What does it take for a company to be resilient in the face of turmoil? This is a question most investors have on their mind. The latter half of the financial year 2019 was challenging for several sectors across the Indian economy as liquidity tightened, risk averseness built up and consumption slowed.
As a forty-two year old company, HDFC has witnessed various market cycles and navigated through booms and busts. Each of these extreme market cycles have been different from the previous ones, but there have always been invaluable lessons learnt.
HDFC’s advantage has been its access to diversified resources. We tapped into new lenders through external commercial borrowings and masala bonds. Our strength has been our ability to seamlessly straddle between wholesale and retail funding. They say, little by little, a little becomes a lot. This best characterises the growth in our retail deposits. We cannot be more grateful to the thousands of small investors who entrust their hard-earned savings with us.
Reflecting back, in the first half of the financial year, we were often asked why we were not growing as aggressively as others in certain segments of the commercial real estate market. We held our ground by consciously staying away from funding what we perceived were riskier assets. Unsurprisingly, in the second half of the year, we were asked what we did differently that enabled us to stay resilient and be the preferred choice in the flight to safety. Perhaps a combination of experience and adhering to our risk appetite held us in good stead.
In the current environment, we have had to work extremely hard to preserve asset quality. While our non-performing loans have been considerably lower than several others in the financial sector, we know we cannot rest on these laurels.
We try to err on the side of caution in our non-individual lending, but admittedly, we did make a few wrong calls and underestimated certain risks. Many would agree that this is par for the course in any lending business. Yet, we know that stakeholders value us for our transparency and we will not compromise or shy away from owning up to genuine mistakes.
In instances where we have had to write off loans, it has been done only after we have exhausted all possible options. Barring these few loans, our ethos of being conservative in our financial decisions has paid off. We know that the best time to save for a rainy day is when we have windfall gains. This has ensured that we always have adequate buffers for contingencies.
BEYOND THE FRAMEWORK OF RULES, ETHICS AND PRACTICES MUST LIE THE SPIRIT OF FAIRNESS AND CONSIDERATION.
As I look back over the years, I have the satisfaction of knowing that it has been a rewarding journey at HDFC. Though we won more and lost some, we always did it with soul and the conviction that it must be the honest path to take. It is tempting to be propelled towards earnest and rapid growth, often missing the fine print of transparency. It is also difficult to swim against the rapacious tide of expediency. Yet, whatever be our trajectory, it has been underscored by values, ethics and uncompromising principles.
When markets are nervous, the strength of long-term relationships are put to test. We have not turned our back on customers who have honoured their commitments, but now find themselves trapped in a quagmire of risk averseness. Some of these relationships have been nurtured for three decades or more. Lending is our bread and butter business. Yet, in unusual times, we know we must not be gripped with fear but continue to do what we perceive is right with conviction and courage.
Financial markets work on trust and confidence. If lending institutions do not get the support or find the courage to lend, then who will fund India’s growth aspirations and who will build India? Rightly so, the Indian financial system is moving to a new landscape, backed by a stronger regulatory and supervisory framework. This may entail recalibration amongst all players, but it will provide stronger safeguards at a systemic level.
I remain confident that the new government along with the regulators will prioritise re-instilling a culture of trust across the Indian banking and financial sector. Culture always precedes positive results.
RETAIL HOME LOANS REMAIN THE BRIGHT SPOT. HOUSING HAS BECOME DISTINCTLY MORE AFFORDABLE. GROWTH HAS BEEN DRIVEN BY VOLUME AND THIS IS THE KEY REASON FOR OUR OPTIMISM.
Amongst retail finance in India, home loans continue to stand out - both, in terms of growth and asset quality. For us, it has been rewarding that our growth has come from increased volume rather than large-ticket loans. This is reflective of two key aspects - we are successfully penetrating deeper into the market and the pipeline of supply of houses at affordable price points is getting stronger.
