Spearheading the Indian mortgage finance industry

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Spearheading the growth in Indian mortgage finance industry over the last two decades, HDFC has remained the largest housing finance company (HFC) in the country. Consistency in its incremental home loan disbursal rates has helped it grow its outstanding loan book at a CAGR of 29% (higher than the industry average of 25%) over the last 5 years. Also, sustenance of high margins and one of the best asset qualities in the sector has helped retain its valuations. The HFC however, has faced stiff competition from banks, especially ICICI Bank which is now the market leader in home finance, resulting in loss of market share (from 40% in FY95 to 26% in FY05). HDFC however, continues to enjoy better margins than its rival LICHF, mainly backed by better geographical reach (through arrangement with HDFC Bank) and income from subsidiaries.

Mortgage loan industry poised for growth: The dynamics of the mortgage industry have changed substantially over the past few decades and the preference for owning homes is clearly higher than renting one. The percentage of homes owned has increased from 53% of total number of dwelling units in FY89 to around 65% in FY05. Also, the average age of the home loan borrower has reduced from 45 years in FY89 to 35 years in FY05 (Source: CRISINFAC report). As per the company's projections, the housing finance industry is expected to grow at a CAGR of 18% over the next 3 years from Rs 569 bn in FY05 to Rs 1,347 bn in FY08.

In FY05, HDFC had 67% of assets and 66% of liabilities on a floating rate basis. This leaves very little scope for asset liability mismatch, which stands to be one of the major problems with most banks (competitors for HDFC in home loans market) that have a high proportion of fixed loans. Thus, while banks have increased interest rates on floating rate loans by an average of 100 to 150 basis points in FY05 (to counter hardening of interest rates going forward), HDFC has exercised only a 50 basis points rise in its benchmark rates. This has given HDFC a cost advantage over its peers that can help it retain its market share.

Besides expanding its geographical reach through wholly owned distribution company Home Loan Services India Ltd (HILSIL), HDFC has also focused on its marketing efforts through the DSA (direct sales agent) force. Percentage of loans sourced through DSAs has increased from 5% in FY02 to 38% in FY05. This is of cost advantage to the company as the compensation is sales linked and the entire expenses is written off against fee income, instead of being booked as operating overheads. It must be noted that this effort has helped HDFC consistently reduce its cost to income ratio (11% in FY05), which is the lowest in the financial sector.

The institution has also been very consistent in terms of asset quality. Even as the revised 90-day delinquency norms (effective from FY05) increased its gross NPA to advance ratio to 1.1% in FY05 from 0.8% in FY04, the HFC maintained its net NPA to advance ratio at zero percent levels through higher provisioning. Also, HDFC's coverage ratio went below 100% for the first time in FY05 (due to the new norms). The HFC remains very conservative in terms of risk assessment (of loans sourced through HDFC Bank and through DSAs) and has centralised appraisal of loans. It is thus expected to maintain its asset quality going forward.