CASE-19 HOUSING DEVELOPMENT FINANCE CORPORATION: THE EXTRAORDINARY- ORDINARY COMPANY

An extraordinary company, run for ordinary Indians by ordinary Indians - that was the housing development finance corporation (HDFC) in 1998. It is Indias premier housing finance company and one of the most successful, most admired and most competitive institutions in the country.

Housing Development Finance Corporation Ltd (HDFC) is one of the leaders in the Indian housing finance market with almost 17% market share as on March 2010. HDFC is Indias premier housing finance entity in existence for over 30 years. With a presence in banking, insurance and asset management, the HDFC group is an important part of the Indian financial services sector. HDFC was the only Indian company to be included in the fifth annual list of 2011 Worlds Most Ethical Companies by Ethisphere Institute,USA. Though housing remains the core business, HDFC has continued to make investments in its subsidiary and associate companies.
Source : http://business.mapsofindia.com/finance/top-housing-finance-companies-in-india.html http://www.hdfc.com/others/financials.asp 34th annual report, page 14. The usual customer of HDFC was a very average person. In 1997, the average cost of a flat or house financed by the company was Rs 398000 (about $10000), and its size was mere 76sq.m, or about 800sq.ft. The average size of a loan was Rs 199,000- roughly 50% of the cost of the unit-with an average pay back period of 11.21 years. This average 38-year old customer had a monthly house old income of Rs 10800(about $250) neither the elite at the top of the pyramid in Indian society, nor the very poor at the bottom, but squarely in the middle. This average Indian, however, was an extraordinarily reliable borrower, as evidenced by the company having had to charge off mere Rs 8mn as by debt since its inception, against a total loan disbursement of Rs 12.2mn.

Now maximum loan given is 80 % of the cost of the property which includes the cost of the land with a maximum payback year of 20 years subject to the retirement age of the customer and also the repayment capacity of the customers. In 2009 Housing Development Finance Corporation (HDFC) had increased its stake in HDFC Bank, due to which then HFDC offers 8.25 per cent fixed rate for new loans to their customers. HDFC has given home loans to more than 38 Lakhs customers to own a home of their own, with around housing loan approvals of over Rs. 3.73 trillion and a total disbursements of over Rs. 3.02 trillion as at March 31, 2011. Sources : http://www.hdfc.com/loans/hm-loan-features.asp, http://economictimes.indiatimes.com/housing-development-finance-corporationltd/infocompanyhistory/companyid-13640.cms, http://www.rrfinance.com/PDF_Files/HDFC%20Company%20Report-Suresh%20Rathi.pdf
Equally ordinary were a vast majority of the 1 million depositors who provided the bulk of the funds that HDFC disbursed to its borrower. Attracted by the companys courteous and the efficient service -the investors received their certificate of deposit on the spot and the interest payment reached them exactly on the due date-they entrusted the company with their savings, eschewing potentially higher returns offered by many other institutions.

HDFC has been able to retain fund from over 10 lac depositors which it disbursed to its borrowers. As the company is doing well , depositors get timely repayment of their principal and

interest. CRISIL and ICRA gave AAA rating for HDFC deposit for consecutive 16 years and the depositor also entrusted the company with their savings, attractive returns and impeccable service standards. Outstanding deposits grew from Rs. 1,458 crores in March 1994 to Rs 24,625 crores in March 2011. Source:
http://www.rrfinance.com/PDF_Files/HDFC%20Company%20Report-Suresh%20Rathi.pdf, http://www.hdfc.com/others/financials.asp 34th annual report, page 19.

HDFC introduced HDFC Systematic Savings Plan ( HDFC SSP) in 2010. It is a monthly savings plan, where the depositor can deposit a fixed sum every month to save or accumulate money for future need. It offers a variable rate of interest. The variable interest rate to ensure that the depositor gets the benefit of higher rate when interest rates increases.The HDFC Deposits provide highest safety, attractive returns and impeccable service standards. In SSP duration of investment is between 24 to 60 months with monthly installment vary from Rs 2000 to 50000. Source : http://www.hdfc.com/pdf/SSP_launch_press_release_feb020210.pdf
The employees of the company were a very similar profile. The culture and hiring of HDFC discouraged stars. As a matter of policy, the company did not recruit fresh MBAs from the top-rated schools the favorite hunting ground for the most financial services company in India. Management recognized and accepted that they could be giving up an opportunity to hire the best raw material. But, in doing so, they were also avoiding the baggage that typically came along prima donna antics, jealousies, and an aggressively competitive environment. HDFC hired people from the next-tier institutions who tended to have more subdued personalities and were able to work jointly with others. The management of HDFC had a firm belief that the efficiencies and synergy of harmonious team-based operations far outweighed the cost of ignoring the best intellectual horsepower. In turn, the top management of the company stressed its own ordinaries avoiding the typical status symbols of their levels. Their salaries were low by industry standards, they drove ordinary cars, and sat in relatively small, cramped offices.

MD of HDFC, Keki Mistry in an interview in 2004 said that HDFC prefers to recruit fresh management trainees straight from campuses and the middle and senior management grows from within. It does not pay much to the employees ,but HDFC brand name and culture attracts young talent to join HDFC. Spirit of entrepreneurship or ownership is inculcated in HDFC employees .Flexibility is a popular mantra in the employees and the the young age they are encouraged to take decision.
Source : page 24. http://www.hdfc.com/pdf/BestEmp.pdf

The only thing not ordinary about the company was its performance. In a poll conducted by Euromoney in 1998, HDFC was voted the most competitive company in India. For two years in a row, it was also ranked as the bestmanaged company in the country. Despite enjoying a dominant 58 per cent share of Indias housing finance market, the company was continuing to grow at about 33 per cent per year improving its share by about 3 per cent each year in a rapidly growing market. It had a very strong balance sheet, with a capital-to-risk-adjusted asset ratio of 20.8 per cent, against the norm of 8 percent minimum set by Indias National housing bank. As a result, i t was the only AAA-rated financial services company in the country. Its financial and capital market performance was stellar

(see Appendix 1) and it was consistently highlighted by the World Bank as a model private sector housing finance agency for developing nations.

HDFC won the Best Strategy award in 2006 at the 4Ps Business, marketing and advertising power award. Limca book of record, 2006 edition features HDFC for the landmark achievement of Rs 1 lakh crore in Home loan approvals. Also got the Best Home Loan Provided title at the Zee Business Pinancle in 2006. HDFC got the Best Governed Company Award in 2010 by Asian Centre for Corporate Governance and Sustainability. It is also the winner of the Finance Asia award for the Best Investor Relation in India and is also among the top two managed company in India. HDFC is also the most admired company in the Financial sector in India" - Wall Street Journal's Asia 200 survey. HDFCs net interest income grew by 23% to Rs 43.9 bn in 2011 from Rs 35.6 bn in 2010. HDFC reported a 27% rise in disbursements and 25% rise in individual approvals in 2011. Due to increase in profit on sale of investments and better recovery in written-off accounts ,net profit grew 34% to Rs 40.8 bn in 2011 from Rs 30.3 bn in 2010. Source : http://www.hdfc.com/others/hdfc_awards.asp#, http://www.nseindia.com/content/corporate/eq_HDFC_base.pdf, http://www.hdfc.com/others/popup/news/4p_161106.htm , http://www.hdfc.com/others/popup/news/limca_161106.htm , http://www.hdfc.com/others/news_other_developments.asp
http://www.hdfc.com/others/financials.asp 34th annual report, page 18. But, perhaps, the companys greater achievement of all lay in the enormous contribution it made to Indian society. It had pioneered the housing finance market and had, it essence, created the opportunity for middle-class Indians to own a home. At the same time, it had demonstrated that a wholesome business, meeting an important social need, could also be extremely profitable.

