MANAGEMENT DISCUSSION AND ANALYSIS

Indian Economy

The Indian economy has been witnessing a steady rise in GDP since the change took place in the central legislature last year. The economic value-added for the FY 15-16 stood at 7.6%,showcasing the impact of reforms brought in by the new government . In order to continue India’s strong growth trajectory in the years to come, the government has been working on several monetary policies and reforms. The inflation rate stood at 5.39% as of April, 2016, which is marginally higher than the government’s target of 5% for the fiscal. On the other hand, the Reserve Bank of India (RBI) has cut down bank interest rates for borrowing to 7% w.e.f. April 2016.

Currency volatility

The Indian Rupee has further debrciated and as per the recent data, USD’s valuation has been raised by 7.63% in the current financial year. As a result, more foreign investors are willing to yield benefits from the golden opportunity of investing in India. With the recent positive reforms proposed in the real estate sector, investing in the sector is indeed a welcome proposition for the foreign investors.

Industry overview

Real estate scenario

The real estate sector is amongst the most profitable and growing sectors in India. After agriculture, real estate sector is the second highest employer in the country. Currently, about 7% of the nation’s GDP is contributed by real estate sector, which is estimated to increase to about 13% within 2028. In FY 14-15, 50% of all the investments made in India are concentrated in the real estate sector, as compared to 26% in FY 12-13. In terms of impact on all other industries, the construction sector ranks 3rd out of 14 major sectors. It is expected that the market size of the Indian Real Estate is to increase at a Compound Annual Growth Rate (CAGR) of 15.2% between FY08 and FY28. Currently, the market value of the industry is US$ 93.8 billion as in H1 FY 14-15. The market size is projected to reach US$ 180 billion by FY 19-20 and US$ 853 billion by FY 27-28. Currently, the urban population of India consists of more than 400 million people.

The number is estimated to reach about 814 million by 2050. Therefore, the demand for adequate homes is all set to witness a boost in the upcoming years. (Source: IBEF)

Given the rising credibility of the real estate industry, more and more money has been invested in the sector for the last few years. As per the IBEF reports as on September 2015, the Private Equity (PE) funds have invested nearly US$ 2.4 billion in real estates in about 53 transactions. In comparison to that, during the same period last year, PE investments counted US$ 1.3 billion across 57 transactions. In Foreign

Direct Investments (FDI), real estate is the fourth largest sector as far as inflow is concerned. The Indian

Government has allowed up to 100% FDI for township projects and settlement developments. With the passing of Real Estate (Regulatory and Developement) Act, 2016 w.e.f. May 01, 2016, both the house builders and consumers are to be benefitted with better governance and more transparency. It is estimated that this Act is about to boost demand for homes among people and hence demand for housing loans will increase.

Residential Estates

During the first half of FY 14-15, the volume of sales of residential projects had dropped by 19% as compared to that of the brvious year. On the other hand, the launch of newer projects witnessed a huge downfall of 45% in the same period.

As far as new property launches are concerned, Bengaluru emerged as one of the better performing markets. This metropolitan city witnessed the highest launches of 15,000 units, followed by Ahmadabad and Pune with 13,000 and 12,000 unit launches respectively. In Bengaluru, most launches were made in the H5-7.5 million luxury segments, while the market witnessed the lowest launches, i.e. 2% in the affordable segment of less than H2.5 million. On the other hand, Mumbai witnessed about 50% of its residential property launches below H5 million ticket sizes. In terms of affordability, National Capital Region (NCR) tops the chart.

About 57% of the total new launches in NCR are below the ticket size of H2.5 million. In order to provide affordable housing to more people and to boost the supply, the Indian government has announced several new schemes in the Budget FY 15-16. The ministry has proposed to allow 100% deduction in profits for projects that do not exceed 30 sq m in metropolitan cities and 60 sq m in other cities in India. The proposal is mainly to achieve the government’s vision of ‘Housing for All by 2022’. Under the policy, about 20 million houses are planned to be developed within 2022 in urban areas and 20 million houses in rural areas. Government has come out with Credit Linked Subsidy Scheme (CLSS) under Pradhan Mantri Awas Yojana (PMAY

Housing industry

In India, about 90% of the total demand for housing is constituted by demand for affordable homes. The recent announcements made by the Finance Minister would certainly boost the confidence of house builders and at the same time provide shelter to many. Apart from the

’Real Estate Regulatory Act, there are certain other initiatives taken by the government for uplifting the Indian housing sector. ‘Housing for all’ vision is expected to attract investors to build more houses in both rural and semi-urban areas. On the other hand, the smart city project is about to develop infrastructure in 100 cities. In addition to that, the Atal Mission for Rejuvenation and Urban Transformation

(AMRUT) policy initiated by the government is likely to boost the infrastructural growth of the nation by developing 500 cities across the country. Implementation of such policies would not only make the environment healthy for the investors and home seekers, but would increase the demands for home loans. Hence, the Real Estate sector has ample opportunities ahead that has to be utilised in order to increase its GDP contribution.

