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DEVELOPMENTS IN NHB

l It has been made obligatory on the partof an HFC to intimate the details ofmaturity of the deposit to the depositor atleast two months before the date ofmaturity of the deposit. [ paragraph 12(iv)of NHB Directions, 2001 ]

l All deposit accounts standing to the creditof sole/first named depositor in the samecapacity shall be clubbed and treated asone deposit account for the purpose ofpremature repayment. [ paragraph 12(v) ofNHB Directions, 2001 ]

Where a housing finance company at therequest of depositor/s repays a public depositbefore its maturity, it shall pay interest at thefollowing rate:

(a) minimum lock in three monthsperiod

(b) after three months no interestbut before sixmonths

(c) After six months The interest payablebut before the shall be two percentdate of maturity lower than the

interest rateapplicable to apublic deposit forthe period for whichthe deposit has runor if no rate hasbeen specified forthat period, thenthree percent lowerthan the minimumrate at which thepublic deposits areaccepted by thatHousing FinanceCompany.

Regulation & Supervision

Registration of HFCs:

During the quarter, applications for grant ofCertificate of Registration (COR) of 2companies were rejected after reconsideration,as directed by the Appellate Authority,Government of India. Till date there are 111companies whose application for grant ofCOR have been rejected. As on 31.03.2005 thenumber of Housing Finance Companiesregistered with NHB continued to be at 46 ofwhich, 24 HFCs have the permission to acceptpublic deposits.

Amendment to Housing Finance Companies(NHB) Directions, 2001 �

a. Regarding Premature Repayment ofPublic Deposits and rate of Interestthereof

Some provisions of the Housing FinanceCompanies (NHB) Directions, 2001 wereamended during the period. Besidesintroducing a new term �Tiny Deposit�, theamendments were related to repayment ofdeposits before maturity, rate of interestpayable on repayment before maturity,interest rate payable on overdue deposits andthe interest rate leviable.

l A new term �Tiny deposit� has beenintroduced. It has been defined as theaggregate amount of public deposits (notexceeding Rs. 10,000/- ) standing in thename of the sole or the first nameddepositor. [Paragraph 2(1) of NHB Directions,2001]

l The repayment criterion for repayment ofdeposits before the maturity date has beenamended as under [ paragraph 12(ii) of NHBDirections, 2001 ]:

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l In the event of death of a depositor, thepublic deposit may be paid prematurelyto the surviving depositor/s in the case ofjoint holding with the survivor clause, orto the nominee or legal heir/s with interestat the contracted rate up to the date ofrepayment. [ paragraph 12(vi) of NHBDirections, 2001 ]

l HFCs are classified into two categories viz.a problem HFC and a normally run HFC.An HFC, which is normally run HFC, witheffect from the date of this notification i.e21st January, 2005, can permit prematurerepayment of a public deposit after thelock-in period at its sole discretion onlyand premature closure can not be claimedas a matter of right by the depositors. Theproblem HFCs have been prohibited frommaking premature repayment of anypublic deposits or granting any loanagainst public deposits except in the caseof death of the depositor or in the case oftiny deposit up to Rs.10,000/- in entiretyor to enable the depositor to meetexpenses of an emergent nature up to anamount not exceeding Rs.10,000/-.[ paragraph 12(vii) of NHB Directions, 2001 ]

l A problem HFC is one which:

(i) has refused or failed to meet withinfive working days any lawfuldemand for repayment of thematured public deposits; or

(ii) intimates the CLB under section 58AAof the Companies Act, 1956, about itsdefault to a small depositor inrepayment of any public deposit orpart thereof or any interestthereupon; or

(iii) approaches NHB for withdrawal ofthe liquid asset securities to meet itsdeposit obligations; or

(iv) approaches NHB for any relief orrelaxation or exemption from theprovisions of Housing FinanceCompanies (NHB) Directions, 2001 orfrom that of Prudential Norms foravoiding default in meeting publicdeposit or other obligations; or

(v) has been identified by the NHB to bea problem Housing FinanceCompany either suo moto or based onthe complaints from the depositorsabout non-repayment of publicdeposits or on complaints from thecompany �s lenders about non-payment of dues.

(b) Risk Weight on GovernmentGuaranteed Loans

In order to remove the anomaly observed inthe regulatory prescription as far as the riskweights on credit facilities guaranteed by theCentral/State Governments are concerned, theBank has prescribed a risk weight of �0� percent in respect of loans guaranteed byGovernment of India/State Governments.Further, in respect of loans guaranteed by StateGovernments, where guarantee has beeninvoked and the concerned State Governmenthas remained in default for a period of morethan 90 days after the invocation of theguarantee, a risk weight of 100 per cent hasbeen assigned. [ paragraph 26 (3) (a)&(b) of NHBDirections, 2001 ]

(c) Submission of Returns

The criterion for submission of various returnsby HFCs to NHB has also been modified[Paragraph 39(1)] as under:

(i) an annual return furnishing theinformation specified in Schedule I to theseDirections with reference to its position ason 31st March every year and a half yearly

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Scheduled Commercial Banks (SCBs) in respectof their loans for housing in the Tsunamiaffected areas. The objective of this RefinanceAssistance is to encourage construction of newhouses/flats as also major repairs (includingextension and upgradation) of the existinghousing stock in the affected areas. TheRefinance Assistance could be availed at aconcessional interest rate of 5% p.a.

New rating Model for SCBs, UCBs andACHFSs

The Bank has already adopted acomprehensive rating model in order todetermine the pricing, exposure limits andsecurity for HFCs. On similar lines, it has newadopted rating models for ScheduledCommercial Banks, Scheduled Primary(Urban) Co-operative Banks and Apex Co-operative Housing Finance Societies (ACHFS)which take into account various parametersrelating to the performance of PrimaryLending Institutions.

Refinance disbursed during July �04 toFebruary�05

Total Refinance disbursed during the periodJuly� 2004 � Feb� 2005 was Rs. 4409.34 crore ascompared to Rs. 923.33 crore during the sameperiod in the previous year. In addition to this,a sum of Rs. 238.70 crore has been disbursedunder Short Term Finance Assistance toHousing Finance Companies.

Project Finance

NHBs Foray into MFI

Recognizing the increasing role of MicroFinance Institutions (MFIs) in India, theNational Housing Bank has recently madeforay into the sector to ensure that housingfinance reaches the grassroots of the lendablecategory so as to achieve NHB�s goal forproviding housing to the poor.

