Rating Rationale. Rating / Credit Opinion 1. Second Loss Facility (SL) Credit Collateral. Over Collateral

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1 Rating Rationale Rating of Pass Through Certificates (PTCs) issued by Nirmaan RMBS Trust Series I 2018 backed by Home and LAP loan receivables (Principal outstanding Rs. 1, Cr), backed by mortgage of property, originated by Dewan Housing Finance Limited, and Second Loss Facility. CARE has assigned a rating of CARE AAA (SO) [CARE Triple A (Structured Obligation)] to the Series A PTCs issued by Nirmaan RMBS Trust Series I 2018 backed by Home and LAP loan receivables, backed by mortgage of property, originated by Dewan Housing Finance Limited, and Second Loss Facility. The Second Loss facility (SL), a part of total Credit enhancement provided, has been assigned a credit opinion equivalent to CARE A- (SO) *pronounced as CARE Single A minus (Structured Obligation) + rating. The Second Loss facility amount needs to be paid back at the end of the transaction. It is rated based on ultimate payment structure. The rating is finalized based on the structure provided to CARE by DHFL, the originator. The rating has been confirmed after the copies of legal documents executed in accordance with the structure, a due diligence audit report by an external auditor and an independent legal opinion is furnished by the Assignor, to the satisfaction of CARE. Consequently, CARE has issued compliance letter. Instrument Principal Outstanding (Rs. Cr) Structure Rating / Credit Opinion 1 Credit Enhancement (Rs. Crs.) Credit Over Collateral Excess Interest Spread Series A PTC 1, CARE AAA (SO) Par Second Loss Equivalent to CARE A- (SO) rating Facility Facilities Rs. Cr As a % of POS Second Loss Facility (SL) Credit Collateral First Loss Facility (FL) Total Over Collateral Excess Interest Spread * Tenure / Door to Door maturity may change due to prepayments or changes in interest rates, if any. $ Excess Interest Spread (EIS) is calculated based on indicative yield to PTC investors. EIS and OC arising in the transaction shall be available for meeting the shortfalls in corresponding payout and replenishment of Credit Collateral. The remaining EIS and OC, if any, will flow back to the assignor. However, subject to certain conditions, the EIS and OC would be trapped as per mechanism discussed in detail in section on Interest rate risks. 1 Complete definition of the ratings assigned are available at and in other CARE publications

2 Issuer / SPV Nirmaan RMBS Trust - Series I 2018 Trustee Originator / Assignor / Collection Agent / Credit Enhancement provider Underlying Receivables Pool Principal Outstanding PTC Principal Outstanding Pool Future Receivables IDBI Trusteeship Services Ltd Dewan Housing Finance Limited (DHFL) Housing: 66.91% and LAP: 33.09% loan receivables generated in the ordinary course of business through finance extended by the originator to salaried (44.61%) or self-employed (55.39%) individuals. Loan receivables are backed by mortgage of property. Additionally, 87.05% of the pool principal is backed by mortgage of residential property. The remaining 12.95% is backed by either commercial, mixed or multiple properties. Rs. 1, Cr Rs. 1, Cr Rs. 2, Cr Pool Cutoff Date 30 th November, 2018 Pool Commencement Date Form of Credit Enhancement 1 st December, 2018 Total enhancement for Series A PTC is as follows: Principal subordination / over collateral of Rs Cr (3.0% of POS) Credit Collateral of Rs Cr (10.0% of POS) provided by DHFL in the form of bank guarantee or fixed deposit. It is further divided into First Loss piece of Rs Cr (5.0% of POS) and Second loss piece of Rs Cr (5.0% of POS). Subordination of Excess Interest Spread (EIS) amounting to Rs Cr. (31.42% of POS) * Actual tenure may be different due to prepayments or foreclosures in the underlying pool 2

3 I. Transaction Structure Obligors (Home and LAP loans) Collection Servicer / Collection Agent (DHFL) Loan given Originator (DHFL) Sale of loan receivables Purchase Consideration SPV (Trust floated by ITSL) Collections Monthly Payouts Subscription Investors in PTC Subordinated Principal / Over Collateral Credit Enhancement provider (DHFL) PLEASE NOTE: Refer to the above table while reading the description of the transaction structure below. Definitions related to terms are provided in Annexure I. DHFL, the Originator, will assign the identified loan receivables along with security interest to a Special Purpose Vehicle / Trust. The identified loan receivables comprise receivables from Home and LAP loans given by DHFL in its normal course of business. LAP Loans comprise loans originated by the LAP and SME lending business verticals of DHFL. IDBI Trusteeship Services Limited (ITSL) acting as a trustee to this transaction will settle a Trust (the SPV Nirmaan RMBS Trust - Series I 2018) for this purpose. The Trust will purchase from the Originator, the Receivables together with the Originator s rights, title and interest in the Facility Documents. The Trust will invite contributions for Series A PTC on specified terms and conditions from the PTC investors. This contribution shall be utilized to pay the Purchase Consideration to the Originator for the sale of receivables. The Trust will issue Series A PTCs representing 97% of the pool principal outstanding. The remaining 3% represents the subordinated principal / over collateral. The PTCs will represent an undivided beneficial interest in the underlying pool of receivables along with the security interest to be assigned pursuant to the assignment agreement, entered into between DHFL as the Assignor and the SPV. The Trustee shall appoint Collection and Processing Agent (DHFL) to collect the Receivables from the Obligors. On each Payment Date, the Contributors shall be entitled to receive the Scheduled Payouts (to the extent of investor s interest i.e. 97% of scheduled payout) as determined under the Payment Waterfall Mechanism, as explained later. 3

