HDFC is 36 years old. The journey has been fulfilling, having
cumulatively financed over 4.4 million units. Each customer has a
different story, yet the end goal is the same - that of becoming a
homeowner. We understand the pride of home ownership. Each day as we
serve our customers, we consider ita privilege to helpthem fulfil
theirdesire of owninga home.
We remain optimistic about the future of our business, knowing that
more Indians are able to afford their own homes as their incomes and
aspirations keep rising. When we started business in 1977, there was a
lot of scepticism. Till then, no institution in India had attempted to
provide individuals with funding to buy a home. There was no regulator,
no credit bureau, access to long-term funding was hard to come by and
foreclosure norms did not exist. Today, we function in a far more
robust financial environment.
Housing Finance on a Strong Footing
Change across the Indian housing finance sector has been gradual, but
when looked at holistically, the benefits have been immense. A stable
regulatory environment and the establishment of institutions to support
housingfinance have helped strengthen the sector.
The housing finance sector in India has been well regulated between the
Reserve Bank of India and the National Housing Bank. The best testimony
to this was the timely intervention of the regulators in the pre-global
financial crisis period. In order to ensure that there was no build up
of asset bubbles in the Indian financial system, the regulators
prohibited banks and housingfinance companies from providingfundingfor
land transactions. In addition, the regulators imposed counter cyclical
provisioning norms and risk weights, which insulated the financial
system. Globally, financial regulators have come under severe criticism
for their inability to have anticipated the impact of real estate
bubbles on their financial systems. India, however, stands as an
exception and due credit must go to the regulators.
The financial architecture created to support housingfinance has helped
the business tremendously. For instance, till the year 2000, there were
no credit bureaus in India. Today, there are four established credit
bureaus. HDFC had the privilege of being one of the promoters of the
first credit bureau in India. The greater milestone, however, has been
that people are now more conscious ofthe importance of maintaininga
good credit history. As customer records with credit bureaus have
increased manifold, lenders are able to increasingly rely on credit
scores to check an individual''s credit history prior to lending. This
strongly supplements the credit appraisal process.
The setting up of the mortgage repository, CERSAI, has been a step in
the right direction. CERSAI was set up with the prime objective of
preventing frauds involving multiple financing by different lenders
against the same property. Further, the recent collaboration of CERSAI
and credit bureaus will benefit lenders because there will now be an
integrated platform to view both, a borrower''s credit score and check
the encumbrance status of a property at one go rather than shuttling
between two platforms.
Another landmark was the enactment of the SARFAESI Act, 2002. Till
then, there were no foreclosure norms in India and the only way to
recover a loan from a defaulter was through the civil courts, which
were fraught with endless delays as courtroom procedures could take
years to reach a conclusion. SARFAESI has proved to be an effective and
speedy recovery mechanism. It is particularly useful in the case of
wilful defaulters. This act has helped to contain non-performing loans.
The government on its part too has played a supporting role for
housingfinance. This has been through continued fiscal incentives on
both, the principal and interest component of a home loan. In the Union
Budget 2013-14, a furtherfillip was given to first time homebuyers who
are now allowed an additional one-time benefit of interest deduction up
to Rs. 100,000 on a home loan. Such fiscal incentives help in
reducingthe effective cost of a home loan fora borrower.
The avenues for raising long-term funds for housing finance companies
have improved significantly. Earlier, longtenorfunding was hard to come
by. However, with the opening up and growth of the insurance sector in
India, the investor appetite for long term bonds has increased. The
investor base in the bond markets too has widened to include banks,
insurance companies, pensions and provident funds, mutual funds and
foreign institutional investors. Bonds now constitute an important
source of fundingfor housingfinance.
The environment for housingfinance in India has never been more stable
and this puts the future of the business on a surer footing. In FY 2013
- a year that witnessed India''s lowest GDP growth in a decade, the
growth in individual home loans remained strong. The demand for home
loans is immense given the acute shortage of housing. Being
increasingly convinced that the worst is probably behind us, the future
outlookforthe housingfinance sector is extremely promising.
Nonetheless, it is important to safeguard the housing finance market
and ensure that it continues to grow in a prudent manner. Regulators
need to be vigilant and have their ear to the ground. Customers must
understand the risks entailed in the products they opt for and lenders
should fulfil their obligations of responsible lending. Red flags must
be raised if schemes or products are detrimental to the system as a
whole. Unhealthy business practices can infiltrate into the system due
to the herd mentality instinct and business compulsions. However such
breeding grounds must be nipped in the bud.
