Project on Housing Loan

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

S u m m e r In t e rn s h ip

AT Housing and Urban Development Corporation Ltd.

By: KULEIN CHAUHAN (SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES)

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Objective of the Study The main objective behind the preparation of this project is to get a deep understanding of the procedure adopted to sanction a loan for financing individual housing projects and parameters considered by Housing and Urban Development corporation Ltd..



























ACKNOWLEDGEMENT I take this oppurtunity to thank all those people who have directly or indirectly helped me in completing this project. I am grateful to Mrs.Neena Jain, Chief Manager (HUDCO NIWAS ) & Mr.Nimit Jain under und er whos whosee guida guidanc ncee I under underto took ok this this proj project ect,w ,whi hich ch has has been been a grea greatt lear learni ning ng experience and given me an opportunity to understand the dynamics of project financing. And my sincere thanks to the finance department of HUDCO for providing their valuable time and facilitating the completion of the project by ensuring the availability of the necessary resources.



























OBJECTIVES •

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To provide long term finance for construction of houses for residential purposes or finance or undertake housing and urban development programmes in the country. To finance or undertake, wholly or partly, the setting up of new or satellite

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

•

•

•

VISION "TO BE AMONG THE LEADING KNOWLEDGE HUBS AND FINANCIAL FACILITATING ORGANISATIONS FOR HABITAT SETTLEMENT

MISSION "TO PROMOTE SUSTAINABLE HABITAT DEVELOPMENT TO ENHANCE THE QUALITY OF LIFE"



























MANAGEMENT TEAM FUNCTIONAL DIRECTORS Chairman & Managing Director (Additional Charge)/ Director Finance Ph: 011-2469 0478, Fax: 011-24620745

Shri T Prabakaran

Email: [email protected]

GOVT. NOMINEE DIRECTORS Director, HUDCO and Additional Secy. (JNNURM) & Mission Director (BSUP), Ministry of Housing and Urban Poverty Alleviation Ph: 011-23061419, Fax: 011-23061420

Dr P K Mohanty

Email: [email protected] & Email: [email protected] [email protected]

Part time Official Director HUDCO, Joint Secy. & Financial Advisor, Ministry of Housing and Urban Poverty Alleviation Smt Sudha Krishnan

INDEPENDENT DIRECTORS

Part-time Non Official Director, Chartered Accountant Ph: (O) 25712813, 32966756 (R) 45621986

Shri Raj Pal Singh Solanki

Email: [email protected] Fax: 25781744



























Part-time Non Official Director, Environmentalist & Process Engineer Ph: 9814006928, 9417021828, 9818116060, 01862221828, 3290228, Fax: 0186-2221828

Shri Dinesh Mahajan

Email: [email protected] & [email protected] Part-time Non Official Director, Advocate High Court Mumbai, Ex Mayor of Mumbai, Ex Chairperson Maharashtra State Commission for Women Ph: 022-26455858

Smt Nirmala Samant Prabhavalkar


Part-time Non Official Director, Ph: 9820059122

Dr Radha Binod Barman

CHIEF VIGILANCE OFFICER

Chief Vigilance Officer Ph: 24624447, Fax: 24365317 Email: [email protected] Shri T K Sanyal





























Sr. Executive Director – (Resource Mobilisation including PDS, Banking & Investment, NHB and HSMI) Email: [email protected] Shri R K Khanna

Executive Director Finance Hyderabad Regional Office Ph:040-23235759 Email: [email protected] Shri A K Kaushik

Executive Director Director – (SBU (SBU for value added added real estate & other housing) Ph: 24647792, Fax: 24620019 Email: [email protected] Smt Manorama Dutta

Executive Director – Chennai Regional Office Ph: 044-28529500, 044-28412711 Email: [email protected]





























Executive Director – (Urban & Regional Planning & SBU for Social Housing-Core Infrastructure, P&SU) Ph: 24620353 Email: [email protected] Dr. P Jayapal

Executive Director Projects (Administration & JNNURM) Ph: 24627321, Fax: 24627439 Email:[email protected] & Email:[email protected] [email protected] Shri S K Chaudhary

Executive Director Finance

Shri P K Aggarwal

Executive Director – (Internal Audit) Ph: 24627396, Fax: 24690804 Email: [email protected]





























Executive Director - (Human Resource Development, Developm ent, Operations, Operations, SBU for Power & Transport, Special Projects & DMRC) Ph: 24647121, Fax: 24643675

Shri H K Dubey


Executive Director -Law & Central Public Information Officer, Nodal Officer (Public Grievances) Ph: 24651880, Fax: 24648428 Email: [email protected] Shri S S Gaur