4 The transaction has a Par structure where the purchase consideration payable by the PTC investors shall be an amount equal to 97% of principal outstanding of the pool as on the cut-off date. The Servicer will maintain a separate collection and payout account (CPA) into which the amount collected from the pool and so payable to the trust will be deposited by the Servicer. The collections made by the Servicer out of the assigned receivables, with respect to the billings of a particular month M, shall be deposited by the Servicer in the M+1 month into the CPA, on or before the scheduled PTC payout date. The Servicer shall hold the amount of receivables collected on their respective due dates, including the prepayment amount, in trust for and on behalf of the PTC investors. In lieu of the collection, the servicer would be paid an amount of 0.25% of the principal outstanding as fee. The Credit cum liquidity enhancement, comprising subordinated Principal / Over Collateral, Excess Interest Spread (EIS) and Credit Collateral, shall be available for covering any shortfall in collections visà-vis the payouts to the PTCs (including amounts payable on account of prepayments). DHFL will provide Credit Collateral in the form of fixed deposit or guarantee prior to the assignment date and shall be available till any amount is outstanding to the PTCs. If Credit Collateral is in the form of fixed deposit, it shall be lien marked in favor of the Trust. If Credit Collateral is in the form of guarantee, it shall be as per CARE s criteria. The subordinated principal / Over Collateral (OC) and the Excess Interest Spread (EIS) are fully subordinated to the Series A PTCs, and therefore form part of the Credit cum liquidity enhancement. The EIS and OC in the transaction shall be available for meeting the shortfalls in corresponding payout and also replenishment of Credit Collateral, to the extent utilized. The remaining Subordinated Principal or Over-collateral (OC), if any, in that month shall flow back to the originator. Such amounts shall not be available for any future shortfalls. However, subject to certain conditions (as discussed in detail in section on Interest rate risks ), OC would not flow back to the originator and be deposited in a Fixed Deposit Account by the Trustee. The remaining EIS, if any, in that month, shall flow back to the originator. Such amounts shall not be available for any future shortfalls. However, subject to certain conditions (as discussed in detail in section on Interest rate risks ), EIS would not flow back to the originator and be deposited in a Fixed Deposit Account by the Trustee. The Credit Collateral shall be topped up in each month from the excess amounts available from collections vis-à-vis the scheduled payouts to PTCs. In the event of either downward revision or discontinuation of outstanding rating of PTCs due to any reason or status changed to Issuer Not Co-operating category, residual amounts would not flow back to the originator and will be utilized towards repayment of accelerated principal to the PTC holder. 4

5 II. Key Rating Factors Credit quality of the assigned pool of assets Pool has weighted average net seasoning of months, weighted average LTV of 60.93%, and well diversified geographically All contracts in the pool are backed by mortgage of property. Pool has moderate concentration of contracts, with top 10 loans comprising 8.93% of POS, and top loan contract accounting for 1.23% of the pool The pool has a high proportion of self-employed borrowers (55.39%), a segment that has witnessed considerably higher delinquency than the overall portfolio of the company. Over Collateral, Credit Collateral and subordination of EIS Basis risk (discussed in detail in section on Interest rate risks ) The transaction structure and defined payment mechanism Sound legal structure of the transaction Performance of past securitized CARE-rated pools Long track record of DHFL in mortgage business 5

6 III. Key Transaction Features a) Yield to PTC Investors The coupon payable to the Series A PTC investors shall be fixed. The coupon will be payable on monthly basis to the Series A PTC investors. b) Security On and after the assignment of receivables by DHFL to the trust, the security interest created for the repayment of the loan so assigned shall remain and be held by DHFL for the benefit of the PTC investors. All the documents pertaining to the security interest shall be in custody of DHFL solely for the purpose of and to the benefit of the PTC investors save and except for itself also under such circumstances as permissible in terms of the Agreement to Assign. c) Recovery on defaults and enforcement of assets DHFL will administer the loans given to the Obligors, in its capacity as the Servicing Agent. Administering of such loans will include follow-up for the recovery of the EMIs from the Obligors in the event of delays. In such cases, it is DHFL's practice to charge the obligors certain out-of-pocket expenses incurred by itself for recovery of the monies due. The entire amount of actual recovery of out-of-pocket expenses would not form part of the Receivables pool of the trust. d) Credit cum liquidity enhancement The Credit enhancement for the transaction includes the following: a) Subordination of OC OC in a particular month shall be available for meeting the shortfalls in corresponding monthly payout and also replenishment of Credit Collateral, to the extent utilized. The remaining OC, if any, in that month will flow back to originator except for certain conditions (as discussed in detail in section on Interest rate risks ), and not be available for meeting future shortfalls. b) Subordination of EIS EIS in a particular month shall be available for meeting the shortfalls in corresponding monthly payout and also replenishment of Credit Collateral, to the extent utilized. The remaining interest, if any, in that month will flow back to originator except for certain conditions (as discussed in detail in section on Interest rate risks ), and not be available for meeting future shortfalls. c) Credit collateral (CC) CC will be in the form of fixed deposit with lien marked in favor of the trust or a third party guarantee acceptable to CARE. CC is divided into First Loss Facility FL and the balance will be Second loss (SL). All beneficial interest in the fixed deposit will be transferred to the trustee. The Credit enhancement shall be available for covering any shortfalls in collections vis-à-vis the payouts to PTC investors (including amounts payable on account of prepayments). First Loss Facility (FL), represents the first tier of protection against 6

