LIC Housing Finance Ltd

To the members of LIC Housing Finance Limited.

The Directors have great pleasure in presenting the Twenty First Annual Report togetherwith the audited accounts for the year ended 31st March, 2010.

Financial results

The profit and loss account shows a profit before tax of Rs.911.26 crore after writingoff bad loans of Rs.0.77 crore and considering the amount recovered of Rs.5.76 crore outof earlier write off and taking into account all expenses, including depreciation andprior period items, the profit before tax is Rs.911.26 crore. The provision for incometax, (net of deferred tax) is Rs.249.09 crore and the profit after tax for the year isRs.662.18 crore.

Taking into account the balance of Rs.225.82 crore being brought forward from theprevious year, the distributable profit is Rs.888.00 crore.

(Rs. in crore)

Dividend

Considering the good performance during the year 2009-10, your Directors haverecommended a dividend of Rs.15 per equity share (150 percent), for the year ended underreview, as against Rs.13 per equity share (130 percent) for the previous year 200809. Thetotal dividend outgo for the current year would amount to Rs.166.59 crore includingDividend Distribution Tax of Rs,24.20 crore, as against Rs.129.17 crore including dividenddistribution tax of Rs.18.76 crore, in the previous year.

Income and profit

Profit before tax and after tax stood at Rs.911.26 crore and Rs.662.18 crore as againstRs.726.42 crore and Rs.531.62 crore, respectively, for the previous year. Profit beforetax and profit after tax both increased by 25 percent as compared to that of previousyear.

The Company earned a total income of Rs.3469.73 crore, registering an increase of 19.51percent. The percentage of administrative expenses to the housing loans, which was 0.54percent in the previous year, has decreased to 0.48 percent during the year 2009-10.

Lending operations

Individual loans:

The main thrust continues on individual loans with a disbursement growth of 69 percentas against 25 percent in the previous year. However, project loans were also given dueweightage resulting in an overall disbursement growth of 70 percent over previous year.During the year, the Company sanctioned 1,01,828 individual loans for Rs.14,151.12 croreand disbursed 97,863 loans for Rs.12.447.73 crore during 2009-10. Housing Loan toIndividual i.e.. retail loans constitute 78.43 percent of the total sanctions and 83.81percent of the total disbursements for the year 2009-10 compared to the last year's figureof 75.11 percent and 83.94 percent respectively. The retail loan portfolio grew by over 34percent from Rs.25,252.87 crore as on 31^st March, 2009 to Rs.33,948.87 crore ason 31st March, 2010.

The cumulative sanctions and disbursements since the incorporation, in respect ofindividual loans are:

Amount sanctioned: Rs.61,090 crore

Amount disbursed: Rs.55,445 crore

More than 10,00,000 customers have been serviced by the Company up to 31^stMarch, 2010 since its inception.

Project loans:

Growth in profit has been attributed amongst other factors to the growing portfolio ofproject loans. The Company sanctioned/ disbursed project loans to selectbuilders/developers. The project loans sanctioned and disbursed by the Company during theyear were Rs.3,892.05 crore and Rs.2,405.20 crore, respectively. These loans are generallyfor short durations, giving better yields as compared to individual loans.

Non-Performing Assets and provisions

The amount of gross Non-Performing Assets (NPA) as on 31st March. 2010 was Rs.263crore, which is equivalent to 0.69 percent of the housing loan portfolio of the Company,as against Rs.297 crore i.e. 1.07 percent of the housing loan portfolio as on 31st March,2009. The net NPA as on 31st March, 2010 is reduced to Rs.46.36 crore i.e. 0.12 percent ofthe housing loan portfolio vis-a-vis Rs.57 crore i.e. 0.21 percent of the housing loanportfolio as on 31^st March, 2009. The total cumulative provision towardshousing loan as on 31^st March, 2010 is Rs.216.79 crore. During the year, theCompany has written off Rs.0.77 crore of housing loan portfolio as against Rs.5.40 croreduring the previous year.