Key drivers of growth of the real estate sector

• Rapid Urbanisation: Government policies together with growing demand for housing for all has set the tone to boom the future growth of the industry, as more people are interested to shift in urban areas.

• Easy availability of financial assistance: With more NBFCs replacing the need for banks and various corporate tie-ups between the builders and the HFCs, it can be estimated that the growth of real estate would be driven in the near future.

• Rise in number nuclear family units: Joint families are not on verge of extinction, but the rate of their existence has come downwards over the last 10 years. With growing number of nuclear units, more houses would be needed to meet the demand.

NBFC Industry

While the market share of NBFCs in the housing finance industry for the FY 08-09 was 26%, it has increased to 38% as on December 2015. On the other hand, share of banks has, therefore faced a downfall from 74% in FY 08-09 to 62% in FY 14-15.

According to the reports of ICRA, the outstanding total housing credit has already crossed H11.4 trillion as on September 2015, as compared to Rs.10.5 trillion on March 2015. Hence, the sector witnessed an annualized growth rate of 17% during the first half of FY 15- 16, which is up from 14% in the Q1 FY 15-16. However, the growth is likely to rise further in the recent years to come. During the period between 2005 and 2015, the share of credit for the Non-Banking Finance Companies (NBFC) has increased from 10% to 13%. However, the NBFC’s share of the Indian GDP, i.e. 13%, is much lower as compared to that of economies such as Malaysia and China at 26% and 33%, respectively. Such a situation in India is undoubtedly an opportunity for the Indian NBFCs to contribute more to the nation’s GDP in the near future.

Non Performing Assets

Gross Non-Performing Assets (GNPA) for the overall sector stood at 0.78% for the Rs.1 FY 14-15 which is marginally higher than brvious year’s GNPA of 0.74%. More and more financial players are specializing in providing riskier services/products such as loans against property, builder loans, etc. Such deals often come with a danger tag and to some extent bad debts has resulted in the rise of NPAs in the banking and financial sector. With more self-employed people under volatile income levels taking loans, sometimes repayment of the same has been delayed. According to estimated projections, GNPA for HFCs is projected to be around 0.8%-1.2% in FY 16-17. (Source: ICRA)

Profitability of NBFCs

In the last decade, the NBFCs have shown a better performance than banks in terms of profitability. While the NBFCs have been able to show steady growth and its return on equities stood on 15% in FY 14-15, the same for the banks has been slightly above 10%. In a study of 10 years report, the NBFCs have outperformed the banks by a margin of 1.6% on average. (Source: BCG) Growth drivers of the housing financing sector

Growing economy: The Indian economy has shown resilience in the face of global downturns, emerging as one of the fastest growing economies in the world. This shall augment rise in per capita income and lead to growing disposable income.

Growth in the need for credit: In the recent years, more people are willing to afford a home of their own. In such a scenario, HFCs are expected to play a greater role in meeting credit demands and ensuring people meet their aspirations.

Reduced risk: Investment in real estate is often viewed as a safe passage for those who want to see increase in valuations of assets within a period of time. Generally, a property does not lose its value depending upon the market fluctuations. Rather, it apbrciates with time. Hence, it can be expected that in the coming years when the government is all set to boost the real estate industry, more people would come forward to buy properties.

Rising urban population: By 2050, the urban population is set to reach more than 814 million, an increase about 400 million from the current level.

Government policies: The new government has set goals of providing housing infrastructure to a large cross section of society. If everything goes according to plan, initiatives such as ‘Housing for All by 2022’, ‘AMRUT’, etc. are expected to boost real estate, which in turn would benefit the housing finance industry in the years to come.

Weakness

Housing paradox: One of the major weaknesses of the housing sector is that during last few years, it has been seen that a number of houses being built without getting booked. This is often leading to a paradoxical situation where people do not have shelters, and on the other hand numerous houses do not have people to live in. As a result, somewhat the opportunity of the NBFCs is weakening

Delays in Project approval: During the last decade, there have been instances when several home buyers faced the issue of project delays. Project delays can happen mainly either because of delay in the building process, or due to quality check. On the other hand, there have been situations when several state governments have delayed the licensing process for building a property, even after the builders have collected money from their clients. Nearly 45% of the projects in Mumbai offered to buyers in 2014 are incomplete and in Delhi-NCR, a whopping 78% of projects are yet to be completed. This particular situation has resulted to the fall in demand amongst the buyers, given the fear related to the payment of both EMIs and house rents. Such a scenario has to be controlled in the near future in order to boost the credibility of the industry. However, the ‘Real Estate Regulatory Bill’ is expected to address the needs of the buyers with adequate measures. (The Economic Times)

Opportunities

Digital brsence: With digital platform been sbrad across the territories of India, more people are getting into the virtual universe. Today, a simple mobile applicatio is all that a consumer needs to meet his/her demands. With increased technology usage and better digital penetration, HFCs can grow like never before. The ‘Digital India’ initiative is estimated to increase the rate of internet usage in India by supplying affordable technological devices to rural areas. Hence, an opportunity is being built slowly for the Housing Finance Companies to penetrate into a greater audience.

