MANAGEMENT DISCUSSION AND ANALYSIS REPORT MACROECONOMIC OUTLOOK GDP The growth in GDP during 2014-15 is estimated at 7.4 percent as compared to the growth of 6.9 percent in 2013-14. The economic growth rate had been revised upwards to 6.9 percent for 2013-14, as against 4.7 percent estimated earlier, after the government updated the base year for measuring national accounts to 2011-12 from the earlier 2004-05. In Q3 FY15, growth rates in various sectors are as follows: agriculture, forestry and fishing' (-0.4 percent), 'mining and quarrying' (2.9 percent), 'manufacturing' (4.2 percent), electricity, gas and water supply and other utility services' (10.1 percent) 'construction' (1.7 percent), Trade, hotels, transport, communication and services related to broadcasting' (7.2 percent), 'financial, real estate and professional services' (15.9 percent), and public administration, defence and other Services' (20.0 percent). According to the RBI the GDP growth estimates of the Central Statistics Office (CSO) for 2014-15 already project a robust pick-up. But leading and coincident indicators suggest a downward revision of these estimates when fuller information on real activity for the last quarter becomes available. Uncertainty surrounding the arrival and distribution of the monsoon and unanticipated global developments are two major risks to baseline growth projections. Output growth assuming normal monsoons, supportive policy environment and no major structural change or supply shocks is projected at 7.8 percent for 2015-16. According to the Economic Survey 2014-15, a political mandate for reform and a benign external environment have created a historic moment of opportunity to propel India onto a double-digit growth trajectory. Decisive shifts in policies controlled by the Centre combined with a persistent, encompassing, and creative incrementalism in other areas could cumulate to Big Bang reforms. As a result of certain macro-economic improvements, India's position now compares favourably with other countries. India brsently ranks amongst the most attractive investment destinations. Amongst BRICS only China scores above India. The Survey further states that India needs to balance the short-term imperative of boosting public investment to revitalize growth with the need to maintain fiscal discipline. Expenditure control and expenditure switching, from consumption to investment would be the key. "The balance sheet syndrome with Indian characteristics" creates a web of difficult challenges that could hold back private investment. Private investment must remain the primary engine of long-run growth. But in the interim, to revive growth and to deepen physical connectivity, public investment especially in the railways, will have an important role to play. •The Survey identifies four factors that pose risks to the external sector: •Renewed financial market volatility in response to US Federal Reserve monetary tightening which is expected later this year; •Possible turmoil if the viability of the Euro-zone were to come into question in the event of a Greek exit; •A spike in oil prices related to geopolitical events; and •A slowly deteriorating international trade environment. Industrial production growth In Feb'15, IIP reported increase of 5.0 percent as against a decrease of 2.0 percent in Feb'14. The cumulative growth for the period April-Feb 2014-15 was 2.8 percent as against -0.1 percent over the corresponding period of the brvious year. In terms of industries, fifteen (15) out of the twenty two (22) industry groups (as per 2-digit NlC-2004) in the manufacturing sector have shown positive growth during the month of February 2015 as compared to the corresponding month of the brvious year. The industry group 'Wearing apparel; dressing and dyeing of fur' has shown the highest positive growth of 62.0 percent, followed by 35.8 percent in 'Electrical machinery and apparatus n.e.c.' and 19.6 percent in 'Wood and products of wood & cork except furniture; articles of straw & plating materials'. On the other hand, the industry group 'Office, accounting & computing machinery' has shown the highest negative growth of (-) 44.6 percent, followed by (-) 43.4 percent in 'Radio, TV and communication equipment & apparatus' and (-) 8.2 percent in 'Other transport equipment'. Monetary Measures On April 7th, 2015 Reserve Bank in its Policy Statement stated The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years. The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 percent by January 2016 and at 4 percent by the end of 2017-18. Although the target for end-2017-18 and thereafter is defined in terms of a tolerance band of +/- 2 percent around the mid-point, it will be the Reserve Bank's endeavour to keep inflation at or close to this mid-point, with the extended period provided for achieving the mid-point mitigating potentially adverse effects on the economy. RBI kept the policy repo rate under Liquidity Adjustment Facility (LAF) at 7.5 percent; Cash Reserve Ratio (CRR) of scheduled banks was kept unchanged at 4.0 percent of Net Demand and Time Liabilities (NDTL). The reverse repo rate under LAF remains unchanged at 6.5 percent, and the Marginal Standing Facility (MSF) rate and the Bank Rate would be at 8.5 percent. Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data. Public finance The revenue receipts in 2013-14 was Rs.1,015,279 crore, 8.9 percent of the GDP. The gross tax revenue in 2013-14 are provisionally estimated to be Rs. 1,133,832 crore which is 10 percent of the GDP. The gross tax revenue has shown a decrease of 0.2 percent in terms of GDP over the brvious year. The shortfall is mainly due to the poor performance of indirect taxes, according to the economic survey report. Fiscal deficit and revenue deficit during 2015 was 117.5 percent and 133.3 percent respectively, of budget estimates respectively. Plan and Non-Plan expenditure were 85.8 percent and 87.2 percent of revised estimates respectively. Fiscal Deficit Financing Fiscal Deficit (actuals up to February 2015) of Rs.5,12,628 crore, largely financed through Domestic Financing. Out of Domestic Financing of Rs.5,96,839 crore, market borrowing was Rs.4,85,780.83 crore which is 98 percent of its budget estimates. The government's disinvestment programme in the new financial year started with REC's Rs. 1,550 crore share sale. The new government's first full Budget in February announced a Rs.69,500 crore plan to sell stakes in government companies. Of this, the government has budgeted Rs.41,000 crore through stake sales in public sector units and Rs.28,500 crore via strategic disinvestment. Balance of payment/Current Account Deficit (CAD) India's Current Account Deficit (CAD) narrowed to $8.2 billion (1.6 percent of GDP) in Q3, fiscal 2015 from $10.1 billion (2.0 percent of GDP) in Q2. Compared to a year ago, however, CAD doubled (from $4.2 billion) due to a rise in goods imports (4.7percent y-o-y) coupled with a decline in goods exports (-1 percent y-o-y). Consequently, merchandise trade deficit widened sharply to $39.2 billion from $33.1 billion a year ago. However, a rise in net services exports to $20.3 billion in Q3, fiscal 2015 vis-a-vis $18.1 billion a year ago, provided some cushion to the CAD. Capital flows at $23.4 billion (up from $18.7 billion last quarter), were more than sufficient to finance the CAD and resulted in an accretion of $13.2 billion to India's foreign exchange reserves. Reserve build-up in Q3 was significantly higher than $6.9 billion in the brvious quarter. The widening of trade deficit was entirely driven by a sharp worsening of India's non-oil trade deficit as non-oil imports have been rising on the back of domestic recovery while non-oil exports continue to languish due to weak global demand. In contrast, the oil trade deficit (oil exports-oil imports) narrowed by nearly $7 billion as sharp decline in oil prices lowered India's oil imports bill, which alone account for 1/3rd of India's total goods imports. Oil prices (Brent) averaged to $76.4/barrel in October-December 2014 compared to $109.2/ barrel in the same period a year ago. CRISIL Research projects a forecast of India's CAD at $32 billion (1.5 percent of GDP) for FY15, similar to FY14. Lower oil prices will help reduce oil imports and offset the impact of higher gold imports following the withdrawal of 80:20 rule. India's current account deficit had widened to a five-quarter high of 2.1 percent of GDP in the second quarter. Global crude prices have declined by 50 percent in the last eight months which has led to a 28.6 percent contraction in India's biggest import item but it also pulled down petroleum exports which fell 20.1 percent in the month. Export growth is likely to remain weak as lower oil prices create downside for petroleum product exports, which account for 20 percent of India's overall exports. Moreover global demand continues to remain weak. Currency and Reserves Foreign currency reserves increased. After the rupee apbrciated in the month of May 2014 in terms of one US$ to Rs.58.78 (21.05.2014) mainly due to large FN inflow, it is now hovering around Rs.62.00-Rs.63.00 (Rs.62.39 on 13.04.2015). In the last year CY2013, Rupee touched a low of Rs.68.4 inAug'13. Inflation Consumer price inflation (CPI) with changed base year from 2010 to 2012 inched up to 5.37 percent in February, higher than the brvious month's 5.1 percent. RBI had expected CPI to be at 8 percent in January 2015 and 6 percent in January 2016. The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation with the new year has revised the Base Year of the Consumer Price Index (CPI) from 2010=100 to 2012=100. In this revised series, many methodological changes have been incorporated, in order to make the indices more robust. As per the new series, higher weight has been assigned to education and health services, while the weight of food and fuel items were reworked and house rent index data has been widened. The Wholesale Price Index (WPI)-based inflation fell to -2.06 percent (provisional) in February 2015 against -0.39 percent (provisional) in the brvious month. Fuel and power, having a weight of 14.91 percent declined by 4.4 percent to 181.3 (provisional) from 189.7 (provisional) for the brvious month. The Primary Articles having a weight of 20.12 percent, declined by 1.9 percent to 241.9 (provisional) from 246.6 (provisional) for the brvious month. With inflation falling and industrial growth still not picking up, RBI had responded by reducing the policy repo rate by 25 bps (on 04.03.15) to 