Growth in Housing Finance Market, Quality of Assets and Customer Related Issues April 20, 2012 Anil Sachidanand, CEO Dewan Housing Finance Corporation Limited

Evolution of Housing Finance Market in India 1971 Centralized direct credit HUDCO established: Public Sector, wholesale lending Pre 1970 Sub Prime crisis. Indian Mortgage Market shows resilience National Housing Bank: Regulatory and supervisory body / refinancing agency st private sector retail housing finance institution established 1984 DHFL commences operations 1988 Late 80’s and Early 90’s Public sector banks / insurance companies promote HFCs Late 90’s Commercial banks get active in direct lending for housing finance 2008 Source: Indian Housing Finance Market Outlook to 2015, Mindpower Solutions Microfinance institutions and foreign banks get active in the housing finance market. 54 HFCs active in the market Pre NHBPost NHB

Housing Finance Market Classification HOUSINGFINANCEMARKETHOUSINGFINANCEMARKET Banks Public Sector Banks Private Sector Banks Foreign Banks Housing Finance Companies Development Financial Institutions, Co-op Housing Societies Micro Finance Institutions Insurance Companies LIC Housing Finance, GIC Housing Finance etc. Key Players providing Home Insurance: New India Assurance, National Insurance, ICICI Lombard, Bajaj Allianz, IFFCO-TOKIO, Tata AIG etc. DHFL, HDFC, GRUH, Indiabulls Housing Finance, Reliance Housing Finance, Sundaram BNP Paribas, Religare Housing Development Corp etc. HUDCO, NABARD, SIDBI, Apex Co-operative Housing Federations, State Co-operative Agriculture and Rural Development Banks etc. Micro Housing Finance Corporation, MAS rural housing and mortgage finance etc. SBI, Bank of Baroda, Canara Bank, PNB, Dena Bank, Bank of India etc. Standard Chartered, Citibank, HSBC etc. HDFC Bank, ICICI Bank, Axis Bank, ING Vysya Bank etc.

HFCs Continue to Register Strong Growth Credit Growth 32% 50% 25% 23% 22% 13% 14% 8% 21% 13% Market Share  Currently there are around 54 HFCs registered with NHB (19 HFCs are allowed to accept public deposits)  Share of HFCs in the mortgage market is expected to grow from 26% in 2005 to 36% in  The increase is attributed to the strength of their focused approach, targeting of special customer segments, relatively superior customer service, and significant growth plans. Source: ICRA, Emkay Research

Are WE as HFCs Happy with the Growth ?...NO…Why? Industry Status Housing Finance Companies, though have a separate classification, industry status given to them is still missing. Trade associations like FICCI, CII, ASSOCHAM etc. do not have a separate housing wing for housing finance companies. Lack of Presence of Business Families Key Indian entrepreneurial families are not inclined to make housing finance as one of their main business units. Eg: Mr. Kumar Mangalam Birla, Mr. Mukesh Ambani, Mr. Adi Godrej, Mr. Anand Mahindra. Limited Capital Market Listing DHFL & HDFC have shown the way to be reckoned as premier housing finance institutions tapping the capital markets. However, there is a dearth of HFCs getting listed on the stock exchanges. No major Housing finance company listed in recent years. New HFCs still need to grow New HFCs remain on the fringes and are best described as marginal players. They are not able to make significant impact in the growth of the industry

Recommendations for Inclusive & Sustainable Growth Inclusion in Trade Associations Facilitation by NHB towards building a trade association of HFCs. Inclusion of HFCs in major trade associations like FICCI, CII, ASSOCHAM etc. Support the Growth of New HFCs Support from NHB to new HFCs in the market by bringing out action oriented plans to ensure the scalability of these companies. This would help them to enjoy strong and sustainable growth in future. Entry Facilitation and Enhanced Borrowing Powers Entry facilitation to the new players in the market. Overleveraging of CAR and enhanced borrowing powers to support the scalability of existing as well as new HFCs.

Quality of Assets in the Indian Mortgage Market  In India, we do not have Prime vs. Sub Prime !!! There is NO need to follow practices of other countries that have different socio-Economic Culture. Being risk averse by nature, an average Indian borrower is less likely to default on loan repayments. Comfortable loan-to-value and instalment/ income ratio with quality credit appraisal has ensured growth with stable asset quality.  Major challenges in maintaining the quality of assets are: Book keeping of loan customer accounts and Document safeguard / retrieval through in-house/outsource model. Quality of auditors with domain expertise stands missing. Understanding that SARFAESI is not a threat but a facilitating mechanism. Given housing finance a state subject, the quality remains subjective. Further, objectivzing end-to-end operations of housing finance remains a big challenge.  Best managed companies on a larger balance sheet having efficient collection & recovery mechanism operate at less than 0.50% of NPA 90 days past dues. Worst players have inefficiency in their collection & recovery efforts. Hence the quality of assets take a beating. These companies operate at NPA levels in the range of %.

Asset Quality of HFCs Remain Upbeat Source: Emkay Research  As discussed, the mortgage market has remained upbeat given the nature of borrower (being end-user) and their risk-averse behaviour. The mortgage demand is primarily dominated by first time home buyers and is not much speculative in nature.  This is evident from the fact that even during the crisis period of , GNPA for HFCs remained well within their comfort zone.  Over the years, asset quality has shown material improvement driven by adequate appraisal systems and effective recovery mechanism. Also, through stringent provisioning norms, NHB has ensured adequate cover.

Customer Service - A Serious Challenge Indian mortgage market is majorly characterized by first time loan borrowers with a conservative mindset. Technical jargons and use of heavy language is not well understood by most of the customers. Educating the customers about the home loan products in simple and easy to understand language remains the key. Biggest challenge for HFCs is to provide quality service to all the customer classes as per their needs.

Customer Diversity Across Income Levels Customers behave differently across income levels on various business parameters It is important not to lose sight of customer’s needs and wants. Organization psychology needs to be aligned with the same. Globals (Income: >Rs.10 Lacs p.a.) Strivers (Income: Rs.5-10 Lacs p.a.) Seekers (Income: Rs.2-5 Lacs p.a.) Aspirers (Income: Rs.1-2 Lacs p.a.) Deprived (Income: < Rs.1 Lac p.a.) Property Purchasing Decision Sensitivity to Interest Rate Emphasis on Quality of Service Judging Creditworthiness Financing Options Investment / End Use Driven Highly Sensitive HighestEasyMany Comparatively Less Very Few Relatively Easy Difficult Relatively Less Sensitive Not Sensitive Relatively High Relatively Less End Use Driven

Recommendations to Enhance the Quality of Customer Engagement  Is there a need felt to have only approved mortgage brokers / originators towing to regulatory guidelines?  Need for an escalation mechanism similar to IRDA for wrong selling / commitment of home loan products?  Guidelines for superior customer service in order to enhance customer engagement  Penalty for non service / wrong service Should it hit the rating of Housing Finance Companies? Should it affect the refinancing option available?  Should customer service be made an important and uncompromising business parameter for all HFCs? Responsible lending along with superior customer service would ensure satisfaction of all the stakeholders in the mortgage market and contribute towards sustainable growth

THANK YOU As the first milestone, mortgage as a % of GDP should be increased to 20% by 2020 Can we all together do it with NHB & RBI as the guardian of the industry?