Increasing demand for lands in suburbs: With the metropolitan areas getting over populated, more people are willing to reside in suburbs where peace brvails. In order to keep meeting the consumer demands, more builders are developing projects in suburban areas. Such a situation can result to be a growth indicator for the HFCs, as more people are exposed to the need of adequate home loans.

Growing population: It is estimated that the total population of India would beat that of China by 2030. In the upcoming years, thus growing population would need to be addressed with adequate housing facilities. Therefore, need for financial assistance would be felt like never before.

Development of smart cities: The government has published a list of 100 smart cities that are to be developed in the coming years. They have also allotted billions of dollars for the development of such projects. When cities would be built, demand for accommodation is about to rise. Thus, a scope for housing finance sector can be noticed.

Threats

Unavailability of land: With the population rising at a faster rate, most of the urban areas in India, (especially the metropolitan areas) are witnessing shortage of land for better housing solutions. Thus, in many areas it has been a challenge for the HFCs to gather clients in over populated areas, thus facing an impact on their margins.

Increasing price of land and property: With the unavailability of urban land, the price of the same is rising. Price hike is not only increasing the cost of building property, but also restricting a number of buyers from purchasing land. Moreover, property seekers are willing to invest in real estate in developing areas, given the chance of increased valuation of their land with the course of development. If such a situation is not controlled in the recent years to come, rising land prices can prove to be an important threat for the industry.

Business Review

Lending Operations

Industry overview

Demand for housing loans continued to sustain in FY 15-16 primarily due to three reasons:

• Controlled inflation rates

• Declined interest rates by the Reserve Bank of India

• Increasing affordability to buy homes

While inflationary measures have been kept under control, the liberal monetary policy and positive reforms have helped in reduction of borrowing /funding cost for the Housing Finance Companies (HFCs).

During the current financial year, the RBI reduced its lending rates at different phases, with an ambitious target of achieving 5% inflation by 2017. It also endeavoured to keep the real interest rate benchmarked to 1-year Treasury Bill rate of 1.5-2%. This resulted in a decline in base rates by several banks and HFCs as well. Can Fin Homes Limited (CFHL) reduced the lending rates upto 1.25% as on October 7, 2015 in order to gain a competitive edge in the Indian housing finance sector. Based on the difference in needs of customers, your Company has structured the pricing of loans depending on the type of employment, i.e. salaried / professional, self employed, etc.

During FY 15-16, the Company sanctioned housing loans and other loans worth Rs.4,418 Crore compared to brvious year’s Rs.3,670 Crore, registering a growth rate of 20%. The cumulative amount of loans sanctioned till March 31, 2016 since inception stood at Rs.20,911 Crore. On the other hand, the amount of disbursed loans for the FY 15-16 has been Rs.3,922 Crore (compared to Rs.3,346 Crore in FY 14-15). Since inception till March 31, 2016, the total disbursements stood at Rs.18,291 Crore. The Company has been able to achieve this through a steady increase in branch network across our area of operations. The Company closed the financial year with a total of 140 branches/satellite offices, steadily rising from 117 branches/satellite offices as stood in the brvious year.

When it comes to sanctioning and disbursing loans to individuals of different income levels, CFHL is committed to serve the middle income class to a greater extent. The Company has sanctioned 32% of loans to customers earning up to Rs.5 Lakh per annum. On the other hand, customers earning Rs.5-10 Lakh per annum constitutes 43% of the total outstanding amount

Loan Portfolio

The Company has a diverse portfolio/products in terms of its loan offerings. With a total of 17 loan products, it ensures customisation for its customers as per their needs. The loan portfolio includes:

I. Housing Loans

1. Housing Loans to Individuals (IHL)

2. Loans under Urban Housing (LUH)

3. Gruhalakshmi Rural Housing Scheme (GRHS)

4. Composite Loans

5. Staff Housing Loan (SHL)

6. Site Loans

7. Line of Credit (LOC)

8. Special Urban Housing Refinance Scheme - Direct

9. Special Urban Housing Refinance Scheme – Indirect

10. Commercial Housing Loans (CHL)

11. Builder Loans

II . Non-Housing Loans

12. Mortgage Loans (ML)

13. Personal Loans (PL)

14. Loans for Commercial Property (LCP)

15. Loans Against Rent Receivables (LRR)

16. Loans to Children’s Education (LCE)

17. Flexible Loan against Property (Flexi-LAP)

While the entire HFC sector is estimated to have grown around 17% during FY 15-16, the growth rate of CFHL has been 29%, as the loan book increased to Rs.10,643 Crore from Rs.8,231 Crore in FY 14-15. The growth of housing loan segment (Book size) has witnessed a growth of 29% in FY 15-16, while the non-housing segment registered 39% Y-o-Y growth. In terms of share, 88% of the total loan register comprises of housing loans, while 12% is covered by the non-housing segment. As far as operational geographies are concerned, the southern part of India covering Tamil Nadu, Kerala, Karnataka, Telangana and Andhra Pradesh contributed 76% of the total sanctions

