Annual Report 2002-2003
Activities of the Bank: 2002-03
Changes in the Refinance Policy
Introduction of Liberalized Refinance Scheme for HFCs and Scheduled Banks
In view of the growing competition in the housing finance sector with takeovers and re-pricing of loans, requirement of many primary lending institutions for varying maturities of loans, a choice of fixed and floating interest rate and finance against prospective loans based on their growth projections became evident. The felt need was to make a more meaningful market foray making NHB the "most preferred destination" for housing finance institutions in the long run.
Towards this objective NHB has introduced a Liberalised Refinance Scheme (LRS) applicable to Scheduled Banks and Housing Finance Companies, 2003 in February 2003.
The important policy changes effected through the LRS are as under:
| i. |
Introduction of internal credit rating for HFCs. |
| ii. |
Introduction of floating rates of interest and maturity based rates of interest. |
| iii. |
Refinance assistance could be used for covering prospective disbursements to be made by HFCs |
Rates of Interest:
Keeping in tune with the overall softening of the interest rate regime, NHB rationalized its refinance rates in the past on an ongoing basis. Under the earlier Scheme, with the change effected in June 2002 the refinance rate ranged between 7.25%-9.50% in rural areas and 8.25%-9.50% in urban areas.
Under LRS, HFCs/Banks have the option to choose either floating or fixed interest rate. The interest rate to be charged to HFCs/Banks will be as prevailing on the date of disbursement and in case of HFCs will depend on their respective internal credit rating. In the earlier schemes repayment period was between 5-15 years. Under LRS HFCs/Banks will have the flexibility to choose repayment period of refinance between 2 years to 15 years (both inclusive). In order to safeguard both NHB and PLIs from extreme volatility in interest rate movements in the case of fixed rates NHB will have the option to review and revise the rates on outstanding loans on completion of 3 years. As on June 30, 2003 the interest rate range under LRS was 6.90%-8.55% (fixed option) and 6.70%-7.95% (floating option).
There is also option available for conversion from fixed to floating rate and vice versa on payment of a fee. Refinance availed can also be prepaid after giving 2 months notice to NHB and on payment of a nominal levy.
Further Reduction in interest rate for Rural Housing: To augment the flow of funds in rural areas the interest rate on refinance in respect of individual housing loans up to Rs.5 lakh in rural areas claimed under Golden Jubilee Rural Housing Refinance Scheme (1997) has been further lowered by 25 bps from the interest rate under LRS as applicable to HFCs and SCBs. This reduction in interest rate has also been provided to other categories of PLIs excluding ARDBs where the reduction in interest rate has been factored in their present interest rates on refinance.
Conversion of past refinance to lower interest rates: NHB in the year 2001-02 had provided a reduction in interest rates from above 13% to 11.5% in respect of all existing refinance loan accounts of HFCs and co-operative sector institutions (i.e., ACHFS and ARDBs). In the year 2002-03, a similar reduction in interest rate on refinance (released till 30/6/2002) has been provided in case of Scheduled Commercial Banks and in case of Scheduled Co-operative Banks (including Primary Urban Co-operative Banks). Conversion of past refinance to lower interest rate has been availed of by all borrowing institutions.
Modifications in Refinance Scheme for ACHFS
The Refinance Scheme applicable to ACHFS has been modified such that ACHFS shall now have the option to choose the repayment period upto 15 years in respect of individual housing loans and the interest rates has been linked with the maturity period of refinance chosen. The ceiling on loan slabs has also been increased. Further, NHB will have the option to revise the rates on outstanding loans on completion of 3 years as per the usual terms applicable to other agencies.
Modifications in Scheme for Subscription in Special Rural Housing Debentures (SRHDs) of ARDBs
The recovery norms have been modified factoring the type of organisational structure i.e., federal or unitary character prevailing in respect of an ARDB. Further, flexibility in the redemption period of SRHDs has been introduced and the interest rate on subscription in SRHDs has been linked to redemption period, at the option of ARDB.