As a basic tenet, construction finance entails higher risks and
therefore such risks have to be built into the pricing. Construction
finance should not, through any innovative structuring be available to
developers at the rate of interest being offered on individual home
loans. Further, complete up-fronting of construction finance to
developers, even before the ground is broken is dangerous.
To my mind, teaser products, of any nature entail risks. Customers need
to be cautious of ''too-good-to-be-true'' type of products. Borrowers
must not be blinkered into believing that there are no risks when
developers offer to pay interest on a borrower''s loan for a specified
period. Borrowers have to be cautious because in the event of a
developer delaying payment, the credit bureau reports will reflect this
in the borrower''s records, thereby impacting his or her
creditworthiness. Ultimately, developers need to recognise that in the
long-run, it is to their advantage to allow a correction in prices
which will help their cash flows.
Increasing Supply and Removing Bottlenecks
Solutions to the acute housing shortage in the country have been
discussed endlessly though action remains slow and sputtered.
Havingspentso many years in this business, one recognises that one''s
voice can never be loud enough when so many vested interests exist as
far as land markets are concerned. Nonetheless, I am of the firm belief
that one must not give up or be beaten down to silence. At the cost of
perhaps now sounding like a broken record, I continue to hold the
stance that increasingsupply is the only way home prices can come down
in India. Even in Tier II and Tier III cities, home prices are
On an optimistic note, however, it is worth recognising the efforts of
a new breed of entrepreneurs and first time developers who have
ventured into the affordable housing space. Such projects may be few
and far between, but the trend is encouraging because this is where the
real demand lies. Most of these affordable housing projects have been
sold out immediately. Hopefully, the more established and larger
developers will take a cue and focus on the affordable housing segment,
ratherthan high end luxury homes that they currently caterto.
As far as legislation to improve transparency in the real estate sector
is concerned, it once again is the unfortunate case of the proverbial
one step forward, two steps back. Various attempts have been made to
revive the Real Estate (Regulation and Development) Bill. The case for
a real estate regulator remains compellingto protect homebuyers and
ensure transparency on the part of developers. Developers continue to
lobby against the bill as they consider it far too draconian and claim
that this would be one more deterrent in the long drawn out process of
obtaining approvals. However, there is no denying how imperative it is
to cleanse the real estate sector which has been characterised by
opaqueness, speed money, vested interests and complete lethargy on the
part of the authorities in granting approvals. Why should construction
permits take two years to obtain for a residential housing project and
why can there not be a single window clearance mechanism? These have
been constant questions raised with no answers. While getting a real
estate regulator in place requires Parliamentary approval which may be
difficult in the current milieu, implementinga single window clearance
isanadministrativejoband is clearly doable.
Ironically, the country is still left with a Land Acquisition Act that
is over a century old while the new Land Acquisition Bill is being
debated for over a decade, having been tossed over three different
governments. The fate of the bill is now uncertain and this is
extremely regrettable since recently, consensus was achieved with the
Opposition on the bill. However, a disruptive Parliament once again
rendered this effort fruitless.
Meanwhile, many states have made good progress in terms of
computerising land titles. While these reforms happen more silently,
they are noteworthy. Land is a state subject and one hopes that some
progressive states will eventually see merit in piloting single window
clearances, at least for residential housing projects.
Onward, Upward and Homeward Bound
This is the theme that we have chosen for our annual report this year
and it signifies HDFC''s journey, confidence and optimism. HDFC''s
journey which began as India''s first retail housing finance company
has today diversified into an array of financial services. The
confidence stems from the fact that HDFC, along with its group
companies have maintained leadership positions in their respective
sectors. The optimism reflects our strong belief that the India story
will get better. No doubt, India is a complex and challenging market.
It is dynamic and exciting, yet often unpredictable and slow to reform.
Despite a series of recent set-backs in the Indian economy, consumer
confidence has remained steady. The middle-class segment is growing,
there has not been widespread loss of jobs and incomes of our target
customers have been rising. Penetration in all our businesses - be it
mortgages, banking, insurance or asset management is still low in
India, so these markets have immense scope to grow.
From an investor perspective, HDFC must now increasingly be analysed on
a consolidated basis. We at HDFC have spent a lot of time and effort
incubating and nurturing many of our group companies. Today, they are
all growing well. In FY 2013, the share of profit from subsidiaries and
associate companies was 27% of the consolidated profit, compared tojust
13% in FY2010.
Let me end by saying that we at HDFC are driven to constantly improve
our services, remain committed to creating value for all our
stakeholders and continue our journey onward, upward and homeward