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return furnishing the informationspecified in Schedule II to these Directionswith reference to its position as on 30th

September and 31st March every year

(ii) further, housing finance companiesaccepting/holding public deposits,housing finance companies not accepting/holding public deposits but having anasset size of Rs. 100 crores and more, shallsubmit to the National Housing Bank aquarterly return furnishing theinformation specified in Schedule III withreference to its position as at the end ofevery calendar quarter.�

(d) Clarification regarding Deposit Registers

In terms of the extant Directions, each branchof an HFC is required to maintain a registerhaving the details in respect of the depositaccounts opened by them. However, in somecases, it has been observed that this register isnot available at the branches since the HFCshave a centralized register at the Head Office.NHB has clarified that in all such cases,separate registers need not be maintained atthe branches. However, the Head Office needsto provide the updated particulars of publicdeposits pertaining to the respective branchesto the branch offices, on quarterly basis i.e. ason March 31, June 30, September 30 andDecember 31, by the 10th of the succeedingquarter.

Financing Activities

Refinance

Refinance Assistance for Housing in theTsunami affected areas

In the wake of serious damage to life andproperty caused by the recent Tsunami tidalwaves in several coastal areas of the country,NHB decided to extend refinance assistanceto Housing Finance Companies (HFCs) and

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Financing of Slum Rehabilitation Project

As the first step towards integrated slumredevelopment by an NGO, NHB hassanctioned Rs. 5.82 crore for the constructionof Bharat Janata Housing Project at Dharavi,Mumbai, a Slum Reconstruction Project underSlum Rehabilitation Act (SRA) Scheme. Anamount of Rs. 0.58 crore has already beendisbursed to the NGO.

The project shall benefit 147 slum dwellers ofthe area. The project aims to achieve completetransformation of the basic nature of the slumsettlement to formal housing. Though theproject period is fixed at 5 years, it is expectedto be completed in 3.5 to 4 years. Through thisproject, NHB has introduced innovativesecurity requirements by obtaining lien on theTransferable Development Rights (TDR).

Self Help Group (SHG) Housing at Tirupati,Andhra Pradesh

The Bank signed an Agreement with SriPadmavathy Mahila Abyudaya Sangham(SPMS), Tirupati, a Federation of women SHGsaffiliated to Dhan Foundation, to financeconstruction of 300 houses in a slumredevelopment project. The project will fulfillthe dreams of 300 women who are currentlyliving in thatched huts in various slums ofTirupati. Most of these women who are smalltraders, vendors, daily wage labourers andartisans are the primary earners for theirfamily. They have formed themselves into SelfHelp Groups (SHGs) with the objective ofdeveloping regular saving habit andimproving the creditworthiness based on theprinciples of mutual sharing and cooperation.

The houses will have a plinth area of 218square feet each and the approximate cost perunit will be Rs. 60,000/-. The members of theSHG will bring in Rs. 10,000/- as their owncontribution, from their savings. NHB�s loancomponent will be Rs. 50, 000/- per dwelling

unit, totaling Rs. 1.5 crores, at concessional rateof 6.5%. The loan will be repayable in 15 years.Land for the purpose, in most cases, has beenallotted by Tirupati Urban DevelopmentAuthority.

Shri K.Muralidharan, Deputy General Manager, NHBand Shri Y. Venkateshwarlu, Managing Director,SPMS exchanging greetings after the signing of theloan agreement in presence of Smt A Jayanthi,Chairperson, SPMS, Shri P.K. Gupta, CMD, NHBand Shri R. V. Verma, Executive Director, NHB.

Other Initiatives

At the behest of the Andhra Pradesh HousingBoard, NHB has also sponsored a study forassessment of the form-work-technology for theconstruction of mass scale low cost housingin the State of Andhra Pradesh.

Mortage Backed Securitization

NHB has been pursuing with its effortstowards developing a framework forestablishment of an institutional model forsecuritization of housing loans. Keeping inview the overall mandate envisioned for NHBunder the National Housing Bank Act, 1987and exploring the initiative of the creation of aSecondary Market Institution on lines ofFannie Mae/Ginnie Mae/ Freddie Mac of theUSA, an agreement was signed between NHB,

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January� 2005.

In order toreview theprogress of thescheme, ameeting wasalso held inFebruary, 2005with therepresentativesof Banks.B e s i d e sreviewing theprogress madeunder thescheme, variousissues related tos u c c e s s f u limplementation of the scheme were alsodiscussed during this meeting.

Legal Aspects

Memorandum of Deposit of Title Deedsmade chargeable with the Stamp Duty inTamil Nadu

By the Indian Stamp (Tamil NaduAmendment) Act, 2004 (Act No. 31 of 2004),an Explanation has been inserted in Article 6in Schedule � I to the Indian Stamp Act, 1899.The said Explanation includes any letter, noteor memorandum or writing relating to thedeposit of title deeds as deemed instrumentevidencing an agreement relating to thedeposit of title deeds. A similar Explanation tocharge stamp duty on note, memorandum,letter, or writing treating them to be anagreement relating to deposit of title deeds wasearlier inserted in the Bombay Stamp Act, 1958.Consequently, the memoranda beingrecorded by housing finance companies andbanks in the State of Tamil Nadu will berequired to be stamped in accordance with the

Asian Development Bank (ADB) and HousingDevelopment Finance Corporation Ltd.(HDFC) on February 15, 2005 for formulatingthe road map for such an institutional model.The study will be conducted with technicalassistance from ADB. The venture wouldenable to garner experiences from otheremerging mortgage markets besides providingsound domain knowledge in the areas relatingto origination and servicing of mortgages.

Shri P.K. Gupta, CMD NHB andother diginitaries at the openingceremony of the GJRHFSMeeting.

Representatives from NHB, ADB & HDFC duringthe signing of documents

Golden Jubilee Rural Housing FinanceScheme (GJRHFS)

Under this scheme, the government setsnational target of financing dwelling units inrural areas. The target for the year 2004-05 was2.5 lakh dwelling units. To make the schememore attractive for the lenders and theborrowers, the GOI announced certainchanges. Accordingly, in compliance with theBudget proposals, RBI issued guidelinesadvising all SCBs to ensure that the interest/installment payments on advances forhousing in rural areas be linked to crop cycles.Similar advice has also been issued by NHBfor the HFCs. The bank had allocated targetsto various primary lending institutions (Banks& HFCs) to meet this goal. Against the allocatedtarget of 2.5 lakh units, the PLIs have financed1,97,278 units during the period April� 2004 to

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provisions of the Indian Stamp Act, 1899 asapplicable to the State of Tamil Nadu. The saidamendment Act has come into force from16.12.2004.

