This is presentation being presented by Shivi Aggarwal, Radhika Gupta, Sweta Agarwal and Madhusudan Partani Students of FORE School of Management ( FMG-18). It has Guidelines of HFC, Busniess Model of HDFC

1. Business Model of Housing
Finance Company in India

2. Madhu
91029
Shivi
91051
Radhika
91041
Sweta
91059
Members
Group 4

3. Housing Industry
• From 28%(300 m) the Urban Population to increase
to 40% (600 m) by 2030
• 70% of New jobs to be created in Cities*
• Young people aspire to be come home owners
• Change in Socio Culture of Society
* as per McKinsey Global Industry research

4. 80
100
120
140
160
180
200
2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun
Residex
Chennai- Residex
Source: NHB- Residex data

5. 80
90
100
110
120
130
140
150
160
170
180
2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun
Mumbai- Residex
Source: NHB- Residex data

6. 0
20
40
60
80
100
120
140
2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun
Delhi-Residex
Source: NHB- Residex data

7. 0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
2007 2008-1 2008-II 2009-I 2009-II 2010-Jan-Mar 2010-Apr-Jun
India- Residex
Source: NHB- Residex data

8. 0
2000
4000
6000
8000
10000
12000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Amount(RsCrores)
Total Loan Disbursements
Source: NHB and IndiaStat

9. Housing Finance
Housing finance connotes finance for meeting the
various needs relating to housing
Purchase of a Land
Acquisition of a
Flat
Construction of a
house
Extension of a
house
Repairs,
renovation and
upgradation of a
house/flat
Taking over
housing loans from
other banks/HFCs.

10. Understanding Housing Loan

11. Housing Loan
• Term:
• Security:
– Primary:
– Secondary:
• Purpose:
• Interest Rate:
Long
House
Guarantee/ Collateral
New Home/ Expansion/ Equity
Land Purchase/Acquisition of House
Fixed, Floating, Teaser

12. Mortgage Vs Lien

13. Importance of Housing finance
Engine of
equitable
economic growth
Reduce poverty
Prevent slum
proliferation
Take part in
financial sector
liberalization
Create and meet
growing housing
demand

14. 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10
Disbursements by NHB under refinancing
Scheme
Banks Disbursments
Others Disbursments
Housing Finance Companies
Disbursments
Source: India Housing Stat

15. Housing Finance system in India
Reasons for a high annual growth in this sector:
 Demand
 Affordability
 Competition
 Policy
 Securitization
 Urbanization
 Nuclear families growing
 Tax incentives

16. Industry structure

17. National Housing Bank
Commercial
Banks
Housing Finance
Companies
HUDC
O
HDFC
Bank
Sponsored
Insurance
Companies
Sponsored
Private Sector
Companies
Cooperative
Institutions
Apex
cooperati
ve
Housing
Federatio
n
State
Cooper
ative
Banks
Urban
Coope
rative
Banks
State cooperative
Agri and Rural Bank
HOUSING FINANCE SYSYTEM IN INDIA

18. Players
NHB HFC SCB
Developers Customers

19. National Housing Bank (NHB)
• Set-up in 1988 as the Apex level institution for housing.
• To promote housing finance institutions both at local and
regional levels
• NHB is wholly owned by Reserve Bank of India
• Ensures a sound and healthy housing finance system through
effective regulation and supervision of housing finance
institutions.

20. Functions
• Promotion function
• Regulatory function
• Financing function

21. Promotion function
• With the setting up of NHB, there have been sustained efforts
at creating and supporting a new set of specialized institutions
to serve as dedicated centers for housing credit.

22. Regulatory function
• The requirement of regulation emanates from the need for a
credible and stable housing finance system.
• It has come out with guidelines for approving HFCs for
financial assistance and for participating in their equity.
• It has also issued the Housing Finance Companies (HFC)
Directions and guidelines for prudential norms for income
recognition, assets classification etc.

23. Financing function
• To provide financial assistance to various banks and housing
finance institutions.
• The principal focus of NHB’s programs is to generate large
scale involvement of various primary lending institutions to
serve as dedicated outlets for assistance to the housing sector.
• The refinance assistance provided by NHB to HFCs has
enabled them to increase their operations and cover a larger
section of the population.

