to pay higher than market interest rates to access housing finance. It must beacknowledged, however, that the poorest families, which do not have sufficient incomes toafford even small housing loans, need targeted, subsidized assistance to improve their livingconditions. For the poorest families, the Project will support subprojects such as slumnetworking and home workplace schemes to improve their housing, income-earning potential,and access to basic infrastructure and services.

B. Objectives and Scope

27. The objectives of the Project are to (i) increase the access of low-income households tomarket-based housing finance by increasing and broadening the finance channels of bothinformal and formal HFIs; (ii) reduce poverty by improving infrastructure and services in slumareas and financing innovative low-income housing subprojects; and (iii) expand the lendingoperations of HFCs to include a greater proportion of loans to low-income households. Theoverall thrust of the Project is to promote market-based lending without subsidies, and the targetbeneficiary group is low-income households.15 In relation to the Government's classification ofhouseholds by income levels, low-income households encompass the EWS, low-income grouphouseholds, and the lower one third of middle-income group households. A profile of low-income households based on income levels is presented in Appendix 5. Unlike under the HFP,the proposed Project will not provide for lending to higher income groups.

28. The design of the Project draws upon many of the lessons learned under the HFP andresponds to the rapid policy and institutional changes taking place in India’s housing financesector. First, the lending channels have been clearly defined and the respective loan allocationsalso represent lending targets to be achieved during implementation. Second, recentexperience has demonstrated the financial viability of CFI lending and the Reserve Bank ofIndia is strongly encouraging formal HFIs to increase the flow of microcredit for housing. Third,the Project will maximize the leveraging impact of ADB funds by (i) requiring that Borrowersmake contributions from their own sources to support different lending modalities; and (ii)stipulating that subloan repayments, net of ADB loan repayments, be re-lent or recycled throughthe same lending channels and to the same beneficiary group(s) over the life of the ADB loan.Fourth, lending for slum networking and low-income housing subprojects will not be throughslum improvement boards, but will be based on detailed subproject appraisals and includeinnovative partnership arrangements with CFIs, NGOs, municipal corporations, privateenterprises, and slum residents, Fifth, the policy reform initiatives are within the scope andpurview of the Borrowers and not government institutions with no direct role in the Project.Finally, all lending will be directed to low-income households and no funds will flow to higherincome households.

29. The Project consists of three parts: part A: lending to low-income households throughintermediaries such as CFIs, NGOs, public and private enterprises, and state and local bodies;part B: reducing poverty through slum networking and home workplace subprojects; and part C:increasing lending to low-income households through formal HFIs. The four primary Borrowersinclude HUDCO, NHB, HDFC, and ICICI. A description of the three project parts, theirrespective mechanisms for the delivery of housing finance, and the relationships of theBorrowers, the intermediaries or subborrowers, and low-income beneficiaries follows.

15 Low-income households are defined as households with monthly incomes of Rs7,000 (about $165) or less. This

definition is approximately equivalent to an income of $1/capita/day at current exchange rates (Appendix 5).

10

1. Part A: Lending to Low-Income Households through Intermediaries

30. Given the limited availability of housing finance through formal HFIs, intermediariesrepresent important and viable conduits for responding to the housing finance needs of low-income households. By promoting and establishing linkages between formal HFIs andintermediaries, such intermediaries can onlend funds to low-income households for housingpurposes. Experience has demonstrated that the intermediaries’ onlending modalities are bestsuited to meet the special needs and economic situations of low-income households, namelysmall, short-term housing construction, extension, and improvement loans that do not alwaysrequire collateral in the form of clear title to real property. The three categories of intermediariesthat will serve as the primary onlenders to low-income households under part A of the Projectinclude (i) CFIs and NGOs, (ii) public and private enterprises, and (iii) state and local bodies. Toincrease the lending impact on low-income households, the Project will provide that allrepayments under each component will be re-lent to households in the same income groupthrough similar intermediaries over the life of the ADB loan. Additionally, to maximize theleveraging of ADB funds and to promote own-source contributions on behalf of the Borrowers,ADB will finance 80 percent of all lending to public and private enterprises and state and localbodies; ADB will finance 100 percent of all lending to CFIs and NGOs.

a. Community Finance Institutions and NGOs

31. This component will improve access by low-income households to housing finance byexpanding the volume of lending to CFIs and NGOs to onlend to low-income households. Morethan 100 CFIs and NGOs have been identified as potential subborrowers under the Project,including the Self Employed Women’s Association, Society for Integral Development Action, SriPadmavathy Mahila Abyudaya Sangam, Society for Promotion of Area Resource Centre, andFriends of Women’s World Banking. CFIs exclude state apex cooperative housing federations,state agricultural rural development banks, and state cooperative banks. Eligibility criteria forsubborrowers under this component, to be applied by the participating Borrowers, will includetheir lending experience, operational capacity, technical expertise, outreach potential,knowledge of target communities, reputation, and loan repayment track record.

32. Lending under this component, as well as under the remaining components of Part A,will be market-based to ensure commercial viability. The participating Borrowers, namelyHUDCO, HDFC, and ICICI, will onlend funds to eligible CFIs and NGOs at interest rates thatinclude a spread to cover their loan processing expenses and a risk premium, based on anassessment of the credit rating of the recipient CFI or NGO. Likewise, the CFIs and NGOs willprovide housing loans to eligible low-income households at interest rates that include anadditional spread for the CFIs or NGOs to cover similar expenses. As the survey of CFI andNGO lending practices indicates, the average loan size is Rs35,000 with interest rates rangingfrom 15 to 18 percent per annum for a term of four years. Based on a detailed assessment ofthe absorptive capacity of CFIs and NGOs, conservative estimates indicate that at least $50million can be channeled through these subborrowers over the five-year project implementationperiod. A total allocation of $40 million is provided for this component for HUDCO, HDFC, andICICI to onlend to qualified CFIs and NGOs.

b. Public and Private Enterprises

33. Drawing from the lending procedures pioneered by HUDCO and HDFC under the HFP,public and private enterprises represent another important and financially viable channel fordirecting housing finance to low-income households. Under this arrangement, HFIs provide bulkloans to public and private enterprises for onlending to their employees. The enterprise

11

guarantees repayment of the bulk loan and, in turn, deducts the individual loan repayments fromthe borrowers’ salaries. Representative public enterprises include state power corporations andport authorities, as well as local water and sanitation authorities. Additionally, associations ofpolice, teachers, and nurses can be considered, along with other types of employeeassociations. Private enterprises include industrial estates; nongovernment cooperatives suchas those in the textiles, milk, and sugar industries; cottage industry associations; and theSarvodaya Sangh societies, which operate department stores across India selling textiles,handicrafts, leather goods, and food items. As distinct from the bulk lending modality, up to 50percent of lending under this component can be in the form of direct housing loans to enterpriseemployees when the enterprise is used as a means to market loans and to consolidate potentiallow-income borrowers. A total of $60 million is allocated for this component to finance 80percent of disbursements through HUDCO, HDFC, and ICICI.

c. State and Local Bodies

34. This component will promote lending through state and local bodies to respond to thehousing finance needs of low-income households in their respective states and localjurisdictions. Lending under this component will be restricted to state governments (and therespective local bodies) that have undertaken various sector reforms initiatives such as puttinginto place progressive urban land ceiling laws and/or amending state rent control legislation.Based on these criteria, the eligible states and union territories (and local bodies locatedtherein) include Andhra Pradesh, Delhi, Gujarat, Harayana, Karnataka, Kerala, MadhyaPradesh, Maharastra, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. Inaddition to the state governments, lending will only be permitted to the five state housing boardsthat have (or are in the process of) undertaking improvements to their financial managementand accounting systems under the ADB Restructuring State Level Housing Institutions TA(footnote 10), namely Gujarat, Kerala, Madhya Pradesh, Tamil Nadu, and West Bengal. Theeligibility of other state housing boards will be considered on a case-by-case basis upondemonstration that they are initiating reform measures in accordance with recommendationsand guidelines of the TA. Given the poor financial performance of state slum improvementboards, state apex cooperative housing societies, state housing improvement trusts, as well asmunicipal development authorities, no lending will be permitted to these institutions under theProject. However, exceptions will be considered when the Borrowers can present a convincingcase that the subborrower’s financial position is acceptable and that adequate financial controlswill be in place to ensure proper accounting of the sources and uses of funds. The $30 millionallocation under this component will finance 80 percent of all funds channeled through HUDCO,HDFC, and ICICI to state and local bodies.

2. Part B: Reducing Poverty through Innovative Subprojects

35. The poverty reduction component of the Project includes support for innovativesubprojects falling into two categories: (i) slum networking, and (ii) home workplace schemes.The beneficiaries of these subprojects are predominately the urban poor or EWS households,and given their limited repayment capacities, subsidies are required to support subprojectimplementation and the operation and maintenance of basic urban infrastructure and services,such as water supply, sanitation, drainage, and solid waste management. HUDCO will serve asthe Implementing Agency for all of the Part B subprojects and assume full responsibility forproject identification, appraisal, implementation, and monitoring. Selection of subprojects will beon a case-by-case basis and based on criteria aimed at achieving substantial developmentimpacts. Subproject proposals will need to include (i) mechanisms to ensure community andprivate sector participation in subproject planning, design, financing, implementation, andoperation and maintenance; (ii) a clear quantification of subsidies and description of payment

12

arrangements; and (iii) simple cost-recovery mechanisms. As in part A, the Project will providethat all repayments under this component be re-lent for additional slum networking and homeworkplace schemes, over the term of the ADB loan. Additionally, both components are eligiblefor 100 percent financing through the ADB loan.

a. Slum Networking

36. Slum networking subprojects require the formation of partnerships among communityresidents, municipal corporations, CFIs, NGOs, and often times private businesses andindustries. The approach focuses on improving all essential services such as water supply,drainage, sanitation, access, and solid waste management within defined slum communities. Itis estimated that 25 to 30 percent of slum dwellers have home-based production activities, andimprovements to water supply, electricity, and sanitation have a direct positive impact on theirproductivity and incomes. Slum networking also includes a guarantee of tenure, which providesthe slum dwellers with the necessary assurance to improve their housing conditions and tocontribute financial resources and labor to community-wide improvements. This has provenmuch more effective than providing households with title certificates that allow them to sell theproperty and move to or establish new slums. The slum networking project in Ahmedabad iscited as an example of a successful partnership involving the Ahmedabad municipalcorporation, community residents, CFIs, and local industries to deliver essential municipalservices to more than 300,000 slum dwellers in the municipality. More than 10 slum networkingsubprojects have already been identified for consideration under the Project; all are to be basedupon a strong partnership approach from design through implementation. The partnershipapproach represents a radical departure from HUDCO’s traditional support for slumimprovement schemes whereby HUDCO provided loans directly to slum improvement boardswith minimal involvement in subproject appraisal, implementation, or monitoring. Subborrowersunder this component will include municipal authorities and CFIs. A total of $10 million isallocated to HUDCO for financing subprojects under this component, with the maximum subloanfor any given subproject to be limited to $2 million.

b. Home Workplace

37. Home workplace subprojects are designed to provide financial resources to low-incomehouseholds that operate cottage industries from their houses for the purpose of improving theirpremises, resulting in increased income potential. It is estimated that 20 million to 30 millionpeople across India are home-based workers; 80 percent are women.16 The subborrowers forhome workplace subprojects will consist of handloom and handicraft cooperative societies, aswell as various public and private companies that out-source their operations such as beedi(tobacco) rolling, weaving, pottery, brass works, footwear, and so on. Due to the low incomes ofhome-based workers, Government-sponsored home workplace schemes contain an element ofsubsidy that is released through the state government when an agreement is reached betweenHUDCO and the implementing agency on the financing arrangements, use of funds, andrepayment capacities of the beneficiaries. The state government also obtains a writtenundertaking from the beneficiaries that the home worksheds financed under the scheme will notbe sold or rented to any other person for at least 10 years. HUDCO funds are subsequentlyreleased based on a staged payment schedule, following a review of the physical and financialstatus of the schemes. HUDCO has successful ongoing programs for such subprojects withworker societies and cooperatives such as the Tamil Nadu Handloom and WeaversCooperative Society, Rajasthan State Handloom Development Corporation, and Rajasthan

16 Mahila Housing SEWA Trust and UNDP-World Bank Water and Sanitation Program. 1999. Credit Connections.

New Delhi.

13

Rajya Bunkar Sahakry Sangh Ltd. As the sole Implementing Agency for this component,HUDCO will be responsible for onlending $5 million to support home workplace subprojects; themaximum subloan size for any given subproject will be $500,000.

3. Part C: Lending to Low-Income Households through Housing FinanceInstitutions

38. This part of the Project is designed to increase share of HFI lending to low-incomehouseholds. This objective is to be achieved through two channels: (i) expanding the housingfinance operations of three HFCs, namely HUDCO, HDFC, and ICICI, to lend directly to low-income households through mortgages with market interest rates; and (ii) expanding therefinancing operations of NHB so that smaller HFCs, which will not be Borrowers under theProject, will be able to increase their lending to low-income households as well as to CFIs andNGOs. As distinct from the low-income households targeted under part A, the low-incomebeneficiaries of part C are those who do have title to real property to support a mortgage loan.Similar to part A, the Borrowers will make adequate provisions to ensure that repayments underthis component are used to refinance loans to low-income households over the life of the ADBloan. ADB funds will refinance 80 percent of all lending under this part to maximize theleveraging of the ADB loan and Borrowers' own-source contributions.

a. Direct Lending to Low-Income Households

39. Low-income households are an unserved segment of the formal housing finance market,as HFCs have traditionally focused on lending to middle- and high-income borrowers. Thetargeted beneficiaries of this component will have average household incomes ranging fromRs5,000 to Rs7,000 per month. These households can afford a mortgage loan of overRs165,000 at market-rate terms.17 Combined with family savings and in-kind contributions,which often amount to the size of the loan, a moderate two- to three-room house could be builtor purchased. Since the HFP, increased competition in the sector combined with deregulationhave resulted in virtual elimination of interest rate differentials by loan size, except for loans byHUDCO to EWS households, which currently carry a Government-mandated annual interestrate ceiling of 10.5 percent. This situation indicates that the downmarketing of housing financeto low-income households is financially viable for HFCs. A total of $115 million has beentargeted for this component under the Project to be implemented by HUDCO, HDFC, and ICICI.

b. Refinancing Loans to Low-Income Households

40. Another means to promote increased lending by HFCs to low-income households is toprovide NHB with financial resources specifically earmarked to refinance HFC mortgageportfolios comprised of housing loans to low-income households. This component will beimplemented solely by NHB, which has the only refinancing facility among the Borrowers. Theinstitutions eligible for participation under this component include all HFCs approved by NHB forrefinancing, with the exception of HUDCO, HDFC, and ICICI. Given the desired focus on HFCs,refinancing of mortgage loans to low-income households by state apex cooperative housingsocieties, state agricultural rural development banks, and state cooperative banks will not befinanced under the Project; however, exceptions may be considered when NHB candemonstrate that a given institution's financial position is acceptable and adequate financialcontrols are in place to ensure proper accounting of the sources and uses of funds. NHB canalso refinance HFC loans to CFIs and NGOs under the CFI refinance scheme; this scheme wasdeveloped under the ADB TA for Strengthening Housing Finance Institutions (footnote 9) and 17 Assuming a mortgage repayment capacity of 30 percent of a monthly income of Rs7,000 per month and a 15-year

mortgage at 13 percent (HDFC’s unified annual interest rate), the maximum affordable loan size is Rs165,976.

14

launched in January 1999. While only one loan has been refinanced under the scheme thus far,the Project will encourage more HFCs to lend to CFIs by requiring that NHB direct 20 percent ofthe funds under this component for CFI refinancing. The total allocation for this component,comprising both the refinancing of low-income housing loans by HFCs and the refinancing ofHFC loans to CFIs, is $40 million.

C. Cost Estimates

41. The project cost estimates, presented in Table 1, include all the investments in housingand related infrastructure improvements expected to be generated through the catalytic effect ofthe ADB loans. The cost estimates assume that individual households receiving housing loansthrough the Project will invest an amount roughly equal to 50 percent of each loan amount(Appendix 6). This assumed beneficiary contribution is very conservative, and based on CFIlending records as well as surveys of low-income borrowers. The contribution of householdsavings, land, and labor often exceeds two times the original loan amount, especially whenhousehold contributions are tracked over time. This tendency for low-income households tocontinue to invest a significant proportion of their disposable income for housing improvementsis attributed to the economic and social benefits of home ownership. As well as constituting ahousehold's most valuable asset, a home provides the physical environment to raise a familyand membership within a local community, and often times a place to support income-generating activities. In addition to the beneficiary contributions, the provision to refinance 80percent of all lending under part C, as well as lending to public and private enterprises and stateand local bodies under part A, will stimulate the Borrowers to contribute own-source funds in anamount equal to 25 percent of the ADB loan for these components.

Table 1: Project Cost Estimates($ million)

ItemForeign

ExchangeLocal

CurrencyTotalCost

A. Lending to LIHs through Intermediaries1. CFIs and NGOs 6 54 602. Public and Private Enterprises 11 102 1133. State and Local Bodies 5 51 56 Subtotal (A) 23 206 229

B. Reducing Poverty through InnovativeSubprojects1. Slum Networking 2 13 152. Home Workplace 1 7 8 Subtotal (B) 3 20 23

C. Lending to LIHs through HFIs1. Direct Lending to LIHs 32 184 2162. Refinancing Loans to LIHs/CFIs 3 47 50 Subtotal (C) 35 231 266 Total 61 456 517 Percent 12 88 100

CFI = community-based financial institution, HFI = housing finance institution, LIH = low-income household, NGO= nongovernment organization.