The Company’s concentration has been mainly on retail lending, as the small to medium ticket loan book amounted to Rs.10,568.57 Crore . On the other hand, big ticket loans (outstanding > Rs.1 Crore) amounted to Rs.74.43 Crore. The average loan ticket size provided by the Company in FY 15-16 is Rs.17.36 Lakh for HL and Rs.13.00 Lakh for NHL. While builder loans constitute 0.28%, mortgage loans comprises 5.92% of the total outstanding in the FY 15-16

The power of sanctioning loans at CFHL, up to a certain limit based on the cadre of the Branch-In-Charge, has been delegated to the heads of respective branches established across the country. However, the eligibility criteria to the disbursement of loans is clearly mentioned and highlighted in the Company’s credit policy. The proposals falling outside the purview of branch sanction limits are referred to the different delegated authorities at the registered office of the Company. During FY 15-16, 92% of loans i.e. Rs.4,070 Crore has been sanctioned at different branches of CFHL, while the remaining 8% is decided at the registered office which accounts to Rs.348 Crore.

Marketing and distribution

CFHL has been successful in expanding its brsence in different parts of the country. The satellite offices launched by the Company have been attracting more business opportunities, as it has reached several potential areas that were not possible to access a few years back. In addition to that, operational cost of maintaining an office is also reduced to a large extent with the advent of the Company’s satellite offices. During FY 15-16, CFHL has opened 3 new branches and 20 satellite offices, which increased the total number of branches and satellite offices to 110 and 30 respectively. Further, as per our branch expansion plan of the Company for FY 16-17 (175 locations), we have, on April 21 2016, opened 7 branches and 20 Satellite Offices increasing our tally to 167. The Company has opened three branches during May 2016 and the branch/satellite offices number stands now at 170. In order to strengthen the marketing and sales operations of the Company at grass root levels and to penetrate deeper into the market, the services of Direct Selling Agents (DSA) are being taken by the Company. However, the DSAs provide leads to the Company, while the technical tasks such as credit and legal aspects are monitored by the higher officials. The number of active DSAs working for CFHL amounts to 638. About 53% of the total business sanctions are been sourced by them in FY 15- 16 as compared to 57% during brvious FY 14-15.

Funding Sources

In order to meet the demand of the customers, CFHL borrows from different banks, NHB, public deposits, NCDs, commercial papers, etc., in addition to its ploughed back earnings/profit. As per the financial books as on March 31, 2016, the borrowings of the Company amounted to H9,478 Crore, as compared to Rs.7,375 Crore.

(a) Refinance from NHB: During FY 15-16, the Company has borrowed fresh finance of Rs.630.64 Crore, which took the total outstanding finance to Rs.3535 Crore as on March 31, 2016 as compared to the brvious year’s outstanding total of Rs.3220 Crore. CFHL has also availed loans from Rural Housing Fund amounting to Rs.400 Crore during FY 15-16 at ROI 6.87% & 6.12%. The total amount outstanding at the end of FY 15-16 is Rs.3535 Crore.

(b) Bank borrowings: CFHL use to borrow money from banks at base rate. However, the cost related to such borrowings exceed as compared to interest rates of NCD/CP. Thus, we have shifted our focus slightly away from banks. This has reflected in the percentage of the Company’s borrowing through banks, which is 27% as compared to brvious year’s 31%. The lenders, amongst others include SBI, Bank of Baroda, Oriental Bank of Commerce, Federal Bank, HDFC Bank and HUDCO. However, the principal banker of the Company continues to be Canara Bank, which the sponsor of CFHL. At the end of FY 15-16, the aggregate of term loans for the Company amounts to Rs.2,020.31 Crore. (Canara Bank, HUDCO, SBI, Bank of Baroda, HDFC Bank).

(c) Commercial papers: CFHL has been mobilising funds through commercial papers (CP) on a regular basis since the brvious financial year. The ICRA has rated CP as A1+, since these papers can be considered to be extremely safe when it comes to payment of financial obligations. Hence, the Company is looking forward to increase its share of borrowing money through CPs in the coming years. During FY 15-16, CFHL raised funds amounting to Rs.3,720 Crore and repaid about Rs.3,695 Crore, leading to a year end outstanding amount of Rs.1,000 Crore.

(d) Secured NCD: In FY 15-16, the Company has issued Rs.1540 Crore through Secured Non-Convertible Debentures (NCD) at competitive rates. Several rating agencies such as such as M/s India Ratings & Research Pvt Ltd (FITCH), M/s CARE Ltd and M/s ICRA Ltd have rated our NCDs as “AAA”. The amount outstanding as on March 31, 2016 is Rs.2090 Crore.

(e) Deposits: As on March 31, 2016 the outstanding deposit amounts to Rs.221 Crore, inclusive of accrued interest as compared to brvious year’s Rs.222. The Company’s deposit scheme has earned the ratings of “MAAA” from ICRA Ltd.

