LIC Housing Finance Ltd

GLOBAL ECONOMIC CONDITIONS

Recovery in the global economy picked up momentum in the fourth quarter of 2009. Thespeed of recovery, however, remains significantly divergent. The projections for globaloutput for 2010 generally point to consolidating recovery, led by the Emerging MarketEconomies (EMEs). The World Trade Organisation projects world trade to stage a strongrecovery in 2010. The risks to the overall global macroeconomic environment have, however,increased because of large public debt in advanced economies, on the back of concernsrelating to reduction in potential output, high unemployment rates, impaired financialsystems and premature exit from the policy stimulus. Closer home, the improvement inglobal macroeconomic conditions is reflected in the turnaround in India's exports and thereturn of capital flows. With stronger recovery in EMEs driven largely by domestic demand,improving exports and return of capital flows, EMEs face the risk of inflation and assetprice build up.

OUTPUT

Concerns about domestic output growth are now subdued as the recovery is getting morebroad-based. This is the result of a rebound in industrial output, better prospects forthe rabi crop and continuing resilience of the services sector. Survey data suggestincreasing levels of capacity utilisation in recent months. Subject to normal monsoons,output growth during 2010-11 is expected to gain further momentum.

AGGREGATE DEMAND

Final consumption expenditure remained subdued during 200910, as growth in both privatefinal consumption expenditure and government final consumption expenditure decelerated.Investment demand, particularly gross fixed capital formation, however showed a gradualrecovery during the year. While the momentum in investment demand is expected to continue,pick-up in private consumption demand could drive the recovery in growth. The fiscalstimulus exit, as planned in Union Budget for 2010- 11, would contribute to improving theoverall medium-term growth outlook, even as going forward, greater emphasis on quality offiscal adjustment would be necessary.

EXTERNAL SECTOR DEVELOPMENTS

India's external sector position improved ahead of the recovery in the global economy.After declining for 12 consecutive months, exports recovered in October 2009. Similarly,imports recovered in November 2009 following a phase of decline. Despite a lower tradedeficit, the current account deficit widened during April-December 2009, as compared withthe corresponding period of the previous year. This is attributable to a fall ininvisibles, particularly on account of business services. During 2009-10, foreign exchangereserves increased by US$27,1 billion, comprising mainly of increase in gold holdings (US$8.4 billion), SDRs* (US$ 5.0 billion) and foreign currency assets (US$ 13.3 billion). Thebulk of the increase in foreign currency assets was on account of valuation. Net capitalflows can be expected to increase further during the current year, reflecting theprospects of higher growth and larger interest rate differentials between India and theadvanced economies. Like other EMEs, however, higher capital inflows could influence assetprices, domestic liquidity conditions and the exchange rate. This will have implicationsfor monetary management.

[*Special Drawing Right (SDR) is the monetary unit of the reserve assets of theInternational Monetary Fund (IMF). This unit was created in 1969 in support of the BrettonWoods system of fixed exchange rates to alleviate the shortage of US dollar and goldreserves in the expansion of international trade]

MONETARY AND CREDIT CONDITIONS

Reflecting the stronger recovery in economic activities, growth in broad money and flowof credit to the private sector exceeded the Reserve Bank's indicative projections for2009-10. While the increase in Cash Reserve Ratio effected by the Reserve bank in itsThird Quarter Policy Review of January 2010 led to some moderation in excess liquidity,overall liquidity conditions remain comfortable as reflected in the daily reverse repooperations. The banking system's credit to the Government was the prime driver of monetaryexpansion during the year. The flow of resources to commercial sector distinctly improvedfrom both bank as well as non-bank sources. Going forward, the demand for money mayincrease with acceleration in recovery and the elevated level of inflation.

GLOBAL FINANCIAL MARKETS

Global financial markets exhibited significant stabilisation during 2009, despite thedrag from the global financial crisis. However, volatility increased in the beginning of2010 due to concerns about unsustainable fiscal positions, as reflected in sovereignrisks. Episodes such as the Dubai World debt standstill and the sovereign debt problems inGreece and East European countries pose a major risk to the stability of financial marketsgoing forward.

