MANAGEMENT DISCUSSION & ANALYSIS REPORT GENERAL: OVERVIEW OF THE ECONOMY Global Economy: The world economy stumbled in 2015, amid weak aggregate demand, falling commodity prices and increasing financial market volatility in major economies. The world gross product is projected to grow by a mere 2.4 per cent in 2015, marking a downward revision from the 2.8 per cent forecast in the World Economic Situation and Prospects as of mid-2015 (United Nations, 2015). The growth rates of gross fixed capital formation and aggregate demand continue to remain subdued. The world economy is projected to grow by 2.9 per cent in 2016 and 3.2 per cent in 2017, supported by generally less restrictive fiscal and still accommodative monetary stances worldwide. The anticipated timing and pace of normalization of the United States monetary policy stance is expected to reduce policy uncertainties, while brventing excessive volatility in exchange rates and asset prices. While the normalization will eventually lead to higher borrowing costs, rising interest rates should encourage firms to front-load investments in the short run. The improvement in global growth is also brdicated on easing of downward brssures on commodity prices, which should encourage new investments and lift growth, particularly in commodity dependent economies. GDP growth for the United States is adjusted downward by 0.4 percentage points to 2.0 per cent, as the GDP growth in the 4th quarter and jobs growth over the past months have been somewhat disappointing. Growth rates of China, India and Southeast Asia are unlikely to see significant improvement in 2016 compared to last year. Chinese growth in 2016 is expected to stay the same as that of 2015 at 3.7 per cent. Domestic Economy: India’s economic growth will slow to 7.4 per cent in 2016-17, from 7.6 per cent in 2015-16, with tepid external demand offsetting the pickup in domestic demand as per the projection of Asian Development Bank (ADB). In its annual Asian Development Outlook 2016 report, GDP (Gross Domestic Product) growth in India is expected to dip marginally this year as expansion in public investment weakens under fiscal constraints, private corporations continue to deleverage, and external demand remains anaemic. Moreover, the weak balance sheets of public sector banks will hamper lending and growth prospects. The Economic Survey pegged the economy’s growth at 7-7.75 per cent in 2016-17, indicating a greater chance of deceleration from the brvious year’s GDP estimate of 7.6 per cent. The slowdown in advanced economies, including US, lower commodity prices and weaker currencies in some major trading partners, vis-à-vis the Indian rupee, are likely to hit merchandise exports and financial, telecom, business and other tradable services. As per World Bank Report, India will be a bright spot amid a gloomy outlook for developing countries in the next two years. The World Bank says that India is “well positioned to withstand near-term headwinds and volatility in global financial markets” compared with other major emerging economies and brdicts it will grow at 7.9 per cent by 2018. That would make it the fastest-growing developing-country economy by some margin, ahead of the next quickest, Bangladesh, at 6.8 per cent and China at 6.5 per cent, according to the World Bank’s “Global Economic Perspectives” report. Economy Outlook for 2015-16: According to IMF World Economic Outlook April, 2015, India ranks seventh globally in terms of GDP at current prices and is expected to grow at 7.5 per cent in 2016. India’s economy has witnessed a significant economic growth in the recent past, growing by 7.3 per cent in FY2015 as against 6.9 per cent in FY 2014. The size of the Indian economy is estimated to be at Rs. 129.57 trillion (US$ 2.01 trillion) for the year 2014 compared to Rs. 118.23 trillion (US$ 1.84 trillion) in 2013. In its World Economic Outlook Update, IMF pegged the country’s growth rate at 6.5 per cent for 2016-17. The steps taken by the government in recent times have shown positive results as India’s Gross Domestic Product (GDP) at factor cost at constant (2011-12) prices 2014-15 is Rs. 106.4 trillion (US$ 1.596 trillion), as against Rs. 99.21 trillion (US$ 1.488 trillion) in 2013-14, registering a growth rate of 7.3 per cent. The economic activities which witnessed significant growth were ‘financing, insurance, real estate and business services’ at 11.5 per cent and ‘trade, hotels, transport, communication services’ at 10.7 per cent. Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. This initiative is expected to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors. Currently, the manufacturing sector in India contributes over 15 per cent of the GDP. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP. The International Monetary Fund (IMF) and the Moody's Investors Service have forecasted that India will witness a GDP growth rate of 7.5 per cent in 2016, due to improved investor confidence, lower food prices and better policy reforms. Besides, according to mid-year update of United Nations World Economic Situation and Prospects, India is expected to grow at 7.6 per cent in 2015 and at 7.7 per cent in 2016. > INDUSTRY STRUCTURE & DEVELOPMENTS The launch of "Housing-For-All by 2022" scheme in 2015 heralded a new era in the housing finance sector. It delivered much-needed boost to the real estate and housing finance industry by creating an enabling and supportive environment for expanding credit flow and increasing home ownership. Housing for all by 2022 requires development of about 11 crore housing units and this will need investment of more than US$ 2 trillion. This translates to about $250 to $260 billion annually, more than double the annual investments witnessed in FY 2014. The schemes and policies that are implemented by entities including HUPA, HUDCO and NHB at the center and various authorities at the state level will promote development of houses for the EWS and LIG categories which have largely been left out earlier. Credit risk guarantee for home loans up to ? 5 lakh, project finance for affordable housing developers and refinance for housing finance companies by The National Housing Bank is also significant in this context. The government has been at the forefront in pushing India's housing finance sector this year. Many new initiatives and policies focussed on lending for housing were introduced in the last 12 months. The biggest highlight was to bring housing loans of up to ? 50 lakh under affordable housing and bringing loans up to ? 28 lakh in urban and ? 