Considering the success of the Liberalised Refinance Scheme, the Bank proposes to leverage on higher growth in the coming years with focus on asset quality.
Revision in Project Finance Interest Rates
The interest rates applicable to the refinance and direct finance schemes of Project Finance have also been revised downwards during the year 2002-03.
| Promotion & Development Activities of NHB during 2002-03 |
During the year 2002-03 NHB revised its Guidelines for extending Equity Support to HFCs w.e.f March 1, 2003. The major changes effected under the revised Guidelines are i) Minimum paid up capital of the HFC should not be less than Rupees ten crores ; ii) minimum promoters' contribution in the share capital will always be the same as applicable to a company making an issue to the public; iii) NHB`s participation in equity in any case will not exceed 10% of paid up capital of the HFC; iv) HFCs should get their shares listed on any recognised stock exchange(s) in India; v) NHB, at any time, may advise the HFC to go for public issue and in case of non-compliance, NHB will not extend any further capital support and insist on buy-back of NHB's holding and vi) HFCs shall enter into a shareholder's agreement with NHB which, inter-alia contains the clause of buy-back of equity shares.
During the year, Bank disinvested its entire equity holding in Andhrabank Housing Finance Limited and Vysya Bank Housing Finance Limited.
NHB subscribed Rs.1.60 crores towards 1.6 lacs equity shares of Cent Bank Home Finance Limited of Rs. 100/- each at par under the Rights Issue.
The Bank has been organizing meetings with CEOs of HFCs for better understanding and resolving of issues of mutual importance. During the current financial year one such meeting was organized and cumulatively, NHB has so far organized 17 such meetings.
Developments on Regulatory Issues
With a view to imparting a more vibrant regulatory regime for the HFCs, NHB had comprehensively amended the Housing Finance Companies (NHB) Directions, 1989 and issued a revised set of Directions namely Housing Finance Companies (NHB) Directions, 2001 during the year 2001-02, superseding the earlier one. NHB has been making amendments to these Directions from time to time to keep pace with the changing market dynamics. The following amendments have been made to the Housing Finance Companies (NHB) Directions, 2001 during the year 2002-03:
A. New provisions for exposure to stock market including stipulation on engaging brokers and policy/prudential norms applicable to demand/call loans have been introduced. Ceiling on exposure to shares, convertible debentures of corporate and units of equity-oriented mutual funds for HFCs has been prescribed at 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year. Within this overall ceiling of 5% for total exposure to capital market, the total investment in shares, convertible bonds and debentures and units of equity-oriented mutual funds by a housing finance company should not exceed 20 per cent of its net worth. HFCs are now required to put in place clear cut policy for demand/call loans. Prudential norms relating to asset classification and provisioning have been made applicable to such loans as well. Besides, the 'past due' concept has been dispensed with. The following changes in respect of asset classification will come into effect from March 31, 2005 onwards:
| • |
The period of default for classification of asset as non-performing asset [NPA] will be reduced from 180 days to 90 days. |
| • |
An asset which is classified as sub-standard would remain in that category for a period not exceeding 12 months instead of 24 month as prescribed earlier. |
| • |
A sub-standard asset would become doubtful asset if it remains sub-standard for a period exceeding 12 months instead of 24 months as of now. |
| • |
Risk weight assigned to housing loans to individuals backed by mortgage of immovable property which are standard assets has been reduced to 50% from the existing 75%. |
| • |
Risk weight of 50% has also been assigned for investments in Mortgage backed securities [MBS], secured by mortgage of residential immovable property, originated by approved housing finance companies and scheduled commercial banks subject to fulfilment of specified conditions. |
In addition to the above, the powers, functions and duties of audit committees of HFCs have been made similar to those laid down in section 292A of the Companies Act, 1956.