DOMESTIC FINANCIAL MARKETS

With market activity returning to tne pre-global crisis level, volatility in thedomestic financial markets was much lower during 200910 than in the year before, when thecrisis erupted. Despite considerable stability and the commencement of exit, markets facedconcerns emerging from large government borrowings and the increase in inflation. Thisaffected yields in the government bond market. The transmission of lower policy rates tothe credit markets improved, although, slowly. Asset prices increased at a relativelyfaster pace in the recent months. With the revival of capital inflows, nominal exchangerate appreciated. Given higher domestic inflation, the appreciation in real terms was evenhigher.

INFLATION SITUATION

Headline WPI inflation firmed up significantly during the fourth quarter of 2009-10.The initial inflationary pressure was predominantly conditioned by rising food and fuelprices, reflecting the impact of a deficient monsoon on agricultural output and theincrease in international crude prices. In the second half of the year with persistentsupply side piessures, inflation became increasingly generalised. This is evident from theacceleration of inflation in non-food manufactured products from -0.4 percent in November2009 to 4.7 percent in March 2010. Inflation, as measured by consumer price indices (CPIs)also remained high, though there was some moderation in February 2010. These inflationaryconditions, coupied with the stronger momentum seen in the pace of economic recovery,created the compelling ground for altering the Reserve Bank's balance of policy focus toanchoring inflation expectations.

GROWTH OUTLOOK

Output growth in 2010-11 is expected to be higher than in 2009-10, assuming a normalmonsoon. Support for sustained momentum in growth can be expected from all three majorcomponents, viz., agriculture, industry and services. Nevertheless, apart frommonsoon-related uncertainty, other downside risks to growth need to be recognised. First,private consumption demand needs to improve significantly to support the growth momentum.Second, global recovery, despite gaining strength, is expected to remain fragile, whichmay have adverse impact on exports. Third, the exit from fiscal stimulus and thegrowth-supportive monetary policy, unless calibrated carefully, may adversely impact thegrowth process. Finally, the domestic saving rate has exhibited some decline, led bysignificant decline in public sector savings. This has adverse implications for thepotential growth of the economy.

INFLATION OUTLOOK

Inflation can be expected to moderate over the next few months, from the peak levelsseen in recent months. There are, however, upside risks to inflation. First, internationalcommodity prices, particularly oil, have started to increase again. In severalcommodities, the import option for India to contain domestic inflation is limited, becauseof higher international prices. Second, the revival in private consumption demand and thebridging of the output gap will add to inflationary pressures. Finally, it is important toguard against the risk of hardening of inflation expectations conditioned by near doubledigit headline Wholesale Price Indice (WPI) inflation.

OVERALL ASSESSMENT

With the improving growth outlook, monetary and fiscal exit measures have started.While recovery in private demand needs to be stronger to reinfo^rce the growthmomentum, the already elevated headline inflation suggests that the weight of policybalance may have to shift to containing inflation, since high inflation itself will dampenrecovery in growth. In the emerging macroeconomic scenario, monetary policy management in201011 will be dominated by the challenge of moderating inflation and anchoring inflationexpectations, while remaining supportive of growth impulses. 12 (source RBI's recentstatement on macroeconomic & monetary development - 19^th April, 2010)

HOUSING FINANCE INDUSTRY STRUCTURE & DEVELOPMENT

India's housing finance industry comprises of banks and housing finance companies.Disbursements have improved in the financial year 2009-10 as compared to lukewarm previousfinancial year. Given India's rapid population growth, increasing urbanisation and risingaffordability the housing finance market will continue to grow. However, given increasingcompetition in the sector from banks, Housing Finance Companies which have access to lowcost funds, better operational and credit cost control, and better service quality willfind going a bit comfortable.