Credit Ratings as on March 31, 2016

“MAAA” by ICRA for its Deposit Schemes

“AAA” by CARE, India Ratings & Research Pvt Limited (FITCH) and ICRA for its Debenture issue

“A1+” by ICRA for its CP issue

“AAA” by ICRA for its long term bank loans and A1+ for short term bank loans

Risk Management

With more HFCs being introduced to the market, several challenges can be witnessed lurking on the path of your Company. In fact, risks tend to change from year to year. In order to keep on track with such challenges, the Board makes yearly amendments and modify the policy keeping in view the risk perceptions. Some of the threat indicators for CFHL are:

• An increase in operating costs

• Competition from banks

• Volatile conditions of the real estate segment

Interest rate risk

Risk definition: The Company’s profitability can be affected because of the mismatch in interest rates between its assets and liabilities.

Risk mitigation: With fluctuations in interest rates, there can be a threat of credit risks. However, the management is continuously monitoring different risks to take steps for mitigation in future. Generally, HFCs borrow money from banks at floating rates that are directly related to the base rate of the banks. Since the loan period is long term, interest rates might vary according to the changes made by the RBI. However, since Banks have now moved to MCLR regime, such variations can be effectively controlled.

CFHL provides loans at both fixed and floating rates depending on the product of the customer. However, such financial risks and their effectiveness are regularly reviewed by the Company’s Risk Management Committee and in many cases they make required modifications to their measures. In addition to that, the Board of Directors and Audit Committee monitor the risk management systems and discuss during Board meetings about adequate steps needed for effective risk management.

Credit risk

Risk definition: One of the biggest risks in the path of sustainability and profitability of the Company is credit risk. Being in the business of financing, a sound credit risk policy and efficient pricing are challenges to avoid lower returns and consequent losses.

Risk mitigation: In terms of the Risk Management Policy of the Company, it conducts regular monitoring and assessment of the customer’s risk ratings by evaluating (measured by RBIA) his/her profile and ensure that the financial experts can limit the challenges and perform adequate measures during times of need. There are several checks while it evaluates the credit worthiness of its customers when they borrow.

At brliminary stages, several credit norms, policies, guidelines and procedures are followed to see if the customer qualifies to get loans. Its well experienced and qualified financial experts make sure the evaluation of credit worthiness of each client is carried out as per brscribed norms. In addition to the in-house resources, it also avails services from different credit assessment agencies for evaluating the risk potential of a customer. The customers’ financial discipline is analysed with the help of reports made available by the Credit Information Bureau India Limited (CIBIL).The Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) keep the threats of multiple finance involvement away. The Company has also put in place Individual Account Monitoring System (IAMS), Offsite Transaction Monitoring System (OTMS) for continuous review of loan assets. By leveraging IT, MIS is generated at frequent intervals for identifying and monitoring the Special Mention Accounts (SMA). The Company has analysed the trend in SMAs with regard to seasoning of assets – period-wise and product-wise in order to initiate corrective steps for maintaining and further improving the asset quality. These collaborations have proved to be beneficial for the Company in the long run, as the GNPA for FY 15-

16 stands at 0.19% (among the lowest in the industry) as compared to 0.17% in FY 14-15.

Liquidit y risk

Risk definition: The inability to match the maturity of assets and liabilities on time might expose the Company to liquidity risk.

Risk mitigation: Being in the business of housing finance, it is largely exposed to liquidity risk, as the tenure of lending extends to 10 years or more. This is contrary to the duration of liabilities created. However, the Company mobilises its funds optimally and within the tolerance level of Asset Liability Management (ALM). The Company is also having a comfortable CAR of 20.69%. In addition, we also regulated the borrowings from different banks, reducing concentration risk. Further, we have also diversified our borrowing profile with Commercial Papers and Non Convertible Debentures (NCDs) . This has not only helped us get funds at lower interest rates, but has also helped us manage the liquidity of funds with ease.

Market risk

Risk definition: The risk pertains to not Company alone, but industry as a whole. Thus, reduced industrial activity and slowdown could impact the demand of consumers and in-turn the business of the Company

Risk mitigation: The government at the centre has renewed market sentiments to a large extent. Positive reforms across various sectors have helped the country register a growth in GDP and register higher economic growth. In addition, we also have a team who regularly assess market conditions, ensuring corrective and decisive steps are taken.

Operational risk

Risk definition: Multiple operational risks associated during the normal course of operation pose a significant threat to overall financial position of the Company

Risk mitigation: We at CFHL, constantly review OTMS reports and the Systems & Procedures (S&P) Committee works on improving our efficiencies. This also helps us brvent frauds and other malpractices. There is a dedicated team in place who constantly monitor the operational performances. Every branch is frequently monitored with visits by our executives to ensure optimum levels of efficiencies are maintained. As a brventive vigilance mechanism, we have developed an Offsite Transaction Monitoring System (OTMS) to detect early warning signals on near-to real-time basis. This has helped us in tackling the issues immediately. As a reactive mechanism, we have tality, the broad instructions are defined and documented in form of a manual, which is followed by all branches/employees/TPEs and other outsourcing agencies during all day-to-day operations. Overall, 1) the quarterly Risk Profile is placed before the Audit Committee and Board. 2) In the Risk Management Committee (RMC) meetings, policies and products are discussed. 3) Risk Based Internal Audit (RBIA) is conducted on an ongoing basis for all branches. We will also endeavour to collect loss data reports and further strengthen our operational risk framework Asset Liability Management

At CFHL, risks related to liability and interest rates are managed quite efficiently by the responsible officials. In order to meet different maturity profiles of customers and to keep the inflows going, we arrange adequate credit from time to time. So far, no constraints have been faced by the Company when it comes to financial obligations. Several banks and other financial institutions offer credit to CFHL and that makes sure that the Company’s business operations are not interrupted.