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D. Financing Plan

42. HUDCO, NHB, HDFC, and ICICI have requested loans totaling $300 million equivalentfrom ADB’s ordinary capital resources to finance 58 percent of the total project cost. It isproposed that ADB finance the entire foreign exchange cost of $61 million and $239 millionequivalent (52 percent) of the local currency cost. The balance of the project cost will be borneby the Borrowers as well as the beneficiary households from their own resources. Table 2shows the financing plan.

Table 2: Financing Plan($ million)

Source

Foreign

Exchange

Local

Currency

Total

Cost Percent

ADB 61 239 300 58

HUDCO 0 21 21 4

NHB 0 10 10 2

HDFC 0 20 20 4

ICICI 0 20 20 4

Beneficiaries 0 146 146 28

Total 61 456 517 100ADB = Asian Development Bank, HDFC = Housing Development Finance Corporation, HUDCO = Housing andUrban Development Corporation, NHB = National Housing Bank.

43. The proposed loans will be provided as lines of credit to finance the entire foreignexchange cost, and part of the local currency costs (58 percent of the total project cost). Theactual use of the loans, each of which will be in a fixed amount and guaranteed by theGovernment, will be periodically reviewed by ADB missions to assess the efficiency andeffectiveness of use by the Borrowers. To stimulate financial contributions by the Borrowers,ADB will finance 80 percent of the total amount disbursed under part C as well as 80 percent ofall loans channeled through public and private enterprises and state and local bodies under partA.

44. The proposed loan utilization for each Borrower is as follows: HUDCO will receive $100million and onlend $25 million to CFIs and NGOs, $20 million to public and private enterprises,$10 million to state and local bodies, and $30 million to individual low-income householdsthrough retail lending, and use $15 million to support slum networking and home workplacesubprojects. NHB will receive $40 million for refinancing HFC loans to low-income householdsand CFIs. HDFC will receive $80 million and onlend $5 million to CFIs and NGOs, $20 millionto public and private enterprises, $10 million to state and local bodies, and $45 million toindividual low-income households. ICICI will receive $80 million and onlend $10 million to CFIsand NGOs, $20 million to public and private enterprises, $10 million to state and local bodiesand $40 million to individual low-income households. These allocations are based on severalcriteria, including development objectives and impacts, each Borrower's capability to implementthe different lending modalities and subprojects, and an assessment of the absorptive capacityof the different financial intermediaries to onlend funds to low-income households. Suchallocations also represent lending targets to be achieved by the Borrowers during the project

16

implementation period. Lending targets by project parts and primary Borrowers are detailed inAppendix 7.

45. The four loans will carry interest in accordance with ADB's market-based lending windowand a front-end fee of 1 percent of the loan amount. In view of the development projectorientation of part B, and the desire to improve the matching of assets and liabilities among theHFCs, the loans will have an amortization period of 25 years, including a grace period of 5years. The foreign exchange risk will be borne by the Borrowers.

46. The provision for financing local currency costs is considered justified under ADB’s localcurrency financing policy.18 With a low per capita income, India is classified as a less developedcountry under the United Nations system, and such ADB member countries are to be givenpriority in ADB's local currency financing policy. The public sector saving rate is very low, thehousing finance sector in general is weak, and consequently, financing is constrained,particularly for the poorest. The central Government and several state governments are takingsteps to (i) improve savings performance through fiscal consolidation and public sectorrestructuring, and (ii) improve access to housing through legislative amendments and improvedtaxation systems and tax administration. Private sector participation in housing finance is beingstimulated by the implementation of conducive policy reforms including appropriate incentivesand ongoing liberalization of the financial sector and capital markets. Finally, the Governmenthas initiated a program to ensure availability of shelter for the lower income groups byencouraging public and private lending through CFIs and NGOs, incorporating livelihoodelements and other participatory approaches, and thus resulting in gradual reduction of grantelements and improvements in loan repayment rates.

47. The local currency component of the Project is high because most housing constructionmaterials are produced locally; this is particularly true for low-income houses. The Project isexpected to have a high demonstration and catalytic value in reforming the housing financesector to make it more effective and efficient in improving access of low-income households tosources of finance for shelter. It thus has high economic, human development, and poverty-reduction values and merits and a relatively high level of local currency financing support, asthere is insufficient opportunity for ADB to achieve its objectives by foreign currency lendingalone.

48. HUDCO, NHB, HDFC, and ICICI will onlend the loan proceeds in local currency tosubborrowers. Accordingly HUDCO, NHB, HDFC, and ICICI will hedge ADB's foreign currencyloans against foreign-exchange risk through either a foreign-exchange risk cover under anappropriate facility available in the market or a currency swap or forward cover, or both,satisfactory to ADB. A representative financing structure under a currency swap arrangement,similar to the arrangement under the HFP, is described in Appendix 8.

E. Implementation Arrangements

49. Each of the four Borrowers will be responsible for implementing their respective projectcomponents and subprojects in accordance with ADB guidelines and procedures. Lendingthrough intermediaries under part A will be implemented by HUDCO, HDFC, and, in the case ofICICI, through ICICI Home Finance Company. Implementation of part B will be the soleresponsibility of HUDCO. Given HUDCO's significant role under parts A and B, HUDCO willcreate a full-time project implementation unit (PIU) to ensure proper subproject identification,appraisal, implementation, financial reporting, and monitoring. The direct lending to low-income

18 R1-95: Review of Lending Foreign Exchange for Local Currency Expenditures on Projects, 3 January.

17

households component of part C will be implemented by HUDCO, HDFC, and, in the case ofICICI, through ICICI Home Finance Company. NHB will be responsible for implementing therefinancing component of part C. The four borrowing institutions must assume the dollar torupee conversion cost, the associated cost of mitigating the risk of foreign exchange ratefluctuations, and the Government guarantee fee. However, it is expected that the longermaturity of the ADB loan will allow the Borrowers to better balance the maturities of their assetsand liabilities. Each of the Borrowers will be responsible for maintaining separate accounts onthe various uses of the loan proceeds.

1. Implementation Schedule 50. The Project will be implemented over five years (2000/01 – 2005/06). To ensure timelyimplementation and in-line with the Government’s emphasis on the disbursement readiness ofapproved loans, each Borrower will prepare a detailed disbursement plan for the first year of theProject including associated draft subloan agreements with intermediaries. The closing date forsubmission of an application for subproject approval will be four years from the date ofeffectiveness of each loan agreement, and for disbursement it will be the loan closing date.

2. Approval of Subprojects 51. All four Borrowers are required to submit the first two subprojects under each applicableonlending channel or component to ADB for review and approval. All subprojects to be financedunder the slum networking and home workplace components of part B will require ADBapproval to ensure that procurement, environmental, resettlement, and compensationprocedures, as well as other ADB conditions, are met. Each slum networking subprojectproposal will include a detailed description of the inputs and their cost; partnershiparrangements of CFIs, NGOs, municipalities, slum residents, and the private sector; financingand cost recovery mechanisms; extent of subsidies involved; any resettlement or compensationissues, and a plan to address such issues; and the implementation plan including institutionaland beneficiary responsibilities, an initial environmental examination of the subproject, and thelong-term management and financing plan. Equally important, the subproject description willdiscuss the measures incorporated to ensure its sustainability and demonstration value.

3. Procurement 52. Procurement under the Project will be in accordance with ADB's Guidelines forProcurement. For procurement of goods and services to be financed by the subloans out of theloan proceeds, the Borrowers will satisfy ADB that the procurement procedures they applied areappropriate in the circumstances. Moreover, they will ensure, and certify to ADB, if requested,that the goods and services to be financed by such subloans are purchased at reasonableprices, account being taken of relevant factors such as time of delivery, efficiency, and reliabilityof goods; their suitability for the qualified housing proposals and slum subprojects; theavailability of maintenance facilities and spare parts; and in the case of services, their qualityand the competence of the parties rendering them.

4. Disbursement 53. The Borrowers will disburse subloans under the Project through (i) a separate imprestaccount of each Borrower, to be established immediately after the effective date of each LoanAgreement; or (ii) ADB's direct payment, commitment, or reimbursement procedures. Theimprest accounts, which will receive initial advances equivalent to each Borrower’s anticipateddisbursements to subborrowers over a six-month period must be set up with local commercialbanks acceptable to ADB. The Borrowers may, from these accounts, make swap or other

18

hedging arrangements satisfactory to ADB to cover the foreign exchange rate risk for project-related expenditures. The imprest accounts will be established, managed, replenished, andliquidated in accordance with ADB's Loan Disbursement Handbook, as amended from time totime. ADB's statement of expenditures procedure will be used to liquidate advances providedinto the imprest accounts. However, each individual payment reimbursed or liquidated using thestatement of expenditure procedure will not exceed $2.0 million equivalent. Other disbursementprocedures will be in accordance with ADB's Loan Disbursement Handbook.

5. Project Supervision and Reporting Requirements 54. Each Borrower will assign a project manager who will be responsible for projectsupervision, monitoring, accounting, and reporting. Each Borrower will also submit to ADB aquarterly progress report on commitments and disbursements, implementation status ofapproved subprojects, any problems encountered during the quarter under review including anymaterial or adverse change in the Borrower’s activities, actions taken or proposed to be taken toremedy those problems, and the expected progress during the following quarter. TheBorrowers will establish and maintain accounts and records in such a manner as to facilitateidentification of income and expenditures related to the Project. The Borrowers will keep properrecords of all onlending activities under part A, identifying the subborrower or intermediary; thesize, term, and interest rate of the loan(s) to subborrowers; the estimated number and incomelevels of beneficiaries; the purpose(s) and use(s) of loans to the beneficiaries; and the averagesize, term, and interest rate of loans to the beneficiaries. Under part B, HUDCO will (i) recordthe lending terms of subloans for slum networking and home workplace subprojects, as well asprepare an assessment of the financial position of the subborrowers; and (ii) ensure that it hasaccess to the list of beneficiaries. For part C, the Borrowers will maintain proper lending recordsthat indicate the monthly household income levels of the borrowers, the purpose(s) of the loan(i.e., new house construction, home improvement, etc.), the security held for each mortgage,and the size, term, and interest rate of each loan. For part C, as well as for the onlending topublic and private enterprises and state and local bodies under part A, the Borrowers willmaintain adequate records to show that ADB funds were used to finance 80 percent of totallending through these channels.

6. Accounts and Audit 55. Each Borrower will submit to ADB certified copies of its annual audited financialstatements and the auditor’s report within nine months of completion of the fiscal year. All ofthe accounts and statements of expenditures and revenues will be audited annually by auditorsacceptable to ADB. Audited project accounts, together with the report of the auditor, will besubmitted to ADB within nine months of the close of the financial year. In addition to the auditedproject accounts, the Borrowers will submit audited annual financial statements through the lifeof the loan. Each Borrower will also submit to ADB, not later than three months after the loanclosing date, a completion report on loan utilization, subproject implementation, and theperformance of intermediaries and subborrowers with respect to onlending funds to low-incomehouseholds for housing purchase, construction, or improvement.

7. Periodic Reviews 56. At its discretion, but at least once every six months, ADB will conduct reviews of themanagement, financial, and operational performance of the Borrowers with respect to projectactivities and their compliance with implementation of the Policy and Institutional Action Plan(Appendix 4). The plan may be modified during project implementation by agreement of theGovernment, Borrowers, and ADB, and will be implemented in accordance with the

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requirements and schedules set forth therein. A midterm review will be conducted by the end of2003 with participation of the involved parties. The objectives of the midterm review are to(i) review the progress achieved relative to the targets set for each project component;(ii) assess the degree of accomplishments in meeting the Policy and Institutional Action Plantargets and revise targets as appropriate; (iii) reexamine the project design, implementationarrangements, and other relevant aspects; and (iv) formulate, within the updated sector settingand other changes in circumstances at the time of the review, any changes to ensuresuccessful project implementation, achievement of project objectives, and sustainability ofproject benefits. In addition, independent project impact evaluations will be organized by theGovernment in the second and fourth years following commencement.

8. Benefit Monitoring and Evaluation

57. To ensure that the target beneficiaries are realizing the anticipated benefits, the Projectincludes a benefit monitoring and evaluation (BME) program to be undertaken by theBorrowers. The BME program will (i) monitor the Project’s implementation performance, whichwill mainly deal with the efficiency and effectiveness of the different onlending arrangements; (ii)monitor the Project’s operational performance, mainly in terms of the Borrowers achieving theirrespective lending targets; and (iii) evaluate the Borrowers' performance during and after projectimplementation. The key monitoring indices, in addition to targets and actions set forth in theproject framework (Appendix 1) and policy and institutional action plan (Appendix 4), will be (i)internal efficiency of sublending operations, (ii) satisfaction of demand for finance, (iii) level ofbeneficiary participation, (iv) ability to service target groups, (v) financial impact on Borrowersand subborrowers, (vi) sustainability of strengthened linkages between HFIs and CFIs, and (vii)socioeconomic impact on low-income beneficiaries. The BME information system design will bebased on ADB’s Benefit Monitoring and Evaluation Handbook and carefully tailored to meet theconditions in the Project. The Borrowers will provide ADB with the information produced underthe BME program in the first quarterly report for each calendar year.

F. The Borrowers

58. The Borrowers represent Government-sponsored, regulatory, and private sector housingfinance institutions. All four institutions have borrowed from ADB in the past, and their soundfinancial management and performance qualifies them to participate in the Project as Borrowersand Executing Agencies. A brief description of each of the four Borrowers follows.

1. Housing and Urban Development Corporation

59. HUDCO was incorporated in April 1970 as a wholly Government-owned company topromote housing and urban development, particularly for the low-income and economicallyweaker sections of society. As the first financial institution dealing exclusively with the housingsector, its establishment marked the beginning of formal housing finance in India. HUDCO isregistered under the Companies Act as a public limited company and run by a board of directorsconsisting of professionals appointed by Government. Its corporate office is located in NewDelhi, and it has 5 zonal, 16 regional, and 12 development offices throughout the country. Itscurrent operations are divided between housing and infrastructure finance through state andlocal agencies. In the past year it began to lend directly to individuals for housing through itsHUDCO Niwas retail lending window.

60. HUDCO currently has authorized capital of Rs12.5 billion ($290.7 million) and paid-incapital of Rs5.8 billion ($135 million). The cumulative number of housing and infrastructureschemes sanctioned through 31 March 1999 is 14,623. Loans sanctioned total Rs230.55 billion,

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of which housing comprises Rs146.04 billion. Cumulative disbursements through 31 March1999 were Rs154.73 billion, and the total number of dwelling units financed through the sameperiod are almost 8.6 million. As a wholly owned Government institution, HUDCO is mandatedto lend at least 55 percent of its funds to low-income groups and the EWS. Since the majority ofits lending is through state and local bodies for which cost recovery from borrowers has beenpoor, HUDCO has required state guarantees for such lending. Hence, prior to the early 1990s,cost recovery and rigid appraisal were not vigorously pursued. Recent economic reforms andthe decline of Government funds for such schemes have made states increasingly reluctant toissue guarantees. HUDCO has therefore undergone fundamental changes in recent years; it isassisting its borrowers to achieve improved cost recovery techniques, and assisting state andlocal bodies to adopt reforms such as commercialization of selected urban infrastructureprojects. The ongoing ADB TA to strengthen state-level housing finance agencies (footnote 10)will also serve to improve HUDCO’s lending and cost recovery.

2. National Housing Bank

61. NHB was established in July 1988 to function as the apex body for the housing financesector. It is wholly owned by the Reserve Bank of India, and has an authorized and fully paid-upshare capital of Rs3.5 billion ($81.4 million). NHB’s three primary responsibilities are to mobilizeresources for the housing sector, promote the development of HFCs, and regulate theoperations of HFCs. As a promoter, NHB provides financial support to HFCs and facilitatesaccess to institutional credit. It provides refinancing to 29 HFCs and other entities according to arefinancing schedule whereby refinance rates are based on loan sizes. As a regulator, NHBsets prudential norms for HFCs based on required capital adequacy ratios, income recognition,asset classification, and acceptable levels of nonperforming assets.

62. As of December 1999, NHB had refinanced a total of Rs47.6 billion ($1.11 billion) forthree categories of approved borrowers: HFCs, scheduled banks, and cooperative institutions.HFCs account for 77 percent of all refinancing; cooperative institutions for 18 percent, andscheduled banks for 5 percent. Lately, due to the decline in interest rates in the country,scheduled banks have not taken any refinancing from NHB, although they have increased theirlending for housing. In January 1999, the NHB board approved a new refinancing scheme forCFIs under which any approved institution, mainly HFCs, could avail of refinancing for loansmade to CFIs. Only one HFC has accessed this facility. Over the past few years, NHB has beenpreparing to undertake a pilot issue of MBS. It has obtained approval from the Reserve Bank ofIndia for such an issue, drafted the necessary legal documents, appointed merchant bankers forthe offer, prepared an operations and accounting manual, and discussed the issue withinterested investors. The pilot issue is expected to come to market in the near future.

3. Housing Development Finance Corporation

63. HDFC was established in 1977 as the first specialized housing finance institution in thecountry. The company was promoted by ICICI with initial equity investments by the InternationalFinance Corporation and his Royal Highness, the Aga Khan. HDFC is a public limited companyspecializing in the provision of housing finance to individual borrowers. As the only privatehousing finance institution at the time, it grew rapidly and is still considered the market leader inthe retail housing finance business. The majority of HDFC’s loans are to individuals whocurrently number over 800,000. To reach lower income borrowers, HDFC has utilized severallines of credit from KfW to finance various projects for low-income households as well as loansto CFIs.