Executive Director - Works & Disposal Ph: 24651675, Fax: 24648367 Email: [email protected] Shri R K Safaya Deputy Chief (F)/Company Secretary Shri Harender Verma

Tele-fax: 24615534 Email: [email protected]





























India’s first private sector retail housing finance institution, the housing development and finance corporation (HDFC), was formed in 1978.Until then there was effectively no market rate housing finance available. HDFC steadily grew into a major force in this sector, despite the control credit allocation structure in the country. Other private sector competitors began to appear in 1983. In 1988, an apex institution, the national housing bank was created In the early 1990s there were essentially three strands of financing flowing into LMI financing. The first and the largest were the continuing flow from HUDCO at below market prices. The major problem with this process was not just the non-sustainability of the pricing and rates, but the high degree of political intervention and default that was tole tolera rate ted. d. Th Thee seco second nd was was a signi signifi fica cant nt amou amount nt of lend lendin ing g to mode modera rate te-in -inco come me households by HFCs, which were required by NHB, to cross subsidise small loans by charging higher rates on bigger loans. Although there was evidence that many of these lower rate, smaller loans were taken by relatively higher income households, moderate income borrowers did receive some benefit from this system. The third was the flow of funds and technical assistance to NGO’S. These amounts remained small and most such institution struggled under the burden of limited management capacity. From 1993 onwards, the pace of deregulation has picked up, there was a slowing of the growth of NHB refinance, which has supported the cross subsidization by HFCs. A shift in fund raising efforts towards the attraction of fixed deposits at market rates from the public eliminated the capacity of private HFCs to continue cross subsidization. Interest rates of all kinds were allowed to be freely set and more and more lenders and borrowers accessed a free financial market place for funding, rather than a political market place of directed credit. The housing finance sector has recently reached a major turning point, with deregulation proceeding to the point that new categories of market rate lenders have appeared- banks, ICICI, IDBI, LIC, UTI etc. lending to higher income groups has become very dynamic. This is the first and very important step in a process of introducing real competition and eventually greater pressure for going down market to LMI lending on a larger scale.





























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Due to poor demand assessment and project inefficiencies, large amounts of resources have ended up locked up in unsold property and housing units. The ineffi inefficie cienci ncies es are aggrav aggravate ated d by pervas pervasive ive state state control controlss on most most aspect aspectss of functi functioni oning ng of hou housin sing g agencie agencies, s, and politi political cal direct direction ionss on estate estate manage managemen mentt project implementation.

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

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































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To strengthen the backward and forward linkages of the housing sector with rest of the economy. To augment the financial resources for the sector.

Functions Of NHB The activities of NHB can be broadly divided into following three categories: Promotion & Development

Interv Intervent ention ion through through instit instituti utional onal credit credit can be made made more more effect effective ive by adoptio adoption n of different approaches to cater to the needs of different income groups. With the setting up of NHB in 1988, there has been sustained efforts at creating and supporting new set of specialise specialised d institutions institutions to serve as dedicated centres centres for housing credit. credit. NHB’s role role in this regard can be measured from the growth of specialised institutions spread over the vast span of the country. Regulatory Function

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































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Housing finance companies;

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Regional rural banks;

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Agriculture and rural development banks; and

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Cooperative housing finance societies

The commercial banks are the largest mobilizer of savings in the country. In terms of coverage also, the banking system has the largest branch network. However, in the past, the saving savingss mobil mobilize ized d were were not being ploughe ploughed d back to the household householdss for shelter shelter purposes. The reluctance on the part of the banks to extend credit for housing as a regular part of their business was basically due to their perceived role being limited to financing of working capital needs of commerce, industry and trade. Yet another factor was that the banks did not want to tie up their short resources in extending long-term housing hou sing loans. However, with the ongoing financial sector reforms and deregulation of the banking sector, the banks, such as SBI, PNB, etc. have become competitive players in the housing finance finance sector. Their advantage advantage lies in the wide network and relatively relatively lower lower cost of funds.

Constraints in Expanding Financial Assistance































comprising smaller businessmen, traders and others have been tapped only to a small extent. There are, of course, factors that preclude the provision of financial information by borrowers in this sector in a form and manner required by the financial institutions. Therefore, this segment of the population tends to look for non-institutional credit. A number of initiatives have been taken to bring in a majority of such population to the formal sector financial institution fold. The RBI has promoted self-help groups (SHG) and NGOs so as to expand their activities and deepen their role, link SHGs with banks and increase the building capacity of NGOs. Similarly, the emergence of a micro finance sector is also of recent origin. While this mode provided funds to people to set-up income-generating activities, over a period of time some of them have provided funds for shelter improvement as well. However, certain problems need to be sorted out. Some of these relate to the rates of interest, security for the loan, selection of borrowers, and credit appraisal. Others involve loan processing fees, end use of funds, and organizational problems at the SHG level, like the capacity to manage long term loans.