CRISIL Research estimates housing finance disbursements to have grown by 18 percent in2009-10 to Rs.1,38,200 crore as compared with Rs.1,17,000 crore in 2008-09. The followingfactors have supported a healthy growth in 2009-10:

a) Reduction in interest rates: Aggressive interest rate schemes launched by publicsector banks led to intense competition in the industry and reduction in interest rates by200-250 basis points, thereby benefiting the consumer:

b) Increase in balance transfer cases: Lower interest rates also increased theincidence of balance transfer cases in 2009-10, thereby contributing significantly towardsdisbursement growth. The growth without balance transfer is estimated at 11.9 percent;

c) Pent-up demand from 2008-09: Lower property prices in the first half of 2009-10encouraged first-time buyers to purchase new homes, leading to consumption of the previousyear's stock;

d) Rise in average ticket size: The second half of 2009-10 saw property prices rise inmajor markets (mainly Mumbai and Delhi), alongwith new project launches with larger areaby many builders. This led to an overall increase of 8 to 9 percent in average ticket sizeof loans and contributed towards value growth in 2009-10.

Housing constitutes over 70 percent of the real estate sector and is amongst the threebasic necessities of life viz. food, clothing and shelter. However, it is largely ignored.The estimated shortage in dwelling units during the period 2007-12 is 5.57 crore approx.

With increase in urbanisation and improving affordability, the demand for mortgageloans will continue to grow at a healthy pace. Further, steady prices ana continuation oftax concessions to self-occupied residential home borrowers, are contributors to thegrowth of the industry. The average age of borrowers has declined over the years, whilethe number of double-income households has grown significantly which enabled them toborrow higher loan amount due to higher repaying capacity.

Looking ahead:

It is estimated that the housing finance industry will be able to maintain a highergrowth in fresh origination of residential home ioans over next three to five years mainlydue to increased affordability of the borrower i.e. ratio of average house price toaverage annual income mainly due to demand for affordable / nano housing projects.

Income tax exemption u/s 80IB(10) should be extended to include projects constructedafter 31st March, 2008. While benefits are available under this section, these benefits donot percolate to the intended recipients. A lot more has to be done so as to benefit themiddle class. Along with the restriction on the size of housing units a restriction on thevalue of the apartment and eligibility of buyers based on income will also serve. Thescheme has to be redesigned in a manner that makes it user friendly and should bemonitored so that it benefits house buyer rather than maximising wealth in the hands ofthe developer. Higher FSI of 4 should be provided so that high cost of land in cities canbe offset.

Affordable housing and integrated township projects should be given infrastructurestatus. By providing this status these projects will have a better access to funds.

The Government should extend the scope of 36(1) (vii) of the Income tax Act, 1961 toinclude housing finance institutions.

Further, the Housing Finance Companies should be relieved from anomaly inherent insection 43D read with rule 6EB of the Income tax Rules wherein the housing financecompanies are being taxed without booking the income and also not allowed to claim asdeduction when provision is required to be made in respect of bad loans.

Housing Finance Companies should be allowed to access long term External CommercialBorrowing (ECB) market, since these companies require long term funding sources at thelowest cost possible, to pass on to the ultimate borrowers.

Competition:

The Housing Finance Industry is one of the most keenly competitive segments of theEconomy, with the Banking sector having a significant presence. However, Housing FinanceCompanies with a dedicated focus on the industry and better understanding of theunderlying real estate markets stand on a better footing when it comes to understandingthe needs and requirement of the customers as also assessing the risks in the industry.

The teaser home loan offer seems to be a dated concept now. As most bankers arespeculating a possible rate hike in the coming months, they have pre-empted it bywithdrawing teaser rates campaign effective 31st March, 2010. However, some Banks and HFCshave decided to continue the scheme with a few changes, inspite of the Central Bank hikingcash reserve ratio, repo and reserve repo rates. The LIC Housing Finance already has aspecial loan scheme which offers 8.9 percent for three years and has remained anattractive proposition for customers as is evident from good growth in new business, animproved retention rate which is reflected in high growth of loan book.

