To our Shareholders
As I sit down to gather my thoughts I can hardly believe this is HDFC's 40'' annualreport. The excitement of growing the housing finance business today remains as palpableas our first day of operations.
I have pondered deeply on how to benchmark an organisation's performance over fourdecades. I can say with certainty that as an institution we have been unwavering in ourcommitment to render exceptional service to our customers and build shareholder value. Wetreat our employees well so they in turn serve our customers well. We know ourdifferentiator is our people-driven approach. This has made us a preferred institution forlong-term investment business and employment. We hope never to change this approach. Itis embedded in our DNA and I am confident that the future leadership at HDFC will continueto uphold this as a tradition.
Forty years and on
Back in 1977 the strong institutional support we received for a never-tried-beforeventure in India was invaluable. We remain indebted to those who supported us at the verybeginning. They believed in our vision and conviction of the need for retail housingfinance in India. It is gratifying that many who had stood by us at inception continue todo so even today. These are generational engagements. Such relationships are rareprecious and deeply valued.
Forty years ago HDFC as the lone retail housing financier in India was All forHousing'. Now these three crucial words have been flipped around to Housing forAH'. This is momentous. The government has rightly pulled out all the stops to increasehomeownership in the country. Every constituent in the housing chain has been incentivisedand encouraged to play their role in the affordable housing mission.
As shareholders you would have recognised that housing has multiplier effects on theeconomy through increased productivity job creation and higher capital inflows.
Countries that accord importance to their housing markets rank better on almost everydevelopmental indicator. People who have the security of a home have a sense of belongingand a key stake in society. Those who live in permanent housing structures are inherentlybetter educated healthier and happier.
Housing outlook - more for less for more
A rapidly growing country like India with a large young population needs more homes ataffordable price points which in turn would enable more households to become homeowners.
The thrust given to affordable housing has been extremely encouraging. Developers cannow avail a 100% tax deduction on profits and gains if they construct affordable housingunits. No other major sector of the economy has been given such attractive incentives.Further according infrastructure status for affordable housing should help open up moreavenues of lower cost longer tenor funding.
For home loan customers besides direct fiscal benefits the government has alsoextended its support through interest rate subventions. The government's modified CreditLinked Subsidy Scheme is an outcome of the realisation that a small bit of support can goa long way in enabling both the middle-income and lesser privileged groups to becomehomeowners earlier in life.
Subscribers of the Employees' Provident Fund Scheme can now withdraw up to 90% of theiraccumulated funds for a down payment to buy a home or service the equated monthlyinstalments through their provident fund account. This measure effectively helps increasethe loan eligibility of a borrower. It facilitates extracting the borrower's own savingswhich otherwise would have been locked up.
Segments of the real estate sector in India have many a times been a hotbed ofundesirable activity. These practices should come to an end with the recent establishmentof real estate regulatory authorities across the country. These regulators will be theconfidence builders for consumers and watchdogs for compliance on the part of developers.Increased transparency benefits the entire housing ecosystem.
For years the market craved an 'enabling environment' that would foster an increasedsupply of homes at the right price points and help widen the target group of customers forhousing finance players. This government's policies on housing are practical andimplementable. With the benefit of four decades of experience in this field I canconfidently say that I have never been as optimistic about the housing sector as I amcurrently.
Culture - our bedrock of sustainability
What differentiates HDFC is perhaps not our products or strategy; it is our culture.Culture is intangible and unique to each organisation. At HDFC we believe our culture isour greatest strength best reflected through the long-term commitment of our employees.We value loyalty immensely.
Our culture is our binding force. Our only ask of our employees is integritytransparency and honesty in all dealings. These atthbutes are our non-negotiables'.
Every employee's role at HDFC is by default designed to be that of a team player. Thisstrong inter-dependence is mutually reinforcing for it helps keep egos aside. Ourinteractions are participatory not confrontational.
Over the years we have experimented and allowed an environment that provides anentrepreneurial zeal. Often we have taken calculated risks. Where it has worked we haveshared our success with our stakeholders. As a people-driven organisation we have learntto make allowances for failure as well. The only condition is that we leam from ourmistakes. A sense of openness and accountability provides the drive to keep extending ourreach to customers and building new relationships.
Our organisation like any other has witnessed various business cycles - extremes ofboth euphoria and stress. It is in these situations in particular that one realises theimportance of corporate culture and its impact on long-term performance. Culture is theinvisible force that lends consistency and endurance.