B. The ceiling on borrowing and deposits that can be accepted by HFCs has been increased from 10 times to 16 times of their net owned fund
C. The ceiling on rate of interest payable by HFCs for public deposits has been reduced from 12.5% per annum to 11% per annum
Ready Forward Transactions in Government Securities
In the 'Mid-term review of Monetary and Credit Policy for the year 2002-2003' the Reserve Bank of India (RBI) had announced the proposal to extend eligibility for ready forward (Repo) contracts to select categories of gilt holders, with adequate safeguards to ensure Delivery Vs Payment (DVP) and transparency. This proposal included HFCs registered with NHB (RBI Notification, No. S. O. 131 (E) dated 22nd January 2003). NHB has permitted all HFCs registered with the Bank under section 29A of the National Housing Bank Act, 1987 to enter in to ready forward transactions in Government Securities and issued necessary circular specifying the terms and conditions to be complied by such HFCs.
Issues Related to Supervision
On-site Inspection
Twenty-nine HFCs were inspected during the year 2002-03 to assess their financial position and verify their compliance with the Directions issued by NHB. Further, inspection of another ten HFCs has been initiated during the year and the inspections are expected to be completed by the end of August, 2003.
Penal action on account of non maintenance of liquid assets
In terms of Section 29B of the NHB Act, 1987, housing finance companies holding public deposits are required to maintain liquid assets equal to 12.5% of their public deposits in the manner prescribed under the Act. HFCs failing to maintain the prescribed level of liquid assets are liable for penal interest as per the Act. During the year 2002-03, penal interest amounting to Rs.77.15 lakhs was received from 14 HFCs. Cumulatively, till June 30, 2003, an amount of Rs.77.55 lakhs has been received as penal interest from 16 HFCs.
Registration of housing finance companies
In terms of Section 29A of the National Housing Bank Act, 1987 (as amended in 2000) HFCs are required to obtain a Certificate of Registration (COR) from the National Housing Bank so as to commence or carry on the business of a housing finance institution. HFCs in existence as on the date of coming into effect of these provisions (i.e. June 12, 2000) were required under the Act to apply for grant of a COR within a period of six month from that date. 161 companies have applied for grant of Certificate of Registration till June 30, 2003.
During the year under review, 17 HFCs were granted COR without permission to accept public deposits, of which COR issued to one HFC viz. DCM Housing Finance Ltd. has been cancelled. Further, applications for COR were rejected in 46 cases.
Out of the 161 application received by the Bank for Certificate of Registration, 48 HFCs have been granted the COR, 51 companies' applications were rejected by NHB till June 30, 2003 and 30 applications are at various stages of processing. 31 Companies with NOF below the minimum threshold limit of Rs.25 lakhs had time till June 11, 2003 to fulfill the minimum NOF requirement and they have been given time till September 11, 2003 to report such compliance to NHB. As stated earlier, one COR granted was cancelled during the year.
HFCs which have not applied for registration have become ineligible to carry on the business of housing finance institutions. Accordingly, it has been decided to delete such companies from the regular supervision and take action against such companies, if they are found to be carrying on the business of an HFI or accepting deposits from public. A list of 181 such HFCs was advertised in English, Hindi and Vernacular dailies for the benefit of the public. Suitable public notice was also issued in March, 2003 highlighting the registration requirement under the Act and counseling the public to verify the financial soundness and credit worthiness of HFCs before having dealings with them.
Co-ordination with other Regulatory Authorities
A close and continuos coordination with the Reserve Bank of India and other regulatory authorities was maintained during the year. NHB actively participated in the Sate Level Coordination Committee Meetings convened by RBI for effective supervision of HFCs. The bank has also decided to appoint Company Secretaries at all centres where offices of the Registrar of Companies are located on retainer ship basis for market intelligence on an on going basis.
| Golden Jubilee Rural Housing Finance Scheme |
The Government of India, had enhanced the targets under the Golden Jubilee Rural Housing Finance Scheme for the year 2002-2003. to 2.25 lakh dwelling units. Accordingly, the target was distributed amongst the various participating institutions.