Currently there are far too many fragmented housing finance schemes. Loans are not only given to middle-class Indians to own a house but loans are also given for home improvement, home extension, short term bridging, land purchase, loans to professionals for non-residential premises(NRP).Home loans are also given to NRIs who aspires to own a home back in his homeland, India. HDFC Home Equity Loans also help customers to encash the present market value of the property by taking a loan by mortgaging their property.
Source: http://www.hdfc.com/loans/home-loan.asp, http://www.hdfc.com/services/loan_against_property.asp. In 1998, however, both the environment in which HDFC operated and the company itself were in the midst of some profound changes. The Government of India had recognized the importance of the housing sector and had begun to create a legal and financial infrastructure to address the huge unmet housing need in the country. As a result, the housing finance market was becoming more crowded and more competitive. Beyond the spate of specialized housing finance companies, large commercials banks were entering the fray, attracted by the very success of HDFC. At the same time, rapid deregulation of the financial services industry had entered a number of new businesses, typically in partnership with a major global player: for instance, with GE capital in consumer finance, with Colliers Jardine Asia Pacific Ltd in property services, and with Natwest for retail and corporate banking. While all of these activities were a part of the HDFC Group, they were structured as separate companies, with HDFC representatives on their boards but with very different management styles, employee pay scales and organizational culture. Within

HDFC itself there was much talk about leveraging the companys 1.9 million customer relationships to become a financial services supermarket. Deepak Parekh, the companys mu ch admired CEO, wanted to nurture the ambition of transforming the company into a universal bank. Issues and Questions Why has HDFC been so successful and what lessons can be drawn from the company's outstanding performance since its inception? What are the key challenges facing HDFC over the next five years? What are the potential upsides and downsides? What must the company do to achieve the upside and avoid the downside? Should HDFC try to emerge as a universal bank? If not, why not? If itshould, how? What actions should it take to create the pathway for getting to that destination?

The Housing Market in India With a population estimated at close to 950 million people, India was by far the second most populous country in the world. It created approximately 5 million new households each year and these were about evenly split between rural and urban India. The National Building Organization looked at the housing shortage in India and came up with the following demand estimates.

With the current population of around 1.21 billion,70% dwell in villages.

Housing Demand Estimates (in million) Rural 1981 1991 2001 Households Housing Stock Of which, Unusable Housing gap 16.3 20.6 25.5 7.0 10.4 15.5 23.3 31.0 41.0 94.1 113.5 137.0 88.7 106.2 127.8 10.9 13.6 16.3 urban 1981 1991 2001 30.7 47.1 72.2 28.8 42.6 64.8 4.3 5.9 8.1 total 1981 1991 2001 124.8 160.6 209.2 117.5 148.8 192.6 15.2 19.2 24.4

The housing shortage for All India, (Urban) on the basis of Census of India, has been calculated as follows:

2001 1. Households ( Mn) 2. Acceptable housing stock 3. Excess of HHs over housing stock (1-2) 4. Of which ,unstable 5. Total Housing shortage(3+4+5+6) 55.83 50.95 4.88 5.68 10.56

2007 66.30 58.83 7.47 17.28 24.71

2012 75.01 66.10 8.91 17.62 26.53

In millions Source : http://mhupa.gov.in/ministry/housing/HOUSINGSHORTAGE-REPT.pdf India is expected to experience a demand of 4.25 million housing units, for the period 2010-2014., the majority of which will be in the affordable segment. Source: http://www.indianexpress.com/news/indias-housing-demand-seen-at-42-lakh/693897/ Real estate market shown growth in both commercial and residential spheres. As shown in the table above there would be shortage of 26.53 million houses during the Eleventh Five Year Plan (200712). The popularity of the Indian real estate sector is highlighted by a report Emerging trends in Real Estate in Asia Pacific 2011 published by PriceWaterhouseCoopers and Urban Land Institute. Investment in Indian Real Estate During 2011, the Indian real estate and housing sectors received US$ 453 million in foreign direct investment (FDI), according to the Department of Industrial Policy and Promotion India (DIPP). The industry also witnessed growth in private equity (PE) investments as well. In November 2011, total investment from PEs was around US$ 741 million. As per the report by Jones Lang LaSalle (JLL), about US$ 15.8 billion has been invested from 2006 till date on various types of assets in the real estate sector in the country, Of which, US$ 2.7 billion went to residential projects and US$ 2.4 billion to township projects. During 2011, PEs invested US$ 320 million in commercial, US$ 65 million in mixed use, US$ 44 million in residential, US$ 190 million in SEZs and US$ 122 million in township projects.
Source : http://www.ibef.org/artdispview.aspx?in=60&art_id=30426&cat_id=381&page=1 While the inherent demand was large, in poor and highly regulated country like India it did not necessarily translate into a market for equivalent numbers of ready housing. As a USAID report stated at the end of the 1980s it is axiomatic that there is tremendous unmet demand for both housing and housing finance. More careful observers note, though, that effective demand may be much more limited, resulting from a variety of price and non-price reasons. In other words, if process, the market would be huge. However, prices are high and non-price rationing devices are so effective that only a relative few are able to exercise their demand.

In the early 1950s, newly independent India invested slightly over 3 percent of GNP in building housing stock. By 1974-78, this had declines to just over 1.5 percent. This contributed to a rising short fall of housing stock. As housing was considered and non productive sector, it received little if any government funding. This, combined with the absence of a formal housing sector, left individual buyers fund purchases by using accumulated savings in combination retirement and provident fund drawdowns. Very limited institutional support was available apart from some loans to existing customers from public sector Life Insurance Corporation (LIC) against accumulated saving. This was despite the Reserve Bank of India (RBI) going on record in 1976 with a recommendation that mortgage lending institutions be created.

Interest in home loan increased during the year, but the demand for housing remained strong across the country. Residential real estate prices in a few cities of the country had risen to unrealistic levels, resulting in a slight slowdown in the volume of sales in these locations like NCR, Mumbai, etc.
Source : http://www.hdfc.com/others/financials.asp 34th annual report, page 43 All over the world, the housing finance industry operated with some basic minimum requirements before a loan could be disbursed. These included clear title, ability to provide some collateral, and a regular and verifiable source of income. Unfortunately, the poorer sections of Indian society could not meet at least to and perhaps all three of the requirements. Therefore, housing finance, as it concerned HDFC, was only relevant at the middle and upper ends of Indian society, who tended to be urban dwellers.

Home loans are given both in the urban and rural sector. HDFC collaborated with Kreditanstalt fur Wiederaufbau (KfW), a German Development bank. KfW sanctioned DM 55 million to HDFC for low cost housing project in India. Agriculturist, planters, dairy farmers, horticulturists are customers of HDFC in the rural areas. Housing Loans for homes in rural areas are also for Salaried persons. Home loan is given to the agriculturists also on the basis of land owned by them and the crops being cultivated.
Source : http://www.hdfc.com/rural/rural_housing_finance_features.asp http://www.gdrc.org/icm/conceptpaper-india.html One of the factors that had inhibited the growth of housing stock in India was the very high stamp duties charged by local municipal authorities each time there was a change in ownership on a real estate title. The rates ranged all the way from 3-15 percent of the value of the property and varied based on the level set by each state. The high stamp duty typically resulted in transactions being done at well below the market price, with the balance being paid in cash. This practice had contributed to a huge and growing black market and had kept professional developers out of the re-development market. The central government recognized the problem and encourages various state governments to move towards a uniform and much lower stamp duty. Once lower stamp duties arrived along with a generally lower level of interest rate (the prime low productivity), securitization of mortgages was expected to create more capacity for housing finance companies and also results in lower cost for borrowers. Tenant protection laws and the Urban land Ceiling Act (ULCA), products of Indias socialist aspirations, historically had had the opposite effect of inhibiting construction and development of housing stock. The government had begun the slow process of chipping away at tenant protection laws, and its actions were expected to expand the urban housing market and, therefore, the market for housing finance.

Recognizing the various price and non-price constraints on the housing market, HDFC estimated that the cumulative housing shortfall in India was of the order of 19 millions of homes, of which some 7 million were in urban India and the balance shortfall of 12 million was spread across rural India. New annual demand was about 4 million units and the addiction of housing stock was about 3 million each year, resulting in a net incremental shortfall of about 1 million units each year, divided almost equally between rural and urban sectors.