Fund raising

The Company raised funds aggregating to Rs.17,004.35 crore through term loans frombanks, Non-Convertible Debentures (NCD), upper tier II Bonds, commercial paper, NHBrefinance and Public Deposit. The Company's NCD & Upper Tier II subordinate Bond issueand bank loans were rated 'AAA/Stable' and Public Deposit was rated as FAAA/STABLE byCRISIL. The Company mobilised Rs.658 crore by private placement of equity throughQualified Institutional Placement.

Qualified Institutional Placement

To meet the growing needs, the Company raised funds through a Qualified InstitutionalPlacement (QIP) of 10 million equity shares amounting to Rs.658 crore (US$ 137.10million).

Auditors

Statutory auditors M/s. Chokshi & Chokshi, Chartered Accountants, Mumbai and M/s.Shah Gupta & Co., Chartered Accountants Mumbai retire at the conclusion of theforthcoming Annual General Meeting (AGM). The Company has received the requisitecertificate from them to the effect that their appointment, if made would be with thelimits specified under section 224(1 B) of the Companies Act, 1956.

The Board of Directors recommend appointment of M/s. Chokshi & Chokshi, CharteredAccountants, Mumbai and M/s. Shah Gupta & Co., Chartered Accountants, Mumbai, as JointStatutory Auditors of the Company for financial year 2010-11.

Directors

Shri B. N. Shukla, Director and Shri Y. B. Desai, Director retire by rotation at theensuing Annual General Meeting and are eligible for reappointment.

The Directors recommend their reappointment / appointment.

Corporate Governance

A certificate from the Joint Statutory Auditors of the Company regarding compliance ofthe conditions of Corporate Governance as stipulated under Clause 49 of the ListingAgreement with Stock Exchanges is attached to the Corporate Governance Report.

Your Company has been complying with the principles of good Corporate Governance overthe years. The Board of Directors support the broad principles of Corporate Governance. Inaddition to the basic governance issues, the Board lays strong emphasis on transparency,accountability and integrity.

Management Discussion and Analysis Report

Management Discussion and Analysis Report for the year under review, as stipulatedunder clause 49 of the Listing Agreement with Stock Exchanges is presented in a separatesection forming part of the Annual Report.

Regulatory Compliance

The Company has been following guidelines, circulars and directions issued by NationalHousing Bank (NHB) from time to time.

Your Company has been maintaining capital adequacy as prescribed by the NHB from timeto time. The capital adequacy was 14.89 percent (as against 12 percent prescribed by theNHB) as on 31^st March. 2010 after considering the loan to value ratio fordeciding risk weightage.

The Company also has been following directions / guidelines / circulars issued by SEBIfrom time to time applicable to the listed company.

Depository system

The Company has signed an agreement with the Central Depository Services (India)Limited (CDSL) for transactions of its shares in dematerialised form, in addition to theNational Securities Depository Limited (NSDL), to give a choice to shareholders inselecting depository participant. As on 31st March, 2010. 14,046 members of the Companycontinue to hold shares in physical form. As per the Securities and Exchange Board ofIndia's (SEBI) instructions, the Company's shares have to be transacted in dematerialisedform and therefore, members are requested to convert their holdings to dematerialisedform.

Public deposits

During 2007-08, the Company started accepting deposits from the public. As on 31stMarch, 2010, the outstanding amount on account of public deposits was Rs.326,19,37,820/-.25 deposits amounting to Rs.65,14,500/- which were due for repayment on or before 31^stMarch, 2010 were not claimed by the depositors till that date. As on the date of thisreport, 9 deposits amounting to Rs.5,50,000/- thereof have been claimed and paid. Theinterest due on the public deposits has been paid on time.

Exemption from provision of section 58A (2) (a) & (b)

In exercise of the powers under sub-section 8 of section 58A of the Companies Act,1956, read with Companies (Amendment Act, 1977), the Central Government has grantedexemption to the public deposit scheme of the Company from provisions of section 58A(2)(a) & (b) of the Companies Act, 1956 on following conditions:

i. Abridged advertisement shall refer to the statutory advertisement published.

ii. Abridged advertisement shall be issued during the validity of statutoryadvertisement.

iii. Abridged advertisement shall be filed with the Registrar of Companies,Maharashtra, within 15 days of its publication.

iv. The exemption will not affect any legal rights available to any deposit holder orany shareholder or creditor as per law enforced in respect of recovery of any amount whichhas become due for repayment.

