MANAGEMENT DISCUSSION & ANALYSIS... Industry Overview The new government at the centre has infused optimism in the sentiments in general. The Reserve Bank of India has managed to bring down the CPI inflation to 6% from the double digit level of inflation which persisted over the brvious two years. A large part of disinflation has been on account of the slump in international crude oil prices. The Union Budget has also announced initiatives to boost investment. As a result, the outlook for the GDP growth has improved. However, the unseasonal rains and hailstorms during the last month could have adverse impact on the agriculture and CPI inflation. Hence, what remains to be seen is the pace with which the acceleration takes place without increasing the inflation. The Reserve Bank of India, in its endeavors to boost the pace of growth, reduced repo rate twice during the year. In its recent bimonthly policy, RBI has also indicated that it will continue to be accommodative in further easing of the rates if the inflation remains within the acceptable range and transmission to lending rates. It is therefore expected that the credit growth which had declined to 9% - lowest in the decade from 14% during the brvious year; is likely to improve during the new financial year. The asset quality which had deteriorated in general across the banking sector during the year under review, is expected to remain weak until economic growth gathers momentum. Even, net-interest margins are expected to follow the similar pattern after experiencing decline by the banking sector. Market Scenario There has been no change in the status of demand in the real estate sector and inventory of unsold properties had bulged to an all time high level. As a result, most of the lenders stepped up the disbursals of loans against existing properties. The spurt in mortgage loans, at a time when the economy has been at its lowest ebb; could prove difficult while effecting recoveries. Hence the risks have increased in the housing finance market when the demand for new residential properties is very sluggish and property valuations have increased. The market scenario has become much more discouraging and it is expected that the scenario might not change for a further period of 12 to 15 months. However, in line with the Central Government's Housing for all - 2022 program, various State Governments have taken up housing projects in the affordable segment through their agencies viz. Municipal Corporations, Housing Boards, Development Authorities or through specialized agencies set up for the purpose. AKME Star Housing Finance Limited (ASHFL) has been trying to minimize the risk while lending to these segments as much as possible by entering into tripartite agreements with various banks and financial agencies. Affordable Housing for All "Affordable Housing for All" has been an important policy agenda of the government, as it seeks to create an enabling and supportive environment for expanding credit flow and increasing home ownership. This will help create an ecosystem of opportunities for every potential home buyer. The affordable housing policy has introduced an interest subvention scheme for housing loans, which is implemented through scheduled commercial banks and housing finance companies (HFC). This came under the purview of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) programme, the flagship scheme of the Ministry of Urban Development. In addition, the Government also promotes rural housing finance in the lower and middle income (LMI) segment through the Ministry of Finance. The schemes are conducted through the Rural Housing Fund, Golden Jubilee Rural Housing Refinance Scheme and Special Refinance for Urban Poor Scheme. These are aimed at providing affordable housing finance to the under-served, low income segments in India's rural and urban parts. Housing Finance Companies Housing finance companies (HFCs) have been on a strong footing, with a keen focus on the large affordable housing segment. Over the years, HFCs have come to play a vital role in the Indian economy and are gaining market share in the housing loan segment. They are at the forefront in catering to the financial needs of the under-banked masses in the rural and semi-urban areas through strong linkages with these segments. Decelerating Inflation and Interest Rate Scenario The Consumer Price Index (CPI) has been easing since July 2014 and has been below the expected trajectory. The decline in inflation and subdued commodity prices provided enough headroom for the Reserve Bank of India (RBI) to cut interest rates. Home loan rates settled at 10% for general borrowers by FY2015 end, down from over 11% in FY2014. Further easing of interest rates is expected to spur housing loan demand and drive the end-user market Opportunities & Challenges facing India's Housing Sector India's housing sector has a strong growth potential in the coming decade, as it thrives upon tremendous growth opportunities linked with the country's development cycle and socio-economic transformation. Few of these opportunities have been discussed below: ¦ Population Growth India's population grew at a CAGR of 1.6% from 2001 to 2011. Any increase in population will have a direct bearing on requirement of housing units. Increase in working population will lead to greater demand for housing. The requirement for households is likely to rise with a change in age mix, growing number of nuclear