HDFC: The Early Years HDFC was the product of a dogged determination of one man H. T. Parekh who sensed a strong need for housing finance in India, and staked his professional reputation on building an institution that would meet this need. A finance professional with a degree in Banking and Finance from the London School of Economics, Parekh had spent some time with a brokerage firm in Bombay before joining ICICI(a leading Indian financial institutional) in 1956, where he had risen to the position executive chairman. The problem of housing in India Had made an early impact on Parekh and he had carefully tracked the role of S&Ls (Saving and Loans Associations) in the US and their equivalent Building Societies in the UK. These were special purpose entities which specialized in raising funding to provide long term loan through mortgages to prospective buyers. Clearly India had no equivalent and commercial banking system had made no attempt to meet this very important social need. Right through his years as the chairman of ICICI, H.T. Parekh continued to talk to people about setting up a housing finance vehicle. The idea was not well received as the law did not provide for easy and smooth re-possession on payment defaults and there was a general perception that the losses would be very large. Parekh persisted and in 1976, after his retirement from ICICI, put together an outline for a housing finance bank. He firmly believed that a well-motivated, professionally managed company would be able to identify and deal with good borrowers who were keen savers and who would go to any length to stay current on a housing loan. Despite a lukewarm response, he pressed on, and HDFC was incorporated on 17october 1997. With a less-chain-enthusiastic, response from the government in the banking sector, its equity capital was subscribed by the Indian business community (Rs 45mn), an Indian public issue (Rs40mn), ICICI (Rs5mn), IFC, Washington (Rs 5mn) and HRH the Aga khan (Rs5mn). The company was incorporated with a mandate to specialize in the area if providing housing finance to individuals, co-operative societies and the corporate sectors. Its primary objective was to enhance the residential housing stock in the country by providing housing finance on a systematic and professional basis and to promote home ownership. Another key objective was to increase the flow of financial resources for housing resources for housing through the integration of housing finance institution with the domestic capital market.

HDFCs Founding Principles There was a major need for housing finance targeted at the household throughout the country. Performance in loan recoveries was a direct function of the credit creation process. Resource mobilization was critical and therefore required an institutional structure which commanded confidence. Initially, a financial institution of this type would be required to mobilize wholesale resources and lend retail, implying a mortgage bank structure as opposed to a savings and loan type institution.

It would be preferable to establish an all-India institution rather than structure one based on a regional concept. Managerial inputs would be critical to the nature of the institution conceived, especially to introduce and operate systems that minimized high transaction costs per loan in retail financial activity. Recruitment of young talent would be necessary to infuse the institution with a set of operating practices not normally found in development banking. Success would require a lean and efficient organization, capable of minimizing transaction costs per loan, thus being able to survive on fairly thin spreads between the cost of funds and the lending rate. Most important would be a very strong customer orientation, not normally observed in this typre of institution. The institution would be market-0oriented, seeking funds and designing products that met with market preferences. Success depended on both sides of the balance sheet: resource mobilization and mortgage lending. Finally, the institutional should be structured in a manner which would combine both the public and private sectors, together with the involvement of the public at large.

Based on his experience, H. T. Parekh was very aware of the critical role that funding and the funding strategy would play in enabling HDCF to raise the resources required for longer-term mortgage lending. The basic options were a large well-organized retail deposited gathering activity or a focus on larger institutional/multilateral/government loans. He made an early choice to go with the latter option.

HDFC has undertaken several consultancy assignments in various countries across Asia, Africa and East Europe to support and establish their housing finance institutions. HDFC continued to partner and support worthwhile projects undertaken by non-government organisations, foundations and local bodies through the SAR (Shelter Assistance Reserve). HDFC involve in CSR activities, to contribute to economic development and social upliftment of weaker section of the society. It indulge in many social development activities like in the areas of education, child welfare, medical research, welfare for the elderly and the handicapped among several others..example: smile foundation. Company distributed 11.48 crores for the development programmes and activities.

HDFC Advantages
Pioneers of Housing Finance in India with over 34 years of lending experience. Widest range of home loan & deposit products. Vast network of over 304 interconnected offices which includes 3 international offices. Most experienced and empowered personnel to ensure smooth & easy processing. Online loan application facility at www.hdfc.com and across-the-counter services for new deposits, renewals & repayments. Counseling and advisory services for acquiring a property. Flexible loan repayment options Free & safe document storage.

Source : http://www.hdfc.com/others/about-hdfc.asp
http://www.hdfc.com/others/financials.asp Page 23

Parekh was able to lobby the government to have public sector financial institutions such as the LIC provide financing to HDFC. This, along with a US$ 4 million line of credit from a promoter (IFC) and government guarantees on long term external funding from bilateral and multilateral financial institutions such as the World Bank, USAID and Kredinstalt fur Wiederaufbau (KfW) set HDFC firmly on the road to its destination as the premier housing finance institution in India.

HDFC had raised funds from international agencies as well as from domestic market. In 2003 HDFC had signed a loan agreement of USD 200 million with International Finance Corporation (IFC), Wahington. HDFC has also signed a loan agreement of USD 50 million from Deutsche Investitions Und Entwicklungsgesellschaft MbH (DEG), a member of the Kreditanstalt fr Wiederaufbau (KfW)

Group of Germany in 2003. The loan was for an average tenor of 6.5 years . It got funds from USAID and ADB (Asian Development Bank), domestic term loans from banks and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds and deposits program for the seventeenth year in succession. Source : http://www.hdfc.com/pdf/HDFCAnnualReport.pdf Funding Mix Rs crore

Mar-11

Mar10

Mar-09

Mar-08
17% 29% 51% 3% 100%

Deposits 21% 24% 23% Domestic Term Loans 36% 32% 28% Commercial Paper/ Bonds/Debentures 42% 42% 46% International Borrowings 1% 2% 3% Total 100% 100% 100% Source : http://icra.in/Files/Reports/CPR/HDFC%20CPR%20%28RR%201%29.pdf

As a development finance institution (DFI), HDFC was also automatically entitled, under the Indian Income Act, to appropriate 40 per cent of pre-tax profits into a tax-free Special Reserve Account, effectively reducing the tax burden. However, there was a provison that the balance in the Special Reserve Account should not be greater than twice the paid-up capital (excluding reserves) of the company. This resulted in HDFC being capitalized relative to assets, as it kept diluting equity to primarily get the tax benefit and secondarily the free funding which further contributed to total income. After a start in 1978 with a capital of Rs. 100 mn and a US$ 4 million line of credit, HDFC had become a substantial financial entity by 1991. Total loans disbursed had reached a level of Rs. 6.7 bn in 1990-91, with a profit after tax of Rs. 298 mn.

HDFC profit after tax for the year ended 2011 was Rs 3534.6 crore. Source : http://www.HDFC.com/others/about-HDFC.asp
At that time, the company was generating more than 90 per cent of its resources wholesale and lending funds to mostly individual borrowers. This happy situation was rocked by Indias macro -economic problems of 1991, leading to a downgrading of the countrys credit rating. At the same time, domestic interest rates moved up to support the currency and to control the growth of money supply. Faced with these environmental problems, the banking sector and other public sector financial institutions were not in a position to continue to support HDFC, leading to an immediate upward impact on HDFCs borrowing costs. This resulted in a major liquidity crunch within the company, which was compounded by its inability to pass on the cost of expensively raised local funds to its individual borrowers. As most houses were lived in and not rented and most borrowers were on a salary, they had virtually no ability to absorb a sudden increase in interest rates. If HDFC had re-priced loans upwards, that would have contributes to deteriorating non-performing loan numbers. So, senior management and the rest of the team were left with no option but to dramatically switch strategy and start focusing on raising funds from retail depositors. Done efficiently, this would certainly raise the average cost of funds, but the impact would be considerably lower than borrowing through the issuance of bonds at 16-17 per cent. The Reserve Bank of India had set the minimum lending rate between 18 and 19 per cent, which further promoted HDFC to consider retail canvassing.

As the story goes, HDFC had built up so much goodwill and trust since 1978 by providing a good product with good service, that investors swarmed into its branches around the country and started funding the company to the tune of Rs. 10 mn a day. This put HDFC on the path to developing a retail deposit clientele and the company reciprocated by providing excellent service to depositors. The investor, for example, was given his/her Certificate of Deposit onthe-spot and the interest warrant reached on the day it was due. In 1998, 54 per cent of HDFCs incremental borrowing requirements were met through small retail deposits.

As Deepak Parekh, H.T. Parekhs successor of HDFC, once said: In one sense the economic crisis of 1991 was the best thing that happened to us because it created a brand new source of funds.

Nurturing Competition HDFC was essentially the solitary player in the formal housing market at the time of its formation. Its only competition was from national, state and local co-operatives, who were inefficient and poorly managed. These public sector entities served as administrative channels for directed and subsidized lending for low income housing. They depended on government allocations, financial institutions and commercial banks for funds. From the very beginning, HDFC looked at the creation of a business model which called for funds to be lent to creditworthy borrowers at market rates. This strategy, combined with a dedication to customer service and a commitment to increasing productivity, resulted in its outstanding success. Being the only serious player with one meaningful competition helped build HDFCs financial performance and its status in the market among borrowers, investors and the general public. HDFC management found they had an excellent business in a fast-growing market with very large unmet demand. The Indian government also noticed the significant success of HDFC and started looking for ways to expand the availability of home loans. The National Housing Bank Act (NHB) was established by the government as a regulating, promoting and refinancing the housing finance sector. With the creation of the NBH, the government had singalled its strong commitment to housing finance and its interest in seeing an expanded reach. It then worked with RBI and directed commercial banks to lend 1.5 per cent of all new deposits to this sector.

