Housing finance is a fast-growing line of business at IFC — and it has a dual impact, developing local capital markets and promoting increased home ownership.
But it’s nothing new. In fact, one of the developing world’s most successful mortgage lenders was created in the 1970s at IFC’s initiative, and now has more than $5 billion in assets.
“Catalytic role” is one of the most important phrases in the IFC lexicon. It’s a big part of what we were created to do — using our ideas and capital to kick start new private sector initiatives that will help reduce poverty and improve people’s lives.
For a good example, look no further than our history with India’s Housing Development Finance Corporation (HDFC). Now one of the most successful mortgage lenders in the developing world, it was started from scratch at the suggestion of an IFC investment officer in the 1970s. IFC has invested more than $243 million in HDFC over the years, using it as an inspiration for today’s global line of business in housing finance.
HDFC has helped more than 1 million Indians realize the dream of owning their own home, and also has worked with us to build affiliated institutions in Sri Lanka, Bangladesh, and Egypt. It pioneered today’s $22 billion Indian home loan market that is growing by 30 percent annually. Perhaps most impressive is the way it continues to thrive today, despite tough competition from much larger national and international banks that it drew into the market.
How did it all begin?
Former IFC investment officer Promodh Malhotra remembers it well. Previously the number two man for Citibank in India, he moved to Washington to work for the World Bank Group in the 1970s — in part, to flee the high personal tax burden and antiquated banking system in his native country that he felt would keep him from ever owning a home there. When he got here and saw how the mature US housing finance sector enabled millions of people of all income levels to own their own homes. He began to think: “Why couldn’t we do that in India too?”
Soon Molhotra was back in India, on mission with the director of IFC’s newly-founded Capital Markets Department, David Gill. Seeing nothing to lose, they decided to float the idea of creating a new standalone mortgage shop. Seeking a local sponsor, they called on ICICI Bank — India’s premier private financial institution today, but then a development finance outfit mainly in the business of re-channeling World Bank and other foreign currency loans to industrial corporations. They pitched the concept to the Chairman, offering to co-invest and provide long-term support. Before long, he was on board.
“HDFC was a case of true institution-building,” Malhotra recalls. “It was formed at IFC’s instigation. The first three founding shareholders were IFC (5 percent), ICICI (5 percent), and the Aga Khan Foundation (5 percent). We got about 30 percent from the big public sector banks and life insurance companies, who never interfered with HDFC’s management. The rest came from leading private sector groups and a public IPO.”
One of the local managers IFC recruited into HDFC was a bright young banker at Chase Manhattan Bank’s local rep office, Deepak Parekh. Given the chance of making a success of his own company rather than working for a foreign-owned bank, he took the risk of joining a start-up — and went on to build an institution that today has more than $5 billion in assets.
Parekh also became a national hero of sorts, using his status as a respected spokesman for the local financial community to advise the government on tough policy issues time and again. At the January 2006 Republic Day celebrations, the government recognized his achievements in service to his country by giving him one its highest honors: the Padma Bhushan award, comparable in status to the Order of the British Empire (OBE) in England or the Congressional Medal of Honor in the USA. In 2004, the Economic Times newspaper also named HDFC India’s top Corporate Citizen, citing its work to rehabilitate the victims of the Gujarat earthquake and Mumbai bomb blasts.
IFC has long since sold its equity stake in HDFC at considerable profit, but continues to do business with it, most recently on a $200 million project that is increasing its access to international capital markets and enabling it to bring its mortgage products to lower incomes groups.
If you have an idea for a “postcard from the past,” please email Celeste Diaz Ferraro at cdiazferraro@ifc.org.