7.50 percent. CRR was kept unchanged. Flls Investment In Equity market, Flls invested Rs.2,752 crore in the month of Apr 2015 (up to 11.04.2015). This year the net investment totals Rs.38,569 crore (up to April 11th, 2015). In Debt market, Flls took out Rs.338 crore in the month of Apr 2015 (up to April 11th, 2015). This year the net investment totals Rs.42,075 crore (up to April 11th, 2015). Last year RBI added $24 billion to foreign exchange reserves as the central bank kept absorbing the Fll flows from domestic markets through state-run banks. The rise in 2014 is the highest since 2009 on a year-to-year basis. Till April 3, the reserves totaled $343 billion. Foreign investors had earlier pulled out a record Rs.48,968 crore (close to $8 billion) from debt as domestic 10-year G-sec rates increased and the rupee weakened. The last time the Indian debt market witnessed an exodus was in 2005, when Flls withdrew nearly Rs.5,208 crore ($1.2 billion). The worst sell-off happened in June 2013 when Flls pulled out Rs.31,341 crore ($5.3 billion) in a single month after Ben Bernanke hinted the market with the announcement that the US Fed could announce a tapering by the end of the year. The rupee lost 12.37 percent in 2013 as it slipped from Rs 55 at the beginning of the year. It even hit a record low of Rs.68.84 on August 28th, 2013. The 10-year G-sec yield rose from 8.05 percent in January 2013 to 8.83 percent at the end of the year, driving bond prices lower. Total FDI inflows (Equity inflows + Re-invested earnings + Other Capital) during Financial Year 2014-15 (from April'14 to Sep'14) are US$ 21.511 billion, as per RBI's Monthly bulletin dtd: November 10th, 2014.The Indian equity markets improved and BSE SENSEX touched its all-time high level of 30,024 on March 4th, 2015. BSE Sensex up by about 27 percent in the last one year. Bank Credit and Deposit growth According to RBI data on 10th April 2015 (Outstanding as on March 20th, 2015), Bank credit grew Y-on-Y by 9.5 percent as compared to 13.9 percent last year. In aggregate, Deposit growth was 11.4 percent as against 14.1 percent last year. Investment grew by 13.2 percent as against 10.3 percent last year. Credit quality of companies has remained under stress mainly in power, construction, engineering, and steel, and led to higher non-performing assets (NPAs). Debt Yields on the 10-year benchmark government bond continued to remain at medium to high levels. The 10 yr benchmark yield may remain volatile. CONCLUSION RBI's focus is on growth as well as inflation. They have taken various measures to increase liquidity, reduce the volatility in foreign exchange market and curb inflation. Latest disinflationary brssures had provided for an accommodative stance of monetary policy. Many important structural reforms are embedded in the Union Budget 2015-16, which will help improve supply over the medium term. In the short-run however, the postponement of fiscal consolidation to 3 percent target by 1 year will add to aggregate demand. HOUSING FINANCE INDUSTRY STRUCTURE & DEVELOPMENT India's housing finance industry comprises banks and housing finance companies. India's urban population has grown over the past 4 decades from 109 million in 1971 to 377 million in 2011 and is expected to grow to almost 600 million by 2030. India is expected to emerge as the third largest economy in the world by 2030 with an estimated 590 million people inhabiting the cities. The agenda of housing for all is a key component of the government's strategy for making Indian cities inclusive and productive. While rapid urbanization and growing cities provide various opportunities, there is a fallout in terms of proliferation of slums, high prices of land and building materials which render houses unaffordable for the segment at the bottom of the pyramid. The technical committee constituted by the Ministry of Housing and Urban Poverty Alleviation has estimated housing shortage at 18.78 million during the 12lh Five Year Plan period of which over 95 percent of this housing shortage is estimated in the Economically Weaker Sections (EWS) and Low Income Group (LIG) categories. With increasing urban population it is estimated that it would generate unbrcedented demand for quality real estate and infrastructure. Approximately 123 million of urban population by 2020 is likely to require professional assistance for construction of houses. This would lead to a whopping 95 billion square feet of potential demand of real estate space across residential, retail, commercial, industrial and civil amenities over 2010-20. This would mean an average demand of 8.7 billion square feet, potentially needs to be built every year. Transportation infrastructure projects have a major impact on adjoining realty markets which can be leveraged to develop affordable housing. Investments in such projects, will also reduce demand friction around the Central Business Districts (CBDs) and allow for greater regional accessibility. Mid segment residential units continued to remain favourite amongst developers with a two-third share in total launches; also, unit launches in this segment increased by 5 percent from the brvious year. Unit launches in the high-end segment dipped by 29 percent in a year; whilst in the affordable