7 collection shortfalls in the assigned receivables and enables the PTC payouts to reach a credit opinion equivalent to CARE A- (SO) rating. Second Loss Facility (SL), represents the second tier of protection against collection shortfalls in the assigned receivables and will be utilized only when the FL is fully exhausted. SL along with FL enables the ratings of series A PTC to achieve CARE AAA (SO). e) Payment Mechanism The Trustee shall open a separate Collection and Payment Account (CPA) with an authorized Bank. DHFL will collect the monthly payments (EMI) from the underlying borrowers in the same manner as it collects payments against its existing loans, but in its capacity as the Servicer. The Servicer would provide collection details for a particular month (say month M) to the trustee by one day before payout date of the next month (i.e. M+1). Upon receipt of this reports / information, the trustee would examine the same and confirm / rectify the same along with payment details and instructions by the payout day of the same month (i.e. M+1). The Servicer will deposit the total monthly collections from the obligors, together with the amounts payable from the credit collateral, if any into the CPA on the payout date, failing which the Servicer will be required to pay penal interest for the period of delay. In the event of prepayment of any loan, the PTC investors would receive the prepayment amount on the immediately following payout date. The servicer shall hold the amount of receivables collected on their respective due dates, including the prepayment amount, in trust for and on behalf of the PTC investors. f) Waterfall Mechanism On a Payout Date, proceeds available in the Collection and Payout Account together with any amounts drawn upon from the Credit Enhancement and transferred to the Collection and Payout Account will be utilized in the order of priority given below. On each Payout Date the monies lying in the Collection and Payout Account shall be applied in the following order of priority: Payment of all statutory and regulatory dues; Payment of any fees related to servicer fee (at 0.25% of the closing POS), trustee, rating agency, due diligence auditor, legal counsel and any aforesaid expenses; All overdue yield payments at the PTC Yield Rate due and payable to the Investors. All overdue principal amortizations due and payable to the Investors. All current scheduled yield payment at the PTC Yield Rate due and payable to the Investors All current scheduled principal amortizations due and payable to the Investors. All payments in relation to Prepayment due to the Investors Reinstatement of Credit Enhancement to the extent of utilization; Balance, if any, to the originator DHFL 7

8 However, subject to certain conditions, the EIS and OC would be trapped as per mechanism discussed in detail in section on Interest rate risks. In the event of there being any additional surplus arising or available from out of the monthly pool collections after meeting the scheduled costs and expenses and payment of the monthly dues to the PTC investors, then such additional surplus shall be available to DHFL. If the amount lying in the CPA is insufficient for making payments to the PTC investors, the credit collateral will be drawn to the extent of shortfall. The Subordinated Principal or Over-collateral (OC) would be available for meeting any monthly shortfalls. However, any excess amount pertaining to the OC and EIS remaining in the CPA, after PTC payout has been made, will flow back to the originators; and would not be available for any future shortfalls, except for certain conditions (as discussed in detail in section on Interest rate risks ). The scheduled cash flow pattern for the PTC investors may change on account of prepayments/changes in terms of the loans including change in the rate of interest on the loans and reschedulements in the underlying pool. If the amounts collected from the underlying pool are insufficient for making payments to the PTC investors the collection agent shall draw amounts to the extent of the shortfall from the Credit Enhancement. g) Clean Up Call Option The assignor will have the option to repurchase the receivables pertaining to the performing contracts any time after the outstanding principal balance on the pool of receivables declines below 10% of the initial pool principal balance at a purchase consideration equal to the PTC principal outstanding amount. The clean up call option can be exercised only if the balance of credit enhancement is enough to cover the non-performing assets. When the clean up call option is exercised, it will have the same effect as prepayments in the pool and the investors would be exposed to reinvestment risk. 8

9 IV. Key Risks & Mitigants 1. Credit Risk It is the risk of non-payment by the underlying obligors. Credit cum liquidity enhancement shall be used to meet any collection shortfalls. Collection shortfalls in the pool may arise due to delay in collection and / or credit losses. The extent of shortfalls in the pool will depend on various factors including borrower s earning stability, interest rate movement and volatility in property prices. Credit cum liquidity enhancement stipulated adequately covers the shortfall risk, as per assigned opinion. However, the PTC investors shall bear loss in the unlikely event of the shortfalls in the pool exceeding credit cum liquidity enhancement. 2. Interest Rate Risk The pool interest inflows are linked to internal interest rate benchmark (RPLR) of DHFL whereas the Series A PTC interest payouts to assignee are fixed. The RPLR is currently 18.82%. Entire pool has floating interest rate and the average pool yield is 11.32%. Thus on average the contractual floating rate is RPLR 7.50%. Key risks Floating rate contracts converting into fixed rate contracts Change in the terms of the contracted interest rates whereby the average spread from RPLR increases due to market competition and other factors (e.g. RPLR-6.0% becomes RPLR-7.0%) Basis risk RPLR reduces but yield on PTCs is fixed. To mitigate the interest rate risk to some extent, DHFL will provide following warranties and shall include the same as a part of the transaction documentation- No floating rate contracts are going to be converted to fixed rate contracts during the tenure of the transaction. The terms of the interest rate contracted with individual borrower will not change during the tenure of the transaction The spread between the coupon rate of PTCs and pool yield will be maintained at 100 bps. Apart from these, the PTC is to be issued for 97% of the pool principal, with collections pertaining to the residual 3% expected to flow back to the originator. Thus, on a monthly basis, the surplus 3% principal collection would help mitigate the basis risk. Cash flow Trapping Mechanism: In addition to the comfort drawn from the above, the originator has proposed to trap the OC and EIS in a Fixed Deposit lien marked to the Trust. In the event of the spread between the pool IRR less servicing fee and the PTC yield falling below 100bps, the Excess Interest Spread (EIS) and Over Collateral (OC) would not flow back to the originator. It would be deposited in the designated Fixed Deposit Account by the Trustee. This trapping mechanism would continue until such time that the deposited cash flows are equal to 3.00% of initial POS. It would be accumulated, until the spread between 9

