MANAGEMENT DISCUSSION & ANALYSIS REPORT

GLOBAL ECONOMIC PERSPECTIVE

Global growth is expected to be 2.8 percent in 2015, lower than anticipated in January. Growth is expected to pick up to 3.2 percent in 2016-17, broadly in line with brvious forecasts. Developing economies are facing two transitions. First, the widely expected tightening of monetary conditions in the United States, along with monetary expansion by other major central banks, has contributed to broad-based apbrciation in the U.S. dollar and is exerting downward brssure on capital flows to developing countries. Many developing-country currencies have weakened against the U.S. dollar, particularly those of countries with weak growth prospects or elevated vulnerabilities. In some countries, this trend has raised concerns about balance sheet exposures in the brsence of sizeable dollar-denominated liabilities. Currency debrciations have been significantly less in trade-weighted terms, partly due to a weakening euro and yen, thus offering only modest prospects for competitiveness gains to boost exports. Second, despite some pickup in the first quarter of 2015, lower oil prices are having an increasingly pronounced impact. In oil-importing countries, the benefits to activity have so far been limited, although they are helping to reduce vulnerabilities. In oil-exporting countries, lower prices are sharply reducing activity and increasing fiscal, exchange rate, or inflationary brssures. Risks remain tilted to the downside, with some br-existing risks receding but new ones emerging.

OVERVIEW OF THE INDIAN ECONOMY

The economy registered a growth of 5.5 per cent in the first half (H1) of the current financial year. This is distinctly higher than the growth recorded in H1 and second half (H2) of the brvious year, 2013-14, and is also in tandem with the projection of the full year growth of 5.4 to 5.9 per cent made in the Economic Survey 2013-14 as well as is in line with the initial expectations of the Government of a gradual pick-up in growth. This is also close to the projections made by several international agencies viz. IMF, World Bank, ADB, etc. India is one of the few economies for which the IMF has raised the growth projections in their October Outlook vis-a-vis the updated outlook brsented in July 2014.

Among the major sectors, agriculture and allied sectors expectedly registered a lower growth rate, while industry and services grew at higher rates in the first half of 2014-15 vis-a­vis the first half of 2013-14. The industrial sector brsents a mixed picture. It is clear that the industrial sector could not sustain the momentum achieved in Q1. Manufacturing growth got dampened in Q2, mainly on account of contraction in capital goods and consumer non-durables. While consumer durables have been contracting for seven consecutive quarters from Q4 2012-13, capital goods continued the recent trend of volatility by moving from a double digit growth in Q1 to contraction in Q2.

The service sector contributes the most to the overall growth of GDP. However, it would be naive to assume that growth in the services sector can continue on its own, irrespective of the performance in other sectors, especially manufacturing. The growth in the other important services sub-sector, 'financing,  real estate and business services', could not be meaningfully correlated with growth in the commodity producing sectors, suggesting that the sector has been growing almost at an auto-pilot mode in the recent years.

IMPORTANCE OF HOUSING AND HOUSING SHORTAGE

A demographic trend suggests that India is on the verge of large scale urbanisation over the next few decades. With more than one crore population getting added to urban areas, India's urban population is expected to reach about 81 crore by 2050. Housing, a basic need for humans, could play an important role in accommodating high urban growth in India. However, several structural issues such as high gestation period of housing projects, limited and expensive capital, spiralling land and construction cost, high fees and taxes, unfavorable development norms and low affordability by Economicall Weaker Section (EWS) and Lower Income Group (LIG) households are bottlenecks restricting desired growth in housing stock in India with respect to housing demand. As per studies conducted by the Ministry of Rural Development and the Ministry of Housing and Urban Poverty Alleviation, it is estimated that almost a quarter of Indian households lack adequate housing facility. The central government acknowledges the importance of housing issue in the country and has launched a massive campaign that promises to provide housing to all its citizens by the year 2022. The vision would require development of about 11 crore houses with investments of over USD 2 trillion. Most of the housing development may need to be done for EWS/LIG households (in both rural and urban areas) whose income is less than INR 2 lakh per annum. It is the urban affordable housing that require the central and state governments' renewed focus, as this segment may require almost half of the total investments envisaged.

The government needs to accelerate the efforts to broad-base and significantly augment public-private-partnership programmes introduced in the past. In order to achieve this, several requisite policies and regulations promoting better coordination between housing stakeholders; delegation of power to urban local bodies; reduction in project gestation period; rationalisation of fees and taxes; a relook at development norms; empowerment of EWS/LIG households; and steps for reduction in project cost and schedule overruns need to be evaluated.