Later NBH announces the Term Deposit scheme for HFCs under which Housing Finance Company (HFCs) can make a minimum deposit of Rs. 25,00,000 and thereafter in multiple of Rs. 5,00,000 for a maturity ranging from 18 months to 60 months. Source : http://www.nhb.org.in/Deposit_Scheme/Deposit_Schemes.php
HDFC management welcomed the new governmental support to the sector and decided to take an active role in the creation of its own competitors. It worked companies with State Bank of India (SBI Home Finance), Canara Bank (Canfin Homes Ltd.), General Insurance corporation (GIC Housing Finance) and the Gujarat state government (GRUH Finance). HDFC kept a significant equity position in each of these companies and supported the new companies on strategy and traing, helping them to become stand-alone entities. Each of these companies operated independently in the market and competed for business with HDFC. A comparative summary of the main players in the housing finance market is given in Appendix 2. Its interesting to note that all the affiliates of HDFC were amongst the largest players in the market. LIC decided to go alone and set up its own captive housing finance company LIC House Finance Ltd.

Over time, HDFC concentrated its effort in western India, although it had offices all over the country. In 1998, 50 per cent of its business came from western India, 2o per cent from the North, 25 per cent from the South and 5 per cent from the East. The portfolio of SBI Finance was concentrated in the East and North-East, Canfin in the South and PNB Home Finance (a subsidiary of Punjab National Bank), a smaller competitor, concentrated its efforts in North India. LIC House Finance (HDFCs largest competitor) worked equally across all regions. A somewhat older comparison of the leading finance companies is given in Appendix 3. The numbers go back to March 1993, but they do provide a basic understand of the cost structure, funding strategy and relative profitability of the different companies. Appendix 4 provides a more recent comparison of the top two companies: HDFC and LIC Housing Finance. Taken together as a group, the housing institutions were by far the largest lender to the housing sector. The working group on urban housing for the Ninth Five-Year Plan (1997-2002) estimated that the total investment required in housing during this period would be about Rs. 1500 bn or Rs. 300 bn per year. It was estimated that the organized housing finance sector could fund no more than Rs. 330 bn over the five-year period, or about one-fourth of the total required. This was expected to be sourced through Life Insurance Corporation of India (LIC) (Rs. 45 bn), General insurance Corportaion of India (GIC) (Rs. 10 bn), commercial banks (Rs. 55 bn), housing finance institutions (Rs. 150 bn), mortgage securitization (Rs. 25 bn) and others (Rs. 45 bn).

HDFC held a 61.4% stake in Gujarat Rural Housing Finance Corp Ltd (GRUH ousing Finance) which is a subsidiary of HDFC in 2010. Source : http://www.nseindia.com/content/corporate/eq_GRUH_base.pdf

While housing finance institutions remained the largest lender, the gap narrowing, as insurance companies and commercial banks had started to recognize the opportunities available in housing fianance, with higher yields and lower loss ratios on a portfolio secured by the underlying property. HDFC by itself had already funded over Rs. 50 bn in the first two years of the five-year period.

Market Share of Housing Finance Companies

1994(%) HDFC LIC Finance GIC Finance 49 26 2

1997(%) 58 20 4

SBI Home Fin* Can Fin* Dewan Finance Others *HDFC affiliates.

4 5 5 9

5 3 2 8

In 1998, HDFC conducted its business with an infrastructure of forty-five branch offices across the country in addition to the Mumbai head office. The offices organized outreach programmes spread across eighty-four locations which enabled the company to sanction loans for properties in over 2,500 cities and towns. Outside India, HDFC opened its first international office in Dubai, United Arab Emirates to service non-resident Indians in their efforts to acquire residential properties in India. M ARKET SHARE OF HOUSING FINANCE COMPANIES 1997(%) 2010(%) HDFC 58 17 LIC FINANCE 20 8 GIC FINANCE * 2 4 SBI HOME FIN* 4 5 CAN FIN * 5 3 DEWAN FINANCE 5 2 IDBI NA 4 SOURCE : http://business.mapsofindia.com/finance/top-housing-finance-companies-in-

india.html
HDFC Distribution Network As an outcome of intense competition in the financial service industry has been the birth of Direct Selling Agents DSAs. In FY 2004, DSAs accounted for 22% of total individual loans approved by HDFC. HDFC distribution networks span around 215 outlets which include 28 offices of HDFC's distribution company in 2005. Apart from DSA( Direct Selling Agent), home loan is also marketed through HDFC Bank Ltd. It has a strong distribution network of over 25,000 deposit agents in 2010. Now HDFC has a wide network of 304 offices (which includes 74 offices of HDFC's wholly owned distribution company HDFC Sales Private Limited) catering to over 2,400 towns & cities spread across the country.It also has office outside India in Dubai, London and Singapore and service associates in the Middle East region, to provide housing loans and property advisory services to Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Source : http://www.hdfc.com/pdf/hdfc-iuhf04.pdf http://www.hdfc.com/others/popup/news/news18jan06.htm http://www.hdfc.com/pdf/SSP_launch_press_release_feb020210.pdf http://www.hdfc.com/others/about-HDFC.asp
In addition to its own staff, HDFC had a network of 42,000 part-time agents who generated retail deposits against a commission ranging from 0.5 per cent for one year deposits to 1.5 percent for three years. About 15,000 of these

agents were active generated at least a few deposits each month. About 70 percent of the agents also represented LIC who paid a much larger incentive fee of 35 per cent of first year and 10 per cent of subsequent premiums on endowment policies. HDFC had created a reputation for fairplay and quick disturbance of commissions, which allowed it to compete successfully for the agents share -of-mind.

HDFC Ltd launches dual rate product in December 2009 as a part of it festive offer on a home loan product at fixed rate of 8.25% upto 31.3.2012 and the applicable floating rate for the balance term. It is for all new loans irrespective of the loan amount . Due to the improved operational efficiency and good quality portfolio of HDFC and based on the current Marginal cost of borrowings it offers this festive offers to all new customer( including NRIs and PIOs) to reduce the cost for the home buyers. It revised it Dual Rate Product in april and july 2010 with 8.25% fixed upto 31.3.2011 and 9 and 9.25% between 1.4.2011 and 31.3.2012, and floating rate for the Balance term. In September 2010 in again revised its Dual Rate Product -4 with 8.25% fixed till 31.3.2011 and 9.50 % between 1.4.2011 and 31.3.2012. Source : http://www.hdfc.com/others/popup/news/festive_offer.htm http://www.hdfc.com/others/hdfc_news_dual_rate.asp
http://www.hdfc.com/pdf/press%20release-Dual%20Rate%20Product%20-%203.pdf http://www.hdfc.com/others/hdfc_press_release_dualRate_4.html Between 1994 and 1997, the company had grown at an average annual rate of 33 per cent, consistently enhancing its market share. Perhaps it could have grown even faster, but the management of HDFC firmly believed in the benefits of stability, continuity and robustness. Higher growth rates, they believed, would have exposed the company to possible lay-offs in a downturn and also the possibility of higher non-performing loans. In 1998, the approvals growth rate was 29 per cent while the disbursements growth rate was 31 per cent. From values to Action The 1996-97 Annual Report of HDFC carried the following statement in its introduction: This year for the annual repot, we have chosen to underline some key principles HDFC has adopted and maintained for nearly two decades of its existence. They constitute the ' core value' that we hold dear- values that are not subject to compromise and reinterpretation as the environment changes around us. They are immutable and true through time and circumstances..... Core values are the basis of a vision, they do not constitute it..... Visions can be wrong hopelessly off the mark if they are not born from strong values.... Values without principles are hollow.... Principles from the immutable and unchangeable core of right action. HDFC from its very first day of operation has built a principle-centred organization. By this we mean.... an organization that has been built on the basis of fairness, kindness, efficiency and effectiveness. While assertions such as these are not unusual in corporate annual reports and publicity brochures, what set HDFC apart was that it had institutionalised a set of practices so as to live by the values and principles that has been articulated by its founder. At the heart of these practices lay the company's firm commitment to building longterm, mutually supportive relationships with all its key constituencies- its employees, investors, depositors, borrowers and regulators.