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64. As of 31 March 2000, HDFC’s paid-up capital was Rs1.20 billion ($27.60 million); its networth was Rs20.96 billion ($481.84 million). As a publicly listed company, its shares areregularly traded on the stock exchange. As of March 2000 the company had 116,000shareholders. It has 67 branches throughout the country, and some 47,000 agents who collectdeposits and submit loan applications where there are no branches. HDFC’s major source offunds is deposits through various deposit schemes tailored to different types of depositors. Italso raises funds through bond and debenture issues, long-term loans from domestic andinternational finance institutions, and NHB refinancing. A new source of finance will be throughthe pilot securitization issue of HDFC mortgages. In its efforts to diversify, HDFC has alsoestablished an infrastructure finance services company, a credit-rating company, consumerfinance companies, a property management company, and a bank.

4. ICICI

65. ICICI was established in 1955 under an initiative of the Government, the World Bank,and representatives of Indian industries. Since that time, ICICI has developed into a universalbanking group with 18 subsidiaries and affiliates. ICICI operations include medium- and long-term project finance, corporate finance, leasing, and other types of financial and advisoryservices. Until recent years, ICICI’s operations concentrated on project-based lending to themanufacturing sector. In response to the changing economic and financial environment, ICICIhas taken steps to diversify its operations with an increasing focus on corporate andinfrastructure financing. As a result of this diversification, ICICI’s asset base has continued togrow. Disbursements increased by 34 percent from Rs192.25 billion ($4.42 billion) in FY1999 toRs258.36 billion ($5.94 billion) in FY2000, while total assets increased by 11.16 percent, fromRs538.57 billion ($12.38 billion) in FY1999 to Rs598.659 billion ($13.76 billion) in FY2000.During the same period loan approvals increased by 38 percent from Rs323.17 billion ($7.43billion) in FY1999 to Rs447.79 billion ($10.29 billion) in FY2000 indicating a strong pipeline ofbusiness.

66. ICICI was not a Borrower under the HFP, and the primary justification for its inclusion inthe Project is to promote greater competition, especially given ICICI's size and its ability to havea significant impact on India's housing finance sector. In 1998/99 ICICI began to provide theentire range of personal loans to individuals, including housing finance, automobile financing,and consumer durable finance. ICICI Home Finance Company was established during thisperiod as a 100 percent subsidiary to provide focus to ICICI's housing finance initiative. As ofMarch 2000, ICICI Home Finance Company approved housing loans for Rs2.57 billion ($59.08million), while disbursements total Rs0.765 billion ($17.60 million). ICICI’s corporate recognitionas well as the group’s large retail customer base and wide distribution network give it a strategicadvantage in entering the housing finance sector. Utilizing its corporate relationships, ICICI’sgeographic reach is nationwide, with 90 branches, 55 service centers, and 9 locations servicedby direct marketing agents. Cumulative disbursements of ICICI Home Finance Companyprojects are projected to be Rs123 million ($2.83 million) by FY2006.

G. Environmental and Social Measures

1. Environment

67. All three parts of the Project will increase the availability of housing finance for thepurchase, improvement, extension, and construction of housing for low-income families.Improved housing and living conditions also mean better environmental conditions, both at thehousehold and community levels, thereby contributing to a better quality of life, improved familyhealth, and greater environmental awareness and pride of community. In the long run, bettereconomic conditions, resulting from the associated benefits of improved housing and

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neighborhood infrastructure, will enable communities to sustain additional environmentalimprovements.

68. Housing improvements financed under the Project will have a strong positive impact onthe immediate living environment for women and children who spend much of their time athome. Better ventilation, increased usable space, and adequate lighting will have a positiveimpact on conditions within the house itself. The use of solid, better quality building materialsand construction practices will reduce household vulnerability to fire, building collapse, rodents,and in many cases, flooding or standing water.

69. Under the slum networking component of part B, the Project will finance improvementsin selected urban slums. Access to clean water in these areas is scarce and many householdshave either no toilet facilities or use latrines that discharge directly into drains and open waterbodies. Exposure to human waste is exacerbated by the inadequacy of drainage and by theimproper disposal of solid waste. In addition, slums are often situated in low-lying areas that aresubject to flooding during the monsoon season. Without adequate drainage and sewage,wastewater mixes with storm water and creates conditions for the spread of waterbornediseases.

70. The slum networking component will also have direct positive impacts on family healthand the surrounding environment by improving community water supply and sanitation, solidwaste management, and drainage. All of these efforts will reduce the incidence of waterbornedisease. The active involvement of local communities in the conception, implementation,financing, and maintenance of slum networking projects will complement and reinforce thesebenefits, ensure greater cost recovery and sustainability, create subproject ownership, andpromote greater awareness of environmental issues.

71. The only potential adverse environmental impact of the Project could be the disruption ofpublic services and transportation during the construction phase for slum networkingsubprojects; however, given the relatively small scale and labor-intensive nature of suchsubprojects, these disruptions are expected to be minor and can be easily mitigated throughappropriate measures. Initial environmental examinations will be prepared for each slumnetworking subproject to identify and minimize any potential adverse environmental impacts.These assessments will be submitted to ADB for review to ensure that they comply with itsenvironmental guidelines.

2. Social Analysis

72. Social aspects of lending to low-income households are presented in Appendix 9, whichsummarizes the results of a comprehensive survey of CFIs, NGOs, and low-income borrowers.The Project will focus on extending loans to low-income households that are currently unable toaccess housing finance from the formal sector. It will involve CFI and NGO networking,community participation, and the education and empowerment of low-income groups to supportsustainable improvements in their social well-being. With the exception of the direct lendingcomponent of part C, the Project will have a high degree of community engagement in all of itscomponents and strong positive social impacts.

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a. Profile of Project Beneficiaries

73. Project beneficiaries will be low-income households with monthly incomes of Rs7,000 orless. Under the CFI and NGO lending component of part A, beneficiaries, for the most part, willbe members of self-help groups in urban and peri-urban areas with a positive record ofborrowing and repaying small loans. The majority of these households will be able to afford loanrepayments between Rs250 and Rs500 per month. Most of the beneficiaries will be women.The beneficiaries under other project parts will include slum dwellers, low-income employeesfrom public and private sector enterprises, state and local government workers, home-basedworkers, and individual borrowers. All of these beneficiaries will be part of householdsinterested in building or improving individual housing, but unable to access market-basedhousing finance through formal channels.

b. Beneficiary Impacts

74. The Project will have a strong positive impact on three levels of beneficiaries. First,individual low-income households will benefit directly from increased access to market-basedhousing finance that, in turn, will provide for (i) a safe, secure, and more comfortable place inwhich to live and raise a family; (ii) a higher standard of living that enhances a family’s socialstatus and improves its children’s prospects for marriage; and (iii) a greater degree of residentialand household stability due to the possession, in many cases by women, of a valuable fixedasset. Also at the household level, improved housing will have several economic impacts thatinclude savings in rent; ownership of a long-term asset with a generally appreciating value;improved infrastructure and services resulting in more time for productive activities; a healthierenvironment, particularly for home-based workers and children; and the establishment ofacceptable collateral that can be used to obtain additional credit. Second, self-help groups andslum neighborhoods will be organized and trained to work closely with CFIs and otherdevelopment partners. Finally, the capacities of HFIs, CFIs, and NGOs will be strengthened toincrease and sustain their lending to low-income households.

c. Impact on Women

75. Women will constitute the majority of subborrowers from CFIs and NGOs for housingloans under part A, as well as for home workplace improvement loans under part B. Their activeparticipation in self-help groups provides opportunities to empower them in household andcommunity decision making and to address their immediate housing and neighborhoodconcerns. The use of project funds for housing will provide women with an important physicaland financial asset that will substantially increase their status and security within the householdas well as in their communities. Since women have the ultimate child-rearing responsibilities,the right and security to land and property will also help safeguard the family’s interests. Womenand children are particularly affected by poor housing conditions and the lack of clean waterand proper sanitation facilities. Better living conditions, and improved community services andfacilities will reduce the vulnerability of women and children to disease, diminish the drudgery ofmany household tasks, and provide more time for income-generating activities.

d. Community Participation

76. Many components of the Project will be community-driven, not only in terms oftraditional levels of participation, but also in terms of developing community ownership andproviding support to people-driven initiatives. Support for CFI lending, for instance, will catalyzethe development of savings groups and other forms of community participation. Emphasis willbe placed not only on delivering basic housing and services to the poor, but also on

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empowering the low-income segment of the population through the establishment of sustainablegrassroots processes and institutions. The creation of working partnerships among CFIs, slumneighborhoods, and municipal authorities will be one of the primary conditions for the selectionof slum networking subprojects. These subprojects will provide a legitimate arena for localcommunity institutions to act as civic institutions and to establish viable partnerships withmainstream agencies for housing and infrastructure development, as well as ongoing operationand maintenance activities.

H. Policy Issues

77. The Project emphasizes the establishment of a comprehensive and conducive policy,institutional, and regulatory environment to foster the development of sustainable housingfinance mechanisms to meet the housing finance needs of low-income households. Duringproject preparation, a number of policy reform measures to improve the efficiency andcompetitiveness of the housing finance delivery system were identified. These policy reformmeasures, presented in Appendix 4, will be periodically and jointly reviewed by ADBadministration missions, the Borrowers, and the Government against progress achieved.Following such reviews, actions and schedules will be amended, if deemed appropriate. Theprincipal project-related policy reform measures and initiatives are outlined here.

1. Strengthen Linkages between the Formal and Informal Sectors

78. The informal sector represents the primary means for low-income households withoutcollateral to access loans for housing. Experience clearly demonstrates that CFIs are importantand viable channels for lending to low-income households on a market-based and sustainablebasis. However, CFIs also suffer from a lack of capital to expand their lending operations. Tobridge this gap between the demand for housing loans and the financial resources available toCFIs, formal finance sector linkages with CFIs must be financially viable. Toward this objective,HFIs need to develop in-house expertise in microcredit lending, develop rating criteria for CFIsbased on their lending records and repayment capacities, standardize and streamline loanprocessing procedures, and develop innovative financing structures such as escrow accounts,guarantee funds, and revolving funds to mitigate the potential risks associated with lendingthrough CFIs. Additionally, NHB needs to encourage HFCs to extend credit to CFIs byexpanding its CFI refinancing window. To strengthen linkages between the formal and informalhousing finance sectors, TA will be provided for CFIs to inform and educate the Borrowersabout microfinance and specifically the lending operations, systems, and procedures of CFIsinvolved in housing finance.

2. Support Market-Based Housing Finance

79. The Government must come to recognize that mandated interest rates serve as adisincentive for lending to lower income groups. The due diligence costs for smaller loanscoupled with the higher risks of uncollateralized lending result in an interest rate premiumrelative to larger, collateralized loans. Failure to recognize this basic market principle hasresulted in a severe shortage of financing available to lower income groups, and the financingthat is available commands usurious interest rates from informal moneylenders. While it is truethat increased competition in the housing finance sector has contributed to the virtualelimination of a Government-defined tiered interest rate structure, as well as the interest ratecap of 12 percent for loans to microfinance institutions, mandated interest rates remain for EWShouseholds. Acknowledging the Government’s desire to ensure that housing loans areaffordable to the poorest of the poor, the gap between existing mandated interest rates andmarket interest rates for EWS loans should be narrowed. The Project will also promote market-

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based lending to CFIs to ensure the commercial and financial viability and sustainability oflinkages between formal and informal sector HFIs.

3. Raise Corporate Governance Standards for Public Institutions

80. Liberalization of India’s financial sector has highlighted the need for public sectorinstitutions to raise their corporate governance standards to improve their financial conditions,management practices, and operational efficiencies. For HUDCO and NHB, the Project willrequire that each institution take specific steps to improve corporate governance by establishingan independent board audit committee with specified composition, powers, and functions,board-specified code of conduct and ethics, and reporting on corporate governance complianceas part of the annual report. As such HDFC and ICICI will be required to demonstrate that theyare in compliance with the corporate governance standards prescribed in the Kumar MangalamCommittee's Report.

4. Improve Subproject Appraisal and Implementation

81. The financial condition of states across India is generally poor and consequently manystates are reluctant to offer guarantees on loans from both public and private sector institutions.Given the significant volume of state lending by HUDCO, this situation has significantimplications for how HUDCO needs to improve its internal appraisal procedures for its state-level lending operations. In addition, at the subproject level, greater attention needs to bedirected by HUDCO to ensuring the financial viability of slum improvement schemes as well asincorporating the requisite degree of community participation to promote greater subprojectownership, cost recovery, and sustainability. The requirement that HUDCO establish a fullyoperational PIU is expected to increase HUDCO's capacity in these areas. Additionally,assistance is envisaged for the design, appraisal, and implementation of slum networkingsubprojects, with particular attention directed at ensuring that the preparation of suchsubprojects is in accordance with ADB's social, environmental, and economic guidelines.

5. Implement Foreclosure Regulations and Provisions

82. An important provision of the amendment to the NHB Act, enacted in May 2000, is toenable HFIs to foreclose on mortgages for defaulting loans in an expeditious manner throughmortgagee power of sale without intervention. However, to make these provisions operationalrequires regulations under the amended NHB Act on procedures for mortgagee power of salewithout court intervention, HFI debt recovery appellate tribunals, and preservation of theexercise of mortgagee power of sale without court intervention notwithstanding judicial reviewunder the NHB Act as amended. As the apex regulatory body for the housing sector, NHB willtake the lead in preparing these regulations for the concurrence of the Government andReserve Bank of India, as these are to be issued under the NHB Act, as amended.

6. Improve the Mortgage Registration System

83. To avoid stamp duties, HFCs across India have increasingly been using equitablemortgages rather than the traditional or standard "English" mortgage. Equitable mortgages,which may comprise as much as 80 percent of the market for new mortgages in India, arelegally recognized and enforceable under the Transfer of Property Act of 1882. Such mortgageinstruments were originally created to facilitate merchant transactions without being burdenedby high stamp duties. Equitable mortgages are not registered, but the original title deeds aredeposited with the mortgagee who, in turn, typically provides the mortgagor with a record ofreceipt. Potential issues or problems with the proliferation of equitable mortgages include (i) the

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possibility that states could take action to recoup stamp duties; (ii) their use is restricted tocertain geographic areas per the Transfer of Property Act; (iii) they do not allow for appointmentof receivers or any foreclosure remedy without court intervention; (iv) there is lack of registrationand consequent lack of public notice; and (v) they cannot be securitized without beingregistered and thereby subjected to stamp duties. Given the complex legal, financial, andpolitical issues involved in addressing equitable mortgages, registration, and stamp duties, theProject requires that a working group comprising representatives of Government, NHB,HUDCO, HDFC, and ICICI be established to prepare a policy paper on improving the mortgageregistration system in India.

7. Expand the Capital Market for Housing Finance

84. NHB has played an important and essential role in addressing the many complex legal,regulatory, and financing issues associated with structuring the first pilot mortgage securitizationissue in India. To build upon this process, NHB must assess the lessons learned from thisexperience in the context of other MBS markets in Asia as well as in developed marketeconomies, and define the requisite reform measures that are necessary to develop India’sMBS market. The progressive development of the MBS market in India also presents somefundamental questions regarding NHB’s future role in the sector. NHB’s traditional role inrefinancing HFC mortgages, for example, will undoubtedly change, and NHB should takedefinitive steps to operationalize and expand its CFI refinancing scheme. Whether NHB shouldassume the role of “market maker,” given its regulatory mandate, needs further consideration toensure an efficient and competitive housing finance sector in India. ADB will assist NHBaddress many of these complex yet fundamental issues related to the future growth anddevelopment of India's housing finance sector.

V. PROJECT JUSTIFICATION

85. The shortage of housing in India is severe. It is estimated to be as high as 40 millionunits. This directly impacts on the quality of life of low-income households, and the economicallyweaker sections of society. The lack of access to affordable housing finance is the most seriousproblem facing low-income households in India who wish to improve their living conditions.Through the different lending modalities, the Project is expected to directly benefit more than270,000 low-income households, or more than 1.3 million people. The recycling or relending ofADB funds will maximize the impact of the loan, resulting in a total of more than 500,000housing loans benefiting approximately 2.7 million people over the loan period. Additionally,ADB funds will serve to leverage financial contributions on behalf of the Borrowers as well asthe low-income beneficiaries who will contribute land, labor, and household savings to housingimprovements. Once low-income families, who already have stable incomes, obtain access tohousing credit, they invest several times the original loan amount in improving their housingover time. This is in contrast to the conventional provision of housing finance to higher incomegroups who move into a completed house and amortize the debt over time. From the financialperspective, the onlending arrangements are designed to be financially viable and sustainablethrough market-based lending whereby the financial intermediaries obtain a sufficient spread tocover their associated cost of operations.

86. Given the basic linkage between improved housing and human welfare, humandevelopment will be enhanced through increased availability of market-based housing financeto support new construction, home improvements, or home workplace activities. Although manyof the benefits that will accrue as a result of improved housing conditions are difficult to quantify,most are based on the connection to improved health and its relation to increased productivity.The availability of loans for housing from CFIs and other financial intermediaries will also enable

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low-income households to establish credit. In addition, basic infrastructure and essentialservices provided as part of the slum networking subprojects will improve the living and healthconditions of slum dwellers, as well as promote partnerships of community residents, CFIs,NGOs, private enterprises, and municipal authorities.