It may also be mentioned that w.e.f. 12.2.2004,stamp duty on agreement relating to depositof title deeds in the State of Tamil Nadu is 0.5%on the value of loan, subject to a maximum ofRs. 5,000/-.

Training

During the quarter a symposium onResidential Mortgage Backed Securitisation forthe investors and originators was held by theBank. The programme was attended by seniorand middle level officers of banks, housingfinance companies and rating agencies.Current developments in the sector werediscussed in the programme and theparticipants learnt about new MBS strategiessuitable for the housing finance market.During the current year, till the close of thisquarter, the Bank has conducted fiveprogrammes for the housing sector.

Shri H. N. Prasad, Regional Director, RBI, Kolkata,addressing the participants of the Symposium onRMBS.

The Bank also provided faculty support tohousing finance agencies during the quarter

on matters related to housing finance.

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Other developments

l The Central Government vide NotificationF. No. 7/15/2000 � BO -1 dated 28th January,2005 has appointed Dr. Amar Singh, JointSecretary to the Government of India,Ministry of Rural Development as Directoron the Board of Directors of NationalHousing Bank under section 6(1)(e) of theNational Housing Bank Act, 1987 vice ShriWilfred Lakra.

l Three articles were published in the lastissue of the housing news. The article on'Green Buildings - Affordable Housing' wasjudged the best among the three underthe Housing News Incentive Scheme. TheBank congratulated Shri Vishal Goyal,Manager for the same and awarded him.

l The Housing News congratulates ShriVishal Goyal, Manager on receiving theProfessor A. Dasgupta Gold Medal forbeing the best candidate in the MBA(PartTime) examination, 2004 of DelhiUniversity.

l The Bank continued to be the championin the IHC Table Tennis Tournament afterbeating National Capital Region PlanningBoard 3-1 in the final. The NHB team wasrepresented by Mr. S. H. P. Rizvi, Managerand Mr. Aditya Sharma, AssistantManager.

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BUDGET HIGHLIGHTS - 2005

Budget outlay fixed at Rs.5,143 billion.

Revenue deficit at Rs.953.12 billion or 2.7 percent of GDP.

Fiscal deficit pegged at Rs.171.99 billion or 4.3 percent of GDP.

Allocation for rural development to increase to Rs.180.34 billion.

Nominal increase in the securities transaction tax.

New Tax as Fringe Benefits Tax at the rate of 30% payable by the employerintroduced

New corporate tax structure with 30 percent corporate income tax rate fordomestic companies plus 10 per cent surcharge

Personal income tax slabs altered. No tax on income of up to Rs.100,000.

Women earning up to Rs.125,000 exempted from tax.

Senior citizens with income of Rs.150,000 exempted from tax.

Standard deduction and income tax rebate under sec 88, 80L abolished.

Instead a combined limit of Rs. 1,00,000 has been fixed for savings underspecified instruments for exemption from taxable income

New Tax Rates:

- 10 percent tax on income of Rs.100,000 to Rs.150,000.- 20 percent tax on income of Rs.150,000 to Rs.250,000.- 30 percent tax on income above Rs.250,000

No surcharge on income up to Rs.1 million.

Tax exemptions under housing loan interest, medical insurancepremium to continue.

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Union Budget 2005-06: Implications for Housing

The Union Budget 2005-06 continued to emphasise the growth of the economy by givingimpetus to the core sectors including the housing sector.

n Increased budgetary allocation under the Indira Awas Yojna to Rs. 2,750 croreprojecting to construct 15 lakh dwelling units under the scheme in rural areas andproposal to construct additional 60 lakh houses under the Bharat Nirman schemeby 2009. This will result in considerable investment in housing sector and alsoimprove habitat conditions.

n The amendment to the definition of �securities� under the Securities Contracts(Regulation) Act, 1956 to include legal framework for trading of securitised debtwill help deepen the securitisation market (asset-backed securitsation & mortgage-backed securitisation) in India. This is likely to benefit HFCs and NBFCs. Thisshould help the mortgage lenders to reduce their cost of funds thereby makingfunds available to home loan seekers at cheaper rates.

n Opening of external commercial borrowing window to MFIs will help indiversification of resources and bring down the cost of funds.

n The proposal to give exemptions to HFCs from paying withholding tax on foreigncurrency borrowing is likely to help HFCs to retain foreign funds at lower costs.

n The Government has proposed to scrap rebates under Sec88 and deductions underSec 80 and introduce Sec 80 CCE, which removes the cap on repayment on housingloan principal from Rs20,000. Under this clause an individual or a HUF is allowedtax deduction of up to Rs100,000 from the earlier Rs20, 000. This is expected toinduce more demand for housing loans as apart from the principal deduction upto Rs100,000, the interest component up to Rs150,000 is already exempt under Sec24.

n Construction of residential complexes with more than 12 residential houses orapartments together with common areas is proposed to be brought under theservice tax net. This will mean additional cost for acquisition of houses.

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NHB RESIDEX

There has been a long standing need tomonitor the movement of value of the realestate in an economy where the industryhas been on steady growth path. Reliable,unbiased information about the long-termperformance of residential propertyspecifically in terms of its pricing and theirmovements over time is needed not onlyfor academic interests but also to makestrategic decisions by the industry players.

Realising thisneed, NationalHousing Bank(NHB) has madea beginning inthis direction.Shri P.K. Gupta,Chairman &M a n a g i n gDirector, NHB,launched aproject for the�Preparation ofthe Real EstatePrice Indices for the residential housingsegment [NHB RESIDEX]�. The projectenvisages compiling the indices for selectedten major town/cities e.g. Greater Mumbai,Kolkata, Delhi, Chennai, Bangalore,Hyderabad, Ahmedabad, Kanpur, Jaipurand Patna. Shri Gupta informed that theseindices will be useful for various stakeholders i.e. Individuals, Builders, HousingFinance Industry as well as Government

and policy makers.

Elaborating further, Shri Gupta mentionedthat individual buyers and builders canbenefit by interpreting the indices to get anidea regarding demand and pricemovements of different types of houses invarious regions/localities. Similarly, thehousing finance industry can make use ofthese indices to assess the likely demandfor housing finance in various regions of the

Country.