25 lakh in other centres under Priority Sector Lending. Over the last six months, various regulatory changes have been announced, including lowering of risk weights for housing loans, grant of SARFAESI Licence to 41 HFCs and revision in the interest rate and in the on-lending cap under the Rural Housing Fund and Urban Housing Fund. These measures are likely to support growth in the low ticket affordable housing segment. Over the last few years, the housing finance market, has continued to report robust growth despite challenges in the economy which has made this segment attractive for both banks as well as NBFCs. > OPPORTUNITIES & THREATS The housing sector in the Country has been growing progressively and has a vast potential for further growth. Considering the projected housing shortage during the 11th Plan Period is around 26.53 million units; indicating a huge growth potential for the housing sector and in turn brsent a growth opportunity for the housing finance industry. Future growth outlook of the housing market looks reasonably good, with the sector becoming more demand driven, the challenge lies in its inclusiveness. Presently access to formal credit is mostly available to the people in the formal sector who are salaried and have dominant incomes. There is a lot of potential in urban areas also for housing finance to penetrate. India will ride the wave of urban expansion. The urban population share may reach 50 per cent in 25 years adding 300 to 400 million people to the existing population of about 350 million in urban areas (Source: Mid-Term appraisal of the 11th Five Year Plan). The potential rise in urban households will also be potential customer base for Housing Finance Companies. 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 having established network across the country and also have access to funds at a relatively cheaper rate. With the active brsence of scheduled banks in the housing finance segment, the market dynamics will play a pivotal role in determining the lending rates and consequently will affect the margins of "stand alone housing finance companies", for which the availability of longer term funds at affordable rates is a cause of concern. > SEGMENT REPORTING The Company is exclusively engaged in the Housing Finance business and revenues are mainly derived from this activity. Accounting Standard 17 regarding Segment-wise Reporting issued by the Institute of Chartered Accountants of India and notified under the Companies (Accounting Standards) Amendments Rules, 2011 does not apply to your Company since revenues are derived from only one segment i.e. housing finance activity. > RISKS AND CONCERNS Your Company is exposed to risks such as liquidity risk, interest rate risk, credit risk, increase in Non-Performing Assets and operational risk which are inherent in the housing finance business e.g. take-overs of our existing accounts. Intense competition, increase in cost of borrowing and narrowing of sbrad, pose a big challenge for sustaining profitability on consistent basis. Prevailing inflationary trends will impact the affordability of vast number of end users. > RISK MANAGEMENT Liquidity risks and interest rate risks arising out of maturity mismatch of assets and liabilities are managed by your Company by constant monitoring of the maturity profiles with a periodical review of the position. Your Company's majority of housing loan advances are on variable rate of interest basis and normally any movement in rate of borrowings is hedged by the loans advanced at variable rates to a certain extent. Credit risks are minimized by having established credit appraisal system in place, brscribing exposure limits, periodic review of the portfolio. Our Company operates in the mid segment and large chunk of borrowers are in the salary group. Your Company is having CIBIL checks, field verification, stringent legal and technical due diligence etc. which have helped to reduce incremental delinquencies. Our recovery mechanism is also robust supported by best use of SARFAESI Act. Operational risks are minimized by strengething the internal control procedures and addressing the deficiencies reported by the internal auditors. > INTERNAL CONTROL SYSTEMS AND ADEQUACY The Company has internal control systems which is commensurate with the size of the operations. Adequate records and documents are maintained as required by law from time to time. Internal audit checks are conducted regularly and internal auditor's recommendations are reviewed for improving systems and procedures. Your Company takes efforts from time to time to meet the changes in business conditions along with statutory and accounting requirements. The internal audit is carried out by independent firms of Chartered Accountants and covers the key areas of business. There is also in house internal audit department which supplements the outsourced internal audit activity. The Audit Committee & Statutory Auditors are periodically apprised of the internal audit findings and compliances and Audit Committee reviews the internal control system. Internal audits and checks are regularly conducted and internal auditor's recommendations are reviewed after which systems and procedures are adopted for improvement. > MARKETING The marketing of your Company's home loan products are done through direct sales, through Direct Selling Agents and tie up with builders. Marketing of home loan products with a focused attention on existing as well as the prospective customers is a constant endeavour at the Company with 60 Offices sbrad across the country. Your Company is also giving its thrust to improve the average yield on advances by selling more number of "mortgage loans" (i.e. Loans against the property" - LAP); for which the margin is high compared to the loans for purchase of homes. > HUMAN RESOURCES / INDUSTRIAL RELATIONS The Company has a dedicated team of 263 employees, who have been contributing to the progress and growth of the Company. The manpower requirement at Offices of the Company is assessed continuously and recruitment is conducted accordingly. Your Company takes pride in the commitment, competence and dedication shown by its employees in all areas of business. Your Company has developed a combrhensive "in-house" induction training module to make sure that new employees understand the basic aspect of the Company in its all operations. In pursuance of the Company's commitment to develop and retain the best available talent, the Company has been sponsoring employees for training programmes organised by National Housing Bank for upgrading their skill and knowledge in different operational areas. 35 > RELATED PARTY TRANSACTIONS The Related Party Transactions with details are furnished in the Notes on Accounts [Note No. 25 point No. 8], forming part of the Accounts. None of the transactions with any of the related parties were in conflict with the interests of the Company. Transactions with related parties entered into by the Company in the normal course of business were placed before the Audit Committee. > CAUTIONARY STATEMENT Statements in this report describing the Company's objectives, projections, estimations, expectations are "forward looking statements" within the meaning of applicable securities, laws and regulations. These statements are based on certain assumptions in respect of future events and Company assumes no responsibility in case the actual results differ materially due to change in internal or external factors. For and on behalf of the Board of Directors sd/- Warendra Sinha Managing Director & CEO Place : Mumbai Date : 29th April, 2016 |