families, continuous urbanization and growing penetration of finance. ¦ Housing for All The Indian government is committed towards Housing for All by 2022, involving construction of 20 million houses in urban India and 40 million houses in rural India. During FY2014, projects worth ' 4,17,231.3 million were sanctioned by the National Housing Bank (NHB) for building 15,69,000 houses and dwelling units for economically weaker and lower income portion of the population. ¦ Rural Demand Rural India accounts for 55.6% of the nation's total income, higher than urban India's contribution of 44.6%. Rural markets have become a powerful economic engine. Since 2000, per capita Gross Domestic Product (GDP) has grown faster in rural areas than the urban centres. Between 2009 and 2012, spending in rural India reached $69 billion, significantly higher than $55 billion spent by urban India during the same period. ¦ Working Population India is expected to see a significant rise in its working age population. In 2010, about 781 million made up the working-age population of 15-62 years. By 2020, this working age population is expected to reach 916 million; and by 2030, this will touch an imbrssive 1.02 billion. This is when India will have the youngest median age of 31.2 years. ¦ Housing Shortage Rapid pace of urbanization owing to rural-urban migration is putting a strain on urban infrastructure in India and leading to substantial housing shortage. The Technical Group on Housing Shortage estimated housing shortage in urban India to be at 18.78 million by 2012, with 95% shortage in the Economically Weaker Sections (EWS)/ Low Income Group segments. Besides urban areas, there is also a looming housing shortage in rural India, where approximately 68% of India's population resides. Rural housing shortage is estimated at 43.9 million in 2012 by the Working Group on Rural Housing Shortage. More than 90% of this lies with the lower income and marginalized groups. ¦ Make in India The Government's "Make in India" initiative, which seeks to make India a manufacturing hub, will have a rub-off effect on the key sectors. It seeks to invite the world's top companies to explore investment possibilities in India. The central objective of the initiative is to take the economy to a sustainable high growth path and follow a new model of urbanization by the creation of various industrial corridors. ¦ Rising Per Capita Income Increase in per capita income leads to creation of increasing wealth and positively impacts disposable incomes. This results in a significant investment multiplier effect on the Indian economy, further leading to increasing consumerism and wealth creation and positively impacting savings ¦ Regulatory Framework Regulatory changes to bring about a level-playing field between private HFCs and banks will benefit the former. A regulatory framework to mitigate risks, improve disclosures and strengthen governance standards will also reduce the perceived risks of private housing finance companies (HFCs). Correspondingly, a stronger framework on risk mitigation, disclosure norms and governance standards will minimize the general risk perception on private HFCs in the backdrop of a spurt in the new entrants in the HFC space ¦ Key Challenges Some of the key challenges to overcome supply side constraints are sourcing of long term bulk finance at lower rates, institutional framework to deliver housing finance to economically weaker sections (EWS) and lower income group (LIG) section, leveraging on technology to achieve scale and reach in a cost effective manner. On the demand side, poor availability and reliability of land records, realigning laws and regulations at the state level to minimize regional disparities are some of the challenges of HFCs ¦ Threats Primary threat to housing finance arises from the economic downturn and a slowdown in employment opportunities or rise in unemployment. Interest rate scenario is yet another major factor significantly affecting the home loan prospects. The demand for home loan being rate sensitive, it can witness post-ponement in new demand, when rates harden. It may even impact repayment commitment of existing loans, when repriced. From the borrowing side for HFCs, it could pose significant threat to sustain growth. Adverse developments in the real estate sector causing delay and default in completion of projects may cause a setback to disbursement of new loans. Likewise, growing prices act as a barrier to end user affordability and demand resistance may trigger inventory build-up and overall slowdown in the housing sector. Spurt in competition, coupled with an intensive fight for market share between HFCs and Commercial Banks within the same space can heighten the risk profile with aggressive underwriting standards. Over reliance on takeover of loans as an easier option to build size and price war, and squeezing margins to undesirable levels are other areas of possible threats. Loan Products ASHFL's major focus has been to provide home loans to individuals and families for purchase, construction and extension. ASHFL also provides loans for repair and renovation of houses and home loans to families in the self-employed category where formal income proofs are not easily available and the repayment capacity of such families are appraised based on their cash flows. Apart from extending home loans, ASHFL offers loans for purchase and construction of nonresidential properties (NRP) and also offers