Shri Gupta furtherinformed that theGovernment andpolicy makers canuse these indicesfor assessing themovement in thehousing stockand its pricevariations over aperiod of time onspatial basis aswell as by

category of construction in order to estimatethe property tax revenue. These indices canalso be used to assess the gap, if any, in thereported and actual market prices of theproperties in different localities/regions andState Governments/Local Authorities canmake their use while formulating theirpolicies on Property Tax/Registration Feeetc.

Shri P.K. Gupta, CMD NHB with Project Team andconsultants.

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�picking his or her own portfolio� of products& services, and defining the limits of the sectorto meet his or her needs.

In this backdrop, companies need to strive tocreate intelligent products & services. Theymust develop and nurture an �experiencenetwork� among the consumer communitieswhich enable transparency and dialogue withtheir consumers. Companies must providetheir consumers with real-time access andaction, and must cope with the heterogeneityand complexity of their changing needs torapidly reconfigure their products andresources in response to changing marketneeds. It is here that Information Technology(IT) has a significant role to play.

IT covers usage of all forms of availabletechnology to create, store, transmit, interpretand manipulate information in its variousformats. Standardisation of systems andprocesses is the essence of implementation ofIT in any institution. Process integrations,centralisation/decentralisation of systems,moving closer to the consumer byempowering them and bringing intransparency is the goal of IT. The focus of ITdevelopment needs to be on granularity,extensibility, evolvability and linkages toachieve experience integration. ITimplementation can be carried out both atEnterprise Level or it can be Modularstandalone business activity/process oriented.Integration of various business activities givesan added advantage.

Housing Finance Industry is characterised byits capital intensive nature coupled with a fairlylong gestation period. Earlier, though therewere identified housing shortages in thecountry, the long pay back period of housingloans discouraged many banks from forayinginto the Housing Finance sector.Consequently, there was a spurt of HousingFinance Companies (HFC) to cater to thislargely untapped market. Double digit growthfigures coupled with near zero percent defaultrate has made housing finance a lucrativebusiness avenue. With the low pickup of creditin other sectors, banks with access to lower costof resources have ventured into lending forhousing and the competition has intensifiedin the housing finance sector.

To stay ahead in this competition, one mustpay careful attention to the many ways inwhich today �s converging markets andtechnologies are redefining the role of thecompanies and the value it provides forcustomers. The strategy here is to search fornew sources of competitive advantages overothers. As C K Prahalad aptly puts it, �It is aboutbeing unique, creating wealth, and inventing newrules and new games � It involves creating carefullyorchestrated experiments and thinking big. Newopportunities may come either from the core or fromthe periphery.�

Today, the definitions of the industry aredriven by consumers � and not by thecompanies. Since, it is the individuals(consumers) who are making their choices,and not the companies. Each consumer is now

ARTICLES

Improving The Depth Of The Housing Finance Market:

A Case For Introduction Of Information Technology- Sachin Gopal Jathar, Deputy Manager

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IT enabled businesses empower staff with aresponsive and flexible environment forproviding highly differentiated services andtimely information. The standardisation ofprocess and systems brought in throughimplementation of IT systems brings downsthe degree of specialised staff requirement andhelps impart a lean structure to organisations.Further, IT can provide cost effective multi-channel integration of branches with the HOand it facilitates to transform services, attract& retain customers and increase profit.

Usage of IT in any industry leads to reductionof cost, increase in productivity, helps extendthe companies capabilities, helps ensurebusiness resiliency, reduces risk and last butnot the least helps reduce inefficiencies andoverheads.

In thef o l l o w i n gsection wewould brieflydiscuss therole of IT canplay inh o u s i n gfinance sectorin its majorbusiness andf u n c t i o n a lm o d u l e scommon to allthe players inthe sector:

Appraisal ofH o u s i n gLoans:

H o u s i n gFinance is abusiness off i n a n c i a lintermediation,

the proper repayment of loans granted isessential for an efficient and sustainablesystem. This can be achieved by generatingquality assets. Careful appraisal of applicationsis the first step towards this.

Every institution has specific lending norms.These are generally in terms of loan eligibilityvis-à-vis repayment capacity, purpose of loan,ratios, Sanctioning Authority, etc. Capturingthese standards in a suitable software packagewhich can be used for generation andmaintenance of loan accounts reduces chancesof intentional/ unintentional oversights inappraisal, thereby reducing operational risk.Multiple levels of authorisations also ensureproper check & controls on the systems.

IT ENABLED BUSINESS MODEL FOR HOUSING FINANCE ENTITIES

¨ Builders, Brokers & Realtors post their property details onto the HFI systems.¨ The consumer approaches the HFI with intent to procure a property.¨ The details of the consumer�s requirement are entered into the HFI�s systems wherein the

consumers housing requirements are matched with those in the available in the database.¨ The proposal is then forwarded for to the appraisal level where the credibility of the

customer is adjudged from information brought in from the Customer Information fileand credit bureau. Simultaneously, the property titles verification is made. The loan limitsfor the consumer are drawn and the same is checked against the price of the property to befinanced.

¨ Legal Documentations are prepared and the Mortgage Insurance is drawn.¨ Legal Documentation is completed. Payment is released to the Builders/Realtors/Property

owner.¨ The automated processing unit keeps track of the loan servicing, post disbursal monitoring

and regulatory requirements at the backend.

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Optimising Resources Allocation.

Consider a company with a loan portfolio comprising of say 1000 loan accounts. On therepayment day, we observe that some 100 borrowers have defaulted on repayment on theirdues. Generally in such scenarios, the company would start recourse/follow up action for allthe 100 accounts on the highest priority basis.

However, using datamining techniques, the data that we can collect from the HFI�s databasecan be used to plot the borrower�s repayment profile. The patterns so emerging from studiesof these profiles can be quite interesting. As in our aforesaid case, we may observe that of the100 defaulters, 80 borrowers are chronic late payers who repay their due shortly after the duedates. Thus in this case its only 20 accounts that need due attention and need active follow upon the highest priority. Thus there is curtailing unnecessary loss of time efforts and in turnsadding to the company�s bottom-line.

