Growth in Housing Finance Market,

Quality of Assets and Customer Related Issues

April 20, 2012

Anil Sachidanand, CEO

Dewan Housing Finance Corporation

Limited

Evolution of Housing Finance Market in India

1971

Centralized direct credit

HUDCO established: Public Sector, wholesale lending

Pre 1970

Sub Prime crisis.Indian Mortgage Market shows resilience

National Housing Bank: Regulatory and supervisory body / refinancing agency

National Housing Bank: Regulatory and supervisory body / refinancing agency

1977

1st private sector retail housing finance institution established

1984

DHFL commences operations

1988 Late 80’s and Early 90’s

Public sector banks / insurance companies promote HFCs

Late 90’s

Commercial banks get active in direct lending for housing finance

2008

Source: Indian Housing Finance Market Outlook to 2015, Mindpower Solutions

2009-11

Microfinance institutions and foreign banks get active in the housing finance market.54 HFCs active in the market

Pre NHB Post NHB

Housing Finance Market Classification

HOUSING

FINANCE

MARKET

Banks Public Sector Banks

Private Sector Banks

Foreign Banks

Housing Finance

Companies

Development

Financial

Institutions, Co-op

Housing Societies

Micro Finance

Institutions

Insurance

Companies

LIC Housing Finance, GIC Housing Finance etc.

Key Players providing Home Insurance: New India Assurance,

National Insurance, ICICI Lombard, Bajaj Allianz, IFFCO-TOKIO, Tata

AIG etc.

DHFL, HDFC, GRUH, Indiabulls Housing Finance, Reliance Housing

Finance, Sundaram BNP Paribas, Religare Housing Development Corp

etc.

HUDCO, NABARD, SIDBI, Apex Co-operative Housing Federations,

State Co-operative Agriculture and Rural Development Banks etc.

Micro Housing Finance Corporation, MAS rural housing and mortgage

finance etc.

SBI, Bank of Baroda, Canara Bank,

PNB, Dena Bank, Bank of India etc.

Standard Chartered, Citibank, HSBC

etc.

HDFC Bank, ICICI Bank, Axis Bank,

ING Vysya Bank etc.

HFCs Continue to Register Strong Growth

Credit Growt

h

32%

50%

25%

23%

22%

13%

14%

8%

21%

13%

Market Share

Currently there are around 54 HFCs registered with NHB (19 HFCs are allowed to accept public deposits)

Share of HFCs in the mortgage market is expected to grow from 26% in 2005 to 36% in 2015.

The increase is attributed to the strength of their focused approach, targeting of special customer

segments, relatively superior customer service, and significant growth plans.Source: ICRA, Emkay Research

Are WE as HFCs Happy with the Growth ?...NO…Why?

Industry

Status

•Housing Finance Companies, though have a separate classification, industry

status given to them is still missing.

•Trade associations like FICCI, CII, ASSOCHAM etc. do not have a separate

housing wing for housing finance companies.

Lack of

Presence of

Business

Families

•Key Indian entrepreneurial families are not inclined to make housing finance

as one of their main business units.

•Eg: Mr. Kumar Mangalam Birla, Mr. Mukesh Ambani, Mr. Adi Godrej, Mr.

Anand Mahindra.

Limited

Capital

Market

Listing

•DHFL & HDFC have shown the way to be reckoned as premier housing

finance institutions tapping the capital markets. However, there is a dearth

of HFCs getting listed on the stock exchanges.

•No major Housing finance company listed in recent years.

New HFCs

still need to

grow

•New HFCs remain on the fringes and are best described as marginal players.

They are not able to make significant impact in the growth of the industry

Recommendations for Inclusive & Sustainable Growth

Inclusion

in Trade

Associatio

ns

• Facilitation by NHB towards building a trade association of HFCs.

• Inclusion of HFCs in major trade associations like FICCI, CII, ASSOCHAM

etc.

Support

the Growth

of New

HFCs

•Support from NHB to new HFCs in the market by bringing out action

oriented plans to ensure the scalability of these companies. This would help

them to enjoy strong and sustainable growth in future.

Entry

Facilitatio

n and

Enhanced

Borrowing

Powers

•Entry facilitation to the new players in the market.

•Overleveraging of CAR and enhanced borrowing powers to support the

scalability of existing as well as new HFCs.

Quality of Assets in the Indian Mortgage Market In India, we do not have Prime vs. Sub Prime !!!

There is NO need to follow practices of other countries that have different socio-Economic Culture.

Being risk averse by nature, an average Indian borrower is less likely to default on loan

repayments.

Comfortable loan-to-value and instalment/ income ratio with quality credit appraisal has ensured

growth with stable asset quality.

Major challenges in maintaining the quality of assets are:

Book keeping of loan customer accounts and Document safeguard / retrieval through

in-house/outsource model.

Quality of auditors with domain expertise stands missing.

Understanding that SARFAESI is not a threat but a facilitating mechanism.

Given housing finance a state subject, the quality remains subjective. Further , objectivzing end-

to-end operations of housing finance remains a big challenge.

Best managed companies on a larger balance sheet having efficient collection & recovery mechanism

operate at less than 0.50% of NPA

levels @ 90 days past dues.

Worst players have inefficiency in their collection & recovery efforts. Hence the quality of assets take a

beating. These companies operate at NPA levels in the range of 1.85-2.25%.

Asset Quality of HFCs Remain Upbeat

Source: Emkay Research

As discussed, the mortgage market has remained upbeat given the nature of borrower (being end-

user) and their risk-averse behaviour.

The mortgage demand is primarily dominated by first time home buyers and is not much

speculative in nature.

This is evident from the fact that even during the crisis period of 2008-09, GNPA for HFCs remained

well within their comfort zone.

Over the years, asset quality has shown material improvement driven by adequate appraisal systems

and effective recovery mechanism. Also, through stringent provisioning norms, NHB has ensured

adequate cover.

Customer Service - A Serious Challenge

• Indian mortgage market is majorly characterized by first time loan borrowers with a

conservative mindset.

• Technical jargons and use of heavy language is not well understood by most of the customers.

• Educating the customers about the home loan products in simple and easy to understand

language remains the key.

• Biggest challenge for HFCs is to provide quality service to all the customer classes as per their

needs.

Customer Diversity Across Income Levels

• Customers behave differently across income levels on various business parameters

• It is important not to lose sight of customer’s needs and wants. Organization psychology needs

to be aligned with the same.

Property Purchasing

Decision

Sensitivity to

Interest Rate

Emphasis on

Quality of Service

Judging Creditworthin

ess

Financing Options

Investment / End Use Driven

Highly Sensitive

HighestEasyMany

Comparatively Less

Very Few

Relatively Easy

Difficult

Relatively Less

Sensitive

Not Sensitive

Relatively High

Relatively Less

End Use Driven

End Use Driven

Recommendations to Enhance the Quality of Customer Engagement

Is there a need felt to have only approved mortgage brokers / originators towing to

regulatory guidelines?

Need for an escalation mechanism similar to IRDA for wrong selling / commitment of

home loan products?

Guidelines for superior customer service in order to enhance customer engagement

Penalty for non service / wrong service

Should it hit the rating of Housing Finance Companies?

Should it affect the refinancing option available?

Should customer service be made an important and uncompromising business

parameter for all HFCs?

Responsible lending along with superior customer service would ensure

satisfaction of all the stakeholders in the mortgage market and contribute towards

sustainable growth

THANK YOU

As the first milestone, mortgage as a % of GDP should be increased to 20%

by 2020

Can we all together do it with NHB & RBI as the guardian of the industry?