10 the pool IRR less servicing fee and the PTC yield remains below 100bps. As and when the spread rises beyond 100bps the trapped cash flows would flow back to originator. 3. Commingling Risk DHFL, the servicer shall collect monies from the underlying obligors and deposit the same into the designated collection account. However there is a time lag between the collection and deposit. This gives rise to commingling risk. The credit quality of DHFL minimizes this risk (standalone rating of DHFL is CARE AAA). 4. Prepayment Risk The transaction has a par structure. Any prepayment would be passed on to the PTC investors to the extent of the principal outstanding corresponding to the prepaid contracts. The shortfall, if any, in collection arising as a result of the prepayment will be met from the credit cum liquidity enhancement. Also prepayments in the pool may adversely affect the excess interest spread available. Credit cum liquidity enhancement stipulated covers this risk adequately. 5. Servicer risk DHFL is acting as servicer to the transaction. The PTC investors face servicing disruption risk if the servicer fails to perform its duties and obligations as per Collection & Servicing Agreement. Strong servicing capability and good track record of DHFL provides comfort to the transaction. Further, the transaction documents also provide for appointment of alternate servicer, if needed. 6. Legal Risk The securitization transaction involves transfer of receivables which must be a valid sale as per law. This effectively means that the originator does not retain any control over the receivables. It should not contradict any of the terms of the underlying loan agreements. The trust should have unrestricted access to the receivables as well as credit cum liquidity support, subject to terms of its utilization. An independent legal opinion confirming the above would be obtained by seller to mitigate this risk. 10

11 V. Originator s Brief Profile Dewan Housing Finance Corporation Ltd. (DHFL) was incorporated in 1984, and is among the oldest private sector Housing Finance Companies (HFC) registered with the NHB. DHFL has carved a niche market positioning for itself due to its consistent focus on the market segment of the Low and Middle Income and Salaried group. As at Mar 18, promoter and related parties held 39.23% of the stake; Foreign Institutions held 19.92%; and others investors (including, DIIs and public float) comprised 40.84% of the shareholding of the company. At the end of Mar 18, DHFL had an AUM of Rs. 1,11,086 Cr. The company has plans to enhance the share of their salaried customers in the medium term. During FY13, both First Blue Home Finance Ltd. (FBHFL) and DHFL Holdings Pvt. Ltd. were merged with DHFL which enabled DHFL to grow its loan book size significantly. DHFL currently enjoys CARE AAA (CARE Triple A) rating for long term and medium term obligations. Organization presence: At the end of Mar 18, DHFL had established a large distribution network a network of 347 locations, including branches, service centres, circles/clusters, disbursement hubs, and collection centre in India. Most of these centres are located in Tier II and III centres. DHFL has its corporate and national offices in Mumbai and overseas representative offices in London and Dubai. The company has 3,582 permanent employees as on 31st March, Financial profile: DHFL s loan portfolio increased 10% to Rs. 91,932 Cr from Rs. 72,096 Cr. at the end of FY17. The Capital Adequacy Ratio (CAR) was comfortable at 15.29% as on March 31, 2018, as compared to 19.34% as on March 31, Asset quality was stable, with Gross NPA ratio at 0.96% as on March 31, 2018; as compared to 0.94% as on March 31, Financial profile (Amt in Rs. Cr) Year ended / As on 31-Mar-15, 12m 31-Mar-16, 12m 31-Mar-17, 12m 31-Mar-18, 12m Interest Income 5,716 6,971 8,654 10,025 Other Income , Total Income 5,982 7,317 10,827 10,465 Interest expended 4, ,654 7,565 Net Interest Income 1,256 1,481 2,000 2,460 Operating Expenses Provisions PAT ,896 1,172 Tangible Net worth 4,631 4,981 7,904 8,659 AUM 56,884 69,524 83,560 1,11,086 Capital Adequacy (%) Gross NPA (%) ^ ^ - NPA recognition at 90+DPD 11

12 Business verticals: It has two main business verticals: housing loans and non-housing loans. The housing loans vertical covers loans for purchase of new or re-sale property, self-construction and extension / improvement of existing property. On the other hand, non-housing loan products primarily include loans against LAP / Mortgage (against residential property) and SME loans (against commercial property and land). Despite ~25% growth in AUM during the period FY15-18, the proportion of housing loans has consistently declined from 75% in FY15 to 59% in FY18 and LAP proportion has increased from 18% to 21% in the asset composition. Project Loans have increased from 6% to 16% and SME Loans have increased from 1% to 4%. The company has increased its focus on lending to these high-yield segments, keeping in line with the macroeconomic environment prevailing during the period. Housing loans products: Loans covered under this category are those advanced for purchase of new or re-sale property, self-construction, extension / improvement of existing property. More than 2/3rd of such loans are given for 15 years and above. DHFL s focus on its core customer category of low and middle-income group can be gauged from the loans below Rs. 30 lakh, which constitute a major chunk of its portfolio. Further, a major proportion of its housing loan portfolio has an LTV of 60% or more. Salaried borrowers account for most of the home-loan borrowers for DHFL. DHFL has been traditionally strong in Western Zone. At present, Western zone (states of Goa, Gujarat, Madhya Pradesh, Maharashtra and Union Territories of Dadra & N H, Daman & Diu) account for 64% of the portfolio. This is followed by South, North, East and North East zones. Non-housing loans products: The non-housing loan portfolio comprises lending to individuals or entities, where land / property owned by the borrower is provided as collateral to the transaction. The funds are deployed for business purposes by the borrower. Loans granted against mortgage, SME loans and loans against commercial property and land comprise the asset portfolio of non-housing loans of DHFL. More than 70% of the portfolio 12

