Financial Operations of the Bank during 2003-04

Annual Report 2004-2005

Financial Operations of the Bank during 2004-05

Resource Mobilization

During the year, resources were raised by issuing bonds, commercial papers (CP) and borrowing from banks by way of Line of Credit (LoC). Bringing down the cost of funds and building a low cost resource-base continued to be a challenge for refinancing operations. The borrowings under various categories vis-à-vis the borrowings in the last year are as under:

Capital Gain Bonds: The Bank mobilised funds by issuing Capital Gain Bonds at coupon rates of 5.25% per annum payable annually (having a tenor of 7 years with put and call option at the end of 5 th year) and 5.10% (having a tenor of 5 years with put and call option at the end of 3 rd year) till November 30, 2004. With effect from December 01, 2004, the interest rate structure on Capital Gain Bonds underwent changes as under –

[percentage per annum]

Period	For 5 years with put/call option at the end of 3 years	For 7 years with put/call option at the end of 5 years
1.12.04 to 15.02.05 (for amounts up to Rs.1 crore)	5.35	5.50
(for amounts of Rs.1 crore and above)	5.45	5.50
16.02.05 to 15.04.05 *	5.45	5.50
16.04.05 to present	5.25	5.35

* Distinction in rate of interest between amounts upto Rs. 1 crore and for amounts of Rs. 1 crore and above was removed w.e.f 16th February 2005.

Taxable Bonds: In June '05, t he Bank mobilised a sum of Rs.850 crore by issuing Floating Rate Taxable Bonds as follows with tenures ranging from 3 to 5 years and rates linked to GOI securities and carrying put and call options.

Date of Issue	Amount (Rs. in crore)
02.06.2005	150.00
02.06.2005	350.00
07.06.2005	250.00
07.06.2005	100.00

Commercial Paper: During the year the Bank came out with 9 issues of Commercial Paper (CP). The face value of the CPs ranged from Rs.50 crore to Rs.300 crore and the term of the papers ranged between 81 days and 365 days. As on June 30, 2005, Commercial Papers to the tune of Rs.769.61 crore were outstanding.

Priority Sector Bonds: In November '04, the Bank mobilised a sum of Rs.250 crore by issuing Priority Sector Floating Rate Taxable Bonds Series I and II, having a tenure of four and three years respectively with a put and call option at the end of one year. The Bonds were floated at a spread of 10 bps over the 1 year GOI (semi-annual) benchmark.

Status of Priority Sector Bonds

Investments made by the Scheduled Commercial Banks in Bonds issued by NHB were reckoned as indirect finance to housing within the category of priority sector lending, subject to certain conditions. With a view to encourage Banks to lend directly to the priority sector borrowers, the Reserve Bank of India has decided that investments made by Banks on or after April 01, 2005 in the bonds issued by NHB shall not be eligible for classification under priority sector lending. The investments which have already been made by banks up to March 31, 2005 in such bonds shall not be eligible for classification under priority sector lending with effect from April 01, 2006.

Cost reducing measures:

On cost considerations, it was decided not to draw the undrawn loan amount of USD 13 million from the Asian Development Bank. The interest cost under swap arrangement with Bank of India (in respect of the borrowing from ADB), was negotiated for a lower rate with effect from June 2004. Efforts are being made to reduce the interest burden on earlier high cost borrowings to support lower lending rates.

Rating of borrowing programme

Ratings have been obtained for Bonds/Commercial Papers from all the four rating agencies. Fitch has awarded a rating of ‘AAA ( Ind)’ and CARE has rated the instruments as ‘CARE AAA’. ICRA has given a rating of ‘A1+’ while CRISIL has given ‘AAA/Stable’. These ratings indicate ‘highest degree of certainty regarding timely payment of financial obligation on the instruments.

Listing of the Bonds:

The bonds of the Bank are listed on the Bombay Stock Exchange. In addition, most of the bonds are also listed on the National Stock Exchange.