Issues in the Development of the Housing Finance Sector





























































stimulates the growth of secondary and tertiary sectors. This is on account of the intrinsic chain of backward and forward linkages with other sectors of the economy, fuelling growth of ancillary industries such as cement, steel, brick and tiles, building material, paints and finishes etc. besides triggering off the demand for consumer goods as well as supporting services. Empirical evidence has established that along with the significant contribution to the national income and gap, housing is one of the largest employment generators in India.

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

Resource Mobilization

































HUDCO extends assistance benefiting the masses on urban and rural areas under a broad spectrum of programs as listed below;

Housing • • • • •

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Urban housing Rural housing Staff rental housing Repairs and renewals Shelter and sanitation facilities for foot path dwellers in urban areas (night shelter, pay and use toilettes) Working women ownership condominium housing

































• •

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

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

































Housing Housing options are provided to the different economic categories as given below The economically weaker section with household income of Rs 2500 per month or less The low income grow with household income from Rs 2501 to Rs 5500 per month The middle-income group with household income from Rs 5501 to Rs 10000 per month The high-income group with household income more than Rs 10001 per month Considering Considering the income income brackets, brackets, HUDCO has evolved ceiling costs and loan limits for various income groups linked with affordability and prevailing costs of construction for various geo-climatologically contexts. These are kept under constant review for income limits costs of houses and loan limits.

































development projects, commercial complexes, integrated low cost sanitation and basic sanitation schemes.

Profitability With Social Justice HUDCO performance can be summarized as one signifying “profitability with social justice”. HUDCO has been continuously managing its operations efficiently and also making profits, these are ploughed back as reserves for increased operations. In 20012002, 200 2, HUDC HUDCO O made made a prepre-ta tax x prof profit it of Rs 373.2 373.21 1 cror crores es prov provis isio ional nal (exc (exclu ludi ding ng provision for nap). Till 1989-90, HUDCO was exempted from income tax liability from 1990-1991, HUDCO has been paying tax. HUDCO for the first time has paid annual dividend of Rs. 10.17 crores for 1999-2000 & Rs. 20.87 crores for 2000-2001.

































The corporate plan 2010 envisages the formation of independent and synergetic cells or empowered groups on the area of strategy planning. Business development, asset liability management, risk management, Consultancy management, organizational systems and estate estate development development to ensure ensure sustained sustained business growth besides exploring exploring new avenues of diversification. The stress is on expansion of lending to housing and urban infrastructure, housing deliver through expanded avenues including retail financing, increased Consultancy assistance for projects in India and abroad, impetus to building technology trader initiatives and in house research and training programs with national/international na tional/international networking.



































HOUSING Year

Sanctions

Releases

URBAN INFR INFRAS AST TRUCT RUCTUR URE E

TOT TOTAL

Sanctions

Sanctions

Releases

Releases



































field of human settlements. The habitat scroll of honor has been awarded to HUDCO for the year 1991 in recognition of innovation, development and promotion of building materials, design and construction for affordable housing for the poor and training in construction skills.



































The HUDCO HUDCO NIWAS NIWAS scheme scheme emergi emerging ng as a popular popular indivi individua duall home home loan-l loan-lendi ending ng window continued to elicit an overwhelming response. Ever since the launch of the scheme in March 1999, it has benefited over 3.32 lakh families with a total sanction of Rs 2692.16 crores and disbursemen disbursementt of Rs. 2475.64 crores. crores. During During the year 2009-10 2009-10 alone, an amount of Rs. 464. 03 crores have been sanctioned from 75296 applicants, besides



































a) An application application for for loan shall shall be submit submitted ted in any “HUDCO “HUDCO NIWAS” NIWAS” office office in the presc prescrib ribed ed form form along along with with suppor supporti ting ng documen documents. ts. This This form form with with a list list of supporting documents is available at any “HUDCO NIWAS” office. b) Propos Proposed ed owners owners of the housing housing unit unit for which which loan is sought sought will will have to be co applicants. However all co-applicants need not be co- owners.



































