Preliminary review of "non-conforming" loans made under the housing guaranty loan program HG-003

The evaluation covers the period 4/91-6/96. Implementation is unclear, since the guidelines laid down under the Master Program Implementation Plan (MPIP) do not seem to have been strictly followed by the participating housing finance companies (HFCs) -- Gujarat Rural Housing Finance Corp. Ltd. (GRUH), Canfin Homes, Ltd., and Housing Development Finance Corp. Ltd. Key issues are as follows. (1) Differing perceptions of the HG program have led all three HFCs to adopt different methods of submitting their reports/statements to the National Housing Bank (NHB) and of documenting their lending to below median income families. (2) There is a discrepancy between the total amount that the National Housing Bank (NHB) claims to have disbursed to GRUH and Canfin Homes for refinancing and the total amount that these two HFCs claim to have received from the NHB. These differences have caused some confusion among the HFCs. (3) Only two criteria -- loan size and the time period during which loans had been granted -- were considered by the HFCs in claiming refinance under the HG Program. No specific methods of targeting at the below median income were employed by the HFCs simply because the refinanced loans were made with retrospective effect. Ironically, then, the most critical indicator -- the income of the borrower -- was never among the criteria for granting (re)finance either at the NHB or the HFC level. (4) A very high proportion of loans have been granted to ineligible households, i.e., those with incomes above the median; in the case of Canfin Homes, this stands at 60.9% and for HDFC, at 47.94%. In the case of Canfin, a high percentage of "pari-passu" loans are also observed, i.e., 28.18%. Close to 18% of loans refinanced to GRUH could be termed ineligible. Lessons learned are as follows. (1) A crucial issue in explaining the high proportion of ineligible loans is the use of loan size as a proxy to borrower"s income. Findings indicate that it is necessary to distinguish between borrowers who take small loans and those who cannot afford larger loans. Borrowers may prefer to take smaller loans for reasons other than the unaffordability of larger loans. Thus, in order to target the below median income group, it may be necessary to use not just one indicator (i.e., loan size), but also collaborating indicator(s) (e.g., income and or dwelling size) in deciding on the eligibility of borrowers. (2) Another key issue is the HFCs" lack of clarity about the central aim of the HG Program, as evidenced in the above-mentioned differences in program reporting and documentation. It may be extremely critical to communicate the right kind of information to the HFCs so as to ensure uniformity in their lending practices under the HG Program. (3) Traditionally, the HFCs have always viewed the below median income group as risky and non-creditworthy and have expressed a number of administrative and operational difficulties in extending them credit. Although these attitudes are changing, it is unlikely that the HFCs will include the below median income group in their routine lending programs unless their officers are given proper incentives and training. A "special program status" distinguishing an HFC"s lending to below median groups from its routine lending schemes may also prove beneficial. (4) Lastly, the inclusion of systematic and periodic evaluations, looking specifically at the end-use of the loan as well as the beneficiary group covered under the HG Program, may also pave the way for timely alterations and modifications in program strategies. (Author abstract, modified)