(Source:https://www.kpmg.com/IN/en/Issues,Andlnsights/Articl  esPublications/Documents/Decoding-Housing-for-all-2022.pdf)

HOUSING INDUSTRY OUTLOOK

The housing sector in India remains on course with double digit growth, attributed mainly to a large population base, rising income levels and rapid urbanisation. It is the second-largest employment generating sector after agriculture, contributing about 5% to 6% to India's GDP share and capital formation. It is perceived as the third-most impactful industry in India in terms of its effects on other industries. It directly impacts over 250 ancillary industries such as cement, steel, transport, construction, paint, brick, building materials, and consumer durables. It is expected to soon overtake other industrial sectors in terms of its GDP contribution. Even then the housing finance market remains relatively under-developed by global standards. (Source: NHB Report on Trend and Progress of Housing in India 2013)

THE INDIAN HOUSING FINANCE MARKET

The Indian housing finance market is today among the more robust and vibrant segments of the Indian economy. The Indian housing finance market has developed only in the past three decades or so, as prior to the late 1980s there was virtually no housing finance market to speak of. In the past three decades, particularly the period post-1987 (i.e. after establishment of the National Housing Bank), the housing finance market in India has grown phenomenally, enjoying double digit yearon- year growth and achieving vibrancy in terms of a larger number of players and products to serve different segments of the market. During these years, the regulatory philosophies of the National Housing Bank and the Reserve Bank of India (the central bank of India and regulator of all banks operating in the country) have been constantly changing and evolving as per the needs of the sector and market environment, domestic and global.

The following institutions are providers of market-based housing finance solution, in one form or another:

Commercial Banks: are the largest mobilisers of savings with wider network coverage. Banks today are the major lenders to housing sector, accounting for nearly 67% of the market. As a result of concerted efforts by NHB, RBi and Central Government towards development of stable housing finance, Banks now have much larger housing loan portfolios and are quite bullish on this product segment.

Housing Finance Companies: are companies with principal objective of lending for housing finance. However, the noticeable aspect revealed is that there are only about 20 companies accounting for greater than 90% of total housing loans provided. The NHB operates as the principal agency for promoting, regulating and providing financial and other support to HFCs at local and regional levels, while banks and NBFCs are managed and regulated by the RBI. As on June 30, 2014, 59 companies have been granted certificates of registration by NHB to act as HFCs. With sharper focus on collections and recoveries, the quality of HFCs was maintained well.

Cooperative Banks: deploy funds from a common pool of resources to provide for various needs of its members. In Indian scenario, a lot of reluctance has been noticed by these cooperative banks to provide loans for housing finance. The major reason for this is the high risk and illiquidity in giving housing loans from common corpus.

Besides the above Regional Rural Banks, and Agricultural and Rural Development Banks have also been active and their share in housing finance is increasing.

(Source: Report on Trend and Progress of Housing in India 2014- NHB).

HOUSING FINANCE COMPANIES

The key success factors

The key factors for HFCs to succeed in the Indian housing finance industry include:

Cost of funds Strong credit function Cost of operations Product features Brand recognition

Opportunities and Threats

Housing finance in India is growing rapidly. With the intervention of the banking sector and the emergence of more specialized financial institutions, the sector is attracting a wide range of customers ranging from individuals to corporations to groups. The composition of funds for the housing sector - a mix of short and medium-term funds, is a concern. Measures are being considered for channelling long-term pension and provident funds as well as external funds into the housing sector. A securitization market has also begun to operate, as a measure for better matching of assets and liabilities. The Government of India, Reserve Bank of India and the National Housing Bank have attached priority to the housing finance sector and continue their support to the sector through fiscal and regulatory measures. The burgeoning middle class, their increasing purchasing power, the changing demographics, and the increasing number of nuclear families coupled with a low delinquency rate have resulted in a low number of non-performing assets compared to other sectors. Further, this has enabled the sector to grow at a phenomenal rate and attracting many institutional players rebrsenting high volume.

The property prices have seen upward movement and the expected rise in interest rates due to inflationary brssures could impact the affordability of the average home loan borrower to a great extent. Nevertheless the housing finance sector is expected to continue to grow steadily backed by the continuing demand and supply gap in dwelling units, reducing age profile of borrowers, higher income levels, increasing proportion of double income households and easy and wider choice of financing options.

Housing being one of the low risk asset classes for financiers and hence scheduled commercial banks has become very aggressive in this segment, which are armed with well established vast network and accessibility to funds at relatively lower costs. The concern for the "stand alone housing finance Companies" will be the continuous availability of funds at a longer tenor with affordable rates. Reserve Bank of India has mandated the Banks to switch over to the system of "Base Rate", which is a welcome measure, will enhance transparency in lending rates, however may result in increase in cost of funds for the Housing Finance Industry. However still there is ample scope for the "Housing Finance Industry" to grow, due to huge demand and supply gap existing in housing segment and the consequent need for funding of purchases of shelter across all segments of the population.

