TO OUR SHAREHOLDERS
Hope Begins at Home
The pandemic has been one of the most scarring periods in living memory. Through thisunfortunate devastation if there is one key takeaway it is that hope begins at home.More than ever before a home is not just a physical space it is a feeling. A home issacred. It is where the strongest human bonds are created. The pandemic has taught us thatthe three phases of a fulfilling life learning earning and returning can be done fromhome. Since inception HDFC recognised the importance of housing and for forty-four longyears we have stayed true to our objective of enabling Indians to become homeowners. Theyear under review entailed two distinct halves. The first was the shock and suddenness ofthe national lockdown. Working remotely called for a reorientation of mindsets systemsand processes. It was also a period when we further fortified our balance sheet throughour capital raise. The upside of conducting virtual roadshows was that it enabled us toreach out to a significantly larger investor base across several geographies. The secondhalf of the financial year reaffirmed our belief that more than ever before people arecraving for homes. Demand was for affordable housing and high-end properties. It came fromfirst-time homeowners and those moving up the property ladder into larger homes orrelocating. Every loan disbursed during the pandemic reassured us that as an organisationwe were resilient adaptable but most importantly humane. In the darkest of days we sawthat the more innovative and efficient we got in disbursing loans including optimisingour digital platforms the more hope and happiness we were able to bring to our customers.A confluence of factors aided the sharp recovery seen in housing in the second half of thefinancial year. Developers were more willing to rapidly close out deals. Interest rateswere at record lows. Continued fiscal benefits on home loans and concessional stamp dutyrates offered by certain state governments also encouraged home buyers. Despite theeconomy contracting 7.3% in FY21 the demand for home loans surpassed all expectations.Going forward the risks of recurring waves of infections may result in temporarysetbacks but the inherent demand for homes loans remains stronger than ever. Across theglobe the battle against the virus is still raging. At this juncture the only way tonavigate this crisis is vaccinating as many people as fast as possible.
Stellar Role of Regulators
I do believe that the second wave of infections in India could have less of an impacton the economy than the first wave. As is the case globally recovery is likely to remainpatchy and uneven. Since the outbreak of the pandemic despite the disruptions the Indianfinancial system and capital markets have displayed remarkable resilience. Kudos must goto the regulators who have consistently been responsive to the needs of the economy. Theregulators have had their ear to the ground welcomed feedback and have taken measuredsteps in a consensual manner.
The Reserve Bank of India (RBI) has had to do the heavy-lifting. It is only befittingto acknowledge that without RBI's timely interventions much of the financial system maywell have been decimated due to the extreme risk averseness in the early days of thepandemic. Since February 2020 the support announced by RBI stood at Rs. 15.7 trillionwhich is equivalent to 8% of GDP. No doubt the task ahead remains daunting as RBI has tobalance the need for growth facilitate the government's borrowing programme rein ininflation continue with stimulus measures and support sectors deeply impacted byCOVID-19.
The Indian capital markets appear to have had a smooth run -- largely driven by theoverall sentiment of the markets. Yet behind the scenes the Securities and
Exchange Board of India (SEBI) has been working at a frenetic pace with the singleobjective of ensuring normalcy of all market operations throughout the pandemic. SEBIresponded with alacrity to not just the need to ease compliance burdens but also providedextensive options to make it easier and faster for issuers to raise capital. As a resultIndian companies raised a record high equity capital of Rs. 1.9 trillion in FY21. Despitethe challenges SEBI continued its focus on deepening the corporate bond marketsfacilitating new and innovative market instruments focusing on investor protection andensuring India Inc. stays at the forefront of benchmark standards on environmental socialand governance (ESG) disclosures.
The leadership of both these institutions and their workforce deserves a place ofhonour for the yeoman service rendered in these trying times.
More than ever before a home is not just a physical space it is a feeling. A home issacred. It is where the strongest human bonds are created. The pandemic has taught us thatthe three phases of a fulfilling life learning earning and returning can be done fromhome.
Ironing Out Regulatory Wrinkles
As FY21 marks the first transition year of housing finance companies (HFCs) beingregulated by RBI I thought I could share some ponderings on the regulatory landscape.These are reflections of my personal views.
Regulation and supervision are critical functions in any financial system and it isimportant that trust between a regulator and regulatee is never compromised.