13 comprises loans advanced against residential properties of borrowers. The recent growth in the non-housing portfolio of DHFL is mainly due to the aggressive lending to these segments. This segment has witnessed traction in rapidly urbanizing Tier II and III centres that are in proximity to major cities. A) Origination HL & LAP: DHFL uses a blend of its internal sourcing mechanism and external Direct Sales Agents (DSAs) for originating the new business. In case of housing loans, most of its business (60-65%) is generated through its internal mechanism; while 30% is sourced through Direct Sales Agents (DSA). In contrast, LAP business is mostly generated through DSAs (70%), in line with the trend in the wider LAP industry. SME: For SME business, the company has tied up with several OEMs (Original Equipment Manufacturers) to gain access to customers needing finance at the point of sale. In this vertical, the contribution of DSAs to the overall origination is very high, at nearly 90%, while the remaining 10% is originated through internal sources and OEMs. Within the SME vertical, every product line has a different sourcing team. Individually, these product teams are individual domain experts, specializing in their field for over 5-7 years. Further, due to the various products / business verticals of DHFL, it can originate business internally. For instance, when it makes project loans, it offers housing loans to the purchasers of the houses built in that project. This enhances the productivity of the internal sourcing vertical. Branch network: DHFL has a large distribution network of 362 company operated locations across India and 357 locations through alliances and is well-distributed across India. 80% of its branch network is spread in Tier II and Tier III locations. In terms of the mode of the internal sourcing vertical, DHFL sources its business primarily through branch walk-ins and its Direct Sales team (DSTs). Tie-ups: DHFL also has tie ups with leading public and private sector banks in the form of channel partners to provide home loans to customers. DHFL employs DSTs to source new customers through relationship with developers and other means. It also interacts with leads given by the service centers through telephone and other enquiries. Processing of applications: It has established Centralized Processing Centres (CPCs) for greater efficiency and risk management. Its Regional Offices / Zonal Offices (19 in number) cater to most of the branches in terms of number of loan accounts. Its urban branches cater to the processing of their own loans, while the RO/ZO supervises the processing of the loan the non-urban branches. The company has integrated the erstwhile First Blue branches and sourcing teams in the DHFL network. It has categorized its service centres set up earlier as micro-branches to penetrate C & D category cities. It is the 13

14 assessment of the company that the C & D centres are integral to their next phase of growth, as it has an increasing presence of salaried professionals with moderate property prices. B) Credit Appraisal Process Irrespective of sourcing channel, DHFL retains complete control on credit and technical appraisal. The appraisal team first conducts a CIBIL check to analyze the past credit record of the borrower. It runs an internal de-dupe as part of the process. DHFL has well defined centralized credit policies and systems. The credit norms are reviewed periodically and modification, if any, are made immediately through centralized system. The entire process for credit appraisal and its various aspects is internal and carried out by full-time employees of the company. Credit appraisal matrix: The company has devised an appraisal matrix, which takes into account factors such as occupation, property value, LTV, past credit performance of borrower, etc. to determine the minimum chargeable interest rate. In its matrix, DHFL provides for a different interest rate regime for salaried borrowers and non-salaried (self-employed) borrowers, with differing risk profiles of the borrowers. The matrix specifies limits for use of surrogates in LAP loans [for instance, use of surrogates is permitted for amount upto Rs. 1 Cr in a Category A (urban megapolis) city]. It lists certain risky industries, and no loans be advanced to individuals with ventures in these specified industries. Process: In terms of the actual process of credit appraisal, the front-end officer initiates the relationship with the client. For cases of salaried borrowers, the front end officer interacts with the prospective borrower over the phone, to understand his requirement. While in the case of self-employed clients, the front end officer visits the client for a personal discussion. The case is logged in by the credit team. Based on the data and documents provided by the front end officer, the CPA prepares the Credit Appraisal Memo (CAM) and sends it to the Appraisal Officer (AO). The AO checks the completeness of the documents and assesses the cash flows of the applicant. Approval authority: DHFL has devised an authority matrix in place at each level from branch, zonal/regional office to head office depending up on ticket-size and deviations to the policy. Loans of up to Rs. 30 lakhs can be approved at the branch level, while loans up to Rs. 50 lakhs are approved at the Zonal level. Each loan application has to be signed off by at least two approvers. Deviations: Every deviation from the matrix causes an addition of 25bps to the interest rate being charged to the borrower; due to the enhanced risk from the loan. Once the loans are sanctioned, the process of creation of security starts. Legal and technical teams carry out the necessary activities to ensure the creation of security in favor of DHFL. 14