In respect of house or flat purchased on power of attorney, HUDCO NIWAS may extend loan provided alternate tangible security of adequate value is made available to HUDCO. Alternate security can be third party mortgage, mortgage of other property owned by applicant/co-applicant, pledge of UTI units, National Saving Certificates, LIC policies etc. of equivalent amount.















































































































































































































































































































































































































































































































































































































































































































































































































































































































Zonal office Offices

East zone

Bhuwaneshwar Calcutta Ranchi

No schem chemes es

4 1 0 5

North zone Dehradun

(Rs (Rs in crores) CUMULA TIVE of No of No of loans No of disb urse Amo application approved Amount d unt schem schemes es 180 220000 1100 000 900 0 1000 2 0 0 0 0 0 0 0 0 180 221000 1102 000 900 0

0

0

0

1 0

50000 0

100 0

1

50000

100

6 0

27587 0

395 0

6

27587

395

North West Chandigarh 4 zone Jammu&Kashmir 0

17500 0

400 0

4

17500

400

Jaipur Lucknow

North East Guwahati zone Kohima

0 500 00 0 500 00

CURRENT YEAR No of

No of loan

applic applicati ation on Amount Amount

disbur disbursed sed Amount Amount

0 0 0

0 0 0

0 0 0

0 0 0

0

0

0

0

0

0

0

0

0

100 0 0 0

0 0

0 0

0 0

0 0

100 0

0

0

0

0

0 0

0 0

0 0

0 0

0

0

0

0

0 0

0 0

0 0

0 0

0

0

0

0

0

173 47 260 0 0 0 0 173 47 260 0 175 00 400 0 0 0 0 175 00 400 0

























South zone Bangalore calicut

3 0

19651 0

183 0

4

14000

400

Trivendrum 1 Vijayawada 0 Vishakhapatnam 0

30000 0 0

410.68 0 0

8

63651

993.68

0 0

0 0

0 0

2 0

13700 0

388 0

Chennai

West zone Ahmedabad Bhopal Mumbai Raipur

192 97 0 140 00 300 00 0 0 632 97 0 0 120 00 0

158 0 0 0

0 0

0 0

0 0

0 0

400 410. 68 0 0 968. 68

0

0

0

0

0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0

0

0

0

0

0 0

0 0

0 0

0 0

0 0

0 0

337 0 0 0

0 0

0 0

0 0

0 0

























ANALYSIS The total loan disbursed by HUDCO NIWAS till March 2010 amounts to Rs 3450.18 Cr. Of this the bulk loan comprises 85.96% that is Rs 2965.68 Cr, the rest 14.04% consists of individual loan that is Rs 484.50 Cr. By and large the figures (in %) are same for the current financial year 2010-11. Total loan amount =Rs 973.85cr Bulk loan amount =Rs 843.68 Cr, this is 86.6% of the total loan disbursed. Essentially, only 13.36% of total loan consists of individual loan p ortfolio. It can be seen that that majority of the business of HUDCO NIWAS comes from its bulk loans. Bulk loans are mainly given to Government agencies, cooperative bodies etc which do not comprise the main Retail housing finance business of HUDCO NIWAS. Theree fore Ther fore HUDC HUDCO O NIWA NIWAS S shou should ld chang changee its its stra strate tegy gy and and conc concen entr trat atee more more on indivi individual dual loans to achiev achievee its its long-t long-term erm objective objective of being being a market market leader in this this segment.



























SUGGESTIONS

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



























SWOT ANALYSIS OPPORTUNITIES AND THREATS Opportunities •

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The traditional joint family system in India is yielding place to nuclear families. The demand for more homes from the same family is leading to a growth that has not been factored into the 40 million national housing shortages. With expectations of adequate monsoon, the demand for housing is expected to rise consistently. Of a shortage of 40 million units, considerable demand is from the semi-urban and rural areas. The fall in the rate of interest in the economy has made housing finance more affordable, leading to increased demand The tax incentives and the classification of credit extended to the housing finance industry as priority sector lending has fuelled growth. The saving in tax has directly increased demand. The priority sector classification reduced the cost of borrowing. This was passed on to the customers, increasing demand indirectly. With the improvement in the standard of living, housing has emerged a priority among the urban youth; the demand is expected to increase from this segment also. The entry of a number of players has opened up yet another opportunity for inorganic growth. There are several private housing finance companies that are facing a squeeze on margins. This has opened up acquisition opportunities.

Threats The threat for the housing finance companies comes from increased competition. Banks have realized that the loans allocated towards housing, classified as priority sector lending, can be raised at a reasonable cost. This enables them to give these loan loanss out at low low rate ratess and and repo report rt an attr attract activ ivee prof profit it.. Th Thee lendi lending ng sect sector or,, and and companies have been plagued with defaults in servicing and repayment. Remarkably, this has been the lowest in the housing finance sector since the house serves as an attractive mortgage.





