segment they declined by 38 percent from the brvious year. Although luxury units contributed only 1 percent to total unit launches, they increased by five times from the brvious year. As per the leading rating firm ICRA, 60 percent of housing loan credit is covered by HDFC, LIC Housing, SBI Group, ICICI Group and Axis Bank. Around Rs.3.7 lakh crore -housing loan book is with housing finance companies while the banking sector holds loan book to the tune of Rs.6.3 lakh crore. Approximately Rs. 18,000 crore to Rs.28,000 crore -External capital is required for housing finance companies to grow at 20-22 percent in next five years. Capital value trends at the end of 2014: Pune saw the highest increase in capital values with most markets registering an increase, in capital values. Quoted capital values apbrciated in the range of 2-14 percent from the brvious year in majority of Pune's submarkets. Quoted capital values in the high-end segment of Chennai's central submarket comprising locations such as Boat Club and Poes Garden, also apbrciated by 8 percent from the brvious year primarily due to dearth of new supply amidst continued demand. Bengaluru, Hyderabad, Mumbai and Kolkata witnessed a mixed trend with capital values in many submarkets remaining sticky throughout the year. Due to continued demand and because of improving infrastructure, quoted mid segment capital values apbrciated by 3-7 percent in a few submarkets of Bengaluru. Quoted capital values in a few submarkets of Hyderabad and Mumbai apbrciated by 2-9 percent, primarily due to unit launches at higher prices. Quoted capital values in Ahmedabad and Chennai remained largely stable for majority of the submarkets from the brvious year. Mid segment units in south submarket (Maninagar- Ahmedabad) apbrciated by 5 percent year on year and GST (Grand Southern Trunk Road - Chennai) also improved by 10 percent in 2014. Delhi-NCR was the only city that registered correction in its quoted capital values during the year. Apart from Noida, which witnessed an apbrciation of 5-6 percent in both mid and high-end properties, quoted capital values corrected in the range of 2-11 percent due to high levels of unsold inventory in other submarkets within the NCR. Looking ahead: The Indian government has recently announced its vision of 'Housing for all by 2022', the year in which India will celebrate 75 years of its independence. To achieve this target, the government will need to come up with an optimum mix of budgetary support and policies to strengthen investors' sentiments and make housing projects, especially in the affordable segment, financially accessible to people from all walks of life. Making around 2 crore urban houses and 4 crore rural houses is a huge project in itself, and will require not only a sustained government interest and investment but will also need substantial private sector investment and involvement. Affordable housing is a focus area of the government. Moreover, the government has relaxed its FDI policy for projects, demonstrating its commitment to provide housing for all its citizens. Looking at the scale of demand, India needs to do a lot more to promote affordable housing and achieve the government's vision of 'Housing for all by 2022'. Some of the initiatives, if taken by government could help to realise this dream, and they are: properties should be sold to individuals in the appropriate income brackets, otherwise, there may be speculation in prices; housing policies should be revamped from time to time to keep them relevant; specific tax holiday benefits alongwith subsidies on interest rates and waiver of stamp duty, could be provided for affordable housing projects, and reserved zones for affordable housing in city plans, would enable adequate supply of land. According housing 'Infrastructure status' would benefit the sector by providing easier access to funds. Increased moratorium period on repayment of loans, along with concessional rates, would help in making investment attractive. Investing in real estate has become increasingly popular over the last few decades. Real estate is considered to be one of the sound investment options. Real estate market offers plenty of opportunities for making big gains. India is likely to witness an infrastructural boom, providing real estate with an advantageous edge as an investment vehicle. However, it is important to mention that caution should be exercised at all cost while investing in real estate, considering many facets including possible capital apbrciation during the project life cycle and studying the reputation of the developers for delivery within stipulated time as well as legal issues related to the project. Competition: The Housing Finance Industry is one of the most keenly competitive segments of the Economy, with the Banking sector having a significant brsence. However, Housing Finance Companies with a dedicated focus on the industry and better understanding of the underlying real estate markets stand on a better footing when it comes to understanding the needs of the customers as also assessing the risks in the industry. Making housing loans available for a greater part of the home value for the customers of affordable homes, is a welcome step. Many banks used to earlier give loans