Housing remains a key priority area of the new government. We look forward to supporting the government’s mission of striving towards ‘Housing for AH’. We are indeed proud of our achievement of garnering over 100,000 customers who are beneficiaries under the Pradhan Mantri Awas Yojana - Credit Linked Subsidy Scheme (CLSS) - a housing scheme launched by the Prime Minister of India. HDFC is the first housing finance player to have achieved this target. To my mind, the CLSS is amongst India’s most effective and well executed welfare schemes for housing. The success of the scheme lies in offering first-time homeowners a small helping hand when they need it the most. Due credit must be given to the government for facilitating this scheme, but more importantly, for recognising the central role housing plays in an economy, in job creation and in providing a strong sense of security to people. We look forward to a continued partnership with the Ministry of Housing and Urban Affairs and the National Housing Bank in increasing the number of beneficiaries under the scheme.
The individual home loan market in India is dominated by a few financially strong players. Competition is good for us - it keeps us alert, on our toes and pushes us to constantly raise the bar in increasing our reach and improving our customer service.
So far, the housing market in India has been looked at from the lens of India’s young demographic profile. With 65% of the population being under the age of 35 years, this trend is likely to continue.
There is another demographic aspect that India now needs to focus on. The population of senior citizens in India is expected to grow to 173 million by 2025 - a growth of more than double in a decade’s time. By 2050, India is estimated to have 240 million senior citizens. The Ministry of Housing and Urban Affairs has demonstrated foresight by issuing model guidelines for development and regulation of retirement homes for senior citizens.
These guidelines deserve more attention than they have got so far. The model guidelines call for a tripartite agreement between the developer, resident of the retirement home and the service provider. The service provider’s role is to offer customised services to senior citizens such as medical, security, infrastructure, house-keeping, amongst others. One hopes the housing ministry will take up the responsibility to ensure that every state in India adopts these guidelines. This in turn would help widen the bouquet of housing finance products.
OUR RESOLVE IS TO KEEP ENGAGING DEEPLY WITH OUR STAKEHOLDERS AND MEET RISING INVESTOR EXPECTATIONS.
We appreciate the efforts of shareholders who engage with us - not just from a perspective of being an investor, but also discussing broader issues of contemporary corporate governance and how we can better serve our communities. We recognise the benefits of ensuring that our management always stays accessible to discuss HDFC’s performance, the impact of the changing macro environment on the organisation and articulating our long-term strategic plans.
Our belief is that shareholders are best served when they exercise their judgment and vote on resolutions based on substance and on a case-by-case basis rather than entirely outsourcing this effort, which is often an algorithm based one-size-fits-all approach.
We have gradually refreshed our board with independent directors who bring to the table core skills and perspectives that will help us steer our path in the current environment. We reiterate that this is still an on-going process.
I also believe it is important to articulate the role of HDFC’s executive directors in the context of their directorships in HDFC group companies. The objective of having these directorships is to best protect the interests of HDFC’s shareholders. HDFC is the parent company and has investments in its subsidiary and associate companies. Taking care of our strategic investments is a core function at HDFC. So to reiterate, directorships of HDFC’s executive directors in HDFC group companies is an extension of their responsibilities at HDFC. It would be erroneous to construe these directors as being over boarded.
Our board does review the outside involvement of our executive directors to ensure that the balance between broadening their perspective and managing the demands on their time is optimal.
I offer my assurance that the external directorships held by our executive directors in no way impinges on their responsibilities at HDFC. Many of our shareholders, both large and small regularly interact with our executive directors and perhaps can vouch for this as well. Keki, Renu and Rangan are outstanding professionals and are rightfully being recognised for their capabilities.
As far as India is concerned, it is important to stay optimistic and recognise that the economy will tide over some of the short-term challenges. This should not take away focus from the broader picture that India stands tall today. Several countries are in the midst of a political storm, while India has voted decisively for stability and continuity. This is a strong mark of confidence and India stands ready to welcome patient capital seeking to earn attractive returns to fund its growth ambitions.