STRENGTHS AND WEAKNESSES Strengths •

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

Weaknesses •

•

The company does a good business in Delhi and NCR. However there is only one office in the whole region catering to the needs of many people. The company is lacking on the technological front as a result paperless work is not possible, which in turn increases the workload of employees and also services





























CRITICAL ANALYSIS OF HUDCO NIWAS Financial Overview HUDCO has been raising funds at competitive rates from the market. The main sources of the funds are bonds (taxable & tax-free), subscribed by financial institutions and high net-wor net-worth th indivi individual duals, s, and loans loans from from banks. banks. HUDCO HUDCO raised raised capita capitall at a weight weighted ed average cost of 10.09% in the financial year 2007-08 and at 7.51% in 2009-10. These rates are concurrent with one of the lowest rates quoted in the market. The interest rates charged by HFCs for loans are basically determined by their cost of funds, although competition and some other factors may play a role in it. It can be observed from the comparison of interest rates of major players in the market that the interest charged by HUDCO NIWAS is, by and large, 50-100 bps higher than other HFCs. Here, immediately, one may be led to the conclusion that the cost of funds for other companies is lower, leave alone some of the banks. But facts do not support this result. The cost of capital for others are similar and rarely below that of HUDCO. The cause of this can be attributed to a deliberate decision by the management or some degree of inefficiency in translating the lower cost of capital to a reduced rate of interest charged by HUDCO NIWAS. The pros and cons to this state of affairs must be taken care of. A higher interest rate mean more margin for each loan disbursed. This adds to the bottomline of HUDCO. But over the years the housing finance segment has become very competitive with a large number of players including foreign banks claiming a portion of the pie. In such a scenario, a 25-50 bps difference in rates can take away the market of an HFC to its competitors. This can be seen in the decline in disbursements by HUDCO NIWAS in the year 2009-10 from the previous financial year. However, there is an increase in sanctions but these sanctions can be explained by a higher level of bulk loans. This anomaly needs to be rectified. Although, a lower interest rate puts pressure on the





























phenomenon also reflects the credibility of HUDCO in the financial system. However, there is one potential area which has not been tapped well. It is ECBs or external commercial borrowings. If the going had been good in the domestic bond market, it is even better in the overseas market markets. s. ECBs ECBs are enabli enabling ng corpor corporate atess to borrow borrow cheaper cheaper than than even the yields yields on government securities. The trickle to raise funds through ECBs is turning into a rush, as even after the rupee: dollar premiums moving up in the recent past, the cost still works below the yields on government securities. The 6-month Libor has come down from by around 45 basis points (bps) during ’10 to 1.03%. For corporate, corporate, borrowing borrowing 5-year 5-year funds at, suppose 100 bps over 6-month 6-month Libor, Libor, the all inclusive borrowing cost works close to 4.50/60%. This includes the hedging cost (towards buying forward cover) and arranger fees. This is even lower than the yield on the 5-year government security, which is currently trading at 5.33%. The ECB spree has been fuelled by the consistent fall in Libor after the European Central Bank (ECB) cut its key interest rate by 50 bps to 2%, the lowest level since ’48. The effect is enhanced by the recent cut in the Fed Rate by 25 basis points to 1%. If the rupee keeps rising, it would undermine the necessity to buy forward cover. A falling Libor with possibly very little or no forward cover would mean raising funds at the bare minimum levels. Also, ECBs are regarded more a domain domain of the large borrowers. borrowers. There are no lenders lenders to borrowers who have demand of funds say in the region of $5-10 million. The large corporates can always bargain a competitive pricing, a liberty not available to smaller borrowers. Looking at this, HUDCO is reasonably well placed for ECBs. In fact, LIC Housing Finance has already raised $75 million at 69 bps from the overseas market. The range for corporates to borrow through ECBs could be between 60 to 150 bps over 6month Libor. The term is usually 5 to 7 years. Hence, it is clear that the cost of funds can be markedly reduced through the ECB route. This reduction can be carried to the customer by decreasing the interest rate of HUDCO NIWAS, thus providing a competitive edge in the market without putting much pressure on the margins.





























