TEXT-Fitch release on India's National Housing Bank

(The following statement was released by the rating agency)

Nov 18 - Fitch Ratings has today affirmed India-based National Housing Bank's (NHB) National ratings at Long-term 'AAA(ind)' with Stable Outlook and Short-term 'F1+(ind)'. Simultaneously the agency has affirmed its INR55bn long-term bank loan programme at 'AAA(ind)', INR112.6bn long-term debt programme at 'AAA(ind)', INR20bn commercial paper programme at 'F1+(ind)', and its INR25bn short-term bank loan programme at 'F1+(ind)'. The Long-term Deposit rating on NHB's INR10bn fixed-deposit programme is affirmed at 'tAAA(ind)'.

NHB's ratings are driven by expected strong support from the Government of India (GoI) given NHB's developmental role in the socially and politically important sector of rural housing. NHB's importance as the regulator of housing finance companies (HFCs) and its ownership structure, (it is wholly-owned by the Reserve Bank of India (RBI) which is planning to transfer its shareholding to GoI) also provide the basis for the high expectation of support. This is important as NHB's standalone financials would not merit the highest National Long-term rating.

RBI has a demonstrated history of supporting the bank in the past when required through equity infusions. In addition, the FY08/09 budget of the GoI announced an INR10bn fund (equivalent to 6% of NHB's borrowings at FYE June 2008) to help NHB refinance rural housing projects. The fund, which is to be raised from banks that do not meet their 'priority sector' lending volume requirements, will enhance NHB's access to low-cost funding, which was earlier curtailed with the withdrawal of capital gain bonds by the government for reasons of fiscal prudence. It would also help NHB to support the GoI's social objective of refinancing housing in rural areas. For example, such refinancing constituted 40% of NHB's loans in FYE June 2008 and is expected to increase to 50% over the medium term.

NHB's net interest margin (NIM) remains low, compared to higher-rated banks and Non Banking Finance Companies, at 1.3% in June 2008 (June 2007: 1.1%). This reflects the higher proportion of low-yielding refinancing to banks (65% of loans) and HFCs (27% of loans), and, as a non-commercial bank, the absence of a low-cost deposit base. NHB's balance sheet shrank in FYE June 2008 as regulations require its borrowings to be no more than 11x its 'net-owned funds'. Thus further equity infusions are required for expanding its loan book as internal capital generation remains low. While the INR10bn fund would support NHB's NIM, profitability could remain under pressure due to phasing out of low-cost capital gain bonds (INR31.5bn) and GoI-guaranteed external borrowings (INR4bn).

While NHB's exposures carry high concentration risk, credit risk is low as they are primarily to the better-rated banks and HFCs. Gross non-performing loans (NPLs) were nil at FYE June 2008. Asset quality could come under some pressure with increasing exposures to state housing boards and small micro-finance institutions which are more vulnerable to delinquencies during an economic slowdown; these sectors, however, constitute only 4% of NHB's loans.

NHB was created by a Parliamentary Act in 1988 and it refinances housing finance companies and residential mortgage lending of commercial banks. It also advises the government on policy issues relating to the housing sector, establishes regulatory guidelines and conducts on-site supervision of HFCs. NHB is increasingly exploring opportunities to broaden its product portfolio through regional rural banks, cooperative banks and micro-finance institutions with the introduction of affordable housing funding for the rural market.