15 Legal verification process: DHFL has appointed legal professionals in at least one office in every state due to differences in laws dealing with land and property. In some cases, large branches have a member of the legal team, coordinating the activities of the host branch and other branches in the area. Its internal policy stipulates seeking the opinion of third party professionals in case loan amounts are beyond specified threshold limits. It has empanelled legal professionals in several areas who prepare reports and execute and register documents for all the loans made by the company. The company has an internal legal team to appraise and coordinate the activities of the external legal appointees. Technical appraisal: The technical valuation of any loan application is carried out by an internal team of Engineers and Polytechnic graduates. Most of these teams are specific and located at branch level. Their assessment process includes visiting the site of the property being underwritten, where the team assesses the structural strength in case of a constructed property. The technical evaluation process includes a comparative analysis of the property, with the values of the properties in the surrounding areas. It is also compared to the circle rates (issued by the local government). Residex: Further, the technical department prepares a property value index for the various centres on lines of the Residex. This index is used as a benchmark for deriving the range of deviation for the properties being underwritten. Further, the company maintains a database of highest and lowest value of properties traded in every circle, used to measure the range of deviation with the price calculated. The company s process stipulates that in case of any discrepancy in the values proposed in the application and derived by the technical team through physical estimation or index; the credit appraisal team can seek an independent 3rd party s report. For loans above Rs. 1 Cr, the company is mandated to seek internal and external valuation. Risk team: The company has provided for routine training sessions for their technical team to update their knowledge and adopt the best practices. Further, its Risk Department coordinates between various departments with respect to designing new or considering changes to its credit appraisal policies; based on inputs from its field staff. The company is working on a model of green channel for automated approval and scoring for salaried borrowers through CIBIL and internal matrix check. LTV: The average LTV for the AUM is between 45-50%. Depending on the occupation of the borrower, the company has defined its policy for maximum exposure by way of LTV ratio. For a salaried borrower with assured and predictable cash flows, the entity has set specific criteria to permit higher-level LTVs. However, for selfemployed borrowers, the cash flows are calculated using surrogates of income. In such a situation, DHFL has a policy in place to limit its exposure to such borrowers. Its policy clearly prefers higher equity proportion by the borrower for self-employed borrowers. 15

16 C) Collection & Monitoring The collection and monitoring of accounts is managed internally by DHFL. The collection and monitoring effort is supervised nationally, though it is executed and manned by branch officials. DHFL has efficiently deployed technology to ensure national assessment and reporting of the collection department. More than 85% collection is through PDCs/ECS. Delay: In case of any delay, an alert is triggered with the collection team. The recovery effort is initiated when funds (cheque / ECS) not cleared. The details of all contracts which are overdue is shared with recovery team. The branch collection team reminds the customer through telephone call for making the payment and to ensure sustainable customer relationship, quality check in origination and establish responsibility. The behavior of the borrower is tracked and assessed by the company. Collection team filters the cases where payment is not made by customer despite reminder call. Cases are segregated on the basis of the severity of the delinquency. For softer buckets (upto 30 DPD), consistent reminders for payment through tele-calling is done by the branch level officials. Delay beyond 30 days: Post 30 DPD, the field officers and collection officers initiate collection exercise. They get in touch with the borrower and try to assess reasons for delay. In case of a temporary cash flow issue, the company monitors the situation of the borrower over a period of time. However, in case of a major issue, the company tries to work out a solution with the borrower, to mutually agreeable solution. In case the delinquency moves to higher buckets, the senior collection officers and branch managers increase the recovery efforts in order to prevent the contract from turning bad. The department is led by a VP-level official to track all collections bucket-wise and branch-wise. This is to ensure any issue with a borrower can be dealt with seriously at the top-level immediately. Further, the Chief Risk Officer monitors the performance on a monthly basis to prevent any escalation in DPDs. Filing of case: In case the officials of the company assess and conclude that the amount due is not recoverable, the company resorts to legal action u/s 138 of Negotiable Instruments Act. In case of persistent non-cooperation of the borrower, the internal legal team files a suit of recovery under provisions of the SARFAESI Act. Though the regulatory structure provides for using the provisions of this act, the company has used it very selectively. The suit for repossession of property underwritten by DHFL to be auctioned in future for recovery of money due is filed by the internal legal team. It has been the experience of the company that once any legal suit for repossession is filed, most borrowers tend to arrange for the money to repay the amount due owing to the fear of losing property (mostly, residential and self-occupied). 16

17 D) Assessment of Asset Quality Disbursement Housing Loans DHFL s HL disbursements grew at a brisk pace of 19% CAGR between FY HL loan disbursements were stagnant at Rs. 15,591 Crs in FY17, as compared to Rs. 15,097 Crs in FY16. However, cumulative HL disbursements in FY18 crossed the Rs. 20,000 Cr mark, touching Rs. 22,342 Crs, growing at a pace of 43% y-o-y. LAP Loans 17

18 DHFL s LAP disbursements grew at a brisk pace of 58% CAGR between FY LAP loan disbursements rose 26% in FY17, from Rs. 3,359 Crs in FY16, to Rs. 4,248 Crs in FY17. However, cumulative LAP disbursements in FY18 crossed the Rs. 10,000 Cr mark, touching Rs. 10,979 Crs, increasing 1.5 times y-o-y. Property-backed SME Loans DHFL s SME disbursements reached Rs. 2,748 Crs in FY18; nearly twice its FY17 disbursements that were Rs. 1,418 Crs. In FY17, SME loan disbursements had declined 15% to Rs. 1,418 Crs, from Rs. 1,672 Crs., mirroring a trend witnessed by this segment. 18

19 Delinquency Housing Loan Portfolio DHFL s HL portfolio rose to Rs. 57,402 Cr in Mar 17, up 14% from Rs. 50,570 cr at the end of FY16. The minimum and maximum 90+DPD levels for DHFL s HL portfolio have been in the range of 0.68% and 1.08% for the period Mar 11 till Mar 17. In FY18, DHFL has reclassified certain loan assets as non-housing, pursuant to NHB guidelines. During FY18, the HL AUM rose 13.9% and minimum and maximum 90+DPD levels for DHFL s HL portfolio has been 0.45% and 0.69%. The HL portfolio has witnessed 16.7% CAGR between FY13-FY18. 19