capture a share of this burgeoning market. In such a situation, a flat rate of 9.5% and hardly any aggression in marketing is going to make a dent in the business of HUDCO NIWAS. It is time to have a strong focus and a sound strategy on marketing. A clear market segmentation and targeting and market positioning is required to remain competitive in the sector. Market segmentation and targeting involve classifying customers and potential cust custom omer erss in diff differ eren entt grou groups ps acco accord rdin ing g to some some crit criter eria ia,, like like demo demogr grap aphi hic, c, psychographic, identifying the potential of each segment and finally targeting the specific segm segmen ents ts accor accordi ding ng to reso resour urce ces, s, reach reach,, etc. etc. of the the comp compan any y and and the the preva prevail ilin ing g competition in the segments. Housing finance depends on the income of the individual to a large extent. However, location as in urban, semi-urban or rural has a considerable effe effect ct on the the requ requir irem emen entt of loan loans. s. Th Ther eref efor ore, e, mark market et segm segmen enta tati tion on can be don donee according to income and location. Sometimes, tastes and attitude can also be taken into account. Hence, demographic and psychographic segmentation are the favored ones in the housing finance sector. The next step can be- identifying the segments which have high growth potential for the coming few years. Although the requirement for housing is very high in the country (currently there is a shortage of more than 20 million houses), growth potential is skewed in housing finance. The housing scenario in small towns and rural areas is far from good, but housing finance has not picked up a lot due to low levels of income, legal hassles regarding land ownership and some other problems. The real potential lies in the socalled Indian middle class who lives in urban and semi-urban areas. HUDCO NIWAS should focus on this segment with a clear strategy. So it becomes the target segment. Curren Currently tly HUDCO NIWAS NIWAS is not a strongl strongly y recogni recognized zed brand brand in the hou housin sing g loan loan market. It does not enjoy any particular positioning in the mindsets of customers. There seems to be no marketing push to sell their loans. There is no effort to make the brand a household name in housing loans. The organization does not appear to be driven by market forces. Although it has a wide reach through an extensive network of branches, it has not been able to turn this opportunity into profitability and improving its bottom line. On the other hand, other players are carving a niche and have been successful in building





























HUDCO NIWAS also needs to improve its services services markedly. markedly. According According to the survey earlier mentioned in the project, customers give a lot of emphasis on the time taken for sanction of the loan. The average number of days taken by HUDCO NIWAS is 7-10 days, which is considerably higher than what the major players take (3-4 days). The other poin pointt to take take heed heed of is that the custo custome merr shou should ld be aske asked d to visi visitt the the offi office ce as infreq infrequent uently ly as possib possible le during during the sancti sanction on and disbur disbursem sement ent proces process. s. In this this way, way, customer satisfaction can be enhanced.

Advertising Fierce Fierce compet competiti ition on calls calls for aggres aggressiv sivee advert advertisi ising ng to stay stay in the mainst mainstrea ream m of the market market,, otherw otherwise ise there is a danger danger of gettin getting g oversha overshadowe dowed d by other other brands brands and becoming becoming obscure in the market. Advertising Advertising,, it seems, is not on the agenda of HUDCO NIWAS. It is not seen in the advertising-space. It may be that the management has deliberately reduced patronizing advertisements due to lower benefits as compared to the costs incurred. But low or no advertising can harm the organization more in the longer term. So it is pertinent to have a thrust in publicity and advertising to be in the reckoning and communicate effectively to the customers cu stomers as well as potential customers. Identi Identifyi fying ng the variou variouss media media for advertisi advertising ng is the first first step. step. The media media availa available ble currently are: Radio

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































Internet

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

Word of mouth is a powerful source of publicity in the services industry. There is a high degree degree of intang intangibi ibilit lity y and variab variabili ility ty in servic services. es. The custom customer er parti particip cipate atess in the manufacturing and delivery of products. At the same, there is simultaneous consumption of the product. Hence the quality of service provided to the customer is of utmost importance. Customers propagate the quality of service offered to their relatives, friends and other acquaintances. An impressive impact on the customer makes him a kind of brand ambassador. This also helps in building trust on the provider.

Improving Internal Processes at HUDCO NIWAS The housing finance sector, as I have mentioned earlier, is witnessing a lot of action and the competition only seems to aggravate in the future. In such a scenario, a high level of market orientation is required to maintain profitability. A change in the mindset and