Risks and Concerns

One general feature observed in many of the housing finance companies is lowering of interest sbrads due to increase in cost of funding and competitive rates to be offered on housing loans due to stiff competition from scheduled commercial banks. Upward trend witnessed in property prices and the expected rise in interest rates will impact the affordability of vast number of end users.

Risk Management

Risks include credit risk, liquidity risk, and interest rate risk, operational risk market risk. The credit risks are minimized by having established credit appraisal system in place, brscribing exposure limits, periodic review of the portfolio. The Company operates in the mid segment and a substantial majority of borrowers are in the salary group. The Company employs checks, field verification, stringent legal and technical due diligence etc. which have helped to reduce incremental delinquencies. The operational risks are minimized by strengthening the internal control procedures and addressing the deficiencies reported by the internal auditors. Liquidity risk and interest rate risk arising out of maturity mismatch of assets and liabilities are managed through regular monitoring of the maturity profiles, and yield management by way of risk, return, and portfolio management. The company proposes to manage the increased risk through available methods of portfolio churning by the RMBS/loan asset sale / assignment route as well as rate SWAP arrangements when probable with Banks/Institutions.

Risk Management Committee

The Company has formed an Asset Liability Committee (ALCO) which meets at periodic interval to review its approvals and controls to the various risks faced. The ALCO reviews the process of implementation of various risk management techniques, system policies, procedure and evaluates as well as advises for changes required in relation to the business environment.

Segment Reporting

Accounting Standard 17 regarding Segment-wise Reporting does not apply to your Company since revenues are derived from only one segment i.e. housing finance activity.

Marketing and Selling Arrangements

The Company has a strong marketing team, which has taken steps to serve the customers at their door step which includes appointing Home Loan Agents, Direct Selling Agents and Home Loan Counsellors. The Company also caters to walk-in customers among others.

Loan Products

SHCL's major focus has been to provide home loans to individuals and families for purchase, construction, extension, repair and renovation of houses. The Company has also developed loan products for the families in the self-employed category where formal income proofs are not easily available and the repayment capacity of such families are appraised based on their cash flows.

Credit Evaluation

The Company has in place an effective credit appraisal mechanisms aimed at providing your Company a significant competitive advantage. Through a combination of financial documents based assessment and personal interview, the assessment system is customised to capture the credit worthiness of applicants from different segments - the salaried class, self employed, practicing professionals or those engaged in the informal sector.

Sbrad on Loans

The weighted average rate of lending during the year was 11.89 per cent p.a. as compared to 12.32 per cent p.a. in the brvious year. The average all-inclusive cost of funds was 8.12 per cent p.a. as compared to 9.21 per cent p.a. in the brvious year. The sbrad on loans over the cost of borrowings for the year was 3.77 per cent p.a. as against 3.11 per cent p.a. in the brvious year.

New Segments

The Company has been continuously analysing the housing needs and credit profile of under served market segments. Method of gaining a deeper understanding of these market segments are under review and would enable us to enlarge our customer base.

Business Strategy

To be a prominent Corporate Citizen in promoting housing activities through customer friendly home finance schemes within a service oriented atmosphere. To consolidate and grow in a competitive environment reflecting the ethical standard of a good corporate citizen.

Financial and Operational Performance

The same has been covered in the section Directors Report forming part of this Annual Report.

Human Resources

The Company has dedicated staff strength of 45 persons as on March 31, 2015. The manpower requirement of the offices of the Company is assessed and recruitment is conducted accordingly. Personal skills of employees are fine tuned and knowledge is enhanced by providing them internal and external training, keeping in views the market requirement from time to time. Outstanding performers are rewarded by elevation to the higher cadre.

Loan asset per employee of the Company as at March 31, 2015 was Rs. 305.15 lacs.

Business Outlook

Going ahead, your Company intends to grow its loan book, income and profits by deepening reach in existing regions, continuing its key focus on under-penetrated markets and segments, accessing low cost and diversified fund sources, optimising operating costs and efficiency through process changes, mobilising debt at attractive rates, transmitting cost efficiency and remaining competitive in pricing of products, improving recovery ratio and containing NPAs, leveraging technology to positively impact the working and customer experience.

Conclusion with Caution

Statements in this report, describing the company's objectives, estimations, projections, expectations are "forward looking statements" based on the management's current expectations and beliefs concerning future developments and their potential effect upon the Company. Several factors could make significant difference to the company's operations. These include economic conditions affecting demand and supply, Government regulations and taxation, natural calamities, etc. over which the company does not have any direct control. SHCL assumes no responsibility in case the actual results differ materially due to change in internal or external factors.