20 LAP Portfolio The AUM of the LAP portfolio crossed Rs. 13,500 Crs. in Mar 17, as compared to Rs. 11,006 Crs in Mar 16. The 90+DPD levels for DHFL s LAP portfolio (including portfolio of erstwhile FBHFL) were in the range of 0.95% and 4.86% for the period Apr 11 till Mar 15. However, in past two years, the peak 90+DPD has declined to 3.90%. During FY18, the LAP AUM rose ~70%, from Rs. 13,500 Crs to nearly Rs. 23,000 Crs. Correspondingly, the minimum and maximum 90+DPD levels have been 1.08% and 1.77%. Property backed SME Portfolio The AUM of the portfolio originated by the SME vertical crossed Rs. 2,500 Crs. in Mar 17, as compared to Rs. 1,570 Crs in Mar 16. The SME portfolio is of comparatively recent origination, with first disbursements dating to H2FY15. In the limited period since then, its delinquencies have been fluctuating. The maximum 90+DPD level for DHFL s SME portfolio was 1.57% during the period Nov 14 till Mar

21 During FY18, the SME AUM rose ~81%, from Rs. 2,529 Crs to nearly Rs. 4,570 Crs. Correspondingly, the minimum and maximum 90+DPD levels have been 0.38% and 1.06%. 21

22 Static Pool Performance Housing Loan CARE has analyzed the annual static pool behavior of DHFL s HL loans originated during FY The performance of these pools is available up to Mar 18. The highest 90+DPD was observed in the FY08 vintage at 2.26% (in the 9 th quarter since its origination). However, it has declined to 0.07% in Mar 18, after having amortized 92%. The maximum 90+DPD was 0.87% for FY10 static pool, which declined to 0.18% as of Mar 18 (the pool amortized 81% at the end of Mar 18). Similarly, the FY11, FY12 and FY13 have amortized 74%, 70% and 66% at the end of Mar 18 and witnessed maximum 90+DPD of 0.92%, 0.72% and 0.43% respectively. At the end of Mar 18, their respective 90+DPD receded to 0.27%, 0.19% and 0.19%. In totality, all static pools have shown peak 90+ DPD in the range of 0.22% to 2.26%. The average of all static pools has witnessed peak of 0.83% in the performance of all static pools up to Mar

23 CARE has also analyzed the half-yearly and quarterly static pools for the period FY11-FY17. The performance of this set of quarterly static pools is available up to Mar 18. The maximum 90+DPD was 1.33% for H2FY11 static pool in its 15 th quarter post-origination that has declined to 0.41% in Mar 18. In FY16-17, quarterly static pools have witnessed lower 90+DPDs at similar points if time, as compared to previous static pools. LAP CARE has analyzed the static pool behavior of DHFL s LAP loans originated during Apr 09 to Mar 17. The performance of these yearly static pools is available up to Mar 18. The highest 90+DPD was observed in the FY13 vintage at 2.45% (in the 15 th quarter), which has reduced to 0.75% in Mar 18 (having amortized 88%). The peak 90+DPD was 1.65% for FY10 static pool, which declined to 0.11% as of Mar 18 (amortization 96%). However, the FY13 and FY14 yearly static pools have witnessed peak 90+DPD of 2.07% and 2.37% respectively, which has receded to 0.39% and 0.15% at the end of Mar 18 (amortization 88% and 79%). The average of all static pools has witnessed peak of 1.43% in the performance of all static pools up to Mar

24 CARE has also analyzed the half-yearly and quarterly static pools for the period FY11-FY17. The performance of this set of quarterly static pools is available up to Mar 18. The maximum 90+DPD was 3.97% for H1FY12 static pool in its 15 th quarter post-origination that has declined to 0.91% in Mar 18. In FY17, quarterly static pools have witnessed lower 90+DPDs at similar points if time, as compared to previous static pools. SME Lending by the SME business vertical commenced operations in Q3FY15, and stabilized in FY16. The period for which the performance is available since disbursement is limited and includes loans generated in FY The performance of the same is available up to Mar 18. The Q2FY16 has seen highest delinquencies of 5.70% in its 11th quarter, which has declined to 0% in Mar 18. The average curve for 90+DPD has seen peak of 4.51% in Mar 18. The average tenure of the underlying LAP and SME assets is more than 10 years. The period for which the static pool performance is available, is limited. However, the delinquencies witnessed by the SME portfolio are not material. 24

25 VI. Comparison of Past Rated Pools Pool characteristics Particulars Pool 1 Pool 2 Pool 3 Pool 4 Pool 5 Pool 6 Tran. Date Mar-14 Mar-14 Feb-15 Mar-15 Jun-16 Sep-16 Series A1 PTC Rating AAA AAA AAA AAA AAA AAA (SO) (SO) (SO) (SO) (SO) (SO) Series A2 PTC Rating AA AA AA - (SO) (SO) (SO) - - Cash collateral as % of pool principal Series A2 PTC subordination Pool Principal (Rs. Cr) Future receivables (Rs. Cr) Number of loans ,596 4, ,197 Avg. original loan amount (Rs. Lacs) Salaried as proportion of total borrowers (%) W. A. Balance Tenure W. A. Seasoning (months) W. A. Original LTV (%) W. A. Rate of Interest (%) W. A. IIR (%) Top 3 states (%) Obligor exposure top 10 (%) Maturity (months) Tran Transaction Avg Average W. A. Weighted Average 25