Deployment of Funds

The details of financial assistance extended by the Bank during 2004-05 in the form of refinance and direct finance are given below:

Disbursements during the year under review at Rs. 7527.20 crore are more than double of the total disbursement made in the preceding year. The details of the aggregate disbursements under General Fund and Slum Improvement and Low Cost Housing Fund are given in the table below:

GENERAL FUND

(Rs. in crore)
[A] Refinance Disbursals	2002-03	2003-04	2004-05	Cumulative
a) Individuals	2709.72	3252.89	7500.04	20474.04
b) Projects	0.00	0.00	0.00	234.50
Sub - Total	2709.72	3252.89	7500.04	20708.54
[B] Direct Finance Disbursal	58.27	38.51	8.75	302.41
Total disbursals from General Fund [A + B]	2767.99	3291.40	7508.79	21010.95

Slum Improvement AND Low Cost Housing Fund

(Rs. in crore)

	2002-03	2003-04	2004-05	Cumulative
[A] Refinance : Orissa Cyclone Projects	0.00 0.00	0.00 0.00	0.00 0.00	5.47 11.29
Sub Total	0.00	0.00	0.00	16.76
[B] Direct Finance : Projects	14.79	5.98	18.41	110.10
Total [A + B ]	14.79	5.98	18.41	126.86

Refinance Operations

During the year 2004-05, refinance aggregating Rs.7500.04 crore was disbursed, as against Rs.3252.90 crore disbursed last year, registering a growth of around 131%.

The break up of the disbursements made during 2004-05 is as under:

Institution category	Amount (Rs. crore)	Dwelling units (number)
HFCs	2060.95	63,178
Banks	5404.09	1,29,677
Cooperative Institutions	35.00	3,955
Total disbursement	7500.04 *	1,96,810

* An additional amount of Rs. 562.20 crore was disbursed to HFCs under Short Term Scheme

The graphical representation of the releases during 2004-05 is as under:

Performance under the Golden Jubilee Rural Housing Refinance Scheme

In recent years, the rise in refinance disbursements by NHB has also been matched by the commensurate growth in disbursement under Golden Jubilee Rural Housing Refinance Scheme (GJRHRS). The Scheme was launched in the year 1997 for promotion of housing activity in the rural areas. During the year 2004-05, out of the total releases of Rs.7500.04 crore, around 47% aggregating Rs.3536.16 crore has been made under the GJRHRS in respect of loans given by Primary Lending Institutions (PLIs) in rural areas. The break up of the disbursements made under the Scheme is as follows:

Institution Category	Amount (Rs. crore)	Number of units
Housing Finance Companies	1551.37	53,390
Scheduled Banks	1981.52	91,229
Cooperative Sector Institutions	3.27	150
Total	3536.16	1,44,769

To promote rural housing, the Bank lent its refinance at a concession of 50 basis points in interest rates under GJRHRS which has resulted in considerable growth in disbursals under the Scheme. The comparative disbursements under the GJRHRS since introduction of the Scheme are given below:

Cumulative Refinance Disbursements up to 30th June, 2005

(Rs. in crore)

Institution Category	Amount
Housing Finance Companies*	11141.82
Scheduled Banks	7920.72
Cooperative Sector Institutions	1578.76
Total	20641.3 0

*excluding disbursals under short term facility

Asset Quality

With 100% collection efficiency, the Bank continues to have Nil Net NPA position as at 30 th June 2005.

Risk Mitigation Measures adopted by NHB

Risk based lending and pricing

With the introduction of the Liberalized Refinance Scheme (LRS) in March 2003, NHB has developed a system of internal credit rating for different categories of PLIs and also adopted the policy of risk based pricing and rating-linked exposure limits. The system was fine tuned during the year under review by introducing granularity in the method used for assessing the PLIs in respect of risk and pricing of funds lent.

Minimization of Interest Rate Risk

During the year, 92% of the refinance releases were made under fixed rates while the balance 8% were made under floating rates. This minimizes the interest rate risk, especially given the fact that the Capital Gain Bonds, which are the mainstay of NHB’s borrowing at present are also at fixed rates. Moreover, while the floating rates are reviewed on a dynamic basis, the Bank has the option to reset the coupon rates after a tenure of 3 years in respect of refinance released under fixed rate having tenure of more than 3 years.

