RELATED ARTICLES |
In 1977 when it started as the first specialised mortgage company in India to provide home loans to the salaried class, borrowing was looked down upon. Relatives and friends provided interest free loans and borrowing outside this circle was taboo.
It was an “untried and untested” market, as HDFC chairman Deepak Parekh puts it. “My father worked in Central Bank of India for 38 years and with the full retirement benefit he bought a house and he had to start work again the next day,” he recalls.
HDFC began with an initial capital of Rs 10 crore, of which 5 per cent came from World Bank’s private sector lending arm IFC, another 5 per cent from Aga Khan Foundation, 5 per cent from ICICI and the remaining from the public. The dream run had just begun. It took wings with economic reforms in 1990s.
“Growth in home financing in India was just waiting to happen and HDFC took advantage of the reforms process to expand in segments where the economy opened up,” says Parekh.
At the end of the third quarter of 2010-11, the total number of housing units financed by HDFC stood at 3.5 million. While its own market capitalisation was at $20.9 billion, the market value of its listed subsidiary — HDFC Bank — was about $24.3 billion. In March 2010, total assets of the group stood at Rs 4,50,000 crore and the total customer base at 30 million. Out of HDFC’s total loan book of Rs 1,09,051 crore, about 68 per cent went to finance individual homes and the remaining for construction and developer finance.
The regulatory provisioning requirement is 3.26 per cent, while HDFC’s provisions are twice the amount at 6.56 per cent. The third quarter ended December 31, 2010 was the 24th consecutive quarter at which the percentage of non-performing loans has been lower than the year-ago period. Despite operating in the highly volatile property market, HDFC has managed to keep its NPAs at less than one per cent (0.79 per cent) of gross advances.
HDFC’s success goes beyond the housing sector. It has now emerged as a financial conglomerate with presence in the entire gamut of services including banking, insurance (life and non-life), asset management and real estate venture capital.
Vice-chairman and CEO of HDFC Keki Mistry says: “HDFC has been cautious in its approach, even at the risk of being branded conservative.”
But growth has happened and how. Prudent lending, customer orientation, deploying technology in preference to opening of branches for business expansion, and building a dedicated workforce have all contributed to this growth.
To prevent asset-liability mismatches, “we generally give fixed-rate loans from our fixed-rate borrowings and floating-rate loans from our floating-rate borrowings,” says Mistry.
Building strong customer loyalties was another factor. Managing director Renu Karnad Sud, who joined the company even before Parekh, says: “We personally knew our customers. Now the market has become highly fragmented as customers are looking for deals. Their interest last only as long as the interest rate is the lowest. Earlier, the rapport with customers was stronger.”
While the demand for home loans was always high, finding funds was an issue at the beginning. HDFC realised early that depending on wholesale deposits would be risky. So apart from loans taken from financial institutions and banks, HDFC mobilised retail deposits from across the country to fund its flourishing business.
Deepak Satwalekar, HDFC managing director till 2000, who retired as CEO of HDFC Standard Life in 2009, and his team put in place a revolutionary concept in retail fixed deposits. HDFC began giving fixed deposit certificates across the counter. That was at a time when banks took months to give a certificate. “If the man on the street can trust us with his money, often a life’s savings, the least we could do was to give him a certificate across the counter saying subject to clearance of the cheque,” Satwalekar said.
With attrition at a mere two-three per cent, it is an employee-friendly and customer-focused company that grew by learning from competition and peers. HDFC, according to Parekh, is looking to innovate some of its employee retention tools. Promotions will be faster. It will not be based on the length of service, and meritocracy will be prime focus for promotions.
“Employees were given the authority to take decisions. The open-door policy of the organisation was another important factor that helped prevent attrition,” says executive director
VS Rangan, who himself has spent close to 25 years in the organisation.
A rapid expansion with brick and mortar branches like some of its peers was never on HDFC agenda. “We still depend on outreach programmes to expand our presence. For example, when we see demand coming from smaller towns, the nearest branch organises an outreach programme, where HDFC executives put up in a hotel and invite prospective customers to meet them for a home loan. If we get 40 applications, then we open a branch there, because we are sure of break-even. We were always focusing on cost-effective solutions all the time”, says Karnad Sud.
But isn’t HDFC worried of its market share being eaten up by stronger competition? Ironic as it may sound, HDFC is a company which has a track record of helping rivals build their housing finance business.
In its incipient stage, HDFC experimented with growth models. It promoted competition by helping SBI and Canara Bank set up home finance subsidiaries, and joining hands with Ambuja Cements and Gujarat government and some public sector banks to start a home finance company, Gruh Finance, which is now a listed entity where HDFC holds 61 per cent stake.
From a monopoly in home mortgage, HDFC’s share is now down to 30 per cent. First ICICI Bank came along with its aggressive marketing strategies and then SBI more recently with an interest rate that undercut the market, pushing HDFC to the second place in housing finance. But for HDFC, this has been a learning process which would keep its competitive edge sharp in the future.
Similarly, learning from peers about keeping the balance sheet healthy would be valuable to HDFC. One of the first tie-ups HDFC had was with GE Capital in June 1993 to understand the consumer finance business. To understand the backend operations and technical know-how of managing a database, HDFC went for another tie-up with property management firm Colliers Jardine. But the parting of ways with Chubb, which was a tie-up for general insurance, was an unhappy chapter for HDFC.
Says Karnad Sud: “From GE, we learnt how to issue post-dated cheques. If we could do it for consumer finance we could do it for home finance as well. Colliers taught us property management and brokerage services. We were not happy with Chubb as it was US-focused and India was not an important market for it.”
HDFC would of course have to employ all its learning as a pioneer in home finance to wade through what some analysts see as increasingly turbulent waters of property market. The rise in property prices may dim the demand for houses. Banks also have been cutting down exposure to developers so the developed stock coming into the market may also be lower.
According to research analyst with India Infoline Aalok Shah, “Risk to the business is only if the developers are choked of their funds by the banks and are not able to develop their property, this could hurt the demand for homes.”
Mistry counters that argument: “Property prices are high and unaffordable only in some pockets of Mumbai. But penetration of mortgage is low in India which is another factor that will fuel HDFC’s growth in the coming years.”
According to HDFC estimate, the cost of a house as a multiple of an average home buyer’s annual income is only 4.7 times now, compared with a multiple of 22 times in the mid-1990s. “It makes housing a lot more affordable now,” says Mistry.
The number of double-income families has gone up, tax benefits and general income levels too have gone up, and the journey forward for HDFC would be as exciting as it has been over the past three decades.
manjuab
@mydigitalfc.com
 Limited.JPG)
Post new comment