Teaser loans refer to step-up loans where interest rate is a low fixed rate in theinitial years, but is benchmarked to market rates after 2-3 years with a minimum floor.Such teaser rates are ideal for borrowers who intend to prepay their home loans within theinitial years. Despite the marginal increase in this dual** rate product, it is a good betfor such borrowers. However, a penalty of 2 percent is slapped on prepayment within 3years of the loan tenure.

(** Rates vary depending on ioan amount.)

It may be mentioned here that the teaser rates are a matter of regulatory concern. TheRBI has already raised concerns over teaser loans being offered by banks. Borrowers withlow financial means may get attracted to such loans on finding the initial low interestrates to be within their financial means, but may land themselves into a financialdistress should interest rates start rising.

The government holds the view that the resulting delinquency of such loans would haveadverse impact on the financial stability of the lending banks. The finance ministry hasraised the concern at a time when some banks are either re-launching teaser rates orextending the period of previously-introduced rates.

From 1^st July, 2010 as per the RBI guidelines, the banks will have to peginterest rates on various loans disbursed by them to their 'Base Rate' instead of BPLR.The base lending rate is an improvement over the PLR as it reflects the actual cost tobanks that has to be covered through their lending operations. The guidelines announced byRBI on base rates of banks are interesting for several reasons. The definition provided byRBI has four components namely, cost of deposits, negative carry on Cash Reserve Ratio andStatutory Liquidity Ratio, overheads cost and returns on networth. Most of the banks areyet to arrive at the new barometer (base rate) for pricing loans. Since the teaser ratescheme is for limited period, those opting for the loan would be doing so without anyinformation on the kind of interest payable from the third year - a discouraging factor.Thus, the risk arising out of the uncertainty may not seem daunting for home loanborrowers intending to prepay their loans within say 5 years, but long term borrowerscould be thrown off track once the base rate comes into effect.

Opportunities:

With the economy giving indications of a recovery, the question as to whether this isthe right time to buy property has yet again surfaced. However, the answer as to whetherthis is the right time to buy, is not a simple yes or no, but depends on a number offactors like whether a buyer is looking for a first or second house, for living orinvestment and if it is an investment, whether it will be a long-term or short-term one,etc. If we consider two property hot spots in the country, Delhi - NCR and Mumbai, it hasseen two booms and two slumps in the last decade. The ups and downs may continue,regardless of prevailing market sentiments, depending on the project, geographicallocations and various other factors.

From a macro economic perspective these booms and slumps predominantly affect activeinvestors and traders in property, who want to make money on every deal they make. Thedilemma of whether it is right time to buy, is always there tor those who are looking fortheir first home. Even when the market was worst hit by the recession, there were gooddeals in the market for those locking to invest in property. If the fundamentals arestrong i.e., where the property has clear title, is in an area where growth is expectedand where prices have already corrected, then one may opt for buying.

Realty companies assert that the prices have reached the bottom and will only movenorthwards, hereafter. In a demand - supply mismatch scenario, the prices have to go up,unless there is a case of more land being released. Moreover, it is a myth that the buyersare staying away from the market, in FY 2008-09. one of the reputed developer managed tosell more than 8,000 flats as was reported in a recent media report.

Until a few years back, a house in Mumbai was a distant dream for in the residentialsegment, is in the price bracket of Rs.5 lakh to Rs.15 lakh, while 26 percent is in therange of Rs.15 lakh to Rs.25 lakh. On a national average, affordable housing is anythingbetween Rs.5 lakh and Rs.15 lakh. However, in Mumbai, projects within the range of Rs.20lakh to Rs.45 lakh can be called affordable. In certain areas in Mumbai, people would evenfind properties between Rs.50 lakh to Rs.1 crore affordable, especially areas close to theCentral Business places.