for 80 percent of the value of house / flat, are now ready to give 90-95 percent of the home value in case of affordable housing and the repayment period can be as much as 30 years, thus reducing the EMI, as per the new RBI guidelines. Interest rates on a home loan are one of the most important factors that influence the buying decision of an affordable homebuyer. With the RBI's decision to cut the repo rate by 25 basis points, property buyers are enthusiastic since now, an affordable home can become even more affordable for them as interest rates are likely to come down. Banks and Housing Finance Companies are likely to lower their interest rates in order to enable the home buyers to avail home loans at competitive rate. One of the key concerns emerging among developers is about banks getting more cautious about lending to the realty sector. Banks are reluctant to lend money to realty companies as RBI made it tougher for banks to provide high value loans to properties costing over Rs.75 lakh. The RBI had also raised the provision requirement for loans. This move by RBI gives more space for HFCs to capitalize and consolidate its market share by providing loans at very competitive rate to enable the developers come up with affordable housing project and be part of the Government's objective of providing housing for all. Opportunities: The aspiration to own a home remains a basic concern for every individual. In fact, developers remain positive that it is this 'need-based concern' which would ultimately help them to tide over the brsent lull phase. Catering to this basic concern, several housing finance companies and banks extend various loan schemes. With real estate investments turning out to be a proven and time-tested asset apbrciation mechanism, any time can be considered a good time for investment in property. However, purchase behaviours are often affected by auspicious dates, as defined by the Indian calendar. "This is particularly so, in the case of individuals buying homes for their own use, where the emotional reasons to buy on an auspicious date, assume greater importance". After all, a home is one of the most significant investments of a lifetime. For the last few quarters, developers have been gearing up in order to buck the market trend and devise various measures to incentivise their property sales to prospective buyers. As buyers are getting more price sensitive, developers are also offering discounts on the rates per square feet charged from the customers. Positive aspects of Real Estate Investment a) A sound investment: The best thing about investing in real estate is that there is likely apbrciation with the passage of time. b) Less risk involved: Investors are less likely to end up with a loss by investing in real estate. Real estate is relatively free from drastic fluctuations and rarely loses value over the long term. On the other hand, factors such as surrounding infrastructure developments, i.e. a new road, school or hospital etc., can increase the value of real estate many times. c) More choice: There is a wide array of choices for investing in real estate across India. It can be land, commercial / residential space. d) Profitability: Investment churns up profit in many ways as returns, including apbrciation, resale and rents. India is a country that is challenging the limits of aspirations and possibilities every day. If there is one sector that reflects the changing aspirations and growing needs of this new India, it is the housing sector. Strong economic growth has led to rising incomes, better availability of attractive home loan options, wide range of supply and growing aspirations. All these factors have made buying an attractive proposition. In fact, in metropolitan cities, it is not uncommon to see young professionals aspiring to own additional home than the one they reside in, thus leading to a 'Second Home Wave'. Second home in India is a relatively new phenomenon that gained steam in the mid-1990s as the country went through its first real estate upswing. No single factor can be attributed as the driver of the second home wave; rather it was combination of a host of converging factors that led Indian home buyers to explore second home purchases. Suburbs across the country have emerged as a brferred location for home buyers for brmium residence, given the better land availability in these areas as compared to city centers, yet away from its hustle and bustle. Growing market maturity has ensured that a wide range of top-end housing projects which are closer to nature are now available. This category includes residence options along beaches, hillside homes, and riverside resorts and in other natural surroundings. What is interesting is not only the geographical diversity of these homes, but also the significant range of formats in which such projects are being developed in planned communities across the country including villas, townhouse, row-house and even apartments. A subset within this category includes wellness homes, which allow buyers to rejuvenate themselves from demanding careers and stressful lifestyles. Such homes offer relaxation and wellness centers that offer yoga, meditation and other rejuvenation avenues. There has been noticeable trend among home buyers