Tenure of Refinance Releases

Housing Finance Companies have borrowed for an average tenure of about 6 years with quarterly repayments, thereby bringing down the weighted average period of loan (WAPOL) to 3 years. Banks on the other hand have generally borrowed for 3 year tenure with bullet repayment. Hence, the WAPOL for all the releases made during the year is around 3.06 years. Since the major source of funds for NHB for the last 3 years has been its Capital Gain Bonds having 3 year maturity, the lending is in line with the incremental borrowings, suiting the Bank’s ALM requirements.

Strengthening of Off-site Surveillance System

NHB has a system of off-site surveillance where under its clients are required to submit prescribed returns periodically. The system has been strengthened by revising and rationalizing the returns for various categories of PLIs. In case of a few categories of PLIs involving relatively greater degrees of risk, the off-site system is supplemented by on-site scrutiny of underlying housing loan assets. The mechanism has helped in checking the financials of the clients as also maintaining quality of assets.

Project Finance

The Bank continued to extend financial assistance to public housing and development agencies for undertaking various types of housing projects.

During the year, the Bank sanctioned finance for 12 projects. The disbursals under Project Finance aggregated to Rs.27.17 crore. An aggregate of 46,222 dwelling units have been constructed with this assistance so far.

Cumulatively, till the end of June 2005, the Bank has sanctioned 384 projects having project cost of Rs.2808.14 crore and loan component of Rs.1971.58 crore. Of these 384 projects, 228 projects were financed through the refinancing route and the remaining 156 projects were financed through direct finance window. So far, the Bank has disbursed Rs.658.30 crore as project finance of which Rs.245.79 crore was disbursed as refinance, and the remaining Rs.412.52 crore as direct finance. The total number of dwelling units that have received finance from NHB is 1,99,445 and the number of plots that were covered for housing project development was 17, 936.

The details of direct finance provided out of General and Special Funds are as follows:

	During the year 2004-05			Cumulative till 30th June 2005
	Number of projects	Amount Sanctioned [Rs. Cr.]	Amount Disbursed [Rs. Cr.]	Number of projects	Amount Sanctioned [Rs. Cr.]	Amount Disbursed [Rs. Cr.]
General Fund	7 (4684)	113.35	8.75	61	1138.15	302.41
Special Fund	5 (41,538)	84.47	18.41	95	290.91	110.11
Total	12 (46222)	197.82	27.16	156	1429.06	412.52

Figures in bracket indicate the number of dwelling units financed

Other Highlights:

In its first initiative to support the housing needs of the micro financing institutions, the Bank disbursed loan to an NGO, SPARC Samudaya Nirman Sahayak for construction of 147 flats for slum dwellers in Dharavi, Mumbai.

During the year, the Bank also sanctioned its first loan to a Federation of Women Self Help Groups (SHGs), Sri Padmavathy Mahila Abyudaya Sangam at Tirupati for construction of 300 houses in slums at various places in Tirupati.
Rs. 10.80 crore was sanctioned to SHARE Micro Finance Ltd., a Micro-Financing Institution based at Hyderabad, for construction and up gradation of 4500 houses of women group members.
Extending the support to Tsunami affected people in coastal Andhra Pradesh, Rs. 70 crore was sanctioned to Andhra Pradesh State Housing Corporation Limited for construction of 40,000 dwelling units.

Financial Performance of the Bank during 2004-05

During the year under review, profit before tax amounted to Rs. 77.63 crore as against Rs. 155.46 crore during the previous year. Profit after tax worked out to Rs. 44.04 crore as against Rs. 118.13 crore during the year 2003-04. Profit for the year 2004-05 has been arrived at after providing for deferred tax liability of Rs. 25.17 crore (2003-04 nil). Besides, profit for the year was adversely affected due to loss on sale of securities of Rs. 78.04 crore (2003-04 nil) and general pressure on interest spread. As a result of decline in profitability, the return on equity for the year 2004-05 worked out to 9.78% as against 26.25% in the year 2003-04. Further, a sum of Rs.48.84 crore on account of deferred tax provision in respect of earlier years was adjusted against reserves as a result of which the net owned fund declined marginally from Rs. 1656.78 crore as on 30th June 2004 to Rs. 1651.99 crore as on June 30, 2005.