These days, with the advent ofinterconnectivity between remote branches,the transaction at the branch levels can alsobe captured and monitored by the HO on areal time basis. This helps in timely detectionof any lapses that may have occurred at thebranch level. Not only the financial appraisals,the requirement of securities (collateral) andcompliance to legal formalities like executionof documents etc can also be tracked in videsuch IT systems. The detailed status of a loanaccounts such as part disbursements, stage-wise disbursements vis-à-vis the total sanctioncan be tracked in real time online by usingthese systems. Thus by using IT solutions,Housing Finance Institutions (HFI) can keepproper control over their loan portfolio.

Post Disbursal Monitoring

Post Disbursal Monitoring forms one of themost critical functions of any lending activity.In an environment of numerous activeaccounts, IT systems can help in generatingvarious MIS viz account status, informationrelating to repayment due, payments received,short payments, overdue, etc. which arecrucial for active monitoring of the loanportfolio. In most of the advanced enterprise-wide IT systems, such tracking is centralised

to a particular region i.e. HO or zonal office.However, even stand-alone entities can keeptrack of the loan accounts, repayment profile,repayment cash flows, etc. by using offunctions of standard spreadsheetapplications like Microsoft Excel, etc.

The housing segment has undergone ametamorphosis in the past few years with toomany lenders chasing too few (good)borrowers. With all market players resortingto aggressive lending, undercutting andreducing credit appraisal standards, manyborrowers find themselves heavily leveraged.Not surprisingly, wilful defaults and white-collar frauds have slowly crept into the homeloan field with the active collusion of assortedplayers. Institutions need to gear themselvesup against this to ensure there are no majorslippages in recovery. The launch of CreditInformation Bureau India Ltd. (CIBIL) is asignificant step in this direction. They havemade pioneering advances in capturing andcomprehensively charting information of thecredit portfolio of Indian lenders by usingcustomised software specifically designed forthis purpose. With the right IT interfaces athand institutions can thereby effectivelymanaging the health of their portfolio & NPAlevels.

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Product Marketing:

Having talked about the increasingcompetitiveness in the housing financeindustry, it is but natural that there wouldalways be a strong marketing move by thecompetitors so that their products reach thepotential borrowers before others. This �earlybird syndrome� demands a receptivemarketing team which not only analyses theacceptance of current product and services butalso swiftly acts upon them and takes it backto the consumers. IT solutions deployed formarket charting and market research can beused to capture the product demand earlieron and help the firm to gear up to comfortablyride the demand curve.

In today�s cut throat competition, internet hasemerged as a popular means of reaching thecustomer. Wide coverage with respect toinformation and target customers, benefit ofaudio-visual communication and personalisedinformation for interest shown by prospective/existing borrowers � all at an economical cost,makes this a popular & effective marketingmedia. These websites can be made popularthrough sensitisation of customers throughvarious publicity media and for the net savvypeople, by linking with sites related withhousing finance. Further, data assimilatedaccumulated from such websites would helpbuild consumer behaviour/demand databaseswhich can be used fro business modelling.

Computer kiosks can also be set up at publicplaces such as shopping malls, airports,railway stations, etc. offering �One Stop orSingle Window Housing Solutions� catering tovarious housing related needs of theconsumers.

Regulatory Compliance:

Increased financial innovations have becomea regular feature bringing in multi-dimensional risks in the sector which in turn

has drawn in multiple regulating authoritiesto monitor the sector. These are the days whenthe conventional forms of regulation of HFIsare being supplemented by the suggestionsof Basel II Accord. Directions and Guidelinesissued by the regulatory authorities arebecoming more & more multi-dimensional.

The Regulatory Authorities constantlyendeavour to ensure that the prudentialprescriptions enforced by them are close tointernational norms and that it is neither strictnor lax but just correct in tune with the sector�sneeds and capabilities. Regulators feel that theexponential growth of credit to the sectorshould be calibrated with measurement of therisk rather than mere fund deployment toboost the short-term business growth. Theplayers are faced with increasing regulatoryrequirements of management of market risks.

Time and again the regulator authorities haveset down prudent practices and prudentialnorms for the sector. Complying with theseprudential norms needs Identification of theNPAs based on stipulated norms, migrationbetween different sub-classifications,provisioning based on the age of NPA andincome recognition which are best done withthe held of suitably structured IT systems. Therecent shift over from 180 days norm to 90days norm will make such follow-up morechallenging. Reviewing the performance ofthe Banks in the Housing Finance sector, RBIhas recently increased the risk weightage onhousing loans extended by Banks from 50%to 75%. It is a matter of time when these wouldbe extended to the whole sector. This wouldresult in making housing finance businessmore capital intensive. HFIs and Banksholding time deposit (Public Deposits) are tomaintain SLR in form of cash and securities.The maintenance of proper SLR is a strictregulatory requirement.

A robust IT system which monitors the asset

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liability portfolio of the institutions, helpadhere the regulatory requirements and canenable the institutions to tide over smoothlythrough these changes.

Risk Management & ALM

The resources structure of financial institutionsespecially those catering to the housingfinance sector is skewed towards short termborrowing who support long term lending;leading to inheritant asset-liability mismatch.Costly lessons have been learnt from the USS&L crisis of 1982. Historically, in the lowinterest rate regime the US Saving & LoaningIndustry use to borrow for short-term fundsat 3%, lend long i.e. 30 years at 6% and earned3%. However, adverse upwards movement inthe interest rates in the 1980�s lead to thecollapse of the whole S&L industry, costingUSA $153 Billion.

Housing finance unlike other financialactivities has a social agenda attached to it. Themore efficient the process the lower the frictionthere would be due to financial intermediation.This would help reduce the cost of housing.However, failure of these institutions carries ahuge social cost both with loss on financialfront and confidence in the system.

Introduction of IT in areas such as riskmanagement and ALM, has helped simplifyand amplify the behaviour of the company�sfinancial portfolio. Armed with proper ITsolutions for Risk Management & ALM, theInstitution can weigh its financial position vis-à-vis its risk appetite against the marketcondition and develop & price (risk basedpricing) its product range. By doing so, theycan successfully exploit the arbitrageopportunities arising in the markets.

The basis of risk management lies in �Knowingthy self � which conceptualises in three phases;identifying the risky areas, quantifying risk andmitigating it. With help of IT, institutions can

not only model their financial structure, butcan also know their strength and weakness.By doing so they are better equipped fordeveloping innovative product ranges and inlowering the turn around time.