The liquidity position of the Company’s assets and liabilities is regularly monitored and reviewed by the ALM committee. The committee also takes effective measures to fight the situation. Quarter-yearly meetings are arranged where the Risk Management Committee, Board of Directors and the Audit Committee reviews the financial risks that the Company might face. In all the four quarters of FY 15-16, the management of the Company has graded its risk profile as low.

Internal Audit and Control

External audits are conducted by the National Housing Bank (NHB) annually, while Canara Bank, i.e. the sponsor of CHFL conducts Management audit once in two years. During the current financial year, NHB had conducted such inspectional audit in September 2015. As per the reports, no major deficiencies are noticed in the Company’s operational functions.

Internal audits (Risk Based Internal Audit-RBIA)-During FY 15- 16, Managers of CFHL have audited the branches as well as the registered office of the Company. Such audits are done mainly on quarter or half-yearly basis. However, in FY 15-16 the branches of CFHL across the country have been rated [low/high/moderate risk]. Further reports of quarterly (25 branches) / half yearly (77 branches) internal audit have been reviewed by external audit firms (as on March 31, 2016). “Application audit of IT systems” efficiency of existing internal control audit were conducted on a standalone basis

The internal control and systems in the Company are adjacent to the nature of the business, its business model as well as the operational size of the organization. In order to lessen financial risks, the Company is equipped with an efficient internal control team. This team has to follow certain guidelines and policies that have been initiated by the authority. The management of the Company makes sure that the different branches of the Company are operating effectively in a regular manner. In order to keep things crystal clear, several procedures are followed by the operating officers in the Company. In case a loan is sanctioned at the branch level, the Overseeing Manager or executive reviews it. On the other hand, if loan sanctions are done at the registered offices then a different authority is responsible for reviewing it. Similarly, loans sanctioned by the DGM are reviewed by the Managing Director through a committee of executives; and in case it is sanctioned by the Managing Director, review is done by the Board itself.

In order to guide the management at different branches, the Overseeing Managers often visit those offices at certain intervals. Not only are such visits undertaken at specific intervals but also during the hour of need.

In order to have a better look into the internal affairs of the Company and control it, CFHL has already set up OTMS (Offsite Transaction Monitoring System) in 2013. This was mainly done to monitor sensitive transactions online, that too at almost real time basis, gradually leading the Company officials to trace danger signals as early as possible. Since many branches are opened during a year, it is the responsibility of the Company to be sure about their operations. In order to keep a check on their operating capacity and system, the internal control unit at the CFHL conducts an audit in the newly opened branch within six months since its inauguration.

The Audit Committee of the board in CFHL reviews several audit reports by RBIA, NHB, Canara Bank, LFAR, Quaterly/half yearly Internal Audit Reports at different branches of the Company as well as pending mortgages and perfection of securities. The reports of standalone “Application audit of IT systems” by the IT auditors and special audit for evaluating “efficiency of existing internal control systems” were reviewed by Audit Committee. In addition to that, the operation and performance of the audit department is also reviewed by the committee at quarterly intervals. In case any operational risk is noticed, the committee issues proper directions to mitigate the risk. The board has been reviewing the risk profile of the Company, KYC/AML compliances, ALM at quarterly intervals and compliance of fair practice code, customer complaint at half-yearly intervals as per the regulatory guidelines.

The legal compliance report about the compliance status of various regulations is placed before the Board/ Audit Committee on quarterly basis. The Audit Committee of the Board of Directors reviews major inspection and internal Audit observations along with the reply, including the actions to be taken/ taken on such observations, on a quarterly basis. The Company has a review system for all policies annually before the commencement of a financial year, so that the new policies are implemented from the beginning of year. All policies are critically analysed by the Risk Management Committee of the Board and reviewed/approved by the Board. In tune with this, the Company has reviewed all the policies of the Company viz. credit policy, recovery policy, accounting policy, corporate governance policy, investment policy, information technology policy, brmises policy, KYC Policy, audit policy and outsourcing policy and such other policies were revisited and reviewed during the FY 15-16. The internal control systems in the Company are adequate and commensurate with the nature of its business and size of its operations.

Quality of Assets

Before granting loans to customers, the Company evaluates the risk chances of the customer by assessing all the required eligibility as regulated in the policy. In case an applicant is seen to be beyond the level of manageable risk matrix, the Company does not consider the person for any loans. In order to minimise risk, the Company also analyses portfolios in several intervals and avoids sanctioning loans to people falling in the high risk index. The Gross NPA stood at Rs.19.76 Crore (0.19%) as on March 31, 2016 compared to brvious year’s amount of Rs.14.35 Crore (0.17%). The average GNPA for the housing finance industry for the current financial year has been 0.70%.