25. Strengths
Active Mainstream sector
Effective regulatory framework
Extensive network of regional
banks and institutions
Specialized skills as Dedicated
Players in the housing industry
Weakness
Interest war persist
Dilution in due diligence on part of
lenders
Lack of uniformity in norms
Increase in default rate
Asset Liability Mismatch
Opportunities
Increase Urbanization
Housing microfinance has potential
Tax rebates on house loans
Falling interest rate
Lower SLR will enhance liquidity so
more loans can be offered
Threats
High Cost of Funds
Competition from SCBs
Higher cost of home ownership is
dampening demand

27. RBI Mid-term Review Highlights
pertaining to Housing Sector
• The RBI in its mid-term review policy, released on 2nd
November, 2010 made the norms for housing loans more
stringent to curb the excessive borrowing that has pushed
property prices in most metros to levels seen before the
global financial meltdown and even beyond.
• Among the steps mandated by the RBI are:

28. • Increase in the risk weight of high-value loans of Rs 75 lakh
and above to 125 per cent. Increasing the risk weight means
banks will have to keep more money aside against high value
loans.
• Bringing down the ceiling limit on housing loans to 80 per
cent of the property value. This is intended to dissuade
excessive borrowing for housing purposes. Till now, banks
used to impose their own ceiling on housing loans, but there
was no cap from the RBI side.

29. • An increase in the funds to be kept aside by banks as a
cushion in case of defaults on loans made at teaser rates. It
has increased the standard asset provisioning by banks for all
such loans to 2 per cent from the earlier 0.4 per cent.
• It has been observed that many banks at the time of initial
loan appraisal do not take into account the repaying capacity
of the borrower at normal lending rates.
The overall policy is designed to check the creation of pricing
bubble in the market

30. Business Model

31. • Incorporated in 1977
• primary objective of meeting a social need -
that of promoting home ownership by
providing long-term finance to households for
their housing needs
• 1505 Employees as on 31st March 2010

32. Snapshots
• Loan Book ` 97,967 Crores, 22% growth y-o-y
• Deposits ` 23,081 crores, 19% growth y-o-y
• Operating Income ` 11,338.28 Crores
• EPS- ` 92.47 , 23% growth
• ROE- 20%- Highest in Industry
• Cost to Income Ratio- 72.59% Lowest
• PAT 24.88%
• Loan Turnover 0.12 times

33. Subsidiaries

34. Value Chain

35. Source of
funds
Processed
into
products
Deployment

36. Liquidity Cycle
Inflows
• EMI
• CPs/ NCDs
• Short Term Borrowings
• Refinancing
Outflows
• Loans
• Repayments of
Borrowings
• Operating Expenses

37. Process
•Need Identification
•CompetitionProduct Development
•Direct and Indirect Selling
•Cross SellingLoan Origination
•Both borrower and asset are scrutinized
•Different Documentation based on Occupation
Due Diligence
•After being satisfied, Loan deal is Signed
•Terms/ Conditions of Loan AgreementClosure
•Outflow of Funds
Disbursement
•Regulation and Control of property
•Insurance/ maintenanceMonitoring
•On Maturity, Collection of Loan/EMI
•On default, Recovery of LoanCollection/Foreclosure

38. Process and Risks
•Business Risk( Competition)- Acceptability
•Compliance RiskProduct Development
•Operational Risk
•Competition; Pricing RiskLoan Origination
•Underwriting Risk- Appraisal
•Property and Person RelatedDue Diligence
•Documentation Risk
•Interest Rate RiskClosure
•Liquidity Risk
•Credit RiskDisbursement
•Default Risk/ Delay Risk
•Operational RiskMonitoring
•Credit Risk
•Default RiskCollection/ Foreclosure

39. • All Values in ` Crores
• Data has been taken from
– Companies Annual Report
– CMIE Prowess
– Capitaline
– NHB and RBI

40. FDI
15% FIs/Banks
1%
FII
59%
Insurance Co.
9%
MF/UTI
3%
Non
Promoter(Non
Institutional)
13%
Share Holding Pattern
FDI
Fis/Banks
FII
Insurance Co.
MF/UTI
Non Promoter(Non
Institutional)

41. Sources of Funds
Share Capital
0.26%
Reserves Total
13%
Non Convertible
Debentures
30%
Term Loans
Institutions
2%
Term Loans Banks
25%
Unsecured Loans
30%

42. 0.26% 0.29% 0.61%
13.34% 13.25%
8.97%
29.70%
33.51%
24.59%
1.78%
2.86%
9.08%
25.43%
20.52%
29.51%
29.49% 29.56% 27.23%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2009 2005
Sources of Funds
Unsecured Loans
Term Loans Banks
Term Loans Institutions
Non Convertible Debentures
Reserves Total
Share Capital