Statutory information

The Company does not own any manufacturing facility. Hence the particulars relating tothe conservation of energy and technology absorption stipulated in the Companies(Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988, are notapplicable. The particulars of foreign currency expenditure and foreign currency earningsduring 2009-10 are given at item No. 16 and No. 17 in the Notes to the Accounts. There areno employees covered by Section 217 (2A) of the Companies Act, 1956. read with theCompanies (Particulars of Employees) Rules, 1975, as amended.

Auditors' observations

No adverse remark or observation is given by the statutory auditors.

The Company has interna! audit system which is being conducted inhouse instead ofoutside agency. Efforts are being continued to further strengthen the internal auditsystem to make it commensurate with the size and the nature of the business.

Systems and procedures are being upgraded to provide checks and alerts for avoidingfraud arising out of misrepresentation given by borrower/s while availing the housingloans

Outlook for 2010-11

The initiatives taken by the Company during the year are expected to improve itsoperational and financial performance. Major initiatives taken by the Company include:

• Expanding its operations by establishing new business centres.

• Increasing its distribution by appointing new agents and activising more agents.

• Supplementing its distribution channel by operationalising a new company LICHFLFinancial Services Limited

• Incentivising and motivating the marketing intermediaries systematically forimproving productivity.

• Raising funds through loans at attractive rate of interest and terms.

• Maintaining good relations with lenders for reducing overall cost of funds.

• Reviewing the existing lending rates at regular quarterly intervals in view ofthe change in interest rate scenario, thereby insulating the stakeholders of risk ofinterest fluctuation and passing on the benefits as applicable to the customer.

• Timely review of credit appraisal system to improve the loan asset quality.

• Initiating steps to upgrade Information Technology platform to ensure prompt andeffective service to the clientele

• Initiating brand building measures to generate general awareness and improve theimage of the Company and also increase the overall market share.

• Swift, appropriate and competitive pricing of its existing loan schemes toattract new customers.

Following the government's policy to provide shelter to a large number of people, thegovernment offers a number of incentives to boost housing and housing finance activities.Some of these are listed below:

1. The Union Budget 2010-11, continues with the tax concessions in respect of interestpaid on loan raised for buying / construction of house property.

2. Rebate for repayment of housing loan under Section 80C of the Income-tax Act, 1961,of Rs.1,00.000/- is also continued for the year 2010-11

Base for tax rates of 10 percent, 20 percent and 30 percent have been widenedand the maximum marginal rate of 30 percent is now applicable above Rs.8 lakh which wasapplicable above Rs.5 lakh for AY 2010-11 resulting in increased disposable income.

3. No change in the corporate income tax and cess rates, however, the rate of surchargeon corporate has been reduced to 7.5 percent from existing rate of 10 percent.

4. In the definition of the taxable services Construction of Complex service [(section65 (105)(zzzh)] and 'Commercial or industrial construction service [section 65(105)(zzq)],it is being provided that unless the entire consideration for the property is paid afterthe completion of construction (i.e. after issuance of completion certificate by thecompetent authority), the activity of construction would be deemed to be a taxable serviceprovided by the builder / promoter / developer to the prospective buyer and the servicetax would be charged accordingly.

5. Provisions of The Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act. 2002. (SARFAESI Act) continue which help housingfinance companies to foreclose bad loans without the intervention of the court and therebyimprove NPA position.

The management perspective about future of the Company

In view of the huge shortage in urban housing units in the country, the Uniongovernment has been providing continued support to make the sector attractive, and givingit clue recognition in the last three Union budgets. The government said the country needsinvestment to the tune of Rs.3,61.000,/- crore to meet the shortage of nearly 25 millionhousing units. There was approximately housing shortage of 24.7 million dwelling units atthe beginning of the 11th five year plan. The investment requirements would be close toRs.3,61,000/- crore for overcoming this massive housing shortage and, therefore, themanagement reasonably foresees good potential for growth in the business of the Company.

Directors' Responsibility Statement pursuant to Section 217 (2AA) of the Companies Act,1956

In accordance with the provisions of Section 217 (2AA) of the Companies Act, 1956, andbased on the information provided by the management, your Directors state that:

• In the preparation of the annual accounts, the applicable accounting standardshave been followed.