exploring the options of buying second homes in pilgrimage centers as trips to such places tend to be periodic. Homes in pilgrimage centers serve the dual need of being a holiday home and a good investment. Threats (bottlenecks) Unavailability of land, delays in project approvals and low floor space index norms are constraining the supply in certain markets, thereby affecting the ability of prices to settle at a more rational level. Residential real estate is defying the conventional wisdoms of economics where a constant price hike is not benefitting the real estate companies either. With brssure on both, the demand and supply side, residential real estate has gone into a vicious cycle of ever increasing cost, falling demand, liquidity crunch and last but not the least, delay in approvals adding to the woes of the developers. Home sales have slowed down, private equity has dried up, the primary market is subdued and banks have been reluctant to lend to builders. A combination of consumer activism, agitation by farmers, bureaucratic delays, labour shortage and legal wrangles, have contributed to the holding up of projects. Land acquisition complexities impede investors. The core issues that surround the acquisition of land are more complex than those related to built-up property. Also, there are issues of multiple approval requirements for any housing project varying from State to State. Segment-wise Reporting Segment has been identified in line with the Accounting Standard on segment reporting, taking into account the organization structure as well as the differential risk and returns of these segments. The Company is exclusively engaged in the Housing Finance business and revenues are mainly derived from this activity. Outlook The general feeling is that the demands of the sector may well be addressed in the future but the roadmap and the vision of the government, vis-a-vis the fortunes of the realty sector are well intended. Most importantly, the Finance Minister has committed to implementing the GST from 1sl April, 2016 and has also committed to remove exemption and decrease the corporate tax rate from 30 percent to 25 percent over the next four years, which would ultimately leave more investable surplus in the hands of the corporates, which will be ploughed back into the business and thereby, contribute to the country's GDP. Further, the move to monetise gold by parking the same with banks, will create investable surplus in the hands of individuals and the move to abolish wealth tax will be a big boost in this regard. From the real estate industry point-of-view, the government has made one much needed announcement and that is with respect to Flls being permitted to invest in Alternate Investment Funds (which includes REIT i.e. Real Estate Investment Trusts). These funds will have a 'pass through status' which means the post tax income earned by these trusts, will be passed through to the investors with no additional tax. The government's vision 'Housing for All by 2022' will encourage more investment in the affordable housing; however, this needs to be backed by strong policy framework and faster clearances. Measures like revisiting and revitalising Public Private Participation model, increasing funding for infrastructure, introduction of a br-defined permissions regime, and proposal to rationalise capital gains tax regime for REITs, etc., will have a positive impact on the sector. According to rating firm ICRA, Housing loan growth is set for a major apbrciation in the current financial year 2015- 16 as government's focus on affordable housing could lead to improved mortgage penetration. Approximately 22 percent home loan growth is expected in the current fiscal 2015-16. Housing being a state subject, increase in the devolution of central taxes towards the state may help states to allocate more money towards affordable housing. In fact, the allocation of Rs.22,407 crore towards urban development and housing, the bulk of which is expected to fund affordable housing and smart cities is a welcome move, especially in Mumbai, which needs it for affordable housing. From the point of view of personal income, the budget proposal may result in the increase in disposable income for the common man by providing health cover, transport allowance and pension contribution. Homes are evolving and so is consumer's aspiration. Having seen the world, literally Indians are finally realizing that homes can be developed to be more than just a roof to sleep under. While a home is all about the things that stimulate happiness and contentment such as family, love, care, leisure and play, the core concept of home has far evolved from being a basic 'need' to being 'desired'. Housing helps to provide a stable platform for future development of a democratic society. Globally, there is a strong correlation between economic development and housing and housing quality. It is said that alleviating the urban housing shortage could potentially raise the rate of growth of GDP and have a decisive impact on improving the basic quality of life. Risks and concerns Risk is inherent part of the Company's business. Effective Risk Management is critical to any Housing Finance Company for achieving financial soundness. In view of this, aligning