Rules processes and systems ensure conformity and compliance. What is the outcome whenthere are no guideposts? This is where values attitude gut-feel and ethics come to play.
I am proud of HDFC's home-grown culture. It is not a given - we work on it everyday in all our dealings. Our culture is not a mandated goal but simply an outcome ofcollective repeated emulated refined and internalised set of behaviours. It is imbibedthrough demonstrative effect which starts at the top and flows down.
The assurance I offer investors is that as long as our culture remains sacred HDFCwill keep creating shareholder value for the years to come.
In for the long haul
"HDFC has a long way to go to fulfill the role for which it has been established.I can only hope and pray that HDFC will prove equal to the task it has undertaken. "
H T Parekh - Founder Chairman First Annual Report 1978
Housing finance is a long-term business. The relationships we develop with customersare long-term as well. The time taken to build new homes in India is inordinately long.This begs the question - why are financial results looked at with such a short-term lens?
In any sector the objective of disclosing quarterly financials is to provide an updateon a company's performance. Yet quarterly numbers need to be viewed with the rightperspective.
Short-termism is becoming worryingly dominant. I strongly believe time has come for anopen dialogue on the perils of extreme short-termism. We need a change in the mindset andperhaps a different matrix to better evaluate corporate performance. Patient engaged andproductive capital must not become elusive.
In any sector when unrealistic expectations override there is undue pressure onmanagement to deliver. If this repeatedly happens every three months it leaves littletime to focus on the long-term big picture. Short-termism undermines a company's abilityto invest and grow.
We believe there is strong merit in investing time and effort through regular opendialogue with our investors. This helps investors understand us better. At HDFC. wecontinually assess the environment to determine a sustainable growth trajectory. We shunshort-cuts and myopic strategies. Growth expectations have to be recalibrated as the basegets larger. Market conditions regulatory requirements and self-imposed prudence havemeant that the time taken for loans to reflect profitability has increased. We maintainthat our strategy of fortifying our balance sheet has held us in good stead.
Certain emerging market trends suggest that aggressive growth particularly on loansagainst property is now experiencing some level of stress. For us our priority has alwaysbeen housing loans. Further at an industry level shifting of housing loans from oneplayer's balance sheet to another does not tantamount to growth in the overall housingmarket. The overriding objective must always be funding incremental housing.
The outcome of the government's measures however will largely depend on the extent ofsupply of affordable housing. The final price point of these units is crucial.
What lends confidence is that certain well reputed and experienced developers havealready committed to building affordable housing units. Yet the reality is that in Indiathe building cycle is unduly lengthy. The last leg of change needed to boost the housingsector is streamlining building approvals.
Building approvals is the domain of state governments and local level authorities. Ifspeedier delivery of projects is the need of the hour then the process of multipleapprovals at various stages of construction is counterproductive. Even if a few key statestake the lead to fast-track approvals for affordable housing projects it will set aprecedent for others to emulate.
It is equally important to find the means to reduce land prices. A decade ago. theReserve Bank of India had prohibited banks and housing finance companies (HFCs) fromfunding land transactions as they feared the build-up of a real estate bubble.
To acquire land developers have to rely on funding by non-banking financial entitiesand private equity funds but these are at exorbitant rates. While one appreciates thestress that the banking sector is undergoing on asset quality it does appear illogical tocontinue to prohibit HFCs from funding land transactions. HFCs understand the needs ofdevelopers. No doubt land financing requires strong checks and balances. HFCs can helpreduce the cost of a home for the customer if they are allowed to fund the developer atthe time of purchase of the land. One can only hope this repeated plea gets its dueattention.
Over the last 25 years we have seized every opportunity to diversify into variousfinancial services as and when these sectors were liberalised.
HDFC has a unique structure as both a single product financial company and parent ofthe group companies. Our subsidiary and associate companies are decentralised and managedand run by independent boards. Our only call on our group companies is performanceevaluation of the group CEOs succession planning acquisitions and key investments.
We now hope to extract greater value from our group companies and explore listingopportunities where conducive. To better reflect long-term value creation investors ofHDFC need to increasingly focus on the consolidated rather than the standalone entity.
To conclude I would like to reiterate that India's macro-economic fundamentals havenever been stronger than today. A number of structural reforms are underway which willplace India on a higher growth trajectory. We are excited about our future as we are aboutIndia's future and we hope you partake in our optimism.