And in the Annual Report of 2010-2011, the mantra of the HDFC Ltd that the time changes but the values remain relatively stable. Transparency, integrity, professionalism and the spirit of service are the values which continue to inspire people through different eras and moments. These values are considered as sacred mantras for HDFC Ltd for winning heart of their customers. They continue to march the value that they have served to their customers over years. Source : http://www.hdfc.com/others/financials.asp 3th annual report ,page 5

Corporate Values and Culture

Above all, we value integrity, honesty of purpose and commitment to the interests of the organisation. To HDFC, business is not merely earning profits, but a way through which we provide essential and valuable services to society. 'Customer Services' is the key activity in our operations. This is reflected in our promptness and caring attitude towards our customers. A positive and personalised approach to our customer's need is what we have always strived to attain. We adopt a 'Learning by Doing' philosophy which encourages decision making as well as learning from the process of doing. The philosophy demands feedback and a tolerance of constructive criticism. People are our most important resources. it is our intimate concern to continuously develop them. We appreciate good inter-personal relationships and supportive leadership, coupled with strong teamwork both within and between departments. We believe in smooth and effective communication to ensure better flow of information and understanding amongst employees at all levels. Every employee can meet any executive for airing personal grievances, giving suggestion or putting forth any creative idea. This' open door' policy has resulted in a very open and informal culture. Our approach to discipline is reformative and not always penal. Employees are expected to adhere to rules and regulations as laid down from time to time.

Goals Develop close relationships with individual households and meet their needs with sensitivity and efficiency. Maintain image domestically as a premier housing finance institution and to spread it internationally. Nurture innovative spirit amongst employees. Maintain high degree of professional integrity.

Provide consistently high returns to shareholders. Maintain growth through diversification- a financial supermarket.

GOALS

1.

. Develop close relationships with individual households and to meet their needs.

2. Maintain its position as the premier housing finance institution in the country and also internationally. 3. To transform ideas into viable and creative solutions. 4. To grow through diversification by gaining leverage from their existing client base. 5. To nurture the values and ethos of Brand HDFC through all its Subsidiaries and Associate Companies. GROWTH STRATEGY OF HDFC
Increase the return on equity each year by 1 percentage point in order to maximise shareholder value; Maintain gross Non-Performing Assets (NPAs) below 1%; Consistently grow the loan book; Improve operational efficiency by consistently bringing down the cost to income ratio.

Source : http://www.hdfc.com/others/objectives_background.asp

Regulatory Relations
Meeting an important social need, rather than personal profit, was clearly the key motivator for H.T. Parekh in founding HDFC, and he firmly believed in the need lot building a symbiotic relationship between the public and private sectors for achieving economic and social progress in India. His personal background as the chairman of the quasipublic sector ICICI had undoubtedly influenced his views. As a result, both he and his successor, Deepak Parekh, maintained very strong relationships with all related government agencies, and both of them consistently invested significant amounts of time and energy working on government protects and initiatives, not all of which were of direct commercial interest to the company they led. At the same time, these relationships also helped the company achieve some significant regulatory successes. Some of these successes included :

Commercial banks were required to on-lent 1.5 per cent of deposits to the housing finance sector. Initially, HDFC got the government to guarantee long-term foreign currency loans from the USAID,
World Bank and other development-oriented lenders.

The Malhotra Committee on reforms of the insurance industry ( of which the HDFC chairman was a

member) recommended private sector entrants into the insurance sector. HDFC was one of the companies expected to be approved for entering the business, and it had already established a strategic partnership with Standard Life of the UK to commence operations as soon as the new regulations were put in place.

HDFC always compiled with the Housing Finance Companies (NHB) directions regarding regarding accounting standards, prudential norms for asset classification, income recognition, provisioning, capital adequacy and credit rating. During the year 2011, NHB stipulated that the loan to value ratio (LTV) for individual housing loans up to ` 20 lakhs should not exceed 90% and for loans above ` 20 lakhs, the LTV should not exceed 80%. Also amended the risk weights for individual housing loans ranging from 50% to 125%, depending on the loan amount and LTV. Source : http://www.hdfc.com/others/financials.asp 3th annual report ,page 22 and 23

Shareholder Relations
HDFC had about 130,000 shareholders and was described as a core holding by several analyst who followed the company. The reason was simple: for years, it had been one of the star performers in the Mumbai stock exchange.

As Deepak Parekh, Chairman HDFC, said in December 1996: I am merely a professional who happens to be at the helm of affairs of a corporation, which is rather atypical. HDFC has no single financial institution, or government, or multinational, or FII or family holding dominant ownership. Thus, I have always viewed my own role as that of a trustee, who is enjoyed with the task of running a business enterprise.

The company was managed by professionals on behalf of its various shareholders. Parekh and its team had a declared internal goal- minimum 20 per cent return on equity. They were very concerned about returns to shareholders and worked consistently on increasing the return on equity. Through HDFC, there was a strong focus on productivity and the company was managed for performance. The managements philosophy was to outsource all non-value-adding functions. These included data entry, security, housekeeping, canteens, etc. They watched headcount growth very carefully and ensured that their own employees only worked on value-added activities intrinsic to the HDFC business proposition.

Customer Relations
A house is the biggest and single most important asset that a family buys- and it is for life. So we have to be helpful. -Deepak Parekh As described earlier, the average borrower at HDFC was a very average person, who would typically have to stand in queues to get anything done at another financial institution. Relating well to this average customer was seen by HDFC management as the key to the companys mission. Every employee of the company was trained in handling customers through a customer relations workshop. This workshop was customized from HDFC employees and was based on the material used by S&Ls. Key components of this workshop, which have been run regularly since 1980, were: How do you guide the process of an interview? How do you manage the communication process?

How do you manage difficult customers?

Each branch provided real-life examples of difficult situations and these were used as learning opportunities during the workshop. So, while the general attitude towards service was driven by senior management, who set an example and talked incessantly about the need to make customers feel appreciated and wanted (this was done through their regular visits to branch officers and at the head office), servicing techniques were taught through formal training sessions. HDFC as a company was very well tuned into client perceptions and needs. It used agents and front-line staff to sense shifts in client behavior. Simultaneously, it consistently looked for ways to improve on existing products and delivery systems. An important examples of this is how the loan approval cycle time was progressively reduced from two to four weeks, to a point where the decision could be made and communicated across the table. Importantly, this was done in an environment wherein HDFC was the best service provider and much better than its nearest competitor. Initially, all loan applications were finally reviewed and approved at the head office and, typically, it took four weeks to approve a loan. Clients were so happy to get the money that they did not worry too much about the delay. However, management felt that four weeks was too long and hired Dr V.S Mahesh, a Professor of Service Management at the University of Buckingham, UK, to work with the company to start collapsing the cycle time. This process was started in 1989 with a workshop attended by all branch managers in each region. It kicked off with an overview of service management and then proceeded to identify specific bottlenecks in HDFCs loan approval processes. Cross-functional groups were established to investigate each bottleneck and recommend solutions. A champion was identified for the most vexing issues (20 per cent) and the participants agreed to develop a solution within a tight timeframe. At the end of the prescribed period, the various groups came back with their proposals and the company found how to reduce the cycle time fro m an average o f fo ur weeks to two to five days, once all the recommended changes were implemented. The next stage came in 1994, when customers started noticing the two- to five-day cycle time and started seeing it as a delay. The company went back to the 1989 formula and ran another set of workshops. They found they had various unnecessary manual operations around the approval process and this resulted in needless delays. Non-essential items like manual filing were eliminated and a new set of standardised procedures were put on the computer. This called for a team of two people to prepare each application and another two to check and approve the loan. Once implemented, this resulted in the capability to approve applications across the table. A commitment to customers was an all-encompassing theme at HDFC. Further evidence of this commitment can be found, for example, when loans were per-paid the company arranged to promptly return all original title documents to the borrower. There were no unnecessary delays similar to those the borrower would experience at almost any of its competitors. Also, while the documents were stored by HDFC, they were kept in a well-organised secure facility which ensured that they were safe, easy to locate, and not damaged by moisture or other elements. This practice was almost unique in the Indian finance industry. Customer satisfaction is the hallmark of all HDFC offerings. The first touch of HDFC's personalised service begins as soon as a customer approaches HDFC, and over time it progresses into a long and meaningful relationship. Stateof-the-art information systems supported by strong in-house training programmes conducted at its specialized training centre in Lonavla, have equipped HDFC to respond swiftly to the ever-changing customer needs and thereby empower customers in making the right home buying decision. This is what sets apart HDFC's customer service philosophy - 'With You, Right Through'.

