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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 help them fulfil their desire of owning a 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 housing finance 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 housing finance companies from providing funding for 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 housing finance 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 of the importance of maintaining a 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 housing finance. 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 further fillip 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 reducing the effective cost of a home loan for a borrower.
The avenues for raising long–term funds for housing finance companies have improved significantly. Earlier, long tenor funding 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 funding for housing finance.
The environment for housing finance 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 outlook for the housing finance 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. Having spent so 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 increasing supply is the only way home prices can come down in India. Even in Tier II and Tier III cities, home prices are inflated.
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, rather than high end luxury homes that they currently cater to.
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 compelling to 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, implementing a single window clearance is an administrative job and 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 to just 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 bound.