Internal Physical Processes

The average number of days taken to sanction a loan is about 7-10 days at HUDCO NIWAS, which is higher than the time taken by the top players (4-7 days). This has an important bearing on customer satisfaction and even on the perception of the potential customers. Training the line management to be efficient and fast in the delivery of service can help. The servicescape, which is the overall organization, design and décor of the office, also plays a crucial role in customer satisfaction. A friendly environment always leaves a pleasant impression on the customer. Computerizat Computerization, ion, networking networking and highly efficient efficient database database management management is elements elements constituting internal physical processes. LAN and internet are required in all the offices across across the countr country. y. Althoug Although h there there is WAN to connect connect the region regional al office officess to the corporate office, there is a need to link the branch offices with each other for efficient and effective data processing. A Customer Relationship Management (CRM) system can help in buildi building ng sound sound relati relations onship hipss with with custom customers ers,, with with custom customers ers getti getting ng treate treated d as “clients”. But such a system is also very expensive, so an intensive cost-benefit analysis needs to be done. Employ Employee ee motiva motivatio tion n is the key to improv improvee intern internal al proces processes ses.. Perfor Performan mance ce based based rewards; rewards; giving giving non-cash non-cash compensation compensation along with regular compensati compensation, on, employee employee enhancement enhancement programs programs like personal personal development development sessions, sessions, can raise the motivation motivation levels.































RESTRUCTURING OF HUDCO NIWAS Sweepin Sweeping g changes changes have been mentione mentioned d in the previous previous sectio section. n. How can they they be brought about? One-way is- restructuring HUDCO NIWAS. The organi organizat zation ional al object objective ive of HUDCO HUDCO is differ different ent from from HUDCO HUDCO NIWAS. NIWAS. The business operations of HUDCO and HUDCO NIWAS are separate. HUDCO’s primary focus is on project finance, infrastructure development (sewage systems, etc.), township plan planni ning ng & devel developm opmen ent, t, and and soci social al upli uplift ftme ment nt thro throug ugh h hous housin ing. g. HUDC HUDCO O was was established for this purpose and its top management is molded in such a business set-up. On the other hand, retail housing finance is a completely different ball game. It requires a different framework of focus, strategy, work culture and internal processes. HUDCO NIWAS operates in the highly competitive housing finance sector where the market dynamics keep changing with players reducing rates and coming out with new schemes freq freque uent ntly ly.. A high high degr degree ee of mark market et orie orient ntat atio ion, n, quic quick k deci decisi sion on maki making ng and and implementation are key to excel in the market. It is also important to keep a keen eye on the moves of the competitors. It means being always on one’s toes. These changes are difficult to bring about in the present set-up. An argument can be to make HUDCO NIWAS a subsidiary company of HUDCO, but not a wholly owned subsidiary. A part of the equity should be put on the block for private placement with































NEW PRODUCT FOR HUDCO NIWAS Currently the housing finance market offers only two products on the basis of interest rates, i.e. fixed and floating rates. The fixed interest rate caters to the most risk averse customers. On the other hand, floating rate moves simultaneously with the market, so it is highly risky. There is no such offering, which tries to achieve the balance between benefits and risks. One such product could be a blend of both fixed as well as floating rate mortgage loan. In this, mortgage repayments on half of the loan amount is calculated on fixed interest rate and the other half is on floating rate. Here, if the rate goes down, the borrower gains from the floating portion of the loan and when the rate goes up, the fixed portion of the loan cushions the borrower against it. Therefore, this product combines the benefit of reduced rate (when rates go down) of floating loan and lower risk of fixed loan. The borrower will also be allowed to convert, once in the tenure of loan, the floating rate portion into fixed rate to hedge his risk, or he is allowed to convert the fixed portion to floating to take advantage of the consistent fall in interest rates. The detailed schedule is given in the following pages along with the proposed loan agreement.































LOAN AGREEMENT LOAN LOAN AGRE AGREEM EMEN ENT T made made at the the plac placee and and on the the date date stat stated ed in the the Sched Schedul ulee BETW BETWEE EEN N Hous Housin ing g and and Urba Urban n Deve Develo lopm pment ent Corp Corpor orat atio ion n Limi Limite ted, d, a Compa Company ny inco incorp rpor orat ated ed und under er the the Comp Compan anie iess Act, Act, 1956 1956 and and Havi Having ng its its regi regist ster ered ed offi office ce at "HUDCO BHAWAN", IHC Complex, Lodhi Road, New Delhi-11 0003, hereafter Called "HUDCO" (which expression shall unless the context otherwise requires, include its successors and assign) of the ONE PART AND "the borrower" (which expression shall the context otherwise requires, include his heirs, executors and administrators) of the OTHER PART.

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

(a) The term "Schedule" means the Schedule written after Article 11 of this Agreement. (b) The term "Loan" means the loan amount provided for in Article 2.1 of this Agreement and the Schedule. (c) The term "Repayment" means the repayment of the principal amount of loan interest

































1.3 Subject to context thereof the expression "Property" shall mean and include land. 1.4 The term term and expres expressio sion n not herein defined defined shall shall where where the interpre interpretat tation ion and meaning have been assigned to them in terms of the General Clauses Act, 1897 have that interpretation and meaning.