HDFC's specialist team of over 1,600 trained and experienced professionals follows a 'single-window concept' for providing smooth and value added services at all stages. The team guides the customers right through the entire process of property purchase - be it property search assistance, technical support prior to finalising the property, legal advice on property related documentation, personalised home loan counseling or providing tailor-made repayment options to suit the customer's specific requirements.

Customer satisfaction is the main focus of all HDFC offerings. State-of-the-art information systems supported by strong in-house training programmes conducted at its specialized training centre in Lonavla. It equipped HDFC to respond smoothly with the changing customers needs. . This is what sets apart HDFC's customer service philosophy - 'With You, Right Through'. HDFC's specialist team of over 1,600 trained and experienced professionals follows a 'single-window concept' for providing smooth and value added services at all stages. Team guides the customers right through the entire process of property purchase from property search assistance, technical support, legal advices, personalized home loan counseling and other as the customers require ments. Source : http://www.hdfc.com/others/about-hdfc.asp

Employee Relations
Between 1991 and 1997, HDFC had quadrupled its loan assets while increasing its employee count from 724 to 794. Despite a booming market for fianc personnel, it had consistently enjoyed extremely low employee turnover and no senior manager had left the company in many years.

Why did people join HDFC and why did they stay? An informal survey among a wide cross-section of HDFC officers and staff yielded the following responses: An informal atmosphere. This was carefully cultivated by senior management, including the chairman, who frequently walked through the office in shirtsleeves and willingly answered a ringing phone in an empty office (typically, he left a message for the person concerned). H.T Parekh was credited with creating the informal atmosphere and Deepak Parekh for maintaining it. A concern for people . The company worked with an open-door policy. With virtually no staff turnover, everyone knew everyone else and they could walk into the office of the managing director, executive directors or a general manager (even the chairman if he was in) to raise their concerns and have them addressed. Tenure was given a lot of respect in the company. When HDFC Bank shares were being distributed at par to employees, the allocation formula was transparent to all, and while it recognised seniority in terms of position, equal weightage was given to tenure. Large responsibilities. HDFC was a merit-oriented organisation and it did not hire laterals (with very rare exceptions). There was a shared belief that lateral hires might not fit as well into the culture of the company. As the business was growing at over 25 per cent per annum, there were significant advancement opportunities for most employees. The company had a transparent performance appraisal process wherein the employees were kept fully informed. For officers, the form consisted of six sections: (i) Self-assessment, (ii) Appraisal of overall performance, (iii) Appraisal of personal attributes, (iv) Objectives for the following years, (v) Comments by appraiser (includes commentary on self-appraisal as well as achievement of objectives and promotability ), and (vi) Development and training needs focus. Each officer was aware of and involved in all the sections of the appraisal except (v). Free sharing of information through a regular and active communication programme . There were few status symbols accorded to senior managers. They drove fairly ordinary cars and were not particularly well paid by industry standards. So, there was no real we- they distancing between the seniors and others. There were many internal communication organs and perhaps most important, the full-time directors made it a point to address all employees at the various locations of company on a regular basis.

The people did not see themselves as employees or the company as an employer . The company belonged to them as much as they belonged to the company. This was an extended family. Management had a no-firing policy except in cases of fraud/deception. Etc. This sense of belonging and security resulted in a very high level of both loyalty and commitment. A simple illustrative example could be found in peoples response to a major fire in a companys main office in Mumbai. The ground floor was gutted and it was impossible to serve customers in the office. So, while some employees sacrificed their personal time to re-equip the office, others took the office to the pavement outside the building and handled customer on the roadside. Another indicator: there was no union at any location of the company. Personal development. Management had set-up a specialized housing finance training centre at LONAVALA. All employees rotated through the training centre on a regular basis and ample opportunities for personal development. In addition, the company reimbursed each employee for the cost of two professional qualifications. This process of training and development, along with a commitment to merit and reluctance to hire laterals, created some unique opportunities. For example, the manager (deposits) in the head office had joined the company as a stenographer in 1981. In India, very few other companies would have offered this possibility. No politics. The no-star policy of the company described earlier led to a very open environment, with very little overt politicking.

It hold 2nd position in the survey of Best Company to work for ,2004,by employees perception alone. HDFC formula for keeping its employee happy may lack the typical HR hype, jargon and spiel but it works and all thats all that matters. Source : http://www.hdfc.com/pdf/BestEmp.pdf

The Role of Leadership

In November 1996, Deepak Parekh, chairman of HDFC, was chosen as Businessman of the Year- the most visible and coveted recognition for corporate leadership in India. Explaining its choice, the selection committee highlighted the following accomplishments of Parekh: His all-pervasive influence both within HDFC and outside that had, over the year, not just earned the respect of colleagues and peers but also of decision makers in government, international institutions and foreign collaborators. It was no secret that his office had become the first port of call for many potential investors into the country who came to seek his guidance. His company both met a social need and was extremely profitable- vibrant proof that the two were not mutually exclusive. Through market leader by a wide margin, it continued to set standards in customer service adding to the tremendous bank of goodwill that it had built up. Leading an organization that had come to be regarded as world class, this forward thinker represented the best side of Indian business. Deepak Parekh studies Commerce at Sydneham College, Bombay, before qualifying as a charted accountant from London. He returned to India and worked in a small business before joining Grindlays Bank in their Merchant Banking division. He then moved to Chase and rose to become Chases representative for South Asia, before moving on to HDFC in 1978. Despite the much lower pay and uncertain prospects, he could not resist the vision and passion of H.T.Parekh, who also happened to be his uncle. Deepak Parekh joined HDFC as a deputy general manager and quickly became a key player with a sense of mission. He rose to become managing director of the company before succeeding H.T.Parekh as the chairman in 1994.

While the businessman of the Year award merely confirmed it, Deepak Parekh had become a management icon in the country. Reputed to be addicted to people and a familiar face at a variety of high level in India, he was a classic networked executive. A member of the Advisory board of Banker Trust in New York and of Capital International Group, he also served on the boards of twenty companies and social or educational institutions in India.

Deepak Parekh got Padma Bhushan award in 2006. He is the well known face in the Housing finance sector, also always the first choice of both government and industry on business matters of the highest importance. He has stood up for liberal real estate and housing policies both at the Central and State levels .Deepak Parekh was then nonexecutive chairman of HDFC Asset Management Company Ltd, HDFC Standard Life Insurance Company Ltd and HDFC Chubb General Insurance Ltd. Before this, he has won awards like the JRD Tata Corporate Leadership Award from the All India Management Association (AIMA) and is the first recipient of the Qimpro Platinum Award for Quality for his contributions to the services sector. Source http://www.hdfc.com/others/popup/news/padmabhushan0306.htm
As an individual, Deepak Parekh had the reputation of being a delegator, on the one hand, who had the faith and the courage to empower people to an extent that was highly unusual in India, and a firm leader, on the other hand, who regularly stepped in to assume a hands-on role and expected his decisions to be unwaveringly followed. An excellent public speaker in constant demand in national and international seminar circuits, he served as a source of inspiration and a motivator for extraordinary efforts within the company. Under his leadership , HDFC created a number of new activities by creating new joint venture companies, and it was his passion and charisma- like that of his uncle before him- that had attracted a number of high-profile executives to join as CEOs and senior managers in these ventures. Strategically, Deepak Parekh enjoyed the reputation of being a visionary- someone who could see opportunities early so as to be able to get in before others and lead rather than compete in the business. He had driven the policy of collaborating with public sector banks, helping then create their own housing finance companies, instead of taking a competitive posture. He had also taken the lead in creating subsidiary company in the infrastructure leasing business and in the credit rating business- well before others woke up to the opportunities. Interestingly, through serendipity perhaps rather than design, HDFC had developed a two hat system for the top job from the very beginning. H.T.Parekh was the visionary who created the company after he had a full career and retired as the executive chairman of ICICI. Once HDFC had been created, he concerned himself with the big picture. He was the external face of the company and represented HDFC to the press and to the regulators. Within the company, he was the father figure who created the caring culture- for both customers and employees. Deepak Parekh, on the other hand, was the businessman who was responsible for managing the company on a day-to-day basis and ensuring the quality of operating results. Once H.T.Parekh stepped down as chairman, Deepak Parekh succeeded him as the visionary and statesman and appointed Deepak Satwalekar as the managing director. An HDFC veteran who had earlier worked for a short period with Citibank, Satwalekar together with his team of executive directors had taken over Deepak Parekhs earlier role of running the company on a day-to-day basis. HDFC- Universal Bank of the Future?