Risk Management to Company's Organisational Structure and business strategy has become an integral part in Company's business. Over a period of last 3 years, LIC Housing Finance Ltd. has taken various initiatives for strengthening risk management practices. The management has to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. The company is exposed to risks in the course of their business such as credit risk, interest rate & market risk, liquidity risk and operational risk. LIC HFL's strategy in optimizing business opportunities within the aforesaid constraints is assisted by a robust asset liability management. The objective can be summarized as below: Reduce potential costs of financial distress by making LIC Housing Finance less vulnerable to adverse movements in liquidity, interest rates, exchange rates (wherever applicable). Create a stable planning environment, by ensuring that the business plan is not adversely impacted during the financial year due to any adverse liquidity situations, interest rate and currency fluctuations by using tools such as time-bucket wise liquidity statements, duration gap and Forex exposure reports. In other words, it is aimed at ensuring that the Net Interest Income (Nil) is not adversely affected irrespective of adverse changes in the above risks as far as possible. Credit Risk: Minimise the credit risk by adopting scientific techniques for credit evaluation, brscribing exposure limits, portfolio composition and periodic review of the portfolio; LIC Housing Finance operates in the mid-market end-user segment where the delinquency rates have been lower. A large chunk of borrowers are in the salaried segment. The Company has been following stringent credit assessment processes like adoption of the application scoring system (scorecard), compulsory CIBIL checks, field investigation, legal and technical due diligence etc. which have helped to reduce incremental delinquencies. The prudential norms with regard to exposure, credit concentration etc specified by National Housing Bank (NHB) also facilitate in managing and diversifying the credit risk. Interest Rate Risk and Market Risk: Every financial institution has an inherent interest risk arising on account of volatility in the interest rates and also Asset Liability Management mismatches. The lending rates of the company are linked to floating benchmark rate of the company which captures the interest rate movements. The liquidity, interest rate risks and foreign exchange risks are actively managed through various tools such as Asset Liability Management, time-bucket analysis, liquidity statements, forex exposure reports. Being in a competitive sector, the company is also exposed to risk of competition from other market players, however the management believe that by virtue of its strong brand and pan India brsence, vide range of products and experience in the sector, the company will be able to compete successfully with other players in the market. Operational Risk: Operations risk is the risk that deficiencies in internal controls will result in unexpected loss. This risk is associated with human error, system failures and inadequate procedures and controls. The company's strong internal controls and audit processes commensurate with the size of the company and nature of business ensures that operational risks are minimised. The internal audit is carried out by the internal audit department and by a firm of chartered accountant appointed by the management. Asset Liability Management: The company follows The Asset Liability Management System for Housing Finance Companies - Guidelines' issued by NHB. The company has in place Board approved Risk Management Policy. The policy specifies the prudential gap limits and the tolerance limits and the reporting mechanism. The Asset Liability Management (ALM) reports are periodically reviewed by Asset Liability Committee (ALCO) and ALCO in turn apprises the Board on ALM issues periodically. The average loan to value is in the range of 50-60 percent (as against the regulatory limit of 90 percent for loans up to Rs.20 lakh and 80 percent for loans above Rs.20 lakh and up to Rs.75 lakh and 75 percent for loans above Rs.75 lakh) and its instalment to income ratio ranges between 30-40 percent, both being amongst the lower ones in the industry. The low average ticket size of the loan of Rs.19 lakh and pan India sbrad of business adequately disperses the risk. The Company has one of the best recovery machineries in its category, which has addressed NPAs, supported by legislations such as the SARFAESI Act. Internal Control Systems & their Adequacy The Company has internal audit system which is effective and commensurate with the size of its operations. Adequate records and documents are maintained as required by law from time to time. Internal audits and checks are regularly conducted and internal auditor's recommendations are considered for improving systems and procedures. The company's audit committee reviews the internal control system and looks into the observations of the statutory and internal auditors. During the year, various guidelines / circulars were issued on the operational side to ensure better credit appraisal, as a result of which quality of loans should further