Article 2: Loan, Interest, etc 2.1 Amount of Loan

The borro The borrowe werr agre agrees es to borro borrow w from from HUDC HUDCO O and and HUDC HUDCO O agre agrees es to lend lend to the the borrower a sum as stated in the Schedule on the terms and conditions herein setforth. Interest

































be made by cheque duly crossed and marked II A/c payee only" and the collection charges, charges, if any, in respect of all such cheques will have to be borne by the borrower and the interest on HUDCO loan will begin to accrue in favour of HUDCO as and from the dat date of deli delive very ry//desp despat atch ch of the the cheq cheque ue irresp respec ecttive ive of the tim time take taken n for for transit/collection/realisation of the cheque by the borrower or his bank. 2.6 Amortisation

(a) Subject to Article 2.2 the borrower will amortise the loan as stipulated in the Schedule subject however that in the event of delay or advancement of disbursement for any reason whatsoever, the date of commencement of EMI shall be the first day of month following the month in which, the disbursement of the loan will have been completed and consequently the due date of payment of the first EMI shall in such a case be he last day of the said

































2.9 Terminal Date for Disbursement

Notwithstanding anything to the contrary contained herein HUDCO shall cancel further dis-bursement of the loan, if the loan shall not have been fully drawn within 12 months from the date of the letter of offer. 2.10 Alteration and Re-Scheduling of Equated Monthly Instalments

If the loan is not totally drawn by the borrower within a period of 12 months from the date of offer, the EMI may be altered and re-scheduled in such manner and to such extent as the HUDCO may, in its sole discretion, decide and the repayment of the amount already drawn will be made as per the said alteration and re-scheduling, notwithstanding anything stated in Article 2.6 and the Schedule. 2.11 Liability of Borrower to be Joint and Several

The liability of the borrower to repay the loan together with interest, etc. and to observe

































The borrower shall comply with the following : (a) To give a declaration to the effect that the borrower has a clear and marketable title to the property offered as security, free from reasonable doubts and encumbrances, and that the borrow borrower er indemn indemnifi ifies es and keeps keeps HUDCO HUDCO saved saved and harmle harmless ss agains againstt any risk risk whatsoever. (b) To execute a demand promissory note in favour of HUDCO for the amount of the loan. (c) To any execute any such agreement/s document/s, undertaking/s that may be required now or thereafter at any time during the pendency of this loan/ or any other loan or loans granted by HUDCO hereafter.

































No extraextra-ord ordina inary ry or other other circum circumsta stances nces shall shall have occurr occurred ed which which shall shall make make it improbable for the borrower to fulfil his obligation under the Agreement. (d) Utilisation of Prior Disbursement

The borrower shall have satisfied HUDCO about the utilisation of the proceeds of any prior disbursements. (e) Pending Legal Proceedings

The borrower shall have furnished a declaration to effect that there is no action, suit, proceedings or investigation pending or to the knowledge of the borrower threatened by or against the borrower before any court of Law or Government authority or any other competent authority which might have a material effect on the financial and other affairs of the borrower or which might put into question the validity or performance of this loan agreement or any of its terms and conditions. co nditions.



































The borrower shall duly and punctually comply with all the terms and conditions for holding the property and all the rules an9 regulations, bye-laws etc., of the concerned Cooperative Society, Association, Limited Company or any other Competent Authority, and pay such maintenance and other charges for the upkeep of the property as also any other dues etc. as may be payable in respect of the said property or the use thereof.



































(c) Agreements and Arrangements

The borrower shall not enter into any Agreement or Arrangement with any person, institution or local or Government body for the use, occupation or disposal of the said property or any part thereof during the pendency of the loan.



































(d) Litigation

That the borrower is not a party to any litigation of a material character and that the borrower is not aware of any facts likely to give rise to such litigation or to material claims against the borrower.



































borrower under or in terms of this Agreement and/or any other Agreements, documents subsisting between the borrower and HUDCO, as well as all other charges and dues to be due and upon such declaration the same shall become due and payable forthwith and the security in relation to all loans shall become enforceable, notwithstanding anything to the contrary in this Agreement or any other Agreements or documents.



































7.2 Bankruptcy or Insolvency

If the borrower shall become Bankrupt or insolvent, the principal of and all accrued





































































































































































































































































































































































































































































































































































































































































































































































































































Project on Housing Loan

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