mortgage loans against existing residential and commercial properties. ASHFL offers developer loans on a selective basis. Home loan products are being offered at variable and fixed rates, giving customers an option to decide on the type of interest rate risk. Customers are also offered an option to select the mode of calculation of interest on loans, since ASHFL offers loans on annual rest basis and also planning to provide loan on monthly and daily rest basis. ASHFL trying to offer home loans under the Rural Housing Fund (RHF) scheme of NHB wherein loans are given in rural areas for select categories viz. Backward classes or Minority Community or Women owners or families having annual household income less than 2 lacs. Since NHB offers refinance at concessional rate of interest under the scheme, the ultimate rate of interest applicable on loans to beneficiaries is regulated with a cap on the sbrad. Loans The loan approval process at ASHFL is decentralized with varying approval limits. Approvals of lending proposals are carried out by the Directors up to the limits delegated. Larger proposals, as appropriate, are referred to the Committee of Directors, set up by the Board. Details regarding the loan disbursement are laid down in financial highlights. NHB Guidelines and Prudential Norms GRUH has complied with the guidelines issued by NHB regarding accounting standards, prudential norms for asset classification, income recognition, provisioning, capital adequacy, concentration of credit, credit rating, "Know Your Customer" (KYC), Fair Practices Code, grievance redressal mechanism, recovery of dues, channel partners and real estate and capital market exposures. Inspection by National Housing Bank (NHB) NHB, under section 34 of the NHB Act, 1987, carries out inspection of HFCs every year. NHB conducts combrhensive inspection of ASHFL and also inspects GRUH's lending, resource raising, and accounting activities apart from the compliances with the Prudential Guidelines issued by NHB. Risk Management ASHFL has formulated a risk management framework which lays the procedure for risk assessment and mitigation. The Risk Management Committee (RMC) comprises the Independent Director as the chairman and the members include senior Director holding key positions in the Company. The RMC apprises the Audit Committee of the key risks associated with the business of the Company and the measures to mitigate them. The Audit Committee has been periodically reviewing the risk profile of the Company and evaluating the adherence by the functions of the systems and processes in place for monitoring, evaluation, assessment and mitigation of risk through a systematic and effective audit programme. The observations of Audit Committee, if any, on the risk management are reported to the Board. ASHFL manages various risks like financial risk, operational risk, marketing risk, external risk and regulatory risks associated with the mortgage business. The critical risks which can significantly impact profitability and financial strength are credit risk, interest rate risk and liquidity risk. ASHFL manages credit risk through internal credit norms. Liquidity risk and interest rate risks arising out of maturity mismatch of assets and liabilities are managed through regular monitoring of the maturity profile. Functions and scope of work of the committee has been laid down in detail in Corporate Governance Report part of the annual report. Internal Audit and Control ASHFL has an adequate system of internal control in place which has been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls, monitoring of operations, protecting assets from unauthorized use or losses, compliance with regulations and for ensuring reliability of financial reporting. ASHFL has documented procedures covering all financial and operating functions. ASHFL has robust internal audit programme, where the internal auditors, an independent firm of chartered accountants, conduct a risk-based audit with a view to not only test adherence to laid down policies and procedures but also to suggest improvements in processes and systems. Their audit program is agreed upon by the Audit Committee. Internal audit observations and recommendations are reported to the Audit Committee, which monitors the implementation of such recommendations. IT Audit and Security An information system is the backbone of ASHFL's business. ASHFL has implemented an application software developed by SRG Global Solutions Private Limited (SRG) and has been enhanced and modified by the in-house IT software development group. The application software is integrated to record and process lending and accounting transactions of ASHFL. The Information System at ASHFL operates under centralized IT environment. The centralized IT environment enables prompt communication and also provides highway for easy and quick MIS and brparation of various monthly reports. Considering the significant dependence of ASHFL's operations on its IT system, Company also takes initiative in maintaining adequate control for data integrity and its confidentiality. The Application Software and IT System at ASHFL are upgraded from time to time. Human Resource The enthusiasm of staff members continued to be high in sustaining positive growth of disbursements and in maintaining healthy recoveries. With the high level of commitment and loyalty by staff members, ASHFL is confident to face the challenges of the tougher market conditions. |