• Accounting policies were applied consistently. Reasonable and prudent judgmentand estimates were made so as to give true and fair view of the state of affairs of theCompany as at the end of 31st March, 2010 and profit of the Company for the year ended onthat date.

• Proper and sufficient care has been taken for maintenance of accounting recordsin accordance with the provisions of the Companies Act, 1956, for safeguarding the assetsof the Company and for preventing/detecting fraud and other irregularities.

• The annual accounts are prepared on a going concern basis.

Human resources

The Company aims to align HR practices with business goals, motivate people for higherperformance and build a competitive working environment. Productive high performingemployees are vital to the Company's success. The Board values and appreciates thecontribution and commitment of the employees towards performance of your Company duringthe year. To create the leadership bench and for sustainable competitive advantage, thecompany inducted / promoted employees during the year. In pursuance of the Company'scommitment to develop and retain the best available talent, the Company had organisedvarious training programmes for upgrading the skill and knowledge of its employees indifferent operational areas. The Company rewarded its employees with revision ofremuneration and certain other terms and conditions of service. Apart from fixed salariesand perquisites, we also have in place performance-linked incentives which rewardoutstanding performers that meet certain performance targets. It had been sponsoring itsemployees for training programmes/seminars/conference organised by reputed professionalinstitutions.

Employee relations remained cordial and the work atmosphere remained congenial duringthe year.

Subsidiaries and group companies

The financial statements along with the Report of the Directors of the Company's whollyowned subsidiaries namely LICHFL Care Homes Limited, LICHFL Financial Services Limited,LICHFL Trustee Company Private Limited and LICHFL Asset Management Company Private Limitedfor the year ended 31st March, 2010, are attached along with the statement pursuant toSection 212 of the Companies Act, 1956, with respect to the said subsidiaries. The reviewof performance of the subsidiaries are as under:

1. LICHFL Care Homes Limited :

LICHFL Care Homes Limited has pioneered the corporatised initiative in the sector ofelder care in India by providing assisted community living centres to senior citizens. TheCompany launched its eco-friendly pilot project in Bangalore with cost-effectiveindependent cottages and all other on-campus amenities, fully structured andself-contained to address every possible need of residents. It has library, communitycentre, home theatre, meditation centre, and doctors on call and ambulance to take theailing to the nearest city Medicare centre - all that would make the lives of seniorcitizens comfortable and satisfying. Apart from this project, the Company has alreadypurchased land for its new project at Bhubaneshwar and Jaipur. In respect of project atBhubaneshwar, necessary approval are being obtained for implementation of the project andconstruction activities for the same will be initiated very soon. In respect of Jaipurproject, effective step to obtain the approval from the authority has been initiated.

2. LICHFL Financial Services Limited :

LICHFL Financial Services Limited was incorporated on 31^st October, 2007 forundertaking non fund based activities like marketing of housing loans, insurance products,credit card, mutual fund, personal loan etc. It has become operational in March 2009 andhas already opened 33 offices across the country upto March 2010. The Company earnedprofit after tax Rs.78.19 lakh and declared first dividend @ 5 percent for FY 2009-10. TheCompany plans to open more offices in a phased manner.

3. LICHFL Trustee Company Private Limited :

LICHFL Trustee Company Private Limited was incorporated on 5th March, 2008 forundertaking the business of trustees of venture capital trust, funds - in India andoffshore fund. The Company plans to launch its first real estate venture fund by September2010.

4. LICHFL Asset Management Company Private Limited:

LICHFL Asset Management Company Private Limited was incorporated on 14th February, 2008for undertaking the business of managing, advising, administering venture funds, unittrust, investment trust in India as well as abroad. The Company has selected ChiefExecutive Officer and would launch its operations very soon.

Acknowledgments

The Directors place on record their appreciation for the advice, guidance and supportgiven by the Life Insurance Corporation of India and the NHB and all the bankers of theCompany. The Directors also place on record their sincere thanks to the Company'sclientele and members for their patronage. The Directors also record their appreciationfor the dedicated services of the employees and their contribution to the growth of theCompany.