Perfection of security has also been given extreme importance in order to ensure better quality of assets. One-time settlements and intensive recovery drives are used to bring down core NPA’s (NPAs for more than 5 years). CFHL has been able to maintain the lowest GNPA level in the industry mainly because of the Company’s intense effort and focus on asset quality.

Statement of Profit and Loss

Key performance parameters for the statement of profit and loss Accounts for the year ended March 31, 2016 are:

• Profit before Tax grew by 85% and Profit after Tax grew by 82%.

• Net interest income grew by 69% from Rs.178 Crore to Rs.301 Crore during the year.

• Net interest margin for the year was 3.24% (brvious year: 2.54%)

• Pre-tax return on average assets was 2.73% and post-tax return on average assets was 1.69%.

• Return on Equity is 17.89% in the current year (brvious year: 11.18%)

• CFHL’s cost to income ratio was 18.67% for the year ended March 31,2016 as against 25.61% in the brvious year.

• For the year ended March 31, 2016, a dividend of Rs.10/- per share is being recommended against Rs.7 per share in the brvious year.

• The dividend payout ratio will be 16.95% as against 21.61% in the brvious year

Prudential Norms for Housing Finance Companies (HFCs)

The National Housing Bank (NHB) has issued certain regulatory guidelines to HFCs on prudential norms for income recognition, borrowing powers, provisioning, asset classification, capital adequacy, concentration of credit/investments, accounting standards, credit rating, KYC (Know Your Customer), Fair Practice Code, Most Important Terms & Conditions (MITC) grievance redressal mechanism, recovery of dues, real estate and capital market exposure norms. CFHL has complied with all these regulatory guidelines

According to the NHB brscribed prudential norms, an asset is a NPA in case the interest or the principal installment is overdue in 90 days. HFCs have to make provisions depending on the age of the overdue at brscribed rates and the income on such NPAs is not to be recognised. Apart from the provisioning on NPAs, HFCs are also required to carry a provision of 0.40% on standard individual housing loan, 1% to other individual non-housing loans and loans to developers and 0.75% to commercial real estate - residential properties. CFHL has complied with all the regulatory norms as brscribed by the NHB.

According to the prudential norms, CFHL needs to carry adequate provisions for standard assets, NPA at brscribed rates. CFHL has carried adequate provision on standard assets and exercising abundant caution with 100% provisions for the entire NPA amount of Rs.19.76 Crore as against the regulatory requirement of Rs.9.36 Crore. As a result, CFHL’s net NPAs on outstanding loans of Rs.10,643 Crore is ‘NIL’ as on March 31, 2016. Capital

CFHL’s total borrowing amount as on March 31, 2016 of Rs.9,478 Crore has been within the permitted limit of 16 times of the Company’s net owned funds. The Company has done well to fall into the eyes of the investors, as it has conducted and taken part in many investor meets in both national and international geographies. CFHL has also used the electronic/TV media in the right manner to reach out to target audience.

The Company’s CAR (Capital Adequacy Ratio) as on March 31, 2016 is 20.69%, while the NHB’s stipulation is 12%. Deferred Tax Liability (DTL)

During FY 14-15, the NHB has directed all the housing finance companies (HFCs) to provide for DTL in respect of balance in the special reserve created under section 36(i) (viii) of IT Act 1961 and permitted to adjust the same from the retained earnings. However, NHB has permitted all the HFCs to adjust the DTL in a phased manner over a period of 3 years in the ratio of 25:25:50. Such permission was enacted in the brvious FY 14-15. According to the rules, during FY 15-16, Company has transferred an amount of Rs.18.50 Crore from the general reserve towards DTL.

Debrciation on Fixed Assets

During FY 14-15, there is significant change in the guidelines with regard to provisioning for fixed assets. The rate of debrciation is increased and is linked to the remaining life of the fixed asset. The Company has, as per the revised provisions, reworked the useful life on various fixed assets as brscribed in the Companies Act, 2013 and complied the norms for FY 15-16

Human Resources

During the year, the Company recruited 90 probationary officers and 98 junior officers on contract, giving brference to qualified local candidates for the new branches. The overall staff position as at the end of the current financial year was 553 (Regular – 395, On contract - 158) as against the brvious financial year’s figure of 491. All the new recruits have been given induction training. Additionally, the junior officers are mentored by the Branch Managers and the senior staffs at the branches and the new managers are guided by their Overseeing Executives. The attrition level is 2% during FY 15-16. The branch heads/over seeing executives handholds the new entrant to enable his/her smooth transition into the organisation and help him/her adapt to the value system and its working.

Due to opening of substantial number of the branches (3)/satellite Offices (20), there is a decrease in the cost to income ratio (from 25.61% in FY 14-15 to 18.67% in 2015. Business per employee has increased from Rs.15.90 as on March 31, 2015 to Rs.18.52 as on March 31, 2016. Most of the newly opened branches are reaching the breakeven point within 9 to 12 months and satellite offices within 3 to 6 months. The employer-employee relation continues to be cordial and there have been no instances of any disruption.

