LIC Housing Finance Ltd Management Discussions.

MACROECONOMIC OUTLOOK

The macroeconomic setting for the conduct of monetary policy has undergone significant shifts as domestic activity lost speed in 2018-19 and inflation conditions turned unusually benign under the impact of deflationary food prices. Going forward, economic activity is expected to recover in 2019-20. Headline CPI inflation is projected to move up from its recent low as the favourable base effects dissipate but remain below the target of 4 per cent in 2019-20. Global economic activity and trade have been shedding momentum and downside risks to the outlook have increased.

Consumer price inflation has weakened in a broad-based manner with food prices contracting for five consecutive months since September 2018, fuel inflation collapsing and inflation excluding food and fuel softening even though it remains at an elevated level. Nominal growth in rural wages for both agricultural and non-agricultural labourers remained muted and pressure from staff costs in the organised sector was range-bound in Q3:2018-19. Industrial and farm input costs moderated considerably.

Economic activity slowed down in Q2 led mainly by a large drag from net exports, which became entrenched in Q3 due to deceleration in public spending and private consumption. On the supply side, agriculture and allied activities moderated characterised by a modest growth in kharif and horticulture production. Industrial growth also decelerated led by a slowdown in manufacturing activity. However, services sector activity remained resilient, supported primarily by construction, financial services, and public administration and defence.

In the second half of 2018-19, financial market conditions were characterised by systemic liquidity needs being met through a mix of liquidity injection instruments with the weighted average call money rate (WACR) trading close to the policy rate in February-March; stock markets moving sideways though they rallied in March; bond yields tracking domestic developments and global spillovers; and the Indian Rupee appreciating due to easing of global crude prices and resumption of foreign portfolio inflows. Credit ofitake continued to be buoyant with some moderation in interest rates on new loans since February 2019.

Global growth has lost pace led by deceleration in major advanced economies (AEs) and emerging market economies (EMEs). Ongoing trade tensions have clouded the world trade outlook. Inflation pressures across geographies have remained muted. Financial markets, which ended 2018 on a volatile note, witnessed revival of risk-on sentiment in Q1:2019 on accommodative policy stances and benign oil prices.

Domestic financial markets continued to be influenced by global developments, especially volatile capital flows. The direction of capital flows remains unpredictable, posing challenges for macroeconomic and liquidity management. The exuberance in the equity market in H1:2018-19 generally continued in H2:2018-19, barring some bearishness in October, January and February. Credit growth has been healthy, notwithstanding some deceleration in recent months. Going forward, liquidity operations would continue to focus on achieving the stated policy objective of aligning the WACR with the policy repo rate by meeting the durable liquidity needs of the economy. Adequate and swift monetary transmission remains a policy challenge for the Reserve Bank.

In sum, global economic activity is witnessing a synchronised deceleration, though easy policy stances by the fiscal and monetary authorities in several economies are expected to cushion the pace of the slowdown. The global trade outlook is uncertain as the largest economies of the world struggle to strike a deal. Inflation pressures across geographies remain benign on soft commodity prices and slowing demand. Global growth and trade concerns are expected to remain the dominant theme of 2019, which will drive markets and condition future monetary and fiscal actions.

HOUSING FINANCE INDUSTRY - STRUCTURE & DEVELOPMENT

Housing is an important sector for any economy as it has inter-linkages with other industries. The development of housing sector can have direct impact on employment generation, GDP growth and consumption pattern in the economy. To accelerate development in housing in the country, there is need to have a well-developed housing finance market.

The demand for housing is increasingly being made by individuals and households given the increasing level of income and prosperity. The supply of houses have to come from builders, developers and construction companies scattered widely across the country, both in the private and public sector when examined in the context of demand and supply of housing units, especially in the face of scarce land in the urban areas.

In India, housing finance market is very complex. The government, both at centre and states, is a facilitator and is assisted by two regulators, Reserve Bank of India (RBI) and National Housing Bank (NHB). There are number of players in the housing finance market which includes commercial banks, both domestic and foreign. In addition, there are cooperative banks and housing finance companies, self-help groups, micro-finance institutions, and NGOs. The RBI regulates commercial banks and partially cooperative banks (which are mainly governed by the State Governments under State Cooperative Acts) while the NHB regulates the housing finance companies. The others are not regulated by any authority in the country.

The need of long term finance for the housing sector in India is catered by scheduled commercial banks (SCBs), financial institutions, cooperative banks, regional rural banks (RRBs), Housing finance companies (HFCs), agriculture and rural development banks, non-banking finance companies (NBFCs), micro finance institutions (MFIs), and self -help groups (SHGs). The largest contributor to housing loans by virtue of their strong branch network and customer base are SCBs, accounting for the major share of housing loan portfolio in the market followed by HFCs.

A spate of policy reforms favouring affordable segment were introduced during the years which were quite in sync with the governments vision to provide "Housing for All by 2022." Meanwhile, the new launch supply in top 7 cities increased by 33% in 2018 on an yearly basis. Interestingly, affordable housing contributed significantly to this supply growth.

As it stands, 2018 saw residential supply and sales pick momentum following a significant growth in affordable new supply and high buyer interest for ready-to-move-in properties across the top 7 cities (Mumbai Metropolitan Region (MMR), Delhi-National Capital Region (NCR), Bengaluru, Pune, Hyderabad, Chennai, Kolkata). As many as 1.95 lakh new units were launched across the top 7 cities during the year while housing sales stood at 2.48 lakh units. Remarkably, sales has seen a steady q-o-q rise this year - the first time after 2015.

If we delve deeper, nearly 40% new supply catered to the affordable segment - within Rs. 40 lakh budget. On an average, the unit sizes reduced 8% from 1,260 sq. ft. in 2017 to 1,160 sq. ft. in 2018. These shrinking unit sizes eventually helped reduce the overall ticket prices for homes and thus adjusted into the affordability bracket of homebuyers. Rising sales across the cities helped reduce the unsold stock by over 7% in a year.

New trends emerged with homebuyers preferring to buy properties that are either ready-to-move-in or those nearing completion against under-construction ones.

Overall, the year 2018 was a mixed bag of surprise for Indian real estate with residential segment seeing green shoots of revival, yet away from its earlier peak levels. Bengaluru residential market stood at the top with inventory overhang declining to a year low of 17 months. NCR still has a long way to go as it stands at 52 months inventory overhang - highest across the top 7 cities.

Insolvency and Bankruptcy Code, 2018 gave more power to homebuyers by treating them at par with banks and other institutional creditors. This status will help them recover their dues from realty firms that turn bankrupt.

New Launch Supply

MMR holds the highest share of 31% (59,930 units) of new launches in 2018. However, it recorded the lowest increase in new launches (only 12% over the previous year), primarily due to the massive unsold inventory lying in the city. In terms of share of new launches, Bengaluru holds the second spot with 18% supply (34,880 units), followed by NCR and Pune at 13% each with 26,010 and 24,430 units, respectively.

Chennai real estate activity picked momentum post the political stability being reinstated in the state. The city recorded a 98% increase in 2018 new launches as compared to the previous year. Bengaluru and Hyderabad also recorded an annual increase in new launches to the tune of 91% and 43%, respectively.

NCR recorded only 17% increase in supply over the last year, primarily due to the huge unsold stock prevailing in the market and continuance of subdued demand amidst gloomy business conditions.

City MMR NCR Bengaluru Pune Hyderabad Chennai Kolkata
% decline in avg. size (2015 to 2018) 27% 14% 10% 20% 16% 15% 18%
% decline in avg. size (2017 to 2018) 11% 4% 13% 7% 9% 8% 11%

Homebuyers have become extremely price conscious during the past few years. As a result, developers are consciously reducing the average property sizes across cities to fit their properties in the expected budget range. Alternately, buyers also dont mind buying smaller size units since it comfortably fits in their budget.

Also, due to increasing trend of nuclear families, working professionals/couples prefer to cut down the maintenance hassles and the underlying costs and instead opt for smaller units at prime locations.

In this backdrop, average property sizes continued to shrink over the years – nearly 17% from 2015 to 2018 i.e. from 1,400 sq. ft. to 1,160 sq. ft. In 2018, average sizes reduced by 8%, indicating that builders are lesser focused in luring buyers by offering apt properties.

In the first quarter of 2019 both housing sales and new supply have risen driven by sops in the interim budget, GST rate cuts

Looking ahead:

A report by rating company ICRA said that housing finance companies are likely to grow at 12-14% in the second half of the financial year as the pace of bank growth is likely to increase. NBFCs are likely to grow at 16-18% against a growth of 25% in the first half. Retail NBFC credit growth for financial year 2018-19 is likely to moderate to 16-18% as against 24%-25% growth in the first half. Growth rate in the second half is expected to roughly halve to about 12% basically due to slowdown in credit to loans against property (LAP), SMEs and commercial vehicles. After the RBI dispensation on securitisation by banks (end of Dec2018), an additional Rs. 75,000 crore was made available for NBFCs and HFCs. For portfolio growth of 15%, HFCs need incremental funding of Rs. 1.7 – 1.9 lakh crore in the second half of the fiscal year. The report noted that mismatch between lending and borrowing is high in the 5-7 year and 3-5 year segments. The overall credit growth NBFCs will be around 16-18% while HFCs will grow at 14-16% in the financial year.

The National Housing Banks (NHB) move to tighten capital adequacy ratio norms for housing finance companies (HFCs) will force many to revisit the plot they occupy now. Although the proposed regulatory changes would not adversely impact the stronger among the lot, many HFCs at the capital adequacy ratio threshold of 15 percent or less will need to infuse more equity to grow at a reasonable rate in the future. The message, the regulator is trying to give is that there are circumstances which have forced it to make HFCs more conservative in their credit delivery. As for HFCs which have a capital adequacy ratio of over 15 percent, they might have to raise capital for not just shoring up but for growth. It will address systemic risk of capitalisation and leverage at a sectoral level, but at the same time it might impact the return on equity (RoE) specifically for some large HFCs which are over-leveraged with thinner return on assets.

Analysts believe the move had to be brought about to align HFCs with the wider universe of non-banking finance companies (NBFCs) which cater to a clientele largely not serviced by banks and whose books are seen as risky; and therefore, a capital adequacy ratio of 15 percent. The mess at the Infrastructure Leasing & Financial Services; and the knockdown effects at HFCs like DHFL were the other factors at play. NHB has proposed to raise the capital adequacy ratio of HFCs and cap their borrowing at 12 times their net-owned funds (NoF) in a phased manner by March 2022. The capital adequacy ratio will move up in a staggered manner – to 13 percent by FY2020, to 14 percent by FY2021, and 15 percent by FY2022. Similarly, the proposed cap on borrowings is up to 14 times of NoF by FY2020, but taper off later to 13 times by FY2021, and 12 times by FY2022. Currently, HFCs maintain a floor capital adequacy of not less than 12 percent, while their borrowings re capped at 16 times their net worth.

The cap on borrowings for HFCs will certainly deleverage the sector, but it is important to put forward a structure to prevent a liquidity crunch. From the regulators perspective, the HFCs need to keep much higher capital upfront. The Rs. 9.3 trillion HFC industry is growing at a compounded annual growth rate of 25 percent and has direct impact on sectors such as real estate, cement, steel etc, which generate intensive labour employment. Both credit and its cost of credit will be key primer for overall GDP growth.

Affordability in most cities has improved with property cost coming down six-eight times the annual household income in 2018-19 compared to 11-13 times five years ago, as per CRISIL report. Affordability factor is expected to come closer to the ideal band, given a moderate growth in income estimated for mid-income households.

Underlying the euphoria of GST cut is the caveat of excluding Input Tax Credit (ITC) from developers balance sheets, thus impacting the long-term profitability of projects and perhaps, the inevitable increase in prices which in fact is a conundrum. The arithmetic is simple: when ITC is removed, the developer will pay GST and not get credit for the same. Obviously, there will be an impact on the overall fiscal situation vis--vis project costing and profitability. With key construction input materials like steel and cement being taxed at 18 percent and 28 percent respectively, and ITC eliminated from the final GST calculation on sale, there is no doubt that building homes will become a costlier affair. While GST on steel is unlikely to be revised, the industry is expecting a cut in GST rates on cement. The removal of ITC will certainly lead to a rise in construction cost as the tax paid on inputs would act as one more cost item. In an ideal scenario, developers would have passed on this increase in cost to the buyers, but under conditions where sales are low and end-users are highly price sensitive, a hike in prices is unlikely. Hence, the developers are expected to keep their selling price unchanged and take a hit on their margins. While this latest GST rate cut, and perhaps the last before the General Elections, will bring in the much needed boost to home-buyer sentiments and investor confidence, a lot needs to be done to realise the full potential of GST as a uniform tax code. There are levies and cess and different types of taxes payable in different markets (states), while the actual rate of stamp duty and registration have not been subsumed into a single tax – and these vary across states. Input materials are a similar problem – high rates on steel and cement still continue, which need to be rationalised quickly for ease of doing business.

Even though GST is reduced on under-construction properties, the fact that ready-to-move-in homes are GST exempt does not escape home-seekers. As per the data which indicates that out of the total unsold stock of 6.73 lakh units in the top seven cities, only 13 percent are ready-to-move-in (RTM). Out of the remaining 5.88 lakh unsold under-construction units, 20 percent are slated to be completed by 2019. Naturally, buyers will continue to prefer RTM units, which are altogether free of GST rather than under-construction homes, which do attract this tax. The contest between a lower GST and no GST at all is a no-barrier – apart from the fact, that buyers of RTM homes have the benefit of instant gratification, freedom from project completion uncertainty, and savings on rental outgo until the project is completed.

As per ICRA report, profitability indicators for FY2019 are likely to moderate to 14 – 15 percent (vis--vis 18 percent in FY2018) with some moderation in net interest margins, though upfront income booking on assignments could provide some support.

As for FY2020, ICRA expects HFCs to report similar profitability indicators as FY2019, unless a prolonged slowdown in growth impacts the operating expense ratios and asset quality of some asset classes, which could lead to a further dip in profitability indicators.

COMPETITION

Housing loan portfolio growth for HFCs and non-banking finance companies (NBFCs) reduced to 13 percent year-on-year (y-o-y) for the period ended 31 December, 2018 (18 percent for the same period last year) as per rating agency ICRA. Consequently, banks have availed this opportunity in the market and increased their portfolio 17 percent y-o-y in the same period (14 percent for the same period last year). Total housing credit outstanding increased by 16 percent (18 percent for the same period last year) and stood at a little over Rs. 18 lakh crore as on 31 December, 2018. As disbursements in Q4 (January – March) FY 2019 are also expected to be muted for some large HFCs, FY2019 housing credit growth is likely to be in the range of 13 -15 percent, with the pace of growth of banks being higher than that of HFCs.

In the backdrop of sustained caution among Non-Banking Finance Companies (NBFC) of which HFCs are also part of, with their exposure to real estate, private equity firms are emerging as the largest source of funding to developers. NBFCs had turned aggressive with their lending to real estate sector over the past few years, but had to slow down in the last two quarters, given the liquidity circumstances. While NBFCs are crawling back and have started investing, they are selective with quality and liquidity of assets they are investing in. The liquidity gap that has been created by NBFCs going slow on investing in new assets have provided private equity players a robust pipeline of real estate project financing transactions. Private equity firms have invested around $7.80 billion across 20 deals between October and March as per data from Venture Intelligence.

Without a doubt, the drying up of funding from the NBFC sector is creating opportunities for private equity real estate (RERE) investors. The number of players beginning to return to making active investments in the realty sector in recent months evidences the trend. Apart from domestic private equity firms, investments by large ticket investors, including sovereign wealth funds such as GIC and ADIA; pension fund like CPPIB and stepping up of the pace by trendsetting foreign investor Blackstone. Interestingly, after pre-dominantly focusing on commercial sector deals in 2017-18, private equity real estate investors are now returning focus to the residential sector.

Even as the liquidity scenario is expected to improve slowly, private equity firms are likely to continue gaining market share over the next few quarters.

However, Housing Finance Companies with a dedicated focus on the industry and better understanding of the underlying real estate markets stand on a better footing when it comes to understanding the needs of the customers as also assessing the risks in the industry.

OPPORTUNITIES

While the mid-income and affordable housing category continued to outperform other segments, established developers could take advantage of the same as homebuyers considered execution and delivery track record as the foremost factor. This year new launches have come down leading to reduction in inventory. Sales have been better year-on-year and this demand is being shared by a limited number of real estate developers due to consolidation in the market. Affordable housing is expected to lead the demand for housing in 2019 with ready apartments occupying the centre stage. However, full recovery hinges on the liquidity crisis and an early solution of the same.

Home loan borrowers now need not worry whether they should choose fixed or floating interest rates. The Reserve Bank of India has introduced a new policy measure with regards to loan pricing. From April 2019, it will be mandatory for banks to link all floating rate loans using external benchmarks. This benchmark can be the RBIs repo rate, yield on the 91-day or 182-day Treasury Bill, or any other yardstick produced by the Financial Benchmarks of India. This means for home loan pricing, rates will now be decided by the markets and not the banks. The move is in favour of home loan borrowers, as they can now get more transparent deals with the process bringing more standardisation and ease of understanding. There will be a uniform benchmark for the loan category. Existing borrowers will also switch their loans to the new benchmark.

Ending months of ambiguity and speculation, GST has been reduced to five percent from the previous 12 percent, thus easing the burden on home-buyers significantly. The decision to lower GST will remove the final barriers for fence-sitters from investing in real estate. The government has been taking bold steps in order to revive market sentiment and this decision will allow a more balanced sale of inventory between under-construction and ready-to-move-in apartments, thus providing relief to developers, buyers and lenders. How would this impact ones home buying decision? For an under construction apartment sized 1,000 sq ft and price-tagged at Rs. 5,000 / sq ft, a home-buyers GST liability has fallen from Rs. 4.2 lakh to Rs. 2.5 lakh. Thus a saving of Rs. 1.7 lakh on a home that costs an Rs. 50 lakh can boost sales thereby help in arresting soaring residential inventory.

HOW DO BORROWERS / CUSTOMERS BENEFIT

The move will benefit home loan borrowers, as markets will decide loan rates and not banks;

Even existing borrowers will switch to the new external benchmark. Chances of benefits of RBI rate cuts getting passed on to the borrowers are higher here. Overall, there is a fair play in loan pricing.

From the customer point of view, this will certainly improve transparency in terms of pricing, as a uniform benchmark will be adopted, thus ensuring standardisation. This will also make it easy for the customer to understand the pricing mechanism and its effect on their borrowing. Since different lending entities will have different cost of fund on the basis of their source of liability profiles, impact on their earnings will be only assessed post implementation of new benchmark pricing method. There are no chances of interest rate rising in the nearest future.

BENEFITS OF BUYING PROPERTY

1) Tax Benefit

Tax deduction on home loan principal amount can be claimed under Section 80C with a limit of Rs. 1.5 lakh – stamp duty and registration charges can also be claimed under Section 80C. However, it needs to be claimed in the year in which these expenses are paid. Furthermore, one can claim tax deduction under Section 24 of upto Rs. 2 lakh on home loan interest, whereas first time home owners can also claim deduction of upto Rs. 50,000 under the newly added Section 80EE.

2) A good investment option

If a person buys property, good returns are guaranteed, whereas there is no value for the money if one pays each month as rent.

3) Security

Having a roof over ones head is a basic necessity for any human being and hence, owing a house provides lifetime security.

THREATS (BOTTLENECKS)

Tight liquidity conditions since September 2018 have pushed housing finance companies (HFCs) to lower their disbursements and meet a sizable portion of their fund requirements through portfolio sell-down route, resulting in banks availing of this opportunity to increase their portfolios. However, the Company has not adopted any such method since it has had never face liquidity problem. As some HFCs aim to go slow on construction finance to conserve liquidity, the growth in non-housing loan segment is expected to slacken. However, given the positive long-term prospects for the housing sector, the housing credit growth for FY2020 is expected to be pegged at 14 – 16 percent provided liquidity conditions in the market ease out. While asset quality indicators have remained stable so far, with Gross NPA of 1.4 percent as on 31 December, 2018. Some of the emerging risk factors that need to be watched out for are home loans extended to borrowers where the underlying projects have been significantly delayed, and under-construction properties sold by builders under subvention schemes or buyback / assured return schemes. Gross NPA in the HFC home loan segment are likely to increase to 1.1 – 1.3 percent over the medium term from the current level of 1 percent. Further, tight liquidity faced by some developers where projects are delayed could lead to some stress on the construction finance portfolio of HFCs, leading to an increase in the overall gross NPAs for HFC to 1.4 – 1.8 percent over the medium term.

Stress Points in HFCs

• Reckless non-housing loan lending. High LAP, builder loans and Lease Rental Discounting;

• Slump in rural economy post demonetisation;

• Lending in untested markets has backfired for some HFCs;

• Excessive lending to non-salaried, low income earners with unpredictable cash flows;

• Some cases of ‘dummy borrowing and document fudging by developers in affordable housing segment;

• Small HFCs have low capital base and their cost of funding is high;

• GST implementation has impacted earning capabilities of low-income, non-salaried borrowers.

SEGMENT WISE REPORTING

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

OUTLOOK

It was anticