India: Private Sector Housing Finance Project (Dewan Housing Finance Corporation Limited)

Transcription

1 sap Validation Report Reference Number: PCV:IND Project Number: Investment/Loan Numbers: 7189/2057-IND December 2010 India: Private Sector Housing Finance Project (Dewan Housing Finance Corporation Limited) Independent Evaluation Department

2 NOTES (i) In this report, $ refers to US dollars. (ii) For an explanation of rating descriptions used in ADB evaluation reports, see ADB Guidelines for Preparing Performance Evaluation Reports on Nonsovereign Operations. Manila. Key Words adb, asian development bank, evaluation, extended annual review report, housing finance, independent evaluation department, private sector operations, validation report Director Team leader Team members R. B. Adhikari, Independent Evaluation Division 1, Independent Evaluation Department (IED) H. Feig, Principal Evaluation Specialist, IED1 N. Gamo, Evaluation Officer, IED1 S. Labayen, Senior Operations Evaluation Assistant, IED1 This report was subjected to disclosure restrictions agreed upon by ADB and the relevant sponsor or recipient of funds from ADB. This report is made publicly available in accordance with ADB's Public Communications Policy (PCP) and does not include any confidential information and other information that falls within the exceptions set out in paragraphs 126, 127, and 130 of the PCP. As agreed by the Independent Evaluation Department, Office of the General Counsel, Office of the Secretary, and the Department of External Relations, only this redacted summary will be uploaded in the Board Document System. The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of that territory or area.

3 Extended Annual Review Report Validation A. Project Description 1. Project Background In December 2003, the Asian Development Bank (ADB) approved funding of up to $40 million equivalent in Indian rupees sourced through a local currency bond issue for the Private Sector Housing Finance Project in India. The purpose was to promote market-based mortgage lending to underserved markets in the country. ADB intended to extend corporate loans of $20 million each, to support the expansion of two rapidly growing, well-capitalized and profitable housing finance companies (HFCs), Sundaram Home Finance Limited and Dewan Housing Finance Corporation Limited (DHFL). After ADB Board approval, however, the loan to Sundaram was not disbursed. The project thus entailed the provision of a 10-year loan to DHFL for the purpose of originating new housing loans. 1 The loan agreement signed by DHFL and ADB on 19 July 2004 provided for the extension of long-term, fixed-rate rupee debt to limit interest rate and maturity mismatches, and avoid currency risk. After the loan agreement was signed, ADB, at DHFL s request, amended the loan agreement to allow DHFL to draw both fixed and floating rate disbursements from ADB in line with changing market conditions. ADB s loan to DHFL in the amount of Rs918.6 million was fully disbursed from November 2004 to June Currently, DHFL is the third largest HFC and the second largest private sector HFC in India. Although its overall share of India s mortgage finance market is growing, it is still small, at about 1.5%. In 2003, DHFL had 41 branches. At the time the XARR was prepared, DHFL had 155 locations: 53 main branches, 67 service centers, and 35 other outlets across the country. DHFL has been targeting the low- and middleincome (LMI) segment in semi-urban and rural areas and has steadily increased its disbursements to this segment. It has effectively structured and diversified its products to respond to the rapidly changing macroeconomic scenario without changing its customer focus and long-term lending strategy. The weighted average term of the portfolio was years as of 31 March 2007, with the average loan size showing DHFL s commitment to the LMI segment. B. Issues, Lessons, and Recommendations (Validation of XARR Assessment) 1. Issues and Lessons The extended annual review report (XARR) identifies the following issues for further monitoring: (i) the impact of any aggressive expansion by commercial as well as public banks into the LMI segment on DHFL s financial position; and (ii) DHFL s access to long-term financing to avoid maturity mismatches. This validation agrees that those issues need further monitoring. In addition, this validation recommends that the Private Sector Operations Department (PSOD) closely monitor DHFL s continued compliance with ADB s financial covenants. The XARR highlights the following lessons from the project: (i) mortgage finance for customers in the LMI segment can be commercially viable, but HFCs or commercial banks must have highly trained and experienced staff, and sound credit underwriting and portfolio management policies to successfully generate business in this market segment; and (ii) reliance on a government regulator, such as National Housing Bank (NHB), as a major source of funding may not be sustainable over the long term, considering that financing is not its primary function and there is an inherent conflict of interest between the financing and oversight functions. This validation agrees with these lessons. 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Dewan Housing Finance Corporation (India). Manila.

4 2 2. Recommendations The XARR recommends the inclusion of mortgage industry prudential standards such as limits on a borrower s ability to offer loans on a high loan-to-value basis as financial covenants for ADB financial intermediation loans for housing finance. This validation agrees with this recommendation. C. Ratings XARR Independent Evaluation Department Review Development Satisfactory Satisfactory Outcomes and Impacts ADB s Investment Profitability ADB s Operational Effectiveness (Work Quality) Reason for Disagreement/Comments Satisfactory Satisfactory The XARR assessment underlying the rating is not fully based on criteria stipulated in PAI 6.07B or the IED guidelines for evaluating nonsovereign operations, although their application would have arrived at a the same rating. Excellent Satisfactory ADB s role and contributions were limited to the provision of long-term funds. ADB Additionality Satisfactory Satisfactory Overall Assessment Satisfactory Successful Overall project ratings should be highly successful, successful, partly successful, or unsuccessful per PAI 6.07B and IED guidelines for evaluating nonsovereign operations. Quality of XARR Satisfactory

5 PRIVATE SECTOR OPERATIONS DEPARTMENT'S RESPONSE TO THE EXTENDED ANNUAL REVIEW REPORT VALIDATION REPORT On 26 November 2010, Director, Independent Evaluation Department, Division 1 (IED1), received the following comments from the Capital Markets and Financial Sectors Division (PSCM), Private Sector Operations Department (PSOD). We appreciate led's work on the validation report. After reviewing the final report, reflecting some incorporated comments from PSCM, we agree with the overall assessment and have no further comments on IND: Private Sector Housing Finance Project.