I will steer HDFC to become one of the largest financial supe rmarkets under one roof. -Deepak Parekh, 1992

HDFC saw itself as a company with a customer base 1.9 million people and plenty of opportunities. A wide cross-section of managers within the company shared a strong desire to reposition HDFC from a housing finance lender to a personal finance company. This aspiration was sufficiently widespread within the company to suggest that the decision had already been made and was actually under gradual implementation. The company had already developed a number of affiliate companies in a wide range of related business. Most of them had been set up as strategic alliances with acknowledged leaders in their fields: Colliers Jardine Indian Property Service Ltd and Maruti Countrywide Auto Financial Services Ltd were two examples. Generally, the Strategic partner had management control while HDFC benefited from learning the business, extracting synergies with its own activities, and enjoying outstanding returns on its financial investments in these alliances. In a few cases, such as the HDFC Bank and CRISIL, the companies were manages by trained professionals hired by HDFC from the market. Only in exceptional circumstances did HDFC send its own management talent to the new entities.

Housing Finance

GRUH Finance Limited (with International Finance Corporation, Washington, The Aga Khan Fund for Economic Development, Geneva, and with the support of the Government of Gujarat). SBI Home Finance Limited (with SBI Capital Markets, a subsidiary of State Bank of India). Can Fin Homes Limited (with Canara Bank, Unit Trust of India and Asian Development Bank). GIC Housing Finance Limited (with General Insurance Corporation). Finance Services

Infrastructure Leasing and Financial Services Limited (IL&FS) (with Central Bank of India and Unit Trust of India). The Credit Rating & Information Services of India Limited (the first rating agency in India, co-promoted with IClCl and others). Countrywide Consumer Financial Services Limited (joint venture with General Electric Capital Corporation, USA). HDFC Bank Limited (promoted in strategic alliance with Natwest Markets, UK). Maruti Countrywide Auto Financial Services Limited (with Maruti Udyog Ltd and GE Capital India Ltd). Property Development and Management

Colliers Jardine India Property Services Limited (co-promoted with IL&FS and Colliers Jardine Asia Pacific Ltd). HDFC Developers Ltd (a wholly-owned subsidiary of HDFC).

As a result, the cultures and norms that had been developed within these affiliate institutions were often very different from those of HDFC. HDFC Bank, for example, was much closer to CitibankAditya Puri, managing director, was a career Citibanker and had given up his job as Citi's country head in Malaysia to join HDFC Bank. His vision was to establish HDFC Bank as the first bank in India that would bring together the people and product strengths of the better , foreign banks and the advantages of a local bank. He built the new organisation with smart, highly self-confident and aggressive people, with the top team recruited entirely from the management ranks of foreign banks operating in India. In 1998, even though the organisation was just getting off the ground, Puri and his team had few doubts about the bank's eventual success. They were building a broad retail franchise, as well as strong relationships with selected blue-chip corporate clients. They adopted the very latest technologyHDFC Bank was designed to be almost paperlesstogether with management processes aimed at fast decision making and implementation. The market appeared to reflect the enormous self-confidence of HDFC Bank's management indeed, it has been recognised by Asiamoney in its 1998 report as one of the best-managed companies in India, along with its parent, HDFC. Despite the enormous differences in technology, decision-making-processes, people, leadership style and culture, Aditya Puri acknowledged the possibility that HDFC and HDFC Bank might one day come together. It was Deepak Parekh s vision and passion that had persuaded him to give up his career in Citicorp and return to India, and he had great respect for Parekh as the founder HDFC Bank and as a strategist. So, he was comfortable to leave the decision about the future relationship between the parent and the offspring to Parekh, while focussing his own energies in building HDFC Bank as a premier institution in the country. The story at Countrywide, however, was very different. It was a GE company. It had recruited ambitious, smart and aggressive professionals and it operated with GE policies and procedures. It too was a highly successful company, and there was a great deal of gratitude in Countrywide for all the support that HDFC extended to it in the start-up phase (Countrywide worked out of HDFC offices for the first two years). In 1998, however, it saw itself unambiguously as a part of GE Capital, and employees of Countrywide saw their own future within GE's global network. Increasingly, they had begun to view HDFC as a future competitor in financing durable goods. From HDFC's perspective, it was a matter of some regret: as Deepak Satwalekar said, 'We should never have given a 50 per cent share to GE Capital. They told us it was important for them for accounting purposes, so that they could consolidate the financials of Countrywide in their global accounts.... But, we have learnt.'

In 1998, almost all of HDFC s affiliates were doing well, improving their capabilities and their customer bases aggressively. But each was very different ,with very different kind of people , very different compensation strategies and very different leadership styles . To realize Deepak Parekhs ambition of developing a financial supermarket, one day it would become necessary to mould these diverse offsprings together with the parent. Could that be done ? Should that be done ? If so, when should the process begin ,and how?

In 2001, HDFC ruled out the merger with HDFC Bank for becoming a universal bank. As both the organization( HDF and HDFC Bank) were growing independently at a healthy clip of around 30 per cent per annum and performing well in their respective niche areas. And both the organization do not see any advantage in transforming theirself into universal bank. Housing Development Finance Corporation (HDFC) managing director Keki Mistry said that there was the danger of running an asset-liability mismatch by channeling short-term
funds in savings bank and current accounts into the housing sector, which typically have a long tenors. Source : http://www.business-standard.com/india/news/hdfc-rules-out-universal-bank-bid-viabank-merger/97024/

Subsidiary companies of HDFC HDFC has 16 subsidiary companies : Proportion of ownership Interest (%) NAME OF SUBSIDIARY HDFC Developers Ltd. HDFC Investments Ltd. HDFC Holdings Ltd. HDFC Asset Management Co. Ltd. HDFC Trustee Co. Ltd. HDFC Realty Ltd. GRUH Finance Ltd. HDFC Venture Capital Ltd. HDFC Ventures Trustee Co. Ltd. HDFC Sales Pvt. Ltd. HDFC Property Ventures Ltd. HDFC Investment Trust HDFC Property Fund Scheme - HDFC IT Corridor Fund Griha Investments (Subsidiary of HDFC Holdings Ltd.) HDFC Asset Management Company (Singapore) Pte. Ltd. (Subsidiary of HDFC Asset Management Co. Ltd.) Credila Financial Services Pvt. Ltd. (w.e.f. July 9, 2010) Year ending 2011 100 100 100 59.98 100 100 60.61 80.50 100 100 100 100 97.98 100 59.98 62.8 Year ending 2010 100 100 100 60 100 100 61.36 80.50 100 100 100 100 97.98 100 60 -

Source : http://www.hdfc.com/others/financials.asp# 34 th annual report page 111

Name of Subsidiary (Jointly Controlled Entity)

Name

proportion of ownership Interest(%)

FY11

FY10

HDFC Standard Life Insurance Co. Ltd.

72.37

72.56

HDFC ERGO General Insurance Co. Ltd.