The details of the targets and the achievements under the scheme for various categories of institutions are as under:
| (number of dwelling units) |
| Category of Institutions |
Yearly Target |
Yearly Achievement |
| Banks |
1,06,300 |
97,295 |
| Housing Finance Companies |
1,02,400 |
78,807 |
| Others including Co-operative sector institutions |
16,300 |
2,098 |
| TOTAL |
2,25,000 |
1,78,200 |
The target for the year 2003-04 has been enhanced to 2,50,000 dwelling units and individual targets have been allocated to HFCs and banks.
Among the multi-dimensional promotional responsibilities entrusted to NHB, development of human capital assumes a position of prominence. This is sought to be addressed through training programmes, seminars and symposia on matters related to housing for the officials of HFCs, banks and public housing agencies.
During the year, NHB conducted six training programmes all over the country involving participation from HFCs, state housing boards and development authorities. The programmes addressed issues related to general awareness on housing finance as well as certain specialised topics such as regulatory framework for housing, securitisation, project finance etc. In one programme, officials from leading housing finance institutions in Bangladesh also participated.
NHB extended financial and design support to NCHF for conducting four training programmes for the personnel of housing co-operatives. NCMDARDB was also provided financial assistance for training programmes for officials of co-operative institutions and banks operating in the rural areas. NHB also provided design and faculty support to banks, HFCs and Human Settlement Management Institute (HSMI).
| Mortgage-Backed Securitization (MBS) |
During the year NHB completed two MBS issues the details of which are given below:
i) NHB supports 1st MBS of BOB Housing Finance Limited
NHB successfully completed the first mortgage backed securitization of housing loans originated by BOB Housing Finance Limited. The MBS issue involved 3548 loans amounting to Rs. 77.16 crores. The issue size was Rs.59.65 crores of a tenor of 108 months with a coupon of 6.89% p.a. payable monthly. The issue, which was launched on 22nd April, 2003, was fully subscribed by institutional investors within four days of its launch in the market. The issue was rated LAAA (SO) by ICRA.
ii) NHB supports 3rd MBS of Can Fin Homes
NHB successfully completed the third MBS issue of CanFin Homes Ltd. (CFHL) in the month of June 2003. The Issue comprising of a pool of 2007 mortgages involving Rs.64.13 crores originated by CFHL was launched on June 23, 2003 and closed on July 2, 2003. The Issue with door-to-door maturity of 105 months and average maturity of 53 months, was fully subscribed by a wide range of institutional investors at a coupon of 6.25% p.aThe issue was rated "LAAA(SO)" by ICRA. As a measure to boost the confidence of the investors in the Residential Mortgage Backed Securities (RMBS) papers, NHB has, for the first time, subscribed to the issue, picking up a stake of 5.45% in the deal. This was in line with NHB's mandate to develop and facilitate the market for MBS transactions.
With these two issues NHB has so far completed securitization of 7 pools involving housing loan assets aggregating Rs.500.12 crores.
During the year under review, Reserve Bank of India (RBI) issued notification assigning a risk weight of 50% for investments by Banks and Financial Institutions in Mortgage Backed Securities (MBS) originated by Housing Finance Companies recognized and supervised by NHB, subject to fulfillment of specified conditions.
Recognizing the potential of RMBS as a financial instrument and its role in linking the housing sector with the Capital Market, NHB has been organizing training programmes to acquaint personnel from HFCs, Banks and Financial Institutions about the benefits of securitization of mortgage loans. With the growth which is being witnessed in the housing sector, it is expected that RMBS will assume greater significance and NHB's endeavours have also been to establish systems and procedures for standardization of primary housing finance activities and documents in order enable a sophisticated secondary MBS market.
The market has also witnessed a gradual expansion in the investor base of the MBS paper with Mutual Funds and Primary Dealers (besides banks and Insurance companies) having evinced interest in investing in RMBS. NHB is exploring the possibility of issuing RMBS paper with Banks both in the public and private sectors as Originators. The Pass Through Certificates (PTCs) which represents the undivided interests of the pool assets is now being issued in the dematerialized form. NHB has also been continuing its efforts to sensitize the various State Governments for rationalization of Structure of Stamp Duties and Registration Charges. While five states have reduced the stamp duty structure to 0.1% so far, during the year the Government of Gujarat revised its Stamp Duty Structure in respect of MBS Instruments in terms of which the maximum stamp duty is Rs. 1.00 lakh.