26 VII. Performance of Rated Pools (post Nov 18 payout) Particulars T-1 T-2 T-3 T-4 T-5 T-6 T-7 T-8 T-9 T-10 T-11 T-12 T-1 Asset class HL LAP Months post Securitization Pool Amortization (%) Cum. Collection Efficiency (%) DPD # (%) DPD # (%) Total Overdue # (%) Cumulative Prepayment (%) # - Calculated as a percentage of Initial POS. CARE has rated 12 HL pools of DHFL and has observed the performance of these pools over a period. In Nov 18, the highest 90+DPD and 180+DPD observed was 0.5% of POS. Overdue contracts accounted for around 0.1% of POS for all the rated pools. All of these pools are expected to perform better than the overall portfolio as they are seasoned pools (seasoning range months). 4.0% DHFL HL Pool Performance: 90+DPD 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% M1 M6 M11 M16 M21 M26 M31 M36 M41 M46 M51 M56 M61 M66 M71 M76 DHFL-1 DHFL-2 DHFL-3 DHFL-4 DHFL-5 DHFL-6 DHFL-7 DHFL-8 DHFL-9 DHFL-10 DHFL-11 DHFL-12 For the LAP Pool, the highest 90+DPD and 180+DPD observed was 2.84% and highest overdue contracts accounted for around 0.58% of POS. However, at the end of Nov 18, the 90+DPD and 180+DPD was 0.46%. Overdues amounted to 0.12% of POS. The pool had an initial seasoning of 30 months and is expected to perform better than the overall LAP portfolio. 26

27 4.0% DHFL LAP Pool Performance: 90+DPD 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% M1 M6 M11 M16 M21 M26 M31 M36 M41 M46 M51 M56 OD 90+DPD 180+DPD 27

28 VIII. Collateral Analysis i) Pool Selection Criteria: The pool has been selected by DHFL, from the loan contracts currently on its books, by applying the following key criteria as on the cut-off date (30 th November, 2018): All the loans in the pool are fully disbursed loans; DHFL has not obtained any refinance with respect to these loans; The loans are secured by first exclusive mortgage charge on the property financed in part through the loan; None of the loan contracts should have been restructured or rescheduled; The selected loan contracts should be free from any encumbrances; DHFL is the sole legal and beneficial owner of the loans; DHFL should not have initiated nor should it currently propose to initiate legal / repossession action against any obligors. Key pool characteristics: Description HL & LAP Pool Proportion in pool (%) No. of Loans 4, ,419 Principal Outstanding (Rs. Cr) , Future Receivables (Rs Cr.) 2, Average Original Loan Amount (Rs.) 15,44,438 57,65,056 20,66,271 Average POS (Rs.) 14,84,838 52,04,031 19,44,675 Amortisation (%) Weighted Avg. Instalment to Income Ratio (IIR)* (%) Weighted Avg. Original Loan to Value Ratio (LTV)* (%) Weighted Avg. Rate of Interest (ROI)* (%) Weighted Avg. Initial Tenure* (months) Weighted Avg. Net Seasoning* (months) Weighted Avg. Balance Tenure* (months) *Weight Average Values, weights being the pool principal outstanding Description Value Top 10 Obligors (%) 8.93 Top 5 branches (%) OD contracts (Current, OD) 100%, 0% Top 3 states - Property location (%) & HL Includes plot loans which are lent to borrowers to fund the purchase of land (residential plot) and subsequently construct a house on the plot in the agreed time line. As per NHB guidelines, the HFC is permitted to treat these loans as a Home Loan for the first three years from sanction and disbursement. 28

29 Key observation All contracts are current on cut-off date. Top three states account for 63.85% of the total principal of the pool with the top state accounting for 27.42% (Uttar Pradesh). Since origination pool has amortized by around 5.88%. Seasoning of the pool is months. The pool includes Loans against plots for construction of homes (40.25%), Housing (26.66%); LAP (25.67%) and loans originated by the SME business vertical (7.41%). The weighted average original Loan to Cost Ratio of the pool is 60.93%. The detailed characteristics of the actual pool are given below: State HL LAP Grand Total Uttar Pradesh 23.38% 4.04% 27.42% Maharashtra 6.14% 15.06% 21.21% Tamil Nadu 13.24% 1.98% 15.22% Rajasthan 2.97% 4.34% 7.31% Gujarat 2.18% 4.43% 6.61% Delhi 2.49% 1.73% 4.21% Madhya Pradesh 3.99% 0.05% 4.04% Andhra Pradesh 2.85% 0.01% 2.86% Telangana 2.66% 0.00% 2.66% Karnataka 1.79% 0.61% 2.41% Haryana 1.48% 0.59% 2.07% Uttaranchal 1.33% 0.01% 1.34% West Bengal 0.56% 0.19% 0.76% Punjab 0.63% 0.05% 0.67% Chhattisgarh 0.28% 0.00% 0.28% Bihar 0.26% 0.00% 0.26% Pondicherry 0.20% 0.01% 0.21% Orissa 0.15% 0.00% 0.15% Jharkhand 0.11% 0.00% 0.11% Assam 0.10% 0.00% 0.10% Kerala 0.10% 0.00% 0.10% Chandigarh 0.01% 0.00% 0.01% Grand Total 66.91% 33.09% % Occupation Category HL LAP Grand Total Salaried 42.12% 2.49% 44.61% Self-employed (business) 24.38% 29.66% 54.04% Self-employed (professional) 0.42% 0.93% 1.35% Grand Total 66.91% 33.09% % 29