43. Application of Funds
Net Block
0.20%
Investment
s
10%
Net Current
Assets
2%
Individuals
55%
Bodies Corporate
32%
Other
1%
Loans

44. 0.20% 0.21% 0.76%
9.62% 10.82% 7.73%
2.30% 0.94%
2.53%
54.99% 56.72% 59.94%
31.50% 29.36% 27.58%
1.38% 1.96% 1.46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2009 2005
Allocation of Funds
Other
Bodies
Corporate
Individuals
Net Current
Assets
Investments
Net Block

45. 147.19, 2%
84.59, 1%
7,063.08, 97%
Expenditure
Operating & Administration
Expenses
Miscellaneous Expenses
Interest

46. Revenue Model
Interest
Income
•Interest rates
of 9-11.5% on
home loans
•Average
10.90%
Processing
Charges
•Range of 0.5
to 1.5%
depending
upon the size
•And 2 to 2.5%
in case of
Home equity
loans and Top-
ups
Investment
Income
•Investments in
SLR securities
generate
interest
income
•Yield for HDFC
stood at
10.38% for FY
10
Redemption
charges
•Average 2%
on early
redemption
/prepaid
amount
Referral
Income
•On Referring
Clients to
Subsidiaries

47. Other Income
0.20%
Operating &
Administration
Expenses
2%
Interest
63%
Gross Profit
35%
Operating Income
99.80%
Income and Expenditure
Other Income Operating & Administration Expenses Interest Gross Profit
Average
Interest rate on
Deposits- 8.59%
Average Yield
on Loans-
10.90%

48. Other Income
0.21%
Operating &
Administration
Expenses
2%
Interest
68%
Gross
Profit
30%
Operating
Income
99.79%
Income and Expenditure 2009
Other Income
0.20%
Operating &
Administration
Expenses
2%
Interest
63%
Gross Profit
35%
Operating Income
99.80%
Income and Expenditure 2010

49. 0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
RsCrores
Operating Income
CAGR= 27% over 5 years
0.00
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
120,000.00
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
Rs.Crores
Loans/Advances
CAGR= 22% over 5 years

50. Financial Evaluation
0
2
4
6
8
10
12
14
16
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
ROCE
HDFC
Industry
0
5
10
15
20
25
30
35
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
RONW

51. Risk
INTERNAL RISK FACTORS
• Contingent Liabilities Risk
• Foreign Exchange Risk
• Legal/Regulatory Risk
• Credit Risk
• Operations Risk
• Liquidity Risk
• Interest Rate Risk
• Any Time Exit Options on
the Loans
EXTERNAL RISK FACTORS
• Regulatory changes
• Risk of Competition
• Sensitivity to the
Economy and Extraneous
Factors
• Real Estate Prices Risk
• Increasing Competition

52. Risk Mitigation
• Stringent Credit Norms
• Regular monitoring of the maturity profiles
• Long term forward contracts, principal only swaps,
full currency swaps and currency options

53. Marketing
• 279 Outlets
• Complimented by wholly owned distribution
company, HDFC Sales Private Limited (HSPL).
• Covers 90 Locations
• Distribution Channel on Sources Loans, No role in
credit, technical, legal…
• Organizes fairs
• Through Subsidiaries

54. Products
• Home Improvement
Loan
• Home Extension Loan
• Land Acquisition
• Top-Up Loan
• Property Valuation
• Property
Identification/Advisory
• Senior Citizen's
Deposits
• Cumulative Deposits
• Non-cumulative
Deposits
• Monthly Income Plan
• Systematic Savings Plan
(SSP)

55. Performance Indicator
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
Rs.inCrore
Loan Approvals/Sanctions Loan Disbursements Housing Loan Outstanding
CAGR- 25% over 5 years
Source : India Stat, Annual Report of HDFC
CAGR- 22% over 5 years

56. Competition
• L I C Housing Finance
Ltd.
• Dewan Housing Finance
Corpn. Ltd.
• Deutsche Postbank
Home Finance Ltd.
• G I C Housing Finance
Ltd.
• I D B I Homefinance Ltd.
• ICICI Bank
• State Bank of India
• Canara Bank
• Punjab National Bank
• IDBI Bank
• Standard Chartered
Bank
• Hongkong & Shanghai
Bank