A. Economic Analysis

87. Detailed economic internal rate of return analyses have not been carried out for the slumnetworking or home workplace subprojects as neither their precise subproject locations nor finalterms and uses of funds is available. Additionally, the benefits associated with these types ofsubprojects are difficult to quantify. Among these are health benefits resulting from improvedwater supply, sanitation, drainage, and solid waste management; safety benefits and lessproperty damage due to reduced flooding and fires; land tenure benefits associated with theenhanced security of tenure; and increased productivity and access to education due toimproved health and access to work and schools. For home workplace subprojects, there isalso the financial benefit to the individual household deriving from home improvements tosupport income-generating activities. Although property value increases associated with slumnetworking subprojects are often used to calculate improved economic opportunities andbenefits, this methodology is not appropriate given that (i) property value increases are subjectto various influences, including speculation; (ii) these increases may be regarded as a transferbetween buyer and seller; and (iii) Government could impose a windfall tax on the increase, andsuch a tax, as a transfer, would not be measured as an economic benefit.

B. Financing Justification

88. The justification for lending long-term dollars to finance the rupee costs and cash flowsrequired in India’s housing finance sector is based on a number of considerations. Housingfinance, to be sustainable and available to all segments of society, requires an efficient andfunctioning long-term debt (bond) market. Such a market does not exist in India today.Currently, long-term debt maturities in the private sector range from 3 to 7 years, and up to amaximum of 10 years for government institutions. However, sufficient investor appetite forsecurities over five years is lacking, and even the best issuers cannot count on raising funds ona sustainable basis for maturities over 3 to 5 years. HFIs are forced to rely on short-termdeposits (typically with a 36-month maximum term) for more than 50 percent of their funding,with the balance coming from 3- to 5-year borrowings and some multilateral assistance. At thesame time, mortgages are normally for a period of 15, sometimes 20, years. This situationcreates an asset-liability mismatch for these financing institutions, exacerbated by the absenceof prepayment penalties and the lack of adjustable rate lending. As a result, virtually all HFIswithout proper in-house asset-liability management expertise and access to long-term fundingare at significant risk.

89. The ADB loan is not providing long-term rupees for housing finance. Rather, by itsstructure, the loan is creating the means to allow commercial sources of local currency toprovide long-term rupee financing to the participating Borrowers. The long-term rupee fundsallow the Borrowers to offer affordable interest rates and longer maturities. The “swap”arrangement achieves this by removing both the present and future potential adverse risks offoreign exchange rate fluctuations, interest and principle repayments, and asset-liabilitymismatch. The underlying value of the ADB loan lies in its ability to generate long-term rupeefinancing for housing and the associated demonstration value of the need to create domesticlong-term debt markets, given that foreign sources of finance are neither sustainable nor long-term solution.

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C. Subsidies

90. Subsidies represent a very small part of the overall Project. The majority of project fundsare targeted to low-income households at market rates of interest. Subsidies are not requiredfor project funds that will be onlent through CFIs, enterprises, state and local bodies, or underdirect lending. Onlending arrangements are structured to provide the Borrowers andsubborrowers with sufficient spreads to cover their operational costs, risk premiums, and projectmargins. Subsidies are only required, in part, for the slum networking and home workplacecomponents of part B.

91. For the slum networking component, capital investments will be financed through acombination of loans from HUDCO to local government bodies, usually municipal corporations;contributions from beneficiary households; and grant financing from central and stategovernments, international funding agencies, and private sector sources. Slum networkingsubprojects are typically structured to include approximately 70 percent subsidization of thecapital costs associated with basic infrastructure improvements including water supply,sanitation, drainage, street lighting, and solid waste management; government grants andcontributions from international funding agencies and the private sector constitute the principalsource of such subsidies. The remaining 30 percent of capital costs is borne by the slumresidents who are organized into associations by CFIs, and contribute through a combination ofan up-front payment and weekly or monthly installments. Depending upon the financingarrangements, operation and maintenance costs are often partially subsidized with provisionsthat the local communities will assume an increasing share of operation and maintenance costsover time through different cost-recovery mechanisms. This cost-sharing arrangement will onlybe possible, however, if communities feel they have ownership of the subprojects.

92. For the home workplace component of part B, subsidies are provided by stategovernments. A large number of organized workers are involved in weaving, beedi rolling,handicrafts, and other types of home-based work in rural and semirural India. Virtually all ofthese workers belong to unions or cooperatives, and are in the lowest income category. To beeligible under the government-supported home workplace program, beneficiaries must earn atleast 50 percent of their income from home-based work. The current program providessubsidies from state governments to specified implementing agencies that include unions,cooperatives, and other state apex institutions. The cost of an eligible housing unit, whetherbuilt by the implementing agency or by the individual, is estimated at Rs44,000 in urban areasand Rs35,000 in rural areas. The subsidy component is generally Rs20,000 per unit or about 45percent of its cost. The beneficiary contribution, through any combination of cash, land,materials, and labor, is about 10 percent. HUDCO provides loans through cooperatives toindividual households for the remaining 45 percent. State subsidies are released only uponissuance of the HUDCO loan. The subsidies under the home workplace component are justifieddue to the very low incomes of the beneficiaries, and the fact that a great number of homeworkers are women.

D. Affordability

93. An affordability analysis was conducted for parts A and C of the Project to ensure thatthe loans provided under the different project components will not create an undue financialburden on the ultimate beneficiaries. The results of the analysis are summarized in Appendix10. Loan repayment schedules for different loan sizes were calculated on a monthly basis foreach of the components and compared with the maximum household income of EWS, low-income group (LIG) and middle-income group (MIG) households. Affordability limits weredefined as the maximum percentage of monthly household income that households could apply

29

to repay the loan, namely 15 percent for EWS, 20 percent for LIG, and 30 percent for MIGhouseholds. The graduated scale is due to the fact that very low-income households have lessdisposable income for housing expenses, as a percentage of their total incomes, than higherincome households.

94. Under part A, which will facilitate access to housing finance through financialintermediaries, a repayment period of five years and an annual interest rate of 18 percent isassumed. The interest rate is a conservative estimate and includes the interest rate charged bythe Borrowers to the intermediary plus the spread charged from the intermediary to the finalborrowers. The results of the analysis demonstrate that borrowers of the EWS group will beable to afford a loan up to Rs15,000. LIG borrowers will be able to borrow up to Rs45,000 andMIG households with an income of up to Rs7,000 per month will be able to borrow up toRs80,000.

95. For the direct lending component of part C, the interest rate is assumed to be 13 percentper annum with a 15-year repayment period. While the affordable percentages of income foreach income group are assumed to be the same as those in part A, in practice many HFCsapply a flat rate of 30 percent of income when they analyze the repayment capacity of potentialborrowers. The resulting analysis shows that EWS households will not be able to access loansunder this component. LIG households will be able to afford loans up to Rs90,000, and MIGhouseholds earning up to Rs7,000 per month will be able to access loans of up to aboutRs165,000. The results of the analysis demonstrates that part C of the Project will allow manylow- and moderate-income households direct access to market rate loans for construction andimprovement of their houses.

E. Impact on Poverty

96. Lending to low-income households will have a significant impact on the reduction ofpoverty. Access to housing finance will reinforce a process of steady incremental improvementsin household incomes by providing the means to finance the construction of better living, as wellas home workplace conditions that, in turn, will increase household stability by providing a fixedasset of considerable value that can be used to safeguard household interests. To the extentthat housing loans are made to households with home- based workers (in most cases women),the impact on poverty reduction will be significant. Lending through worker cooperatives andsocieties under part B, such as the Sarvodaya Sangh network of handicraft workers, will have asimilarly strong impact on reducing poverty. Low-income state and local employees, such asnurses and teachers who need to live close to their work, will benefit from savings intransportation costs and time spent commuting. Improved water supply, sanitation, drainage,and footpaths under the slum networking component will improve the health, safety, andproductivity of slum residents. Individual direct lending will have positive impacts on povertyreduction to the extent that household living conditions, health, productivity, and access toemployment are improved.

F. Risks

97. One of the potential risks related to the ability of HUDCO, ICICI, and HDFC to increasetheir lending to CFIs is the absence of bankable collateral for loan security. The majority of CFIsdo not have substantial real collateral, nor do their members have registered titles to land.Where individual or group land titles are not available, HUDCO has required an interest- bearingcash deposit from 10 to 15 percent of the loan, depending on the track record, loan recoverymechanisms, and experience of the CFI. These funds must come from the savings of theirmembers, which is a burden on the CFI membership. In contrast to the present policy, the

30

Project is proposing that superior lending and repayment track records be taken as the principalcriteria for extending loans to established CFIs. The Borrowers must therefore closely monitorthe financial positions as well as the absorptive capacities of partner CFIs.

98. Regarding slum networking schemes, although most states in India have slumimprovement or slum clearance boards, they have a poor performance record in terms ofpromoting community participation and establishing partnerships with CFIs, NGOs, communityresidents, local government authorities, and the private sector. Additionally, their ability to useand leverage financial resources efficiently, and to promote cost recovery has largely beenunsuccessful. The Project’s partnership slum networking approach is therefore a significantdeparture from the traditional approach to slum improvement. However, selected subprojectswill take more time to appraise, design, and implement. The success of this component willtherefore require a major commitment and educational effort on behalf of HUDCO.

99. Each of the Borrowers must cover the foreign exchange risk associated with theirrespective loans. To avoid a negative spread on their loans, the Borrowers will have tonegotiate beneficial agreements with swap partners. There is a risk associated with interest ratemovements in the domestic capital markets vis-à-vis the cost of ADB funds. However, amitigating factor is the relatively long maturity of the ADB funds which will allow all theBorrowers to better balance the maturities of their assets and liabilities.

VI. ASSURANCES

100. The Government and the Borrowers have given the following specific assurances, inaddition to the standard assurances, which have been incorporated in the legal documents:

A. Specific Assurances

(i) The Government and the Borrowers will execute the policy and institutionalaction plan as agreed to by the Government, Borrowers, and ADB.

(ii) Each Borrower will ensure that it is in compliance at all times with the prudentialnorms issued by the regulatory authorities, including capital adequacy, incomerecognition, classification, and provisioning for nonperforming assets.

(iii) Each Borrower will maintain a debt-equity ratio no higher than 12 to 1 and a debtservice coverage ratio of at least 1.1, and confirm that it has no arrears inrepayment of its current debt obligations.

(iv) No withdrawals will be made from the loan account of a Borrower, until anopinion is received by ADB from an auditor acceptable to ADB, in form andsubstance satisfactory to ADB, that certifies that the Borrower is in compliancewith prudential norms, debt service coverage ratio, and debt-equity ratiospecified in the assurances.

(v) Each Borrower will select subprojects and subborrowers for purposes ofonlending to state and local bodies under part A of the Project only in states andunion territories which have undertaken or are undertaking measures to put intoplace progressive urban land ceiling laws and/or amend state rent controllegislation.

31

(vi) Each Borrower will ensure that subloans are only made available to eligiblesubborrowers, including those who are not in default, individually or collectively,on any prior loan.

(vii) Each Borrower will submit to ADB, for prior approval, its first two subprojectsunder each project component to be financed under the loan; and HUDCO willsubmit to ADB for prior approval all subprojects under part B of the Project.

(viii) Each Borrower will ensure that subprojects to be financed under the loan shallmeet the requirements of ADB's guidelines on environmental and socialassessment and management measures.

(ix) Each Borrower will ensure that subprojects involving involuntary resettlement areeither eliminated, or subloans will be undertaken in accordance with ADB'sinvoluntary resettlement policy and ADB's Handbook on Resettlement, asamended from time to time.

(x) Each Borrower will ensure that subprojects to be financed under the loanobserve subloan agreements, criteria, and subloan application proceduresacceptable to ADB, and no sublending is based on comfort letters unless suchcriteria is approved by the Government and is acceptable to ADB.

(xi) Each Borrower will observe subloan financing criteria that include maximum ADBfinancing of 80 percent of the subloan(s) provided by the Borrower for lendingand refinancing under part C, and for lending to public and private enterprisesand to state and local bodies under part A of the Project; the remaining Projectcomponents will be eligible for 100 percent ADB financing.

(xii) NHB will ensure that all refinancing under part C of the Project is directed tohousing finance companies approved by NHB for refinancing, with the exceptionof HUDCO, HDFC, and ICICI.

(xiii) NHB will ensure that 20 percent of the loan to NHB, equivalent to $8 million, isdirected to refinancing HFC lending to CFIs.

(xiv) Each Borrower will take all necessary measures satisfactory to ADB to ensurethat subloan repayments, net of ADB loan repayments, are relent through thesame lending channels and to the same beneficiary groups specified under theProject, during the loan period.

(xv) Each Borrower will ensure that the foreign exchange risk under the LoanAgreement is hedged through an appropriate swap or other hedgingarrangement in form and substance satisfactory to ADB.

B. Conditions for Loan Effectiveness

101. An onlending agreement between ICICI and ICICI Home Finance Company, in form andsubstance satisfactory to ADB, will be duly executed and delivered on behalf of ICICI and ICICIHome Finance Company, and be fully effective and binding on the parties to it.

32

C. Conditions for First Disbursement

102. Conditions for the first disbursement include the following:

(i) No withdrawals will be made from a Borrower's loan account until the Borrowerensures that it is in compliance, or has performed undertakings under a time-bound action plan acceptable to ADB to be in compliance, with corporategovernance standards, as specified in the legal documents.

(ii) No withdrawals will be made from the loan account of HUDCO until HUDCO’smanagement has confirmed to the satisfaction of ADB (i) the preparation of atime-bound action plan on the establishment of a PIU, outlining the PIU’sfunctions and responsibilities, staffing arrangements, financing arrangements,office accommodations, and longer term integration into HUDCO’s operations; (ii)the appointment of a full-time qualified PIU senior manager; (iii) the appointmentof all necessary PIU supporting staff in terms of staff numbers and qualifications;and (iv) the provision of PIU office space, accommodation, and equipment.

(iii) No withdrawals will be made from the loan accounts of HDFC or ICICI, until bothBorrowers jointly establish a working group on mortgage registration to developrecommendations to the Government on mortgage registration, as specified inthe legal documents.

VII. RECOMMENDATION

103. I am satisfied that the proposed loans would comply with the Articles of Agreement ofADB and recommend that the Board approve (i) the loan of $100,000,000 to the Housing andUrban Development Corporation; (ii) the loan of $40,000,000 to the National Housing Bank;(iii) the loan of $80,000,000 to the Housing Development Finance Corporation; and (iv) the loanof $80,000,000 to ICICI for the Housing Finance II Project from ADB's ordinary capitalresources, each with interest to be determined in accordance with ADB’s market-based loanfacility and each with an amortization period of 25 years, including a grace period of 5 years,and such other terms and conditions as are substantially in accordance with those set forth inthe draft Loan and Guarantee Agreements presented to the Board.

TADAO CHINO President

29 August 2000

33

LIST OF APPENDIXES

Number Title PageCited on

(page, para.)

1 Project Framework 34 1, 2

2 A Synopsis of India's Housing Finance System 40 3, 9

3 External Assistance to the Housing Sector in India 44 4, 14

4 Policy and Institutional Action Plan 45 6, 19

5 Profile of Low-Income Households 50 9, 27

6 Total Project Cost and Impact 52 14, 41

7 Lending Targets by Project Parts and Primary Borrowers 54 16, 44

8 Representative Financing Structure 55 16, 48

9 Summary of Survey of CFIs and NGOs and their Memberson Housing Finance Needs and Delivery Mechanisms

57 22, 72

10 Affordability Analysis 68 28, 93

SUPPLEMENTARY APPENDIXES(available on request)

A Review of the Housing Finance Project

B Detailed Description of the Project Components andFinance Delivery Mechanisms

C Survey of CFIs and NGOs and their Members on HousingFinance Needs and Delivery Mechanisms

D HUDCO's Lending Window for Community-basedFinance Institutions

E Financial Performance and Projections for the Borrowers

F Outline Terms of Reference for HUDCO's ProjectImplementation Unit

Appendix 1, page 1

PROJECT FRAMEWORK

Design Summary Targets Project MonitoringMechanisms

Risks/Assumptions

1. Goal

Support humandevelopment byincreasing the availabilityand affordability ofhousing finance to low-income households(LIHs).

2. Purpose

Improve the livingstandards and quality oflife of LIH that lackaccess to affordablecredit for housing andhome-based, income-generating activities.

3. Outputs

3.1 Linkages establishedbetween housing financeinstitutions (HFIs) andcommunity-basedfinancial institutions(CFIs)/nongovernmentorganizations (NGOs) toonlend to LIHs.

• Approximately 270,000

housing loansbenefiting over 1.3million people aredisbursed throughformal and informalhousing financeinstitutions.

• At least 270,000 LIHsobtain loans for homepurchase orimprovement by Dec2006.

• At least 14,000 LIHsobtain microcredit tofinance homeworkplaceimprovements by Dec2006.

• At least five slumnetworking subprojectsare prepared andfinanced by Dec 2007.

• At least 49,000 loanstotaling $40 million toLIHs are channeledthrough CFIs/NGOs.

• Approximately $20million additionalleveraging contributedby LIH beneficiaries.

• Quarterly reports; annual

reports and evaluations,loan documentation,review missions

• Project completionreport

• Project completion

report • Project completion

report • Housing and Urban

DevelopmentCorporation (HUDCO),Housing DevelopmentFinance Corporation(HDFC), and ICICIlending records andquarterly project reports,field evaluations, ADBloan disbursementrequests, reviewmissions

• The Government

continues to place a highpriority on addressing thehousing finance needs ofLIHs and on promotingsectoral policy reforms.

• The relationship betweenthe cost of AsianDevelopment Bank (ADB)funds and market interestrates results in financiallyviable lending modalities.