Regulatory clarity helps minimise potential conflicts. Often there are differences ininterpreting regulations. For instance non-banking financial companies including HFCshave been following Indian Accounting Standards (IndAS) which is still not aligned withthe prudential guidelines. This results in differences in opinions between the inspectionteams regulated entities and even the auditors. Banks and insurance companies have notmigrated to IndAS but it has been three years since NBFCs have. While this isn't a levelplaying field it may be prudent to at least resolve these open-ended issues sooner thanlater. Another niggling point for HFCs is retention of customers. Lenders are susceptibleto losing their existing customers to other players who often lure them through lowerinterest rates or increased loan amounts. As there are no prepayment penalties on floatingrate loans a lender can take over a home loan rather effortlessly. Direct selling agents(who are not tied agents) are happy to play along as it means getting paid a commissiontwice over on the same borrower's loan. Balance transfers only shift assets from oneplayer to another; it does not increase home loans or home ownership at a system level.Yet this is par for the course in a competitive business landscape.
The issue is that onboarding a home loan customer takes a great deal of effort andentails costs as well. But certainly an endeavour to retain a performing customer whichcould entail a change in the rate of interest is not akin to a loan being restructured. Itwould be of great comfort for all HFCs to have this issue put to rest. The currentenvironment has proved that there can be no better protection for a borrower than homeloan insurance and home insurance. COVID-19 has shown how fragile and uncertain life canbe and people now truly realise the importance of life insurance. In equal measure giventhe risks around climate change and abrupt weather patterns home insurance becomes a keyrisk mitigant. Currently an insurance loan given to a home loan borrower is considered asa non-housing loan. Insurance is voluntary for a home loan borrower but the reality isthat the insurance loan to the home loan customer should be considered as an integralcomponent of a housing loan and be permitted to be classified accordingly. After allinsurance protects both the customer and the HFC. My last submission is that theregulatory framework in its current form may have the unintended consequence of penalisinga HFC for maintaining excess liquidity. Larger amounts of liquidity are being held by HFCsout of abundant precaution. But surely maintenance of higher liquidity should not becomethe hindering factor leading HFCs to have to recalibrate their housing and non-housingportfolios so as to meet the prescribed minimum threshold limits of assets in housingfinance. A minor tweak which could exclude surplus liquid balances from total assets toarrive at prescribed limits would go a long way in helping HFCs. These issues are minorteething problems in a regulatory framework that is evolving. The important part is to beable to keep having dialogues with the regulators. RBI has done well to create theRegulations Review Authority along with an advisory group for the same. This committeehopefully will have the ear of both the regulator and the regulated entities therebycreating the much-needed bridge.
People of the Year
History will record the year as one of the greatest tests of courage resilience andcompassion. One falls short of words to adequately express gratitude to all the frontlinehealthcare workers. One also has to appreciate the wonders of technology that kept asocially distanced world connected and marvel the progress of science and medicine whichbrought vaccines to the world in the shortest time ever. At HDFC everything we didachieved and was lauded for is attributable to our employees who put customers firstbelieved in their collective strength and displayed the tenacity to keep persevering.During this period it became more apparent that we have some young and promising talentwhich we will continue to nurture and build a pipeline of leadership. As for plans onlonger-term succession planning I assure you it continues to remain a top priority andvery much a work-in-progress. I could not have been more grateful for having Keki Renuand Rangan lead at the forefront. Keki was the undisputed choice of the board to continueat the helm for the next three years. Continuity and stability is needed at this juncture.Renu has been the go-to' person for all our employees as she tirelessly ralliedteams together leading with sensitivity and compassion. Rangan has finely balanced hisdual role of managing the Corporation's resources in a tough environment whilst alsooverseeing the compliance function.
Lastly I must take this opportunity to thank and bid adieu to two of our very valuabledirectors on our board. Nasser Munjee and J. J. Irani will be completing their term asdirectors in July 2021. Each with their own characteristic style have contributedimmensely in guiding the board's overall strategy. My relationship with Nasser goes back43 years as he was one of the first employees at HDFC. Nasser rose to the ranks ofexecutive director at HDFC and later worked on setting up and heading InfrastructureDevelopment Finance Corporation. Nasser has always been appreciated for his futuristicoutlook and forthright views on governance. He has been a part of HDFC from its startupstage right up to its journey today. He truly has been an HDFC lifer.
J. J. Irani joined HDFC's board in 2008. Being a veteran from the Tata group his valuesystem was closely aligned to HDFC and the board benefitted from his deep industryexperience. Rarely one to mince his words he always stood his ground whilst expressinghis strong opinions. He ably chaired the nomination and remuneration committee overseeingthe phased board refreshment. Change in any institution is inevitable be it at the helm ordown the line. I do also want to acknowledge the contributions of employees who havesuperannuated from HDFC over the years. We continue to build upon their efforts and thishas held us in good stead. Against the backdrop of this pandemic what the future holdsonly time will tell but my instinct is that we will find calm in the chaos sooner than wethink.