Growth in Housing Finance Market, Quality of Assets and Customer Related Issues

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

2. Evolution of Housing Finance Market in India Pre NHB Post NHB National Housing Bank: Regulatory and supervisory body / refinancing agency 1st private sector retail housing finance institution established Commercial banks get active in direct lending for housing finance Microfinance institutions and foreign banks get active in the housing finance market. 54 HFCs active in the market Centralized direct credit Pre 1970 Late 80’s and Early 90’s 1971 1977 2008 1984 1988 Late 90’s 2009-11 Sub Prime crisis. Indian Mortgage Market shows resilience DHFL commences operations Public sector banks / insurance companies promote HFCs HUDCO established: Public Sector, wholesale lending Source: Indian Housing Finance Market Outlook to 2015, Mindpower Solutions

3. Housing Finance Market Classification H O U S I N G F I N A N C E M A R K E T Banks Public Sector Banks SBI, Bank of Baroda, Canara Bank, PNB, Dena Bank, Bank of India etc. Private Sector Banks HDFC Bank, ICICI Bank, Axis Bank, ING Vysya Bank etc. Foreign Banks Standard Chartered, Citibank, HSBC etc. Housing Finance Companies DHFL, HDFC, GRUH, Indiabulls Housing Finance, Reliance Housing Finance, Sundaram BNP Paribas, Religare Housing Development Corp etc. 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. Insurance Companies Micro Finance Institutions Micro Housing Finance Corporation, MAS rural housing and mortgage finance etc. Development Financial Institutions, Co-op Housing Societies HUDCO, NABARD, SIDBI, Apex Co-operative Housing Federations, State Co-operative Agriculture and Rural Development Banks etc.

4. HFCs Continue to Register Strong Growth Credit Growth 32% 25% 14% 21% 22% 50% 23% 8% 13% 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 2015. • 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

5. Are WE as HFCs Happy with the Growth ?...NO…Why? • 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. Industry Status • Key Indian entrepreneurial families are not inclined to make housing finance as one of their main business units. • Eg: Mr. Kumar Mangalam Birla, Mr. MukeshAmbani, Mr. Adi Godrej, Mr. Anand Mahindra. Lack of Presence of Business Families • 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. Limited Capital Market Listing • 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 New HFCs still need to grow

6. Recommendations for Inclusive & Sustainable Growth • Facilitation by NHB towards building a trade association of HFCs. • Inclusion of HFCs in major trade associations like FICCI, CII, ASSOCHAM etc. Inclusion in Trade Associations • 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. Support the Growth of New HFCs 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.

7. 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. • Best managed companies on a larger balance sheet having efficient collection & recovery mechanism operate at less than 0.50% of NPA • levels @ 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 1.85-2.25%. • 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.

8. Asset Quality of HFCs Remain Upbeat • 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 2008-09, 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. Source: Emkay Research

9. 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.

10. Customer Diversity Across Income Levels Property Purchasing Decision Financing Options Judging Creditworthiness Sensitivity to Interest Rate Emphasis on Quality of Service Investment / End Use Driven Many Easy Highly Sensitive Highest Relatively Less Sensitive End Use Driven Comparatively Less Relatively Easy Relatively High End Use Driven Very Few Difficult Not Sensitive Relatively Less • 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.

11. 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

12. 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?