• Borrowers establish andexpand linkages withfinancial intermediaries tochannel housing loans toLIHs.

• HUDCO improves itsinstitutional capacity tostructure, appraise, andmanage innovativehousing subprojects.

• HUDCO, NationalHousing Bank (NHB),HDFC, and ICICIestablish appropriate CFIlending windows,marketing strategies, anddisbursement proceduresto increase lending toCFIs.

• Adequate effectivedemand and CFIabsorptive capacity existsfor housing loans.

34

Appendix 1, page 2

Design Summary Targets Project MonitoringMechanisms

Risks/Assumptions

3.2 Linkages establishedbetween HFIs andpublic/private enterprisesto onlend to LIHs.

3.3 Linkages establishedbetween HFIs andstate/local bodies toonlend to LIHs.

3.4 Innovative slumnetworking subprojectsare prepared, financed,and implemented.

3.5 Microcredit programsare established to supporthome workplace lending.

• At least 46,000 loanstotaling $75 million toLIHs are channeledthrough public/privateenterprises.

• Approximately $38million additionalleveraging contributedby LIH beneficiaries.

• Approximately $15million additionalleveraging contributedby HUDCO, HDFC, andICICI.

• At least 23,000 loanstotaling $38 million toLIHs are channeledthrough state/localbodies.

• Approximately $18million additionalleveraging contributedby LIH beneficiaries.

• Approximately $8million additionalleveraging contributedby HUDCO, HDFC, andICICI.

• At least five slumnetworking subprojectstotaling $10 million areprepared, financed, andimplemented.

• Approximately $5million additionalleveraging contributedby slum dwellers aswell as municipalauthorities and privateenterprises.

• A total of $5 million ischanneled through

• HUDCO, HDFC, andICICI lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO, HDFC, and

ICICI lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO lending records

and quarterly projectreports, field

• HUDCO, HDFC, andICICI establishappropriate lendingwindows, marketingstrategies, anddisbursement proceduresto increase lending topublic/private enterprises.

• Public and privateenterprises willing andable to support housingloan programs foremployees.

• HUDCO, HDFC, andICICI establishappropriate lendingwindows, marketingstrategies, anddisbursement proceduresto increase lending tostate/local bodies.

• State/local bodies willingand able to supporthousing loan programs.

• HUDCO developscapacity to structure,appraise, and financeslum networkingsubprojects.

• Grant sources offinancing are identified tosupplement loan funds.

• Sustainable partnershipsare established amongcommunities, CFIs,NGOs, and localauthorities.

• HUDCO establishespartnerships and lendinglines with worker

35

Appendix 1, page 3

Design Summary Targets Project MonitoringMechanisms

Risks/Assumptions

3.6 HFI lending directly toLIH is increased andsustained.

3.7 Refinancing providedfor HFI lending to LIHs.

4. Activities

4.1 Linkages establishedbetween HFIs andCFIs/NGOs to onlend toLIHs.

• CFI lending windowsoperationalized andmarketed to CFIs

worker cooperatives toonlend to LIHs forimprovements to homeworkplaces, resulting ina minimum of 10subprojects.

• Approximately $3million additionalleveraging contributedby LIH beneficiaries aswell as cooperativesand government.

• At least 65,000 loanstotaling $144 million aredirectly channeled toLIHs by HFIs.

• Approximately $72million additionalleveraging by LIHbeneficiaries.

• Approximately $29million equitycontribution by HFIs.

• At least 27,000 loans toLIHs totaling $50 millionare refinanced by NHB.

• At least $ 8 million isused to refinance HFClending to CFIs.

• Approximately $10million equity iscontributed by NHB.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

evaluations, ADB loandisbursement requests,review missions

• HUDCO, HDFC, and

ICICI lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• NHB refinancing records

and quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO, HDFC, and

ICICI lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

cooperatives andsocieties.

• Grant sources offinancing are identified tosupplement loan funds.

• HUDCO, HDFC, andICICI commit toexpanding direct lendingto LIHs.

• Appropriate screeningcriteria and lendingprocedures are in placeto ensure that housingloans are directed toLIHs.

• NHB developsappropriate refinancingguidelines andprocedures to ensure thatonly loans to LIHs arerefinanced.

• NHB operationalizes itsrefinancing program forHFC lending to CFIs.

• HUDCO, HDFC, andICICI develop sufficientin-house capacity,expertise, andcommitment for CFIlending.

• Lending to CFIs isfinancially viable givencost of ADB funds vis-à-

36

Appendix 1, page 4

Design Summary Targets Project MonitoringMechanisms

Risks/Assumptions

• Appropriate CFIrating criteria andlending proceduresdeveloped

4.2 Linkages establishedbetween HFIs andpublic/private enterprisesto onlend to LIHs:

• Lending programmarketed topublic/privateenterprises

• Participation criteriaand appropriatelending, monitoring,and reportingproceduresdeveloped

4.3 Linkages establishedbetween HFIs andstate/local bodies toonlend to LIHs:

• Lending programmarketed tostate/local bodies

• Participation criteriaand appropriatelending, monitoring,and reportingproceduresdeveloped

4.4 Innovative slumnetworking subprojectsare prepared, financed,and implemented:

• HUDCO works withCFIs, municipalauthorities, privateenterprises, and slumcommunities tostructure viablesubprojects.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: Jan 2005.Responsibility: HUDCO.

• HUDCO, HDFC, andICICI lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO, HDFC, andICICI lending recordsand quarterly projectreports; fieldevaluations; ADB loandisbursement requests;review missions

• HUDCO lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

vis domestic sources ofcapital.

• HUDCO, HDFC, andICICI develop sufficientin-house capacity,expertise, andcommitment for lending topublic and privateenterprises.

• Lending to public andprivate enterprises isfinancially viable givencost of ADB funds vis avis domestic sources ofcapital.

• HUDCO, HDFC, andICICI develop sufficientin-house capacity,expertise, andcommitment for lending tostate and local bodies.

• Lending to state/localbodies is financially viablegiven cost of ADB fundsvis-à-vis domesticsources of capital.

• HUDCO developssufficient in-housecapacity, expertise, andcommitment to prepare,finance, and implementslum networkingsubprojects.

• Grant funds are availablefrom governmentprograms, bilateralfunding agencies, andprivate sector sources.

37

Appendix 1, page 5

Design Summary Targets Project MonitoringMechanisms

Risks/Assumptions

• Appropriatemechanisms in placeto ensure communityparticipation fromsubproject designthroughimplementation

4.5 Microcredit programsare established to supporthome workplace lending:

• HUDCO establishespartnerships withworker cooperativesand developsappropriate lendingguidelines,procedures, andmonitoring systems

4.6 HFI lending directly toLIHs is increased andsustained:

• Institutionalcommitment tomarketing andexpanding lending toLIHs.

• Appropriate criteriaestablished to screenborrowers andminimize credit risk

• Reporting systemsdeveloped todocument borrowerincomes, loan sizes,house location,collateral, etc.

4.7 Refinancing providedfor HFI lending to LIHs:

• Procedures andsystems establishedto facilitate timelyrefinancing of HFIlending to LIHs.

Start: Jan 2001.Complete: Jan 2005.Responsibility: HUDCO.

Start: Jan 2001.Complete: Jan 2005.Responsibility: HUDCO.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: HUDCO,HDFC, and ICICI.

Start: Jan 2001.Complete: July 2001.Responsibility: NHB.

• HUDCO lending records

and quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO, HDFC, andICICI lending recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• NHB refinancing recordsand quarterly projectreports, fieldevaluations, ADB loandisbursement requests,review missions

• HUDCO developssufficient in-housecapacity, expertise, andcommitment to partnerwith worker cooperativesfor microcredit lending.

• Grant funds are availablefrom governmentprograms, bilateralfunding agencies, andprivate sector sources.

• HUDCO, HDFC, andICICI develop sufficientin-house capacity,expertise, andcommitment to increasedirect lending to LIHs.

• Lending to LIHs isfinancially viable givencost of ADB funds vis-à-vis domestic sources ofcapital.

• NHB develops sufficientin-house capacity,expertise, andcommitment torefinancing HFI loans toLIHs.

38

Appendix 1, page 6

Design Summary Targets Project MonitoringMechanisms

Risks/Assumptions

• Reportingrequirementsdeveloped to ensurethat only LIH loansare refinanced

• Refinancing windowfor HFI lending toCFIs operationalized.

5. Inputs

5.1 Financial

• ADB Loan• Beneficiary

contribution• HUDCO contribution• NHB contribution• HDFC contribution• ICICI contribution

5.2 Capacity Building

• TA provided toexpand lending toCFIs and NGOs, tostructure slumnetworkingsubprojects, and toexamine howmortgagesecuritization canexpand the domesticcapital market forhousing finance.

Start: Jan 2001.Complete: July 2001.Responsibility: NHB.

Start: Jan 2001.Complete: July 2001.Responsibility: NHB.

$300 million

$146 million$21 million$10 million$20 million$20 million

Start: Jan 2001.Complete: Jan 2005.Institutional Focus: HUDCOand NHB.

• HUDCO, NHB, HDFC,

and ICICI lendingrecords and quarterlyproject reports; fieldevaluations; ADB loandisbursement requests;review missions; projectcompletion report.

• TA progress reports;

review missions.

• NHB develops sufficientin-house capacity,expertise, andcommitment torefinancing HFI loans toCFIs.

• Refinancing is financiallyviable given cost of ADBfunds vis-à-vis domesticsources of capital.

• Borrowing institutionscomply with ADB financialguidelines andprocedures to account forthe sources and uses offunds, and to monitorproject impacts andbenefits.

• Qualified consultants arerecruited; counterpartcommitment andcontributions are realized.

39

Appendix 2, page 1

A SYNOPSIS OF INDIA'S HOUSING FINANCE SYSTEM

A. Sources of Finance

1. Low-income households have limited access to formal sources of market-based housingfinance. Studies in the 1980s showed that only 10 to 15 percent of housing finance indeveloping countries came from formal institutions, as such institutions cater mainly to middle-and high-income households. Although there is evidence suggesting that the availability ofhousing finance from formal sources has increased, formal institutions in India are not likely toaccount for much over 20 percent. Estimates of the share of various sources of finance in Indiafor the construction of new buildings or for financing additions to existing buildings are providedin tables A2.1 and A2.2.

2. One striking feature of these data is that people largely depend on their own funds forfinancing new housing construction and home improvements. The dependence on own fundsranges from about 65 to 70 percent in the case of new houses and from about 75 to 85 percentin the case of additions to existing buildings. Although the dependence on own funds isgenerally higher in rural areas, this is not true in the case of kutcha (temporary) dwellings.Those building kutcha dwellings are the poorest segment of the population with low personalsavings and thus are more dependent on moneylenders. In the case of new kutcha buildingsthe dependence on moneylenders is as high as 20 percent. According to these data, the shareof formal sector finance varies from about 22 percent (for new buildings) in urban areas to lessthan 8 percent (for additions and alterations) in rural areas. For the numbers presented in tablesA2.1 and A2.2, it is assumed "other sources of finance" are from the "formal" sector. To theextent that these are "informal" sources, the share of the formal sector is even lower.

B. Formal and Informal Sources of Finance

3. Of the estimated Rs1,500 billion required for housing during the Ninth Five-Year Plan,only about Rs380 billion (about 25 percent) is expected to come from the formal sector. Sourcesof housing finance can broadly be classified into formal and informal. Informal sources compriseself-finance, including money from friends and relatives, moneylenders, suppliers' credit androtating credit societies (chit funds/vishis).

4. The formal housing finance sector in India consists of specialized housing financeinstitutions such as National Housing Bank (NHB), Housing and Urban DevelopmentCorporation (HUDCO), housing finance companies (HFCs), and cooperative housing societies;general financing institutions such as insurance companies, commercial banks, and providentfunds; and budgetary allocations of the central and state governments. Due to the earlierwelfare approach to housing and to financial regulations, many of the providers and users ofhousing finance were government and/or public sector agencies. Somewhere between thesetwo categories are the microfinance or community-based finance institutions (CFIs). For thepurpose of this analysis we will classify these as informal sector institutions.

C. The Informal Housing Finance Sector

5. As indicated in tables A2.1 and A2.2, informal sources account for the majority ofhousing finance in India. A description of four different informal sources of finance follows.

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Table A2.1: Shares of Different Sources of Finance for New Buildings(percent)

New Buildings

Pucca a Semi-pucca b Kutcha c AllSource

Urban Rural Urban Rural Urban Rural Urban Rural

Total

Own sources 69.0 72.6 69.4 72.1 65.1 67.8 68.9 72.2 70.1

Money lenders 1.4 7.2 10.2 11.2 18.2 20.0 2.7 8.8 4.8

Friends and relatives 7.1 6.7 10.1 9.9 10.0 6.9 7.4 7.3 7.4

Other sources 4.0 4.9 3.8 2.3 1.5 1.3 3.9 4.1 4.0

Cooperative 1.8 2.4 0.7 0.2 0.7 1.2 1.7 1.9 1.8

Govt. financial institutions 11.1 4.2 4.1 2.5 3.5 2.2 10.3 3.8 8.0

Non Govt. financial institutions 2.7 0.9 0.8 0.6 0.8 0.2 2.5 0.8 1.9

Govt. non financial institutions 1.9 0.9 0.6 0.5 0.1 0.3 1.7 0.8 1.4

Non Govt. nonfinancialinstitutions

0.9 0.2 0.3 0.8 0.0 0.0 0.8 0.3 0.6

Informal 77.5 86.4 89.7 93.1 93.3 94.7 79.0 88.3 82.2

Formal 22.5 13.6 10.3 6.9 6.7 5.3 21.0 11.7 17.8a = permanent, b = semi-permanent, c = temporary.Source: Sarvekshana. 1999. Vol. XXII (3): 262, table 46.

41A

ppendix 2, page 2

Table A2.2: Share of Different Sources of Finance for Additions to Existing Homes(percent)

Additions

Pucca a Semi-pucca b Kutcha c AllSource

Urban Rural Urban Rural Urban Rural Urban Rural

Total

Own sources 75.3 77.0 84.7 76.7 99.6 63.8 78.6 75.4 77.2

Money lenders 3.5 7.2 8.8 7.8 0.4 14.6 4.4 8.2 6.0

Friends and relatives 6.8 7.9 4.0 8.1 0.0 13.1 5.8 8.6 7.0

Other sources 5.1 2.6 0.8 2.2 0.1 5.9 4.0 2.9 3.5

Cooperative 1.0 0.4 1.4 2.8 0.0 0.2 1.1 0.9 1.0

Govt. financial institution 5.2 4.5 0.3 0.6 0.0 2.3 4.0 3.4 3.7

Non Govt. financial institution 2.3 0.2 0.0 0.4 0.0 0.0 1.7 0.2 1.1

Govt. nonfinancial institution 0.5 0.1 0.0 1.4 0.0 0.0 0.4 0.4 0.4

Non Govt. nonfinancialinstitution

0.2 0.0 0.0 0.1 0.0 0.0 0.2 0.0 0.1

Informal 85.6 92.2 97.5 92.6 99.9 91.6 88.8 92.2 90.3

Formal 14.4 7.8 2.5 7.4 0.1 8.4 11.2 7.8 9.7a = permanent, b = semi-permanent, c = temporary.Source: Sarvekshana. 1999. Vol. XXII (3): 262, table 46.

42A

ppendix 2, page 3

Appendix 2, page 4

1. Self-Financing

6. It is clear from tables A2.1 and A2.2 that self-financing is currently the most significantsource of funds for housing. This imposes an obvious constraint on translating the potentialdemand for housing. At the lower income levels, the amount of money, on average, that peopleneed to acquire or improve a house, is relatively small and cannot be economically provided bylarge, formal HFCs. Channeling housing finance to low-income households often requirescommunity-based financial intermediaries that can afford to issue and service small loans.

2. Suppliers' Credits

7. Under this arrangement, the household constructs the house on credit, and is chargedinterest rates, typically between 24 percent and 36 percent per year, by the supplier of buildingmaterials. The repayment period is very short, usually between 12 and 20 months. Physicalassets such as gold and land are often used as collateral. With these high interest rates andshort repayment periods, the ability to meet monthly payments, even for very small loans, islimited.

3. Rotating Credit Societies

8. These go by various names in different parts of the country, such as chit funds or vishis,but the principle is essentially the same. A group of people regularly subscribe to the scheme,and await their turn to access the accumulated pool. Clearly, the viability of such schemesdepends heavily on the mutual trust among the members of the group. For that reason, theseinstitutions tend to be exclusive and limited to groups of people who have a strong social affinityto each other. Their role in the provision of housing finance is therefore limited.

4. Community-Based Financial Institutions

9. CFIs provide small loans with market-based interest rates to low-income households. Asinstitutions, they combine the lending approach of the formal HFCs, but with the monitoring andenforcement mechanisms of communities. This allows them to keep default rates, and thereforetheir interest rates relatively low. Some of the larger CFIs, such as the SEWA Bank ofAhmedabad, are able to directly mobilize funds through their deposit schemes, as well asthrough equity capital. In general, CFIs have problems mobilizing funds. However, because oftheir potential strengths in the lending aspect of the business, CFIs can be an effective channelof funds from the formal sector to low-income borrowers.

5. Interest Rates in the Informal Sector

10. There is quite a variation across the CFIs as well as within a particular CFI with respectto different interest rate schemes. According to the project survey, interest rates were found torange between 15 and 18 percent per annum, with some CFIs charging interest rates of 24percent or more; the most common among CFI lending were 15 percent, 18 percent, 24percent, and more than 24 percent. More than half of the economically weaker sectionborrowers and 29 percent of low-income group borrowers had obtained loans at 15 percent.The highest percentage of loans to middle-income group borrowers was made at rates greaterthan 24 percent. The most common loan maturity periods were from 3-5 years. Despite theshort maturity and high interest rates, repayment records are extremely high. The lowestrepayment rate among mature CFIs was 96 percent.