57. Commercial Bank Vs HFC
•Banks: RBI
•HFCs: NHBRegulation
•Banks: 9%
•HFCs: 12%Capital Adequacy
•Banks: Can Accept All Deposits And Insured
•HFCs: Only Time Deposits, No InsuranceDeposits
•Banks: 25%
•HFCs: 12%SLR
•Banks: Deduction for NPAs under Sec 36(1) of IT Act
•HFCs: No deductionTax
• Banks: `300 Crores
• HFCs: ` 25 lacsCapital

58. Market Share of SCBs
ICICI Bank
22%
State Bank of India
18%
IDBI Bank
4%Punjab
National Bank
3%
Axis Bank
3%
Canara Bank
3%
Bank of
Baroda
3%
Union Bank of
India
3%
Central Bank of
India
3%
Others
38%
Credit to Housing by SCBs

60. Primary Mortgage Market
• The market where borrowers and mortgage
originators come together to negotiate terms
and effectuate mortgage transaction
• Mortgage brokers, mortgage bankers, credit
unions and banks are all participants in the
primary mortgage market

61. Secondary Mortgage Market
• The market where mortgage loans and
servicing rights are bought and sold between
mortgage originators, mortgage aggregators
(securitizers) and investors

62. Securitization in Secondary Market
Borrowers
• Borrow from bank(Mortgage Originators)
• Pay interest and principal to mortgage holder
Banks
• Mortgage Originators
• Sell Mortgages to Aggregators
Fannie Mae &
Freddie Mac
• Mortgage Aggregators
• Receive interest and principal on mortgages from borrowers
• Securitize and sell mortgages (MBS)
Investors
• Hedge Funds, Pension Funds, Foreign central banks etc. buy MBS
• Receive interest thereon

63. Benefits of the Secondary Market
Borrowers
• Increased home affordability
Banks
• Increased liquidity
• Transfer of Default risk
Fannie Mae &
Freddie Mac
• Charge security premium (fee)from investors
Investors
• Full repayment of MBS is guaranteed

64. Downfall of Fannie Mae and
Freddie Mac
• Rapid growth in purchases of risky but profitable subprime loans
• Utilised implicit government backing to borrow at will, but without
adequate capital to protect them from unexpected losses
• Played down the dangers posed by an inflated housing market
• Did not raise enough new capital to weather the storm as the
housing slump expanded
• Over‐estimated the power and accuracy of their computer systems
and mathematical formulae to compensate for new more complex
products

66. Mortgage Guarantee
• a mortgage guarantee company (MGC)By
• a credit institutionTo
• repayment of an outstanding housing loan and
interest accruedFor
• the guaranteed amountUp to
• a housing loan turns into a NPAWhen

67. Tri-partite Guarantee Contract-Purchased by the
lender and paid for by the borrower
Mortgage
Guarantee
Company (Surety)
Borrower
(Principal Debtor)
Credit Institution

68. 1. Banks and HFCs pay the MGC a premium (fee) for buying mortgage
guarantee for every loan they advance
2. The banks/HFCs pass on the cost to borrowers, just like mortgage
insurance premiums
3. The premium will depend on factors such as borrower's profile, income
proof, credit history and security available
4. The premium amount collected from thousands of loans by MGC will be
pooled into a corpus fund
5. When a loan goes bad, the bank/HFC will invoke mortgage guarantee
and MGC will pay the outstanding debt to the bank/HFC from the corpus
fund
Modus Operandi of MGC

69. Insurance vs Mortgage Guarantee
Credit Insurance
• Bi-partite contract
• Business credit insurance
• Regulated by IRDA
• Max FDI is 26%
Mortgage Guarantee
• Tri-partite contract
• Consumer credit insurance
• Regulated by RBI
• Max FDI is 49%

70. Due Diligence in Mortgage Guarantee
Validity of security on guaranteed amount
Credit worthiness of the borrower
Title to the property and marketability of the property
Use of land verified by creditor
Permission from authorities for construction of house

71. Benefits of Mortgage Guarantee
• Make housing more accessible to qualified
younger buyers
• Increase accessibility to mortgage loans in
underserved regions and communities
• Increase accessibility to mortgage loans for
entrepreneurs and the self-employed

72. Benefits of Mortgage Guarantee
• MGC act as credit investigator for credit institutions
• Stimulate the housing resale market because easier
finance available to home buyers
• Encourage lenders to bring yields lower on loans that
have a mortgage guarantee
• Provide loans with lesser down payments to deserving
borrowers

73. Presented By:
Shivi Agarwal
Radhika Gupta
Sweta Agarwal
Madhusudan Partani
FMG 18A
91051
91041
91059
91029