Affordable housing projects acts as a means to empower lower and middle income groupswith a house / flat and the middle and low income group families, due to the everincreasing price tags. However, now, the scenario has changed somewhat, with some playersventuring into affordable / nano housing projects. In terms of advantages, besides puttinga cap on rising property prices, these 'affordable housing' projects can also serve tobridge the shortage of dwelling units for middle and low-income bracket. Since most of theaffordable housing projects target middle and low-income groups, the price is fixed insuch a way as to woo them. The need to own a house is highest among the salaried, middleclass, lower-middle class and newly married couples. In suburban Mumbai, developers /builders are targeting the middle and low-income groups, as the demand for affordablehousing is highest in this segment. As several affordable housing projects are situatedalong peripheral areas of the city, there are several advantages, especially in terms oflower land costs and other incremental expenses, which enable a developer to offer betterspace, better amenities and better value to the customer. Nevertheless, other factors suchas demographics offered by the location, employment opportunities for people,connectivity, accessibility, etc. also play a part in making the projects a success.

Threats (bottlenecks)

The budget proposals have thrown a spanner in the housing industry's growth wheel.Construction services have now been brought under the ambit of the service tax in anunexpected move that would raise cost of apartment that are still under construction. Asper the budget proposal, the finance ministry has suggested that construction would bedeemed to be a taxable service, if the building or complex is still under construction andapproval from the concerned regulatory authority - which in most cases is the residentmunicipal authority - hasn't yet been granted. The levy would cover all construction ofcomplex services or commercial or industrial construction services.

The service tax levy would be 10.3 percent and would also apply to additional servicessuch as those offering preferential location for flats in multi-storey buildings whereflats in each floor are priced at a premium due to their location. This too has beendescribed as a service and hence taxable, according to the proposal tablea by FinanceMinister.

A major feature of the Maharashtra government's budget for 2010-11 presented on 25thMarch, 2010 has been the introduction of one percent value added tax which is payable onthe purchase price of flats mentioned in the sale agreement. It has also increased theregistration fee by lifting the ceiling of Rs.30,000/- and making it a uniform onepercent. For a person belonging to lower / middle-income groups, who opts to buy a flatsay for Rs.20 lakh, it will be a burden.

• Impact of legal charges and documentation fees

There are taxes / duties / fees payable to the state at the construction stage. Thereare two aspects of the cost namely: i) monetary cost and ii) cost in terms of time devotedin obtaining various permissions and clearances. The number of permissions anddocumentation required are quite large. Further, permissions have to be taken fromdifferent departments and that too sequentially. This delays the process of housingconstruction and occupation. The actual fees imposed by the government are not necessarilyhigh but the time taken to obtain requisite permissions is very long, procedurescumbersome and sometimes involves extra payments for getting the transaction through. Thedelays highlight the sluggishness of the market by increasing the gap between change indemand and the market response to it.

• Impact of stamp duties

i) High stamp duties propel the buyers to either under-record the value of transactionor not record it altogether. As a result, the government loses revenue. However,implication for the land / housing market is the incomplete knowledge about the state ofthe market.

ii) Many sales take place on power of attorney basis. Power of attorney does not conferownership right on the person holding power of attorney. This ieads to deficiency in landrecords.

• impact of property tax

Most local authorities still base their property tax on ratable value. The ratablevalue is calculated as a percentage of the cost of construction and the price of land atthe commencement of construction. In a scenario of continuously rising land prices, newlyconstructed properties would pay a much higher property tax than the older properties -even when the market value of the two might be the same. Even in the unit area system ofproperty taxation, older properties pay lower tax than the new properties, age being avariable in determining the tax. This would not only distort the market, but would alsohave a negative effect on investment in new housing.

Segment wise Reporting

Segment has been identified in line with the Accounting Standard on segment reporting,taking into account the organization structure as well as the differential risk andreturns of these segments. The Company is exclusively engaged in the Housing Financebusiness and revenues are mainly derived from this activity.