43

Appendix 3

EXTERNAL ASSISTANCE TO THE HOUSING SECTOR IN INDIA, 1983 – 2000($ million)

ProjectYear

Approved Source AmountA. Housing Projects-Loan Financed

USAID Program – HDFC 1983 USA 125.00

USAID – NHB 1990 USA 40.00

USAID-FIRE – HUDCO 1994 USA 125.00

KfW I – HDFC & HUDCO 1987 Germany 30.50

KfW II – HUDCO 1988 Germany 18.75

World Bank – HDFC 1988 World Bank 250.00

International Finance Corp. – HDFC 1991 IFC 40.00

OECF – NHB 1991 Japan 250.00

CDC – HDFC 1993 UK 37.46

Karnataka Urban Infras. Development – HDFC 1995 ADB 20.00

Housing Finance Project – NHB, HUDCO, HDFC 1997 ADB 300.00

Subtotal (A) 1236.71B. Housing Projects – Grant Financed

Vizakapatnam Habitat Improvement Project 1988 United Kingdom 16.07

Hyderabad Habitat Improvement Project 1989 United Kingdom 24.59

Urban Basic Services 1990 United Nations 19.00

Calcutta Habitat Improvement Project 1990 UNICEF 22.18

Indore Habitat Improvement Project 1990 United Kingdom 25.31

Vijaywada Habitat Improvement Project 1990 United Kingdom 29.34

KfW III 1991 Germany 6.25

KfW IV 1994 Germany 21.87

KfW V 1995 Germany 21.87

Subtotal (B) 186.48 Subtotal (A+B) 1423.19

C. Technical Assistance – Grant FinancedHousing Finance Facility Project 1996 ADB 0.10

Strenthening Housing Finance Institutions 1997 ADB 0.60

Restructuring State-Level Housing Institutions 1998 ADB 0.50

Informal Sector in an Urban Economy 1990 Canada 0.02

Housing Finance Development Fund andMiscellaneous Activities

1991 Netherlands 1.02

Housing Finance System Expansion Program 1992 United States 4.30

Subtotal (C) 6.54 Total 1429.73

ADB = Asian Development Bank, CDC = Commonwealth Development Corporation, FIRE = Financial andInstitutional Restructuring Project, HDFC = Housing Development Finance Corporation, HUDCO = Housing andUrban Development Corporation, IFC = International Finance Corporation, KfW = Kreditanstalt fur Wiederaufbau,NHB = National Housing Bank, OECF = Overseas Economic Corporation Fund, UK = United Kingdom, UNICEF =United Nations Children’s Fund, USA = United States of America, USAID = United States Agency for InternationalDevelopment, WHO = World Health Organization.

44

Appendix 4, page 1

POLICY AND INSTITUTIONAL ACTION PLAN

PolicyObjective Present Situation Actions Needed Agencies

Involved Time Frame

Strengthenlinkagesbetween formaland informalsectors

1. Community-basedfinancial institutions(CFIs) areimportant andviable channels formarket-basedlending to low-income householdswithout collateral.

2. CFIs lack sufficientcapital resources toexpand theirlending operations,as their principalsource of funds isfrom members’savings.

3. Lending experienceand highrepayment rates byborrowers indicatethat CFIs arefinancially viablewith minimal creditrisks.

4. Formal financeinstitutions havebeen reluctant toextend credit toCFIs based on theirperceived creditrisk and lack ofcollateral.

1. Housing financeinstitutions (HFIs) willdevelop in-housedepartments andexpertise formicrocredit lending.

2. HFIs will preparerating criteria for CFIsbased on theirrepayment capacitiesand lending trackrecords.

3. Standardize andstreamlineprocessingprocedures for loansto CFIs to promotegreater efficiency andpredictability.

4. Operationalizeinnovative financingstructures such asescrow accounts,guarantee funds, andrevolving funds.

5. Expand refinancingwindow for HFClending to CFIs andstreamlinerefinancingoperations.

Housing andUrbanDevelopmentCorporation(HUDCO),HousingDevelopmentFinanceCorporation(HDFC) and ICICI

HUDCO, HDFCand ICICI

HUDCO, HDFCand ICICI

HUDCO, HDFCand ICICI

National HousingBank (NHB)

July 2001

July 2001

December 2001

December 2001

December 2001

45

Appendix 4, page 2

PolicyObjective Present Situation Actions Needed Agencies

Involved Time Frame

Supportmarket-basedlending

Raisecorporategovernancestandards forpublicinstitutions

1. Government-defined interestrate ceilingscontinue to apply toloans toeconomicallyweaker section(EWS) households.

2. Most public entities,including HUDCO,continue to lend at10 percent per yearto EWS households

3. HUDCO hasapplied to theempoweredcommittee of theGovernment toincrease the EWSlending rate to 12.5percent

1. Liberalization ofIndia’s financialsector hashighlighted theneed for publicsector institutionsto raise theircorporategovernancestandards.

2. The KumarMangalamCommittee onCorporateGovernanceprovides modelcorporategovernancestandards to beadopted by allprivate companieswith paid up sharecapital at Rs10crores or more by31 March 2001.

1. Decision by theempoweredcommittee of theGovernment toincrease the interestrate ceiling for loansto EWS to be in linewith market interestrates.

1. All Borrowers mustprepare a time-boundaction plan to adoptand implementcorporategovernanceprovisions regardingboard composition,the establishment ofan independent auditcommittee, a boardremunerationcommittee,accounting, andfinancial reporting,and corporategovernancecompliance reportingas part of the annualreport.

Ministry ofFinance, Ministryof UrbanEmployment andPoverty Allevation(MUEPA),HUDCO

HUDCO, NHB,HDFC, and ICICI

July 2001

July 2001

46

Appendix 4, page 3

PolicyObjective Present Situation Actions Needed Agencies

Involved Time Frame

Improvesubprojectappraisal andimplementation

Implementforeclosureregulations andprovisions

1. Due to their poorfinancial positions,states areincreasinglyreluctant to giveguarantees for loansto state and locallevel housinginstitutions, therebyincreasing financialrisks to lenders.

2. Given the volume ofstate lending byHUDCO to state-level bodies, thelack of stateguarantees requiresmore detailedappraisal of thefinancial viability ofstate institutions aswell as subprojects.

3. Increased attentionby HUDCO alsoneeds to be directedto ensuring thefinancial viability ofslum networkingsubprojects, mainlyby incorporatinggreater communityparticipation topromote improvedcost recovery andsustainability.

1. Foreclosureprovisions forhousing financecompanies (HFCs)are contained in theNHB AmendmentBill 2000.

1. HUDCO to developa time-bound actionplan to establish aprojectimplementation unit(PIU) withinHUDCO, whichwould review andmonitor subprojectdesign, appraisal,and implementation.

2. HUDCO willstrengthen its in-house capacity toconduct proper duediligence onsubborrowers andsubprojects tominimize its ownfinancial riskexposure and toensure the financialviability andsustainability ofsubprojects.

1. Draft regulationsprepared, andapproved by NHB’sBoard, forsubmission to theReserve Bank ofIndia and theGovernment on(i) procedures formortgagee power of

HUDCO, state andlocal housingagencies

NHB

January 2001

December 2001

July 2001

47

Appendix 4, page 4

PolicyObjective Present Situation Actions Needed Agencies

Involved Time Frame

Improve themortgageregistrationsystem.

2. Operationalization offoreclosureprovisions is notprecisely definedwith respect to theroles andresponsibilities ofNHB, HFCs, andcivil courts.

1. Equitable mortgagesrepresentapproximately 80percent of all newmortgages issued inIndia, but suchinstruments presentthe followingpotential issues andproblems: (i) thepossibility that statescould take action torecoup stampduties; (ii) their useis restricted tocertain geographicareas; (iii) they donot allow forappointment ofreceivers or any

sale withoutintervention ofcourts,

including notice ofdefault and methodsof valuation and saleof assets; (ii) HFIdebt recoveryappellate Tribunals;including uniformprocedures,administrativesupport, funding,and powers ofenforcement; and(iii) preservation ofexercise ofmortgagee power ofsale withoutintervention ofcourts given judicialreview under theNHB Act asamended.

2. NHB will submitforeclosureregulations fornotification.

1. HDFC and ICICI willestablish a workinggroup on mortgageregistration including(i) definingcomposition of therepresentatives fromthe Government,selected stategovernments, NHB,HUDCO, ReserveBank of India,professionals andother relevantpartners; (ii)outlining terms ofreference for theworking group; and(iii) formulating a

NHB

HDFC, ICICI

December 2001

January 2001

48

Appendix 4, page 5

PolicyObjective Present Situation Actions Needed Agencies

Involved Time Frame

Expand thecapital marketfor housingfinance

foreclosure remedywithout courtintervention; and(iv) they cannot besecuritized withoutbeing registered and,thereby, subjected tostamp duties.

1. Mortgagesecuritizationrepresents a viablemeans to expandthe capital marketfor housing financein India.

2. First pilot mortgagesecuritization issuehas been structured,but has not yet beenbrought to market.

time-bound actionplan for submissionof the WorkingGroup’srecommendations toGovernment onmortgageregistration.

1. Lessons learnedfrom the pilot issuerequiredocumentation andanalysis in thecontext of othermortgage-backedsecurities (MBS)markets in Asia andelsewhere in orderto define therequisite reformmeasures todevelop India’s MBSmarket.

2. NHB’s future role inthe sector requiresreassessment giventhe development ofthe MBS market, aswell as the entry onnontraditionalparticipants in thehousing financesector.

NHB

NHB

July 2001

December 2001

49

Appendix 5, page 1

PROFILE OF LOW-INCOME HOUSEHOLDS

A. Government Income Definitions

1. For purposes of designating beneficiaries of housing and other Government assistanceprograms, the Government classifies the population into four income categories: economicallyweaker sections (EWS); the low-income group (LIG); the middle-income group (MIG); and thehigh-income group (HIG). In January 1999, the Planning Commission updated the incomebrackets for the respective groups as follows: EWS households have monthly incomes of lessthan Rs2,500 or $62; LIG households have monthly incomes between Rs2,500 and Rs5,700(about $142); MIG households have monthly incomes between Rs5,700 and Rs10,000 (about$250); and HIG households have monthly incomes of Rs10,000 and above.

B. Low-Income Households

2. For the purposes of the Project, low-income households are defined as households withmonthly incomes of Rs7,000 (about $165) or less. This definition is approximately equivalent toan income of $1/capita/day at current exchange rates for a family of five. The basis for thisdefinition is the desire to identify a target beneficiary group under the Project that has little or noaccess to housing finance through formal housing finance institutions. In relation to theGovernment’s income classification categories, low-income households encompass the lowerone third of MIG households and below.

C. Income Distribution Data

3. To estimate where the various income groups are located on the national incomedistribution scale, data from the National Council on Applied Economic Research (NCAER) wasreviewed and analyzed. NCAER carries out an annual survey of households, the MarketInformation Survey of Households. The sample for this survey consists of some 275,000households distributed across the country. The main focus of the survey is householdexpenditure on several categories of consumer goods, durable and expendable. A portion of thedata used in this analysis is collected from each household on its gross income. Samplehouseholds are classified into five income categories based on 1995/96 prices, but for purposesof the Project, the income ranges were updated to 2000 prices using the consumer price index.The categories are not of equal size, and the HIG income class is open-ended. Based on thesample distribution of households across income classes, the total number of households ineach income category for urban areas has been estimated. This was also done for low-incomehouseholds as defined above.

D. Income Profiles of Households

4. According to the data, EWS families earning up to Rs2,500 per month comprise some6.3 million households, which are at or below the 12th percentile in 2000. LIG households arethe largest group, about 18.8 million households, the maximum income of which (Rs5,700 permonth) is at the 49th percentile. With monthly incomes from Rs5,700 to Rs10,000, MIGhouseholds number 15.2 million, with the maximum income (Rs10,000 per month) at the 78thpercentile. At Rs7,000 per month, the maximum income of LIH households is at the 61stpercentile.

5. Although it is estimated that some 60 percent of the urban population earn less thanRs7,000 per month, this figure must considered with caution for several reasons. First, the data

50

Appendix 5, page 2

is based on income that is always difficult to determine. Due largely to tax reasons, manyfamilies, when surveyed, purposely understate their income. In the low-income brackets, wheredisposable income is minimal or nonexistent, expenditure data is often a better measure of totalincome. Secondly, a substantial portion of income of low-income households is often in kindrather than cash, and therefore goes undeclared. Thirdly, it is very difficult to update incomedistribution data without adequate sample surveys each year. While the consumer price indexwas used to update the data, another index such as a wage and salary index could have alsobeen used. Given the lack of a recent household income and expenditure survey as well as theforegoing qualifications, the estimate of low-income households earning less than a dollar perday per capita could be as low as the 50th percentile.

51

ADB Loan Borrower Total Funds Beneficiary ProjectProject Part Amount a Contribution b for Lending c Contribution d Cost

A. Lending through Intermediaries 130 153 229 1. CFIs and NGOs 40 0% 40 50.0% 60 2. Public and Private Enterprises 60 25% 75 50.0% 113 3. State and Local Bodies 30 25% 38 50.0% 56

B. Reducing Poverty 15 15 23 1. Slum Networking 10 0% 10 50.0% 15 2. Home Workplace 5 0% 5 50.0% 8

C. Increasing Lending to LIHs and CFIs 155 194 266 1. Direct Lending 115 25% 144 50.0% 216 2. Refinancing 40 25% 50 0.0% 50 Total 300 361 517

ADB = Asian Development Bank, CFI = community-based financial institution, LIH = low-income household, NGO = nongovernment organization.

a Represents the allocation of ADB loan proceeds to each Project part and lending channel (see Appendix 9).b Accounts for Borrower contribution of 20 percent of total lending through parts A.2, A.3, and C, expressed as a percentage of the ADB loan amount.c Represents total funds available for lending through the respective channels.d Accounts for additional contributions or investments by the individual borrowers or beneficiaries, in cash, kind, and/or labor in their houses,

expressed as a percentage of the ADB loan amount.

by Lending Channel and Leveraging Impact

TOTAL PROJECT COST AND IMPACT

Table A6.1: Total Project cost

52A

ppendix 6, page 1

Total Funds Total Funds Avg. Number NumberProject Part for Lending a for Lending b Loan of of

($ million) (Rs million) Sizec Loans Beneficiaries d

A. Lending through Intermediaries 153 6,633.8 119,625 598,125 1. CFIs and NGOs 40 1,740.0 35,000 49,714 248,571 2. Public and Private Enterprises 75 3,262.5 70,000 46,607 233,036 3. State and Local Bodies 38 1,631.3 70,000 23,304 116,518

B. Reducing Poverty 15 652.5 58,000 290,000 1. Slum Networking 10 435.0 10,000 43,500 217,500 2. Home Workplace 5 217.5 15,000 14,500 72,500

C. Increasing Lending to LIHs/CFIs 194 8,428.1 93,010 465,049 1. Direct Lending 144 6,253.1 95,000 65,822 329,112 2. Refinancing 50 2,175.0 80,000 27,188 135,938 Total 361 15,714.4 58,065 270,635 1,353,174

CFI = community-based financial institution, LIH = low-income household, NGO = nongovernment organization.

a Accounts for ADB Loan and Borrower contributions as derived in column 3 of Table 1

b Derived from column 1 based on an exchange rate $1= Rs. 43.5

c Represents the average size of housing loans through the respective lending channels

d Derived on the basis of an average household size of 5.0 persons

Table A6.2: Total Pro ject Impactby Number of Loans and Beneficiaries

53A

ppendix 6, page 2

Appendix 7

LENDING TARGETS BY PROJECT PARTS AND PRIMARY BORROWERS($ million)

Components/Borrowers HUDCO NHB HDFC ICICI Total

A. Lending to LIHs through Intermediaries

1. CFIs/NGOs 25 0 5 10 40

2. Public and Private Enterprises 20 0 20 20 60

3. State and Local Bodies 10 0 10 10 30

B. Reducing Poverty through InnovativeSubprojects

1. Slum Networking 10 0 0 0 10

2. Home Workplace 5 0 0 0 5

C. Lending to LIH through HFIs

1. Direct Lending to LIHs 30 0 45 40 115

2. Refinancing Loans to LIHs/CFIs 0 40 0 0 40

Total 100 40 80 80 300CFI = community-based financial institution, HDFC = Housing Development Finance Corporation, HFI = housing financeinstitution, HUDCO = Housing and Urban Development Corporation, ICICI = ICICI Limited, LIH = low-income household,NGO = nongovernment organization, NHB = National Housing Bank.

54

Appendix 8, page 1

REPRESENTATIVE FINANCING STRUCTURE

1. This appendix describes the representative financing structure for the utilization of AsianDevelopment Bank (ADB) loan proceeds, denominated in US dollars ($), to catalyze theavailability of Indian rupees (Rs) for the Borrowers to finance and implement their respectiveonlending activities and subprojects under the Project. A step-by-step example is presented.

2. Step 1. ADB provides a foreign exchange (FX) loan of $100 million for 20 years toBorrower A against which Borrower A, wishes to obtain rupee funding for 20 years. ADBcharges market-based loan (MBL) rate (LIBOR based) plus 60 basis points (bp) on it’s loan (tothe extent there is a difference in the spreads, there is a cost likely to be no more than 5-10 bpand minimal additional risk).