Resource Mobilisation

Capital is one of the most precious and costlyresources for any institution. Historically, HFIhave been financing their business mainlyfrom owned funds, institutional loans, time-deposits from the public and other public debt.HFCs in India have always found wanting forcapital (funds at the right cost). Barring somelarge market players, it is always the banks,which have been able to tap huge quantumof low cost funds. With the implementationBasel II Accord around the corner, there wouldbe more charge on the capital and institutionswould need to hold capital inline with the riskprofile of their business. HFIs� concentrationon the specialised activity can help economisethe activity based capital requirement and thusHFI�s can move around the capitalrequirement stipulated under Basel II Accord.

To address the capital requirement issues,these institutions are resorting variousmeasures such as sale of mortgage loans,securitisation mortgage backed securitizationor ABS to free funds locked in long assets intheir books. To undertake such activities,institutions need have appropriate IT systemsto take care of the loan documentation, loanservicing, borrower repayment profiles,repayment structure, due diligence, etc.Further, as these processes are of highvolumes, proper use of IT systems can helpHFIs to index their portfolio & prepare thesame to gain higher leverage (cherry pickingor lemon souring) while securitising or sellingoff their loan portfolio.

Finally, with heavy competition on hand themargins of the HFIs have been under

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on the same footing as simple mortgage andthis is the reason for its acceptability amongbanks and financial institutions. The simplemortgage in law is created by a deed whichattracts stamp duty under the applicable stamplaw and also requires registration under theRegistration Act, 1908. The right transferred bya mortgage by deposit of title deed is the sameright that is transferred by a simple mortgage.In the event of mortgagor failing to payaccording to the contract, the mortgagee hasthe right to cause the mortgaged property tobe sold by the intervention of the Court. Theperiod of limitation for enforcing the said rightis also the same under both kinds ofmortgages. Not only this, the proviso to

The most common form of security acceptableto the lenders of housing finance is themortgage by deposit of title deeds of theresidential property. Creation of this form ofmortgage is quite simple. Deposit of title deedsof the property by a person at a notified placewith an intention that the deposit shall besecurity for the debt completes the requisiteswhat the law in India in the Transfer ofProperty of Act, 1882 contemplates for creationof this kind of mortgage. The simplicity of thiskind of mortgage lies in the fact that it requiresno writing and being an oral transaction is notaffected by the law of Registration.

Section 96 of the Transfer of Property Act, 1882,has put a mortgage by deposit of title deeds

pressure. Many companies are now forcedinto rethinking their strategy regardingaligning with the core business or toundertake specialised business activitiesrelating to housing finance. Thesespecialisations could be in areas relating to:

l Originating Housing Loans

l Procurement/Purchase of Housing Loans

l Servicing of Housing Loans

l Market Making- Closing the demandsupply gap

l Underwriting of Housing Loans

l Fraud Check & Recovery of HousingLoans

l Loan Appraisals, Title Verification, LoanDocumentation & Legal Services

l Territory Charting or Market Research &

Market Development

l Marketing of Housing Loans

l Customer Credit Information Service/Exchange

l Real Estate Index Services

The list is only indicative, however, themessage it conveys is that successfultransformation towards better adaptation tothe changing scenario will only be possiblewhen IT is made one pillar for development

References:

l Issues in Bank Regulation & Supervision-K J UDESHI DG RBI

l NPA: Overhang Magnitude Solutions &Legal Reforms- G P MUNNIAPPAN

l Lecture notes of Shri C. K. Prahalad

Housing Finance and Mortgage Security- R. S. Garg, General Manager (Law)

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section 48 of the Registration Act enacts that amortgage by deposit of title deeds shall takeeffect as against any mortgage deedsubsequently executed and registered relatingto the same property.

The difficulty, however, arises when, there areno title deeds or the deeds in possession of aperson are not material evidence of his title tothe property to enable him create mortgageby deposit of title deeds. Inheritance of theproperty from one generation to another,division and sub-division of property withoutproper documents and for host of otherreasons, many in our country do not possessdocuments of the property which we actuallyown or do not possess such document whichin law are regarded material evidence of title.It is said that this kind of situation is prevalentmore with regard to land situated in rural areasof our country making lending for houseconstruction difficult. The Hon�ble FinanceMinister while presenting the union budgetfor the year 2004-05 also echoes the similarsentiments when he said ��..A majorimpediment to credit for rural housing is absence ofproper title to the land. Government of West Bengalhas made a law to simplify the creation of security. Itappears to me that the law deserves to be emulatedby other States.�

Reference to the law in West Bengal is to theWest Bengal Agricultural Credit OperationsAct, 1973 which was enacted for facilitatingagricultural development through creditagencies in the State. The said Act providesfor creation of mortgage or charge on the landowned by an agriculturist as security forfinancial assistance by the execution of adeclaration in the prescribed format. Thedeclaration is deemed to have been dulyregistered under the Registration Act, 1908from the date of its execution provided thecredit agency forward within the prescribedtime a copy of the declaration to the

Registering Officer within the local limits ofwhose jurisdiction the whole or any part ofthe property mortgaged or charged is situate.The Registering Officer is required to file thesaid copy in his Book No. 1 prescribed undersection 51 of the Registration Act, 1908. Thesaid Act declares that no stamp duty underthe Indian Stamp Act, 1899 or registration feeunder the Registration Act, 1908 is payable onthe declaration.

Thus, under the West Bengal Model creationand registration of security interest by way ofmortgage or charge in favour of financialinstitutions and banks is very simple and hasno costs implications. The declaration is anotice to the public at large. There is norequirement of title deeds though the lenderhas to satisfy itself about the ownership of theperson creating the security on the land. It maybe mentioned that many other states havelaws similar to the West Bengal Act for securingagricultural advances. However, there is nouniformity in the matter of exemption ofstamp duty and registration fee. Enactmentof law similar to the West Bengal AgriculturalCredit Operations Act, 1973 for facilitatinghousing development by all stats will certainlytake some time. On the other hand, there isan urgent need to extend housing loans inrural areas as also in other areas even wherethe land owners do not possess title deeds.

As already stated mortgage by deposit of titledeeds cannot be created in the absence of titledeeds. But the law never intended this kindof mortgage to be used for securing suchadvances. This form of mortgage basically isto facilitate trade. It was intended to enable themercantile community to borrow withoutdelay and at frequent intervals. Saving ofstamp duty is a necessary consequence as nodocument is created which records thetransaction. For the same reason, there is nodocument which can be registered. In fact,

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these types of mortgages are at variance withthe policy of publicity of transfers underlyingthe Transfer of Property Act, 1882 and theRegistration Act and embodied even in theWest Bengal Law.