improve during the years to come. Discussion of Financial Performance with respect to Operational Performance Financial / Fund Management The Company's borrowing is planned taking into consideration ALM gaps, interest rate mismatches and the brvailing market conditions. LIC Housing Finance has got highest rating for bank borrowings, non convertible debentures, commercial papers and public deposit schemes from CRISIL/ CARE rating agencies, which has helped the Company to procure funds at very competitive rates. The Company is selectively entering into derivative contracts with sole objective of managing risk associated with the interest rate movement, balance sheet management, converting fixed / floating coupon of the underlying liabilities, switching from the existing benchmark to favourable benchmark so as to brvent cost escalation on account of unfavourable movement of the benchmark and also as a tool to manage the asset liability mismatch. As derivative transactions are linked with risk, the status of each and every transaction is regularly monitored and the Company unwinds transactions at the appropriate time to mitigate the risk associated with it. The prime lending rate of the Company is regularly reviewed and revised as it is a benchmark for asset pricing. Since more than 98 percent of the asset portfolio is on the floating/ fix-o-floating rate, the Company re-prices the loan assets consequent upon the revision in prime lending rate of the company at specified intervals. The Company also reviews the fund position on daily basis and parks surplus funds in liquid mutual fund schemes, fixed deposits, certificate of deposits as per the Board approved policy with an objective of reducing the negative carry to the extent possible Performance / Operation Highlights During the year, the Company sanctioned Rs.31,712.90 crore and disbursed Rs.30,327.32 crore registering a growth of 18.74 percent in sanctions and growth of 20 percent in disbursements over the last year. For the year ended 31s1 March, 2015, the Company's total income from operations was Rs. 10,669.34 crore as against Rs.9,181.38 crore of brvious year. Net profit for year ended 31st March, 2015 was Rs.1,386.19 crore as compared to Rs.1,317.19 crore of the brvious year, showing a growth of 5.24 percent. The outstanding mortgage portfolio as at 31st March, 2015 was Rs.1,08,360.73 crore as against Rs.91,340.89 crore as at 31s1 March, 2014 thus registering a growth of 18.63 percent. Kev Elements of statements of profit and loss account for the year ended 31st March. 2015 •Profit before tax grew by 15.14 percent and Profit after tax grew by 5.24 percent on year to year basis. The increase of 40.80 percent on account of tax expenses is attributed to creation of deferred tax liability in respect of Special Reserve amount appropriated during the period under review has been charged to Statement of Profit & Loss. The creation of deferred tax liability in respect of transfer to Special Reserve has been introduced during the year. •Net interest margin for the year was 2.24 percent. •Tax provision for the year amounted to Rs.715.75 crore as compared to Rs.508.32 crore in the brvious year. •Net interest income grew by 17.77 percent year-on-year basis. •For the year ended 31st March, 2015 dividend @ 250 percent is being recommended as against dividend @ 225 percent in the brvious year. Marketing LIC Housing Finance is one of the largest housing finance companies in India having one of the widest networks of 219 Marketing Offices as on 31st March, 2015 across the country and rebrsentative offices in Dubai and Kuwait. The Company continues to serve the customers at their door step through Home Loan Agents, Direct Selling Agents and Customer Relation Associates. During the year, the Company also participated in property exhibitions in various parts of the country and the same has been an impetus for successful marketing. Recovery Management The gross non performing assets (NPA) as on 31st March, 2015 stood at Rs.494.68 crore as against Rs.609.00 crore as on 31st March, 2014 registering a decrease of 18.77 percent. The gross NPA ratio of the company stood at 0.46 percent as on 31st March, 2015 as against 0.67 percent as on 31s1 March, 2014. Net NPAs excluding provision on standard assets as per NHB norms as at 31st March, 2015 stood at 0.22 percent (Rs.234.43 crore) as against 0.39 percent (Rs.353.58 crore) on the corresponding dates last year. The provision cover on the NPAs stood at 52.61 percent (excluding provision on standard loans as per NHB norms) as on 31st March, 2015. Human Resources Development The Company has staff strength of 1,588 employees who have been contributing to the progress and growth of the Company. The manpower requirement of the offices of the company is assessed and recruitment is conducted accordingly. Personal skills of the 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 way of elevation to the higher cadre. Apart from fixed salary and perquisites, the employees are paid performance-linked incentives which motivates them to perform better. Loan assets per employee as at 31s" March, 2015 was Rs.68.24 crore and net profit per employee Rs.87.29 lakh. Conclusion with Caution 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. |