Outlook

The buzzword for the real estate for the year gone by was 'affordable housing'. Lookingat the demand for affordable housing, many developers cashed in on the opportunity andcame up with several budget projects for the benefit of middle income buyers. Thepopularity of affordable housing is likely to continue for a long while.

Affordable housing is the only way to accommodate people in the suburbs of Mumbai.Commuting will not be much of a problem because of development of infrastructure projectslike upcoming Metro, flyovers, skywalks, better road and increase in the frequency of railconnectivity. So, if the price is right and there is scope for good lifestyle development,people would be open to relocate themselves. This would mean that any neighbourhood canbenefit from affordable housing projects of mid to large scale and ultimately, with theadded infrastructure and support systems coming into aid the projects, property price willonly get better.

Maharashtra Housing and Area Development Authority (MHADA), which constructs low costhomes, has decided to get into redevelopment projects in ecological sensitive coastalareas in the city. It was reported that MHADA would soon begin surveying the coastallocalities immediately. If the plan works, MHADA will get additional area as incentive forre-developing old building, where it can build new homes, and many Mumbaites will be ableto buy flats on the island city.

It is not that affordable housing is in the news, but even luxurious flats are makingheadlines. Recently there was a report in the print media that DLF, the country's biggestrealtor had sold three-fourth of its upscale fiats in central Delhi at Rs.4 crore apiecewithin two days of launch in a sign that demand for such properties is alive and welldespite the drift towards affordable housing. The rush for such luxurious flats shows thatthe Indian realty sector's recovery is real and gathering pace after the sharp spurt indemand for affordable houses in recent months. Analysts say with the economy in shipshapeand the job market ticking again, consumers are regaining the confidence to invest inswank projects despite RBI's interest rate hike.

Housing sector is bound to receive attention of Government because it is a major sectorof the Indian economy. Housing is the largest component of the financial sector, of theconstruction sector and is central to economic growth and the related multiplier effectson employment, poverty reduction etc. It has also impact on several other connectedindustries. It has implications for the healthy growth of households, their optimism andinvestment opportunities and it creates an environment conducive to a positive outlook insociety. Housing helps to provide a stable platform for future development of a democraticsociety. Globally, there is a strong correlation between economic development and housingand housing quality. It is said that alleviating the urban housing shortage couldpotentially raise the rate of growth of GDP and have a decisive impact on improving thebasic quality of life.

Risks and concerns

LIC Housing Finance is exposed to risks such as liquidity risk, interest rate risk,forex risk, credit risk and operational risk which are inherent in the financialintermediation business. The risk management process of the Company will proactivelymanage the uncertainty and volatility in the net interest income of the Company byprescribing maximum exposure limits. The objective can be summarized as below:

• Reduce potential costs of financial distress by making LIC Housing lessvulnerable to adverse movements in liquidity, interest rates, exchange rates (whereverapplicable);

• Create a stable planning environment by ensuring that the business plan is notadversely affected during the financial year due to any adverse liquidity situations,interest rate and currency fluctuations by using various tools such as time-bucketanalysis, liquidity statements, duration gap and forex exposure reports;

• Minimise the credit risk by adopting scientific techniques for creditevaluation, prescribing exposure limits, portfolio composition and periodic review of theportfolio;

• Minimise the operational risk by strengthening the internal control proceduresand making systemic corrections to address the deficiencies reported by the InternalAuditors.

Internal Control Systems & their Adequacy

The Company has internal audit system which is effective and commensurate with the sizeof its operations. Adequate records and documents are maintained as required by law fromtime to time. Internal audits and checks are regularly conducted and internal auditor'srecommendations are seriously considered for improving systems and procedures. Thecompany's audit committee reviews the internal control system and looks into theobservations of the statutory and internal auditors. During the year various guidelines /circulars were issued on the operational side to ensure better credit appraisal, as aresult of which quality of loans has improved during the year.