In my view, housing loans to individuals,whether or not the individual possess titledeeds to the property, should be secured by asimple registered mortgage. It may be by wayof a declaration as is provided in the WestBengal Act referred to above or otherwise.Considering shelter is a basic human necessity,enactment of a separate law on the lines ofWest Bengal Act by each state to facilitatelending for housing development by banksand housing finance companies will be anideal situation. However, pending this otheralternatives also need to be explored.

Stamp duty is a major deterrent for obtaininga simple mortgage. At present stamp duty onsimple mortgage vary from state to state andis in the range of 0.5% to 5% of the valuesecured. This is certainly on the higher side.

The Government of Maharashtra, videNotification MUDRANK -2002/875/CR-173/M-1 dated May 6, 2002 reduced the stamp dutyon such mortgage deed executed for housingloans to two rupees and fifty paisa for everyrupees five hundred rupees or part thereof forthe amount secured under the Bombay StampAct, 1959 subject to such instrument beingaccompanied by Bank/HFC sanction letter andthe purpose of the loan specifically mentionedin the letter. Similarly the Government ofGujarat has fixed stamp duty @ 0.5% upto Rs.15 lakhs borrowed for residential purposesand one percent subject to maximum of onelakh rupees where it exceeds Rs. 15 lakhs.Under the Karnataka Stamp Act also stampduty payable is .5% for the amount securedby such deed w.e.f. 1.04.2003.

The Government of Tamil Nadu, vide G.O.MsNo. 47, Commercial Taxes (J1) dated February12, 2004 reduced the stamp duty on suchmortgages to 1% of the amount securedsubject to Maximum of rupees 20,000/-.However, any writing in relation to the depositof title deeds attracts only .5% of the value ofloan subject to a maximum of Rs. 5,000/-. Thereis an urgent need to align the stamp duty onsimple mortgage with the duty as is chargeablein the case of on any writing relating to depositof title deeds in the State of Tamil Nadu.

The high cost of stamp duty on mortgage loansadds to the cost of housing. There is, therefore,an urgent need to rationalize the stamp dutyon simple mortgages and make it uniformacross all the states in the country. It is truethat during 2002-04 states have reduced stampduty on such mortgages particularly inrelation to housing loans to 0.5%, there seemsto be a case to reduce it further. Consideringthe fact that during the period 2002-2004,housing finance companies and banks puttogether have disbursed a sum of Rs.118245crores (aprox.) a token stamp duty of 0.25 %alone would have earned the states a revenueof about Rs. 300 crores. As the trend of housingfinance disbursement is likely to continue infuture, this could be even a good source ofrevenue to the state governments, which arevirtually getting nothing under the extantprovisions. However, the success wouldnecessarily depend upon the rates prescribed.A high rate may evoke avoidance while a lowrate should meet with compliance.

The response from the states in this regard (i.e.reduction in the stamp duty to desired levels)if any, need to be reciprocated immediatelyby banks and housing finance companies byexecution and registration of mortgage deedsin respect of all the future loans originated inthe concerned state, irrespective of the fact

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whether the borrower is in possession of thetitle deeds or not. If need be, Reserve Bank ofIndia and National Housing Bank should alsostep in by issuing necessary guidelines/directions to Banks and housing FinanceCompanies to ensure execution andregistration of mortgage deed in all such cases.Not only this, risk weightage on loans securedby simple mortgages can also be reduced byRBI/NHB to encourage banks and HFCsaccept this type of mortgage. Banks and HFCscan also consider sharing a portion of such costby interest subsidy or otherwise to meet theadditional cost of stamp duty. Though it maybe a radical departure from the existingpractices of banks and housing financecompanies, it may still not be too late in so faras development of housing finance system inthe country is concerned.

It may be added that the existence of validmortgages is essential for the success ofsecuritization of housing loans and creationof secondary mortgage market in the country.The execution and registration of mortgagedeed will obviate the need for each of the stategovernment issuing notification remittingstamp duties on such transactions as thetransfer of interest secured by mortgage deedattracts a fixed stamp duty of nominal amount.

The other important aspect of the West BengalModel is the method of registration of thedeclaration and registration fee. In some of thestates registration fee is ad-valorem and goesupto 1% of the value of the transaction. Forinstance in Maharashtra registration fee is 1%of the value of loan secured subject to amaximum of Rs. 30,000/-. It appears to be 3%subject to a maximum of Rs. 5,000/- in Gujarat.In Karnataka it is only 0.5% on such mortgagessubject to a maximum of Rs. 1,000/-. In TamilNadu it is 1% subject to a maximum of Rs.5,000/-.

This is certainly on the higher side in relationto housing loan transactions. It should be afixed amount not exceeding a sum of Rs. 250/- or so. States need to look into this matter alongwith reduction of stamp duties and shouldprescribe a uniform rate of registration fee onmortgage transactions of the housing loans.As regards, procedure of registration ofmortgage deed, the same need to be simplifiedpending separate enactment or requisitemodifications in the Registration Act.

The option of simple mortgage at reduced ratsof stamp duty as security for housing loanswill be beneficial to all the stake holders. Thiswill become an additional and importantsource of revenue to the states as at presentstates are virtually not getting anything fromthese transactions because of acceptance ofmortgage by deposit of title deeds by lenders.The lending institutions will be benefited andencouraged as they will be able to securitisesuch loans to raise more resources withoutpaying much stamp duty. Not only this theymay get additional business as they will be ableto finance houses where the owner does notpossess title deeds but otherwise is in aposition to satisfy the lending institutionsabout his ownership. Even the borrower maynot be the looser as even in the absence of titledeeds he will be in a position to borrow andwhere he has the title deeds, he can use thesame for creating second and subsequentcharges to raise loans for his other andtemporary requirement subject to the termswith the first mortgagee. In fact in some of thestates like Maharashtra and Gujarat where anywriting relating to deposit of title deeds attractstamp duty, the borrowers are paying suchduty wherever any writing is recorded by alending institution. This will also advance thepublic policy of publicity of such transactions.

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RBI hikes risk weight on housing loansby urban co-operatives

(Financial Express, January 6, 2005)

RBI has increased the risk weight on housingloans, fully secured by mortgage ofresidential properties, extended by primaryurban co-operative banks to individuals, to75% from 50%.