IT and IT Security

To improve the operational efficiency and bring homogeneity in the operations, the Company has migrated to Core Banking System through Integrated Business Suite (IBS) in 2013. The software provided by the vendor is constantly reviewed and bugs are fixed. Necessary upgradations/enhancements are made from time to time. Biometric attendance marking system was introduced in 110 branches/satellite offices to monitor the punctuality of staff. As an IT Security measure, certain restrictions were introduced to restrict usage of login IDs. De-duplication has been done in all the branches to ensure uniform customer ID to all customers across the Country. Considering the increased number of branches, the Company has also enhanced the bandwidth to speed up the operations in the branch. All branches of the Company and the RO are connected through Internet and our Core Banking Platform. The Company has taken required initiatives in maintaining data integrity and adequate control over the data. IT security is ensured through periodical audit of its operating systems and data at Data Centre (DC) and Data Recovery Centre (DRC) through the Audit Dept. and the external agency.

To increase the visibility of the Company and improve the operational efficiency, the Company has introduced a Customer Portal, Mobile website and Online money transfers on the Company’s website. The Company has introduced a missed call facility to enable customers to know the loan outstanding in their accounts by giving a missed call. SMS alerts are given to customers to remind them and ensure prompt repayment of loan installments, extend wishes for birthdays, inform details of loan schemes, etc. 69.74% of collection of installments is done through Electronic Clearing System (ECS). We introduced facilities for online payment/ credit by customers to the loan accounts this year.

Related Party Transactions

CFHL maintains an arm’s length relationship with related parties. The Company’s detailed policy on Related Party Transactions is uploaded in the Company’s website for the information of all the stake holders. The related party transactions with details are furnished in the Note forming a part of the accounts. All related party transactions are approved by the Audit Committee or Board or members at a general meeting, as applicable.

Outlook for 2016-17

The Company has drawn a challenging business plan for the financial year starting from April 1, 2016, as the total number of branches is aimed to reach 175. The book size of the Company is expected to reach Rs.13,500 Crore. CFHL shall continue to improve its asset quality, lend to individual segments, increasing the nonhousing loan segment, to improve profitability and to extend its business operations.

We planned to open 35 branches and satellite offices (from 140- 175) during FY 16-17, out of which we have already opened in 30 locations (10 branches and 20 satellite offices) in April and May 2016.

At macro level, the prospects for the future are bright & encouraging as the industrial sector, which has not grown on expected lines in the brvious fiscal, is expected to improve. The RBI and government are continuing the policy of managing inflation, promoting investment through generation of employment and income and improved infrastructural facilities including housing have contributed to the optimism. The real estate industry is expected to improve in the current year across the country and credit off take is likely to improve. However, brssure for the reduction of rate of interest and consequently, its impact on the sbrad is expected to persist.

Corporate Social Responsibility (CSR)

Under the Companies Act 2013, Ministry of Finance has published New CSR Rules, which makes Companies operating in India having a net worth of Rs.500 Crore or more or turnover of Rs.1,000 Crore or more or a net profit of Rs.5 Crore or more during the financial year, to mandatorily implement the CSR Rules w.e.f. April 1, 2014. The new Rules are intended to promote socio-economic development in rural areas, improve education, eradicate hunger, promote gender equality, etc. The Rules include a mandate for business entities to spend a minimum of 2% of their average net profit of the brceding 3 years on CSR initiatives. The Company has formed the Corporate Social Responsibility Committee on June 4, 2014 with clear roles and responsibilities in terms of provisions of Companies Act. As against the budgeted CSR amount of Rs.3.72 Crore for FY 15-16, we sanctioned Rs.3.03 Crore for 143 different CSR projects received from 76 branches. Out of the sanctioned amount of Rs.3.03 Crore, an amount of Rs.1.09 Crore has already been spent towards approved CSR activities and the remaining is under progress. The unspent amount of Rs.2.63 Crore is carried forward to 2016-17. The Company continues to extend support for social causes like extending financial support to the students, providing infrastructure to the schools and other purposes specified by the Act and rules framed hereunder.

The particulars of the amount to be spent, already spent and reasons for not spending the balance, if any, are furnished in the Report of Directors. The Company’s policy on Corporate Social Responsibility is uploaded on the Company’s website for the information of all the stake holders.

Cautionary Statement

The statements/averments made in this report describing the Company’s objectives, estimations, expectations or projections, outlook, etc. constitute forward-looking statements within the meaning of applicable securities laws and regulations. Actual results may differ from such expectations, projections, etc. whether exbrss or implied. The statements are based on certain assumptions and future events over which the Company has no direct control. The Company assumes no responsibility to publicly amend, modify and revise any of the statements on the basis of any subsequent developments, information or events.

For and on behalf of the Board of Directors

Sd/- K.N. Prithviraj

Chairman  

Date: May 18, 2016  

Place: Bengaluru