Financial / Fund Management

The Company's borrowing is planned taking into consideration ALM gaps, interest ratemismatches. But, this depends on the prevailing market conditions. LIC Housing Finance hasgot highest rating for bank borrowings, non convertible debentures, commercial paper andpublic deposit scheme from CRISIL / CARE rating agencies, which has helped the Company toprocure funds at very competitive rates. The Company is selectively entering intoderivative contracts with sole objective of managing risk associated with the interestrate movement, balance sheet management, converting fixed / floating coupon of theunderlying liabilities, switching from the existing benchmark to favourable benchmark soas to prevent cost escalation on account of unfavourable benchmark and also as a tool tomanage the asset liability mismatch.

As derivative transactions are linked with risk, the status of each and everytransaction is regularly monitored and the Company has unwound some of the transactions atthe appropriate time to mitigate the risk associated with it. During the financial year200910, the Company has unwound 2 swaps and received an amount of Rs.13.35 crore asunwinding value.

The prime lending rate of the Company is regularly reviewed and revised as it is abenchmark for asset pricing. Since more than 85 percent of the asset portfolio is on thefloating rate, the Company re-prices the loan assets consequent upon the revision in primelending rate of the company at specified intervals.

The Company also reviews the fund position on daily basis and parks surplus funds indebt oriented mutual fund schemes, fixed deposits, certificate of deposits as per theboard approved policy with an objective of reducing the negative carry to the extentpossible.

The composition of outstanding borrowings as on 31^st March, 2010 & theratings assigned by rating agencies is as under;

Performance / Operation Highlights

During the year, the Company sanctioned Rs.18,043.17 crore and disbursed Rs. 14,852.93crore registering a growth of 65.56 percent and 69.52 percent respectively. For the yearended March 2010, the Company's total income from operations was Rs.3,456.24 crore asagainst Rs.2,880 crore during the same period last year. Net profit for year ended March2010 zoomed to Rs.661.64 crore when compared to Rs.531.62 crore in the correspondingperiod last year, thereby achieving a growth of 24.45 percent. The outstanding mortgageportfolio as at March 2010 was Rs.38,081 crore as against Rs.27,679 crore on March 2009thus registering a growth of 37.58 percent.

Marketing

LIC Housing Finance is one of the largest housing finance companies in India having oneof the widest networks of 158 marketing offices as on 31^st March, 2010 acrossthe country and representative offices in Dubai and Kuwait. The Company continues to servethe customers at their door step through Home Loan Agents, Direct Selling Agents andCustomer Relation Associates. During the year, the Company also participated in propertyexhibitions in various parts of the country and the same has been an impetus forsuccessful marketing tool.

Recovery Management

The gross net performing assets (NPA) as on 31st March, 2010 stood at Rs.263 crore asagainst Rs.297 crore as on 31st March, 2009 registering a reduction of 11 percent. Thegross NPA of the company stood at 0.69 percent as on 31st March, 2010 as against 1.07percent as on 31st March, 2009. Net NPAs were 0.12 percent as against 0.21 percent for thecorresponding dates. The provision cover on the NPAs stood at 82.4 percent as on 31stMarch, 2010. The net interest margin for the year stood at 2.70 percent.

Human Resources Development

The Company has a dedicated team of 1013 hands who have been contributing to theprogress and growth of the Company. The manpower requirement of the offices of the companyis assessed and recruitment is conducted accordingly. Personal skills of the employees arefine tuned and knowledge is enhanced by providing them internal and external trainingkeeping in views the market requirement from time to time. Outstanding performers arerewarded by way of elevation to the higher cadre. Apart from fixed salary and perquisites,the employees are paid performance linked incentives which motivates them to performbetter.

Loan assets per employee as at 31^st March, 2010 is Rs.33.51 crore and netprofit per employee as at 31^st March, 2010 is Rs.65.31 lakh.

Conclusion with Caution

Statements in this report, describing the Company's objectives, projections,estimations, expectations are "forward looking statements" within the meaning ofapplicable securities, laws and regulations. These statements are based on certainassumptions in respect of future events and Company assumes no responsibility in case theactual results differ materially due to change in internal or external factors.