74.00

74.00

Source : http://www.hdfc.com/others/financials.asp# 34 th annual report page 111

ASSOCIATE COMPANIES OF HDFC

proportion of ownership interest(%)

NAME

NATURE OF BUSINESS

FY11

FY10

HDFC Bank Ltd Indian association for saving and

Banking services

23.35

23.73

Credit Indian value fund advisor pvt.ltd Ruralshores business services pvt ltd credila financial pvt ltd(upto july 2010)

Micro finance Venture capital BPO Education loan

49.99 21.51 34.39 -

49.99 21.51 36.74 25.64

APPENDIX 1

HDFC KEY FINANCIAL INDICATORS INDICATOR FY93 FY94 FY95 FY96 FY97

EPS growth(fully diluted)(%) Return on avg. equity(%) Return on avg. assets(%) Equity on assets(%) Loan growth(%) Market price per share(Rs) NPL/Total loans(%) Provisions/NPL(%) Profit/Emplyees(Rs lakh) Debt/Equity(Ratio) PER(X) Price/Book value (X) Divident yield(%)

-20 21.6 1.9 9.7 20 1230 .86 147 8 9.30 15 2.6 2.0

41 25.5 2.8 12.3 20 2800 .90 151 14 7.10 25 5.2 1.0

26 21.3 3.1 16.5 22 2050 .69 174 19 5.10 14 2.4 1.6

12 16.5 3.3 22.9 27 3240 .57 186 25 3.50 20 2.7 1.1

26 15.8 3.4 20.3 20 2750 .52 237 31 4.10 14 2.0 1.6

FY11 Investment valuation ratio

Face value Dividend per share Operating profit per share Net operating profit per share Free reserve per share Bonus in equity capital Profitability ratio Operating profit margin(%) Profit before interest and tax margin (%) Gross profit margin(%) Cash profit margin(%) Adjusted cash margin(%) Net profit margin(%) Adjusted net profit margin(%) Return on capital employed(%) Return on net worth(%) Adjusted return on net worth(%) Return on assets excluding revaluations Return on assets including revaluations Return on long term funds(%) Liquidity and solvency ratio Current ratio Quick ratio Debt equity ratio Long term debt equity ratio

2 86.13 172.19 103.09 41.57 50.02 49.77 49.82 12.91 12.91 17.90 17.90 9.04 21.41 15.20 144.18 144.46 9.53 7.29 14.07 5.60 5.26 4

10 390.99 429.04 452.21 42.47 91.13 90.10 90.38 23.95 23.95 26.22 26.22 9.58 17.86 15.81 621.88 633.28 10.32 6.42 15.33 5.43 4.97

10 370.08 410.47 348.10 42.87 90.15 89.61 89.84 17.77 17.77 19.73 19.73 10.54 16.73 14.81 485.26 486.67 11.38 7.18 15.96 6.23 5.70

10 283.34 309.77 335.58 42.93 91.05 90.48 90.69 19.54 19.95 30.76 30.76 9.56 21.26 13.54 449.12 450.68 9.60 17.94 17.90 5.56 5.56

10 226.43 251.85 152.37 48.20 89.35 88.16 88.45 23.56 24.11 27.24 27.24 8.69 27.03 23.02 254.6 254.85 8.75 17.83 17.79 9.09 9.09

Source : http://www.moneycontrol.com/financials/hdfc/consolidated-ratios/HDF

APPENDIX 2 PARTICULAR OF HOUSING FINANCE COMPANIES IN THE APPROVED LIST(AS ON MARCH 98)

Name of housing finance co

Paid-up capital

Net own funds

Deposits

Loans o/s

Sanctions 1997-1998

Disburse Met(199 7-98)

No of branch es

1777.24 HDFC Ltd LIC Housing Finance Ltd 17.97 GIC Housing Finance Ltd 20.49 Can Fin Homes Ltd 28.01 Dewan Housing Finance Ltd SBI Home Finance Ltd GRUH Finance Ltd Global Housing Fiance Ltd PNB Housing Finance Ltd Ind Bank Housing Ltd 11.00 Peerless Abasan Finance Ltd Cent Bank Housing finance Ltd BOB Housing Finance Ltd AB Home Fiance Ltd Vysya Bank Housing Ltd Hometrust Housing Finance Ltd Vijay Homes Loans Ltd 8.25 GLFL Housing Finance Ltd Vijayabank Housing Finance Ltd Parashrawanath Housing Finance Ltd 5.00 Livewell Housing Finance Ltd Saya Housing Finance Ltd 3.00 7.25 9.48 16.3 3 3.00 3.00 4.53 6.00 3.16 7.07 4.50 10.00 7.42 12.46 8.40 11.51 10.00 7.60 9.00 16.25 14.38 13.72 14.16 10.00 14.91 10.00 15.34 15.00 13.25 22.52 29.42 25.25 29.28 26.87 59.90 68.22 119.11 74.99 404.86 78.90

8148.45 2978.78 400.38 575.34 435.34 542.57 286.36 8.03 156.49 217.08 38.95 75.48 101.56 117.87 120.12 61.97 24.71 80.16 15.83 9.05 14.94 1.02 40.90 17.42

2753.61 6944.07 3077.40 872.54 402.66 159.38 583.43 138.67 444.46 110.70 335.91 264.83 25.88 8.72 115.60 60.49 149.26 30.76 29.18 8.30 79.83 109.21 111.26 44.49 106.23 59.74 25.93 8.05 80.96 34.50 20.21 14.75 12.51 .02 18.16 7.65 2.80 30.92 .02 .02 7.42 .02 17.82 45.41 37.03 40.29 31.89 8.07 28.80 13.75 25.33 51.43 25.82 8.55 24.73 44.80 34.90 89.39 106.95 102.79 88.77 89.29 8.35 50.78 137.18 130.48 3251.27 802.10

41 75 16 36 29 24 24 5 13 13 5 13 24 16 13 9 16 8 10 3 4 6 1

Orissa Rural Housing Dev. Ltd Weizmann Homes Mercantile Housing Finance Ltd

4.25 10.00

10.74

2.36

27.20 7.54

27.22 16.47 10.46

15.02 7.44

10 4

1 crore=10 million

APPENDIX 3 COMPRISON OF MAJOR FINANCE COMPANIES, MARCH 1993 Yr est Branch EmplOyees Annu Al dis Unit Loan Out Total Asset Sh. funds Borro Wing Depo Sits PBT PAT Debt/ Eq Admn Cost/ Loan out 15.8 8.9 13.1 5.4 7.8 6.4 9.3 9.5 Ro ta

LIC Fin Can fin Dewan Fin SBI Home GIC GRUH HDFC Total/avg

1989 1987 1984 1988 1989 1986 1977

60 26 16 12 4 10 26 154

694 220 273 59 60 47 728 2081

476 59 77 40 33 15 720 1419

874 347 162 96 42 46 3594 5162

135642 52347 28008 30274 13121 6568 719458 958118

852 281 155 86 45 39 2652 4020

346 355 154 117 64 47 3363 5047

56 36 11 18 7 6 326 461

889 154 105 32 57 38 2009 3284 165 38 67

18.8 534 2.2 3.6 2.1 .8 73.1 106.0

13.5 5.3 1.9 2.5 1.5 .6 55.6 80.9

.76 1.17 1.97 1.59 2.26 3.20 .83 1.68

1.4

1.5

1.2

2.1

2 1029 1302

2.2 1.3 1.6

1.6

1 crore=10 million

For FY 2011

HDFC Net sales Sales T.O Total income Total expenses Operating profit PBT PAT 12,852.93 12,852.93 12,837.42 408.74 12,444.19 4,867.61 3,534.96

LIC Housing Fin 4680.09 4680.09 4867.93 469.66 4210.43 1293.94 974.49

Dewan Housing 1448.72 1448.72 1486.40 173.37 1275.35 341.74 265.13

Gruh Finance 358.90 358.90 359.09 31.76 327.14 125.58 91.51

GIC housing Fin 330.53 330.53 428.26 67.03 263.50 145.77 113.77

EPS

24.10

20.53

25.39

26.03

21.13

In crores

Source : http://www.moneycontrol.com/competition/housingdevelopmentfinancecorporation/comparison/HDF#HDF

APPENDIX 4 PEER COMPARISON 1997 INDICATOR HDFC LICHF

Interest rate spread(%) Return on avg.equity(%) Return on avg assets(%) Loan growth(%) Equity/assests(%) NPL/total loans(%) Price/earnings Per two year EPS growth(98E) Price/book value(%) Dividend yield Market cap/avg assets(%)

1.73 19.8 3.2 20.4 18.5 .5 15.4 .55 2.3 1.4 47.5

1.90 20.0 2.3 22.1 11.4 4.6 6.0 .23 1.1 4.0 13.5

Peer comparison, 2011 INDICATOR HDFC LICHF

Dividend per share Operating profit per share Gross profit margin (%) Net profit margin (%) Adjusted return on net worth (%) Return on long term funds (%) Current ratio Debt equity ratio Long term debt equity ratio EPS Book value per share

9.00 84.83 96.67 27.44 20.64 9.62 10.78 6.66 6.47 24.10 118.05

3.50 88.70 89.83 20.73 19.32 8.65 10.80 10.83 10.75 20.53 87.83

Source : http://www.moneycontrol.com/financials/lichousingfinance/ratios/LIC#LIC