3. Step 2. Borrower A draws down $20 million and places these finds on deposit with anIndian bank (with an offshore branch) for 20 years obtaining LIBOR plus 60 bp on its deposit.Thus, the interest payments the Borrower pays to ADB, and that received on the deposit, match,and therefore there is no dollar interest rate cost or risk to the borrower.

4. Step 3. In consideration of this dollar deposit, the Indian bank (called the “swap” bank)purchases Borrower A’s 20-year rupee bond in the amount equivalent to $20 million. The $/Reexchange rate is fixed at the time of deposit/rupee bond issue (i.e., at 42 to $1, the rupeeequivalent is Rs840 million) and remains fixed throughout the 20-year period. Thus, neitherparty to the transaction bears an exchange risk.

5. Step 4. The dollar deposit with the swap bank secures it’s purchase of the rupee bonds,thus there is no credit risk from the Borrower. The Borrower is thus able to obtain attractiverates for it’s various bond issuances. The interest rate on the rupee bonds is fixed, for example,for 7 years at a determined spread over 7-year Government securities; this “bench mark” isreset every 7 years.

6. Step 5. The interest rate payment dates on the dollar deposit, the rupee bonds, and theADB loan are all matched. The Borrower pays ADB interest with the interest it receives from thedollar deposit. The Borrower pays the “swap” bank interest on it’s rupee bonds out of it’s cashflow (there is a rupee interest payment risk here to the swap bank but it could partially off setany noninterest payment by the Borrower, with the dollar interest payment. This could lead to, ina worst case scenario, the Borrower defaulting on it’s interest payment to ADB, which couldinvolve ADB calling on it’s guarantee from the Government of India).

7. Step 6. Principal payments on the ADB loan, the rupee bonds, and the maturity periodson the dollar deposit (at interest adjustment dates) also match. Thus, when the principalpayment is due on the bonds, once the swap bank receives payment, it releases an equivalentamount of dollars to the Borrower, who then pays ADB.

8. Step 7. The transaction is repeated with the swap bank, for each drawdown of the ADBloan by the Borrower. The “swap“ bank could change, depending on negotiations between theseparties regarding the rupee borrowing cost, but with any swap bank, the interest rate on thedollar deposit and the ADB loan would remain the same, as would the interest and principalpayment dates continuing to match the dollar and rupee payments. New dollar deposit wouldsecure the new rupee bond issuance.

9. Step 8. This system allows the Borrower to obtain 20-year rupee funding, which iscurrently not available in the domestic market. It also allows the Borrower to obtain the mostattractive rates at the existing market. It allows the swap bank to obtain long-term dollars that it

55

Appendix 8, page 2

may need to service it’s clients and/or treasury needs, which would otherwise not be availableand at attractive (ADB) rates. There is no $/Re exchange rate risk, minimal, if any dollar interestrate cost/risk, and no principal payment risk to any party involved in the transaction. Ultimatelyin any worst case scenario, the Government would have to pay ADB under it’s guarantee andthus have exposure to the Borrower.

Figure A8.1: Flow Chart of Representative Financing Structure

ADB

(b) Guarantee for $100 million loan GOI

(

h)

(a) Loan of $100 million

(f) Dollar loan repaym

ent to AD

B (h)

Rep

aym

ent o

f AD

B lo

anin

dol

lars

(c) Dollar placement

(d) Rupee equivalent of ADB loan

(e) Redemption of bonds/repayment of loan in rupeesBorrower A

(g) Pay equivalent dollar deposit of (e)

SwapCounter

Party

56

Appendix 9, page 1

SUMMARY OF SURVEY OF CFIs AND NGOs AND THEIR MEMBERS ONHOUSING FINANCE AND DELIVERY MECHANISMS

A. Introduction

1. A major component of the Project will be to provide housing finance to low-incomehouseholds through community finance institutions (CFIs) working in partnership with Housingand Urban Development Corporation (HUDCO). Although general information exists on thehousing finance needs of economically weaker section (EWS) and low-income group (LIG)households, there is only limited information about the characteristics and housing financeneeds of CFI members likely to participate in the Project. The current understanding of housingfinance needs and preferred loan conditions for low-income households in both urban and ruralareas needs to be improved. A rapid coordinated set of consumer surveys was implementedduring the feasibility study to provide this information. A summary of the survey results andanalysis is presented here.

1. Survey Objectives

2. The basic objectives of the surveys of CFIs, nongovernment organizations (NGOs), andlow-income households were (i) to assess low-income households' socioeconomiccharacteristics, their housing needs, and their potential demand for housing finance in differentareas of the country; (ii) to develop an understanding of low-income households capacity toabsorb housing finance; (iii) to identify existing sources and constraints related to housingfinance for low-income households; (iv) to explore different forms of collateral for low-incomehousing loans; (v) to assess technical and capacity-building support required for loan-financedhousing improvements; and (vi) to assess the impact of improved housing on poverty reductionand the condition of women.

2. Brief Description of the Coordinated Surveys

3. The coordinated set of consumer surveys included a sample household survey, casestudies, six consumer workshops, and three NGOs and CFI workshops in different parts of thecountry.

a. Sample Household Survey

4. A sample household survey was designed to obtain information about EWS, LIG, andmiddle-income group (MIG) households from the members of six major CFIs. These CFIsincluded DHAN Foundation, SHARE, SPMS, SIDA, Indcare Trust, and Shramik Bharti. Theselection of households to be surveyed was based on a purposive sampling approach toexpedite survey implementation and to ensure that adequate data were obtained about thedifferent household types. The planned (and actual) distribution of the 500 (512) surveyedhouseholds were as follows:

By Income By Location By Previous Access to Housing Loans

EWS - 200 (192) Urban - 250 (280) Borrowers - 100 (106)

LIG - 200 (238) Rural - 250 (232) Nonborrowers - 400 (406)

MIG - 100 (82)

57

Appendix 9, page 2

5. The selected distribution of survey households has produced a very good cross-sectionof potential project beneficiaries. Survey households included rural and urban self-help group(SHG) members and borrowers, slum dwellers, and home workers, all with an amplerepresentation of women. The survey questionnaire focused on obtaining relevant informationon the housing need, demand, and absorptive capacity of these households. The DHANFoundation was responsible for overall coordination and implementation of this survey.

b. Household Case Studies

6. Fifty household case studies were undertaken as the second part of the set of surveys.The purpose of the case studies was to deepen current understanding about the characteristicsand housing situation of low-income households, their potential demand for housing finance,and the conditions under which the provision of housing finance would be most effective. Thepurposive case study sample included 18 EWS households, 24 LIG, and 8 MIG. A professionalteam from DHAN Foundation coordinated the implementation of these surveys with help fromeach of the participating CFIs.

c. Consumer Workshops

7. One-day consumer workshops were held in Kanpur, Delhi, Kottayam, Tirupati, Madurai,and Hyderabad at the end of the survey fieldwork. Participants at these workshops were urbanand rural households from the three income categories of EWS, LIG, and MIG. They includedborrowers and potential borrowers of housing finance within each income group. Financialrepresentatives from local housing finance institutions (HFIs) attended two of the workshops.Workshop discussions focused on the relevance of microfinance to housing finance, preferredhousing products, consumer experience with current lending terms and conditions, issues ofcollateral and security, importance of housing as a workplace, forecasting of demand forhousing finance, establishing the need for technical and material support, and identifyingimprovements to loan processing.

d. NGO and CFI Consultation Workshops

8. Three one-day consultation workshops were held with NGOs and CFIs in Calcutta,Chennai, and Mumbai. A total of 90 NGO and CFIs attended the three workshops. The purposeof the workshops was to determine potential demand for housing finance through CFIs and theamount of bulk lending required through the HUDCO lending window, and to discuss measuresto increase the flexibility and effectiveness of this type of lending.

B. Key Findings from the Sample Household Survey

9. Results from the sample household survey include (i) data on the socioeconomic profilesand characteristics of the client population; (ii) an assessment of the housing need, demand,and absorptive capacity of potential client households as expressed through their willingnessand ability to make investments, use credit, and improve their housing situation; and (iii) anassessment of the impact of improved housing conditions on the reduction of poverty andsituation of women.

1. Socioeconomic Profiles and Characteristics of the Client Population

10. Survey activities focused on CFI members who will make up the majority of low-incomehouseholds borrowers under the Project. The survey sample included households from the

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Appendix 9, page 3

three income groups of EWS, LIG, and MIG; households from urban and rural areas; existingborrowers and potential borrowers of housing finance; households working at home; private andpublic sector workers; etc. The broad geographic base of the survey has provided a goodoverall profile of potential project beneficiaries.

a. Average Household Size

11. The average household size for the entire sample was 4.5. Basically similar results wereobtained for all income and geographic categories except LIG households in rural areas. Theaverage household size for this group was substantially higher at 5.9. At the same time, MIGhouseholds in rural areas had the lowest average household size of 4.0. One possibleexplanation for this situation is that the larger household size enables some rural EWShouseholds to become LIG due to additional family workers. The larger household size amongrural LIG also had an impact on the average size of borrower households (5.2) in this group.

b. Age of the Head of Household

12. Survey results showed that there was little difference between the average age ofhousehold heads of borrower and potential borrower households. Roughly a third of thehousehold heads in both categories were less than 36 years old. Another 36 percent of thehousehold heads for borrowers and 40 percent for potential borrowers were between 36 and 40years of age, the most common age group. Roughly 11 percent of the household heads in bothgroups were more than 50 years old.

c. Primary Occupations

13. The most common primary occupations for surveyed household heads in rural areaswere self-employed (at 33 percent) and construction/casual labor (at 28 percent). These sametwo categories were important for EWS households in urban areas (at 28 percent and 20percent, respectively) along with private sector salaried workers (at 26 percent); self-employedhouseholds included all types of shop owners (petty shops, teashops etc), vendors (fruits,vegetables, flowers etc.) and other occupations such as tailoring, woodworking etc. Privatesector salaried workers included those working in private establishments that ranged fromgrocery stores to large private enterprises. Service providers like barbers, dhobis, etc. were alsoincluded in this group. Most MIG households in both rural and urban areas were self-employed(41 percent in rural and 30 percent in urban areas) or salaried (28 percent with the privatesector in rural areas and 23 percent in urban areas). An additional 28 percent of the MIGhouseholds in urban areas were working for the Government. As a result, some 51 percent ofMIG households were salaried and had relatively stable employment. Only 23 percent of theEWS households and 19 percent of LIG households in rural areas were involved in any form ofagriculture (either as laborers or farmers of their own land).

d. Number of Workers per Household

14. Roughly 64 percent of the surveyed households had two or more working members,including 41 percent with two and 23 percent with three or more. Almost 70 percent of theborrower households had two or more working members with roughly 30 percent having threeor more. The percentage of households with two or more workers was highest for LIG in urbanareas (87 percent) followed by LIG in rural areas (83 percent). LIG households in these areasalso had the highest percentage of households with three or more workers. The fact that EWSborrowers in urban areas had one of the highest percentages of households with only oneworker (55 percent) was a surprise.

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Appendix 9, page 4

e. Monthly Household Incomes

15. The average monthly income of all surveyed households was around Rs3,400. Whilethere was little difference in income between EWS borrowers and potential borrowers in ruralareas, EWS borrowers in urban areas appeared to have slightly higher incomes than potentialborrowers in the same income group. EWS and LIG borrowers also appeared to have incomesthat were almost 5 percent higher than the overall sample for the same income groups. Surveyresults showed that some 84 percent of EWS borrower households had monthly incomesbetween Rs1,500 and Rs2,500, while 52 percent of LIG households had incomes betweenRs2,500 and Rs4,500. Some 88 percent of lower MIG households had incomes betweenRs5,501 and Rs6,000.

f. Monthly Household Expenditures

16. The average monthly expenditure for all surveyed households were close to Rs2,500. Asexpected, significant differences were found in monthly expenditures for households living inurban and rural areas. Cheaper access to food in rural areas and more expensive transportationcosts in urban areas were undoubtedly two of the major reasons for these differences.

17. Roughly 80 percent of EWS households in rural areas and 54 percent of those in urbanareas had monthly expenditures less than Rs1,500. The remaining EWS in both geographicalareas had monthly expenditures less than Rs2,500. The difference in monthly expenditures forLIG households was more pronounced with a much higher percentage of LIG households inrural areas at the lower end of the scale (i.e., 82 percent with less than Rs2,500 expendituresper month compared with only 34 percent for urban LIG). Again, while 65 percent of the LIGhouseholds in urban areas had monthly expenditures between Rs2,500 and Rs4,500, thisoccurred for only 16 percent of the LIG households in rural areas. A more even situation wasfound for MIG households, with 21 percent in rural areas having expenditures greater thanRs4,500 compared with 36 percent in urban areas.

18. While only very limited household income and expenditure data were obtained from thesurvey, the results indicate a rather consistent pattern that provides useful insights into thefinancing of housing for low-income households. Households across all three income groupsappear capable of dedicating an important amount of their monthly savings to the repayment ofa housing loan, especially if it follows previous loans for the improvement of income.

2. Housing Need, Demand, and Absorptive Capacity of Potential ClientHouseholds

19. The conversion of housing need into demand and the subsequent engagement of ahousing loan depend on a number of conditions that include the household’s socioeconomicsituation, its security of tenure and period of residence, existing housing conditions, previousborrowing experience, and potential loan conditions and terms.

a. Security of Tenure

20. The overall percentage of homeownership within the survey sample was roughly 87percent. Little difference occurred in the degree of homeownership among the three incomegroups. A somewhat higher percentage of homeownership occurred among EWS households inrural compared with those in urban areas. There was also a higher percentage ofhomeownership among borrowers than among nonborrowers.

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Appendix 9, page 5

21. Some 92 percent of all borrower households owned their house with slightly higherpercentages occurring for rural and EWS households. The percentage of home ownership fornonborrower households was 85 percent. The most notable difference occurred in urban areaswhere only 81 percent of potential borrower households owned their houses compared with 91percent of the borrowers. The fact that 9 percent of urban borrowers were renters may be dueto the fact that they were still in the process of completing their house. Roughly 30 percent ofthe borrowers that owned their housing units did not have documents legitimizing theiroccupation of the land. Another 24 percent were assigned patta, 31 percent had bought theirplots, and the remaining 15 percent occupied their plot by right of inheritance. There were noEWS borrowers in rural areas without proper land documentation. Almost 50 percent of theEWS borrowers in urban areas, however, were without such documentation.

22. Conditions were considerably different for potential borrower households. There was amuch lower percentage of households living on their land without documents (14 percent fornonborrowers compared with 30 percent for borrowers) and a much higher percentage ofhouseholds that had inherited their land (30 percent for nonborrowers compared with 15 percentfor borrowers). The difference was most evident in urban areas where 14 percent of theborrowers owned their land through inheritance as opposed to 32 percent of the nonborrowers.Other than this “flip” between inherited and land occupied without documents, the remainingpercentages for plot tenure was very similar for borrowers and nonborrowers.

b. Period of Residency

23. Results from the survey show that the amount of time that a household has lived in itshouse is not a major factor in the decision to borrow for housing. Some 38 percent of theborrowers in the overall sample had lived in their houses for less than 10 years compared with44 percent for potential borrowers. At the same time, 48 percent of the borrowers had lived inthe their houses for more than 15 years compared with 41 percent for nonborrowers. In terms ofincome groups, a higher percentage of EWS and MIG households in rural areas had lived intheir houses for more than 20 years than LIG households. The situation in urban areas wasreversed. More than half the LIG households had been living in their houses for more than 20years. The situation for potential borrowers was the same, with a greater percentage of EWSand MIG households living in their houses for more than 20 years than LIG.

c. Housing Conditions

24. Close to three quarters of the survey households lived in houses with tile or reinforcedconcrete roofs. This included a slightly higher percentage in rural areas compared with urbanareas due perhaps to a greater sense of land tenure and security. At the same time, over 80percent of the borrowers lived in housing with tile (semipucca) or reinforced concrete (pucca)roofs in basically equal proportions. Only about 20 percent were living in houses with thatched(kutcha) roofs.

25. Significant differences occurred in the type of houses occupied by potential borrowers.Some 45 percent of the EWS category lived in houses with thatched roofs, while 43 percentlived in houses with tile roofs. Roughly 25 percent of LIG households and 8 percent of MIG alsolived in houses with thatched roofs. The average house size for the overall sample was 360square feet (or an average of 80 square feet per person). Houses in rural areas were roughly 20percent larger than those located in urban areas. There was little difference in house sizebetween borrowers and nonborrowers within the different income and geographical categories.The biggest difference occurred between houses inhabited by the LIG and MIG categories.

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Appendix 9, page 6

26. Slightly more than half of the surveyed households had in-house toilet facilities. Theoverall percentages for water supply and electricity were 45 and 74 percent respectively. Therewas little difference in the provision of these services between urban and rural areas. Given theimportance of electricity and other basic services to the well-being of the household, housingconstruction and needed service improvements should be included in the same loan.

d. Borrowing Experience

27. Borrowers became interested in obtaining housing loans for a number of reasons. Themost common reasons were (i) an increase in household size, (ii) improved financial position ofthe household, and (iii) intrafamily disputes. The overwhelming majority of surveyed householdshad taken microfinance loans from informal sources. Most of these loans were used to meetconsumption and social function needs. While EWS loans from money lenders were distributedover consumption, family function, medical, emergency, income generation, and other uses,more than half of these loans were used for medical reasons and family functions. Moneylenderloans to LIG households were used mainly for consumption and family functions.