Change in incumbency
Section 6(1)(b)
Shri N.C. Sharma, Chairman, Life Insurance Corporation of India Ltd. w. e. from August 1, 2002 in place of Shri A. Ramamurthy, Chairman, Life Insurance Corporation of India Ltd.
Shri S.B. Mathur, Chairman, Life Insurance Corporation of India Ltd. w. e. from August 16, 2002 in place of Shri N.C. Sharma, Chairman, Life Insurance Corporation of India Ltd.
Section 6(1)(c)
Shri D.K. Biswas, Chairman & Managing Director, Housing & Urban Development Corporation Ltd. w. e. from November 8, 2002 in place of Shri Pankaj Jain, Chairman & Managing Director, Housing & Urban Development Corporation Ltd.
Shri P.K. Pradhan, Chairman & Managing Director, Housing & Urban Development Corporation Ltd. w. e. from April 1,2003 in place of Shri D.K. Biswas, Chairman & Managing Director, Housing & Urban Development Corporation Ltd.
Shri L.M. Mehta, Chairman & Managing Director, Housing & Urban Development Corporation Ltd. w. e. from June 2, 2003 in place of Shri P.K. Pradhan, Chairman & Managing Director, Housing & Urban Development Corporation Ltd.
Meeting of Board of Directors
During the year 2002-03 (July to June), the Board of Directors met 7 times.
Meeting of Executive Committee of Directors
During the year 2002-03 (July to June), the Executive Committee of Directors met 4 times.
Audit Committee of the Board
Pursuant to the directives of the Reserve Bank of India, Audit Committee of the Board of Directors of the Bank (ACB) was constituted in June, 2000 comprising of four non executive Directors, one of whom is a Chartered Accountant. One of the non-official Director chairs the meeting of the ACB. The Committee met four times during the year.
The ACB provides directions and oversees the operations of the total audit functions of the Bank which include the effectiveness of the systems of internal control, review of the accuracy and fairness of the financial statements and compliance with the regulatory guidelines. The ACB reviews the reports of the Internal and statutory auditors and action taken by the management on various observations and queries of the auditors. It also reviews the follow up of the annual financial inspection by the Reserve Bank of India. Inspection Reports of Housing Finance Companies are reviewed by the ACB as and when directed by the Board.
It is the prerogative of the ACB to invite senior executives whom it considers appropriate to be present at the meetings. Senior Management, internal and statutory auditors are also invited to participate in the meetings of the ACB, wherever necessary.
The total strength of the officers in the Bank as on June 30, 2003 stood at 74 as against 79 at the close of the previous year. With a view to continuously upgrade the efficiency of its human capital, the Bank is making every endeavour to upkeep the proficiency of its people through various training and management development programmes, both in-house as well as external.
Compliance with reservation policy:
The policy of the Government of India regarding compliance of matters relating to Reservation Policy is being strictly adhered to by the Bank. A cell under a Liaison Officer has been functioning in the Bank. In accordance with the directions of the Government of India, post based rosters are being maintained by the Bank.
Reorganization & Restructuring
Keeping in tune with the changing economic scenario that redefines the role and relevance of regulatory regime and financial institutions thereby necessitating continuous innovation, NHB organized a two-day workshop on "Aspiration Driven Transformation" for its officers in March 2003. The workshop was conducted by the Boston Consulting Group (BCG). During the course of the workshop certain issues related to new product and service development, changing facet of regulatory practices, importance of creation of a brand for NHB, foray into advisory services and significance of congenial work environment and motivating human resource policies for the overall success of an organization were discussed. Different workgroups were formed to develop future policies pertaining to each of the above aspects and all these groups have already submitted their preliminary recommendations. A vision statement for the Bank has been evolved and subsequently approved by the Board.