NHB announces concession scheme fortsunami victims

(Pioneer, January 8, 2005)

Shri P.K. Gupta, CMD, NHB announced thelaunch of a special package for financialassistance of the victims of the tsunamivictims of the country. Under the scheme,Banks and Housing Finance Companies canavail refinance at concessional rates i.e. 5%for refinance for individual loans and 5.5%for project finance in respect of constructionor repairs and renovation of houses andprovision of housing related infrastructure.The onward lending rates under the schemehave been pegged at 6.5% and the maximumtenure of loans will be 15 years including 2years moratorium on payment of principaland interest.

Multi-storey homes for slum dwellers

(Hindustan Times, January 14, 2005)

In a bid to beautify the city in time for the2010 Commonwealth Games, the Delhigovernment has decided to rehabilitate slumdwellers in aesthetically built four storeyedone room tenements.

Centre pushes for 4-6% stamp duty

(TOI, January 24, 2005)

The Centre is pushing hard for lowering ofstamp duty uniformly in the range of 4-6%to contain the menace of black money.Experts feel collection may rise due tolowering of rate as people will not hidetransaction value of property to reduce taxliability. However, the move could be moreeffective in containing the use of blackmoney in property transactions if theproposal is implemented with rationalizationin property tax.

HDFC Net rises 29% in Q3

(Business Line, January 25, 2005)

Housing Finance Development Corporationhas reported a 29% increase in net profit, atRs. 236.05 cr for the third quarter endedDecember 31, 2004. The company hadreported a net profit of Rs. 182.81 croreduring the corresponding quarter of theprevious fiscal.

LIC Housing Finance Q3 net down at Rs.42 crore

(Economic Times, February 5, 2005)

LIC HFL has reported a decline in its netprofit at Rs. 42 crore during the third quarterended December 31, 2004, as against Rs. 45.23crore for the same period last fiscal.

EXCERPTS FROM PRESS ROOM

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HDFC cuts rates by 25 bps forloans over Rs. 10 lakhs

(Economic Times, February 8, 2005)

Housing Finance Development Corporationhas lowered its lending rates by a quarterpercentage points for two of its lendingschemes. After this reduction, loans forabove Rs. 10 lakhs are available at 7.25%(variable) or 7.75% (fixed). The special rateswhich are available upto March can beavailed by prospective borrowers who havebeen sanctioned loans but are yet to availthe same.

FDI in retail and real estate soon:Kamal Nath

(Hindu, February 9, 2005)

The Government is likely to come out witha policy on opening up the retail and realestate sectors for foreign direct investmentwithin the next two months. In the realestate sector, the FDI will be driven towardsconstruction and not just investment in landholdings.

HDFC likely to float Rs 2000 crorebonds

(Business Standard, February 10, 2005)

HDFC would be raising around Rs. 2000crore in the next couple of months thatwould be required for funding its financeactivities. The company has recently raisedRs. 1000 crore on private placement basisfrom the domestic corporate debt market.

ECB Norms for HFCs, NHB likelyto be eased

(Economic Times, February 10, 2005)

The government is considering a requestfrom housing finance companies and itsregulator NHB for relaxing foreign currencyborrowing norms. With the interest ratesincreasing and banks and financialinstitutions facing a liquidity crunch, HFCsare looking at ECBs aggressively. They saythey should also be allowed to borrow ECBslike banks.

Home Loan rates to slide if EPF entersmortgage market

(The Financial Express, February 14, 2005)

In what could bring down home loan ratesmthe Employess Provident Fund Organisation(EPFO) Board is toying with the idea ofinvesting in mortgage backed securities aspart of its strategy to raise the return on itsassets. EPFO is viewing investment in MBSas a more favourable route as risks are muchlower than investing in equities, whichpromise highest return but are fraught withhigh risks. NHB is understood to have hadtalks with EPFO over the issue when theNDA was in power, but there was noprogress due to certain �hitches� in the formof high stamp duties and lack of stringentforeclosure laws.

PNB Housing Finance plans loanscheme

(Tribune, February 18, 2005)

Managing Director, PNB Housing FinanceLtd. announced that the company is planninga scheme that would let people open accountsand save with them with a promise that PNBHFL will provide three times loan than thesaved amount at a marginally higher ratethan the rate at which they were receivingon their savings.

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LIC Housing seeks state governmentshelp

(Business Line, February 22, 2005)

LIC Housing Finance Ltd. plans to establisha chain of �assisted living community centres�also known as; care homes� for the aged. Thecompany, which has flagged off its projectin Bangalore, has approached a few otherState Governments for setting up similarcentres. LICHFL Care Homes Ltd., thesubsidiary formed to oversee the programme,has proposed to offer community livingfacilities in cities such as Mumbai, Hyderabadand Kochi. The idea is to provide a cluster ofsecure and environment friendly dwellingunits in each centre.

Construction stocks jump on FDI move

(Business Line, February 25, 2005)

Stock prices of companies with huge landholdings as also those into real estatebusiness shot up on Friday based on marketexpectations that their valuations wouldincrease after the Government allowed FDIin construction.

PNB not to merge home finance arm

(Economic Times, February 25, 2005)

PNB Exceutive Director K C Chakrabarty toldET that PNB will not merge its housingfinance subsidiary with itself. He said thatPNB Housing Finance could continue as aseparate company since it had developedexpertise in the area of housing finance. Hesaid that the only problem with the housingfinance subsidiary is that its cost of funds ishigher than that of the bank. But this problemcan be solved by securitizing its home loanassets with the parent bank.

Edited, Printed and Published by Mr. Vivek R. Katre on behalf of National Housing Bank, Core 5-A, 3rd Floor, IndiaHabitat Centre, Lodhi Road, New Delhi-110003 at Alpha Lithographic Inc., Naraina Village, New Delhi-28. Tel.: 981119620

Shri P.K. Gupta, CMD, NHB at the stall of PNBHFL during the 5th National Convention &Exposition Organised by NAREDCO at IHC on March 11, 2005

Bank of New York, six FIIs buy 18.5% inLIC Housing

(Business Line, March 3, 2005)

Bank of New York along with 6 FIIs haveacquired a total of 18.5% in LIC HousingFinance Ltd. following its Board of Director�sdecision to allow them to hold 49%. The totalFII holding in the company has in factincreased from 12.23% to 25% till December2004 while BNY has acquired as much as5.04% recently-the largest among the FIIs.

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