28. Results from the survey showed that borrowers of housing finance generally had takenmore microfinance loans from a variety of sources than potential borrowers. In particular, EWSand LIG borrower households had clearly been more active borrowers for nonhousing purposesthan their nonborrowing counterparts. EWS housing borrowers had taken 0.62 loans perhousehold from moneylenders compared with 0.39 loans per household for those EWShouseholds that had not borrowed for housing. Similarly, the ratio of loans through SHGs forEWS borrowers was 1.43 loans per household compared with only 0.96 for potential borrowers.SHG loans for LIG households were 1.17 for borrowers and 0.91 for potential borrowers. For allloans combined, the ratio for EWS borrowers was 2.19 loans per household compared with 1.51loans per potential borrowers. For LIG households the ratios were 1.83 for borrowers and 1.42for potential borrowers. Surprisingly, MIG households were the least active borrowers with only0.67 loans per household for those that had borrowed for housing and 0.86 loans for those thathad not.

29. Although little information can be derived from the survey concerning the percentage ofhouseholds interested in borrowing for housing due to its purposive sample, the sources,frequencies and uses of housing loans can be examined. Close to 78 percent of thoseborrowing for housing had borrowed only from the CFI. Another 8 percent had borrowed frommoneylenders, with roughly half these households in the EWS group and the other in LIG.

e. Loan Conditions

30. The survey questionnaire indicated four uses of the housing loans. They include(i) small-scale improvement and upgrading; (ii) additions or expansion; (iii) new construction orrebuilding of an existing house; and the purchase of an existing house. While surveyed EWShouseholds in urban areas used their housing loans more or less equally forimprovement/upgrading, housing unit expansion, and new construction, the clear majority ofother urban and rural borrowers did so for new construction. Overall, 57 percent of all borrowersused their housing loans for new or major construction. In rural areas, 75 percent of EWSborrowers, 78 percent of LIG, and 86 percent of MIG used their loans for this purpose. In urbanareas, the respective percentages were 59 percent, 65 percent, and 64 percent. Roughly 19percent used their loans for improvement and upgrading, while another 15 percent undertookhousing additions and expansion. Only 2 of the 106 borrowers in the survey used their loan topurchase an existing house.

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Appendix 9, page 7

31. Some 87 percent of all EWS borrowers obtained their loans from their CFI with only onehousehold obtaining a loan from a bank. The remaining borrowers had obtained loans frommoneylenders. While all of the LIG borrowers had obtained loans through CFIs, LIG borrowersin urban areas used a wider range of sources. Of these borrowers, 65 percent had obtained aloan from CFIs; 17 percent from moneylenders; and the remaining households from housingboards, banks, and other sources. Close to 71 percent of MIG borrowers in rural areas hadobtained loans from housing boards or the government. In urban areas, 55 percent of MIGborrowers had obtained a housing loan from CFIs, 18 percent from housing boards, 9 percentfrom banks, and the remaining 18 percent from other sources. For MIG borrowers the overallpercentages were 44 percent from CFIs, 22 percent from housing boards, 6 percent from banks,17 percent from the Government, and 11 percent from other sources. Altogether, only three ofthe borrowers surveyed, all of whom lived in urban areas, had obtained a housing loan from abank.

32. The sizes of loans borrowed by households in all income categories ranged from lessthan Rs10,000 to more than Rs100,000. Approximately 37 percent of the LIG borrowersobtained a loan for less than Rs10,000, while close to 21 percent of the EWS borrowersobtained a loan for more than Rs50,000. Altogether, 49 percent of EWS, 52 percent of LIG, and28 percent of MIG borrowed for less than Rs15,000. Four interest rates were predominant: 15percent (39 percent of the loans), 18 percent (11 percent), 24 percent (15 percent), and greaterthan 24 percent (19 percent). More than half the EWS borrowers and 29 percent of the LIG hadobtained loans with annual interest rates of 15 percent.

33. While it might be expected that EWS borrowers would have lower monthly payments,the percentages of borrowers paying less than Rs250 per month actually increased with anincrease in income. Survey results indicate that 30 percent of EWS, 37 percent of LIG, and 39percent of MIG borrowers paid less than Rs250 per month. Similarly, 28 percent of EWSborrowers, 39 percent of LIG, and 28 percent of MIG were making monthly payments betweenRs250 and Rs500. Surprisingly, some 28 percent of EWS households were making monthlypayments greater than Rs1,000, which was virtually the same percentage as that for MIGborrowers. All of the EWS and LIG borrowers were making either weekly or monthly payments.Slightly more than half made payments on a weekly basis. Some 80 percent of the MIGborrowers were also making weekly or monthly payments. Payments by other MIG borrowerswere either annual or based on other methods of payment.

f. Collateral

34. In terms of the collateral, 55 percent of all borrowers provided a form of traditionalcollateral for their housing loan. Of those 34 percent provided a land deed, 4 percent provided apossession certificate, and 7 percent provided another form of guarantee. Consequently landownership documents were the most common form of collateral even for informal finance. Thepercentages of borrowers able to provide collateral were virtually the same for all incomecategories. The ability to provide acceptable collateral as well as the form of collateral providedappeared to have little relationship to the category of income.

35. Slightly more than half of the borrowers (52 percent) felt that group pressure was also aneffective form of collateral. Group pressure was strongest for EWS borrowers, 60 percent ofwhich felt that such pressure was adequate to ensure the repayment of loans. Slightly less thanhalf the borrowers felt that pressure from the CFI was strong enough to guarantee repayment,with EWS borrowers once again the highest percentage at 53 percent. The majority ofrespondents felt that only one form of collateral should be required and that it should not belarge cash deposit.

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Appendix 9, page 8

g. Loan Approval

36. In terms of loan approval, 38 percent of EWS borrowers were able to have their loanapproved in less than a month and 91 percent in less than four months. For disbursal, thepercentages were 45 percent for less than a month and 96 percent for less than four months.Percentages for all the other income groups were similar. Only 30 percent of all borrowersclaimed to have experienced any problems in the approval or disbursal of their loan. Most ofthese problems were not major.

h. Borrowers’ Own Contribution

37. Cash was the most frequent contribution made by borrowers to the construction of theirhouse. Roughly 76 percent of the borrowers contributed their own cash to supplement theirhousing loan. The percentage of households putting in cash ranged from 70 percent for EWS to78 for LIG, and 89 for MIG. Of those EWS households, 45 percent contributed less thanRs10,000. The situation was much different for the two other income categories. Some 34percent of LIG households and 75 percent of MIG households contributing cash put in morethan Rs40,000. Roughly 41 percent of the borrowing households contributed their own labor tothe construction of the house. The contribution of labor according to income group showed 43percent for EWS, 51 percent for LIG, and 11 percent for MIG. In almost every case, the value ofself-help labor was considered to be less than Rs10, 000.

38. While the recycling of building materials can be an important cost-cutting approach, onlyabout 15 percent of the borrowers made any contribution in kind to the construction of theirhouse. Only about 27 percent of the borrowing households obtained building materials from theCFI, with the percentage for different income groups ranging from 25 percent for EWShouseholds to 33 percent for MIG. Similarly, about 22 percent of the borrowers sold some oftheir assets to finance the cost of construction. The percentage was slightly higher in rural (29percent) that in urban areas (18 percent).

i. Supplemental Loans

39. Roughly half the borrowers engaged an additional loan to finance the construction oftheir house. Additional loans were most common when the primary loan was less than Rs20,000. Roughly 61 percent of the borrowers of this size of loan obtained an additional loan, themajority of which ranged between Rs5,000 and Rs35,000. About a quarter of the householdsobtaining a loan for Rs5,000 or less obtained another loan for Rs5,000 or less as well. Onlyabout 26 percent of the borrowers were interested in obtaining a maintenance loan onceconstruction of their house was completed.

3. Impact of Improved Housing Conditions on the Reduction of Poverty andSituation of Women

40. CFI housing loans are intimately linked to the reduction of poverty through support toprovide home work-places and working conditions for women, and the empowerment of womenthrough the self-help group (SHG) approach to decision making and use of householdresources.

a. Home-Work Places

41. Slightly more than 31 percent of all households in the survey used their home as a placeof work. This includes more than half the MIG borrowers in both urban and rural areas. Many

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Appendix 9, page 9

of these households may have been able to use their home workplace to raise their category ofincome. Among borrowers, EWS households had the lowest percentage of households usingtheir house as a workplace at 17 percent. Many EWS households have very poor quality housesthat would require substantial improvement to serve as a place for income-generating activities.Further the survey revealed that close to 30 percent of rural borrowers of housing loans wereusing at least part of their house as a place of work. Some 80 percent of these rural home-workplaces were used for the rearing of domestic livestock. In urban areas, close to 36 percentof the borrowers were using their houses as workplaces for urban functions such as tailoring,petty shops, wood carving, etc.

42. Some 60 percent of these home-workplaces involved the use of a room, 16 percentinvolved the use of open space near the house, and another 14 percent involved the use of thekitchen. The use of housing as a workplace is particularly important for women borrowers, 60percent of whom are home-based workers. Some of the work-related activities that typically takeplace in the home include mat weaving, broom making, tailoring, embroidery, small-scale foodprocessing, petty commerce, temporary storage of goods, etc.

43. The most common home-based work in the survey involved small-scale shops, tailoring,and the holding of animals, which combined made up roughly 70 percent of the total. Resultsfrom the survey showed that improvement to housing and home workplaces generated anincrease in household income between Rs200 and Rs1,000 per month with the averageincrease about Rs500. Almost 60 percent of the home-based workers in the survey werewomen.

b. Impact on Women Workers

44. Some 48 percent of the survey households had at least one woman member working forcash. The LIG category had the highest percentage with 58 percent. The overall percentagesfor EWS and MIG households were 35 and 46 percent respectively. For borrowers, thepercentage of households with women workers was 58 percent with 81 percent of thesehouseholds having only one working woman. The presence of a working woman householdmember varied considerably between rural and urban areas. The percentage of borrowerhouseholds in rural areas with a woman worker was roughly 76 percent, while that for urbanareas was only 43 percent. LIG borrower households in both urban and rural areas had aslightly higher percentage of working women than EWS and MIG.

45. Results from the survey seem to indicate that rural households with at least one workingwoman are more likely to borrow for housing than those without. This is true for all three incomegroups. While the percentages of households with working women in urban areas aresomewhat higher for EWS and LIG borrowers that difference is not substantial.

4. Technical Capacity and Support Provided and Needed

46. Roughly 34 percent of the borrowers obtained technical and/or management support forthe construction of their house. The percentage was slightly higher for LIG households (41percent) and slightly lower for MIG households (22 percent). The percentage for EWS wasclose to the overall average at 32 percent. The importance of technical support was clearlydemonstrated during the field work with SPMS. Houses that were built with the help of theSPMS engineer were clearly better built and less costly than those built without suchassistance.

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Appendix 9, page 10

47. Technical support can help low-income household borrowers in the design, budgeting,and cost control of construction. It insures sound construction at reasonable and predictablecost. Low-income household borrowers of housing finance recognize the value of this serviceand are basically willing to pay between Rs200 to Rs600 per house, or about 1 percent of theirloan amount, for this service. It would be in the interest of all parties if CFIs were equipped witha housing cell to provide this support. Survey results also indicated a preference for the bulksupply of materials from the CFIs (or NGOs); this would save time and reduce the costs ofmaterials and their transport.

C. Results from the Housing Case Studies

48. A series of case studies were implemented to deepen the understanding of EWS, LIG,and MIG needs for housing finance. The basic objective of the case studies was to more clearlyunderstand the qualitative factors affecting the choice of housing products to be financed, thegraduation of households from housing need to housing finance, the provision of supportservices and the impact of housing finance. The basic socioeconomic characteristics of casestudy households were very similar to those of households in the sample survey.

49. The most important result from the case studies was that they provided additionalinformation on the types of housing finance available to low-income households and theirpreferences. The main sources of housing finance are all informal. The SHGs/federations havebeen the most widely used sources of housing finance in the southern and Delhi regions. SHGmembers usually approach their group or the parent CFI for their housing loans. Thoseemployed in permanent jobs also can take loans from their employers. Chit funds are anotherwidely used source of housing finance in the south. Table A9 illustrates the different loanconditions that case study households obtained from informal sources in borrowing for housing.

Table A9: Loan Conditions of Different Housing Finance Providers

ProductInterestRate (%)

RepaymentPeriod (years)

RepaymentSchedule Security/Collateral

Housing Society 12 15 Monthly Land deed

NGOs 12 - 18 3 - 5Weekly tomonthly

Land deed, groupsecurity

Money Lender 36 - 60 2 - 3 Monthly toquarterly

Land deed (agri andothers)

Relatives None

Pawn Broker 60 - 120 2 – 3 Flexible Jewelry, utensils

NGO= non-government organization.

50. Household preferences for the types of housing finance and lenders were influenced by(i) formalities and procedures involved in obtaining the loan; (ii) loan terms and conditionsincluding the rate of interest, repayment period, and collateral requirements; (iii) time required toprocess the loan; and (iv) rigidity in repayment schedules and terms.

51. The average amount of housing finance required to expand a housing unit wasestimated to be Rs20,000 while the average cost of new construction was estimated to be

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Appendix 9, page 11

Rs50,000. SHGs and CFIs were the preferred source of housing finance for their members.Case study respondents felt that housing finance terms should include a rate of interest of 12 to18 percent with monthly payments over a period of 3 to 5 years.

D. Results and Observations from the Consumer Workshops

52. Consumer workshops were held at the end of the sample survey and case study work ineach of the six survey areas. The intention of these workshops was to expand the issues andideas raised during survey work through open discussion. A significant part of the workshop wasdedicated to identifying acceptable requirements for accessing a housing loan, the types of loanproducts desired and their estimated costs, and acceptable conditions of a housing loan from aCFI.

53. Generally agreed upon SHG and member requirements to obtain a housing loan fromCFIs were: (i) for the SHG, at least 2 to 3 years of microfinance operation and a repaymentperformance of 90 to 100 percent; and (ii) for the member, 2 to 3 years membership in the SHG,savings accumulation of Rs3,000, successful use and repayment of 2 to 3 loans for incomegeneration, repayment record of at least 95 percent for past loans, expressed housing demand,low cash outflow to service existing debt and adequate repayment capacity.

54. The type and estimated costs of desired housing products included: (i) the purchase of aplot for Rs5,000 to Rs10,000 for EWS households; (ii) purchase or construction of a new housefor Rs45,000 for EWS, Rs70,000 for LIG and Rs100,000 for MIG; (iii) repairs, improvements,and additions for Rs25,000; redemption of a house site and house for Rs20,000: workplaceimprovements for Rs5,000 to Rs20,000; and construction of toilets, electricity, water facilities,etc. for Rs5,000.

E. Results of the NGO/CFI Consultation Workshops

55. A major objective of the NGO/CFI consultation workshops was to determine an idea ofthe potential demand for housing loans through CFIs. The 30 participants at the consultationworkshop in Calcutta expressed a potential demand for bulk lending from HUDCO of roughly $5million. The 45 participants at the consultation workshop in Chennai expressed a much greaterneed for roughly $40 million. Some of the fast-track CFIs, which were not included asparticipants in the consultations (including SIDA, SHARE, SEWA and DHAN Foundation), haveexpressed a similar need for around $50 million. Clearly not all of the CFIs in the consultationshave the capacity to handle large loans. Nevertheless, a concerted effort was made to developreasonable estimates of what would be required once the new HUDCO lending window is inplace.

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Appendix 10

AFFORDABILITY ANALYSIS

1. An affordability analysis of loans to low-income households through community-basedfinance institutions (CFIs) under part A of the Project is presented in Table A10.1 andTable A10.2 summarizes an affordability analysis of direct lending under part C of the Project.

Table A10.1: Affordability Analysis Part A - Lending through CFIs

% Household incomePrice

(Rs)

Monthly Loan a

Repayments(Rs) EWSb LIGc MIGd

10,000 254 10 5 4

15,000 381 15 7 5

20,000 508 20 9 7

25,000 635 25 12 9

30,000 762 30 14 11

45,000 1,143 46 20 16

50,000 1,270 51 22 18

80,000 2,031 81 36 29

100,000 2,539 102 46 36EWS = economically weaker section, LIG = low-income group, MIG = middle-income group.a Repayment period is assumed to be 15 years at 13 percent.b EWS = up to income below Rs2,500 per month.c LIG = income between Rs2,500 and Rs5,700 per month.d MIG = income between Rs5,700 and Rs7,000 per month.Note: The shaded areas show the loan amounts affordable for the different income groups. The affordable percentagesdepend on the income group (EWS<15%, LIG<20%, MIG<30%) however in the direct lending component, Borrowersconsider that households can spend up to 30% of their income for repayment of housing loans.

Table A10.2: Affordability AnalysisPart C - Direct Lending

% Household incomePrice

(Rs)

Monthly Loan e

Repayments(Rs) EWSb LIGc MIGd

50,000 633 25 11 9

90,000 1,139 46 20 16

100,000 1,265 51 22 18

125,000 1,582 63 28 23

165,000 2,088 84 37 30

175,000 2,214 89 39 32

200,000 2,530 101 44 36EWS = economically weaker section, LIG = low-income group, MIG = middle-income group.a Repayment period is assumed to be 15 years at 13 percent.b EWS = up to income below Rs2,500 per month.c LIG = income between Rs2,500 and Rs5,700 per month.d MIG = income between Rs5,700 and Rs7,000 per month.Note: The shaded areas show the loan amounts affordable for the different income groups. The affordable percentagesdepend on the income group (EWS<15%, LIG<20%, MIG<30%) however in the direct lending component, Borrowersconsider that households can spend up to 30% of their income for repayment of housing loans.

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