The Administrative Staff College of India (ASCI), Hyderabad has been assigned the work of undertaking a study on the reorganization of NHB.
National Housing Bank is fully committed for the successful implementation of Official Language and its effective compliance and the Bank has initiated effective measures for the progress of Hindi in the Bank. It has always been a policy of the Bank that through inspiration and incentive, the use of Hindi should constantly be increased and the Bank has succeeded in this regard beyond expectation. Various statutory provisions stipulated by the government regarding Official Language are strictly adhered to.
In order to inspire Bank's officers to use Hindi in their day to day official work, some incentive schemes have been introduced in the Bank. A large number of Hindi books are being purchased in library of the Bank and the officers of the Bank read Hindi books with great interest.
To develop the creative capacity of the Bank's officers, 'Awas Bharati', a Hindi News Letter, is being published regularly and the 'Awas Bharati' has been placed on second position in the competition for Raj Bhasha Patrika of Delhi based Banking & Financial Institutions by Delhi Nagar Raj Bhasha Implementation Committee.
Bank's regional office in Mumbai also gives due importance to the use of official language. The Bank Nagar Rahbhasha Implementation Committee of Mumbai awarded 1st prize to National Housing Bank, Mumbai in the category of Financial Institutions for performing best work in Hindi.
During the year 2002-03, a long-standing dispute between NHB and State Bank of India (SBI) was resolved in accordance with a package worked out by the Ministry of Finance, Government of India. On October 30, 2002, both the parties entered into a settlement in terms of which NHB was required to pay 50% of Rs.707.56 crores. However, the said sum was to be reduced by the amount deposited by NHB in the Special Court pursuant to orders passed by the Special Court in Suit No. 79 of 1994 (State Bank of Saurashtra Vs. NHB & Ors) with interest accrued thereon. After taking this into account, NHB paid a sum of Rs.150.45 crores to SBI on 17.12.2002 and accordingly, the said dispute stands resolved.
In terms of the above settlement, NHB and SBI jointly proceeded against legal heirs of Harshad S. Mehta. SBI obtained a Decree in its favour for a sum of Rs. 707.56 crores with interest @ 15% p.a. from 13.6.1992 till payment. Recoveries/realizations against the said decree are to be shared between SBI and NHB in such proportion as may be determined by RBI.
During the year, Parliament enacted a law to regulate securitization and reconstruction of financial assets and enforcement of security interest of the banks and financial institutions known as "the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002)". As the procedure envisaged under the said Act for securitization of loans and for enforcement of security interest was cost effective and less cumbersome, NHB requested the Central Government to consider notifying housing finance companies registered with NHB as financial institutions for the purposes of the said Act, pending implementation of the provisions of NHB Act in the matter of enforcement of security through Recovery Officers. The matter is under the active consideration of the Central Government.
During November-December, 2002, a team of officers from the Reserve Bank of India carried out an inspection to assess NHB's financial performance during the year ended June 30, 2002.
| Mortgage Credit Guarantee Company |
The National Housing Bank (NHB) has taken a lead role in promoting and introducing the concept of mortgage default guarantee in the country. Pursuant to the announcement in the Union Budget of 2001-02, NHB undertook the venture and is collaborating with Canada Mortgage and Housing Corporation (CMHC), United Guarantee (UG), a wholly-owned subsidiary of American International Group, Inc. (AIG), International Finance Corporation (IFC) and Asian Development Bank (ADB) in pursuing the implementation of the project.
Mortgage Credit Guarantee will allow lenders to penetrate broader market segments by expanding their reach by offering easier and standard mortgage terms and conditions. The guarantee support will protect lenders against risk of default by the borrowers. This will enhance confidence and help the lending institutions in reaching out to all segments of population and improving home ownership in the country. The guarantee support will improve credit flow into housing and will also result in lower interest rates due to risk cover. The mechanism will also provide a new impetus to mortgage backed securitisation and will bring about improvement in lending practices in the industry. NHB has been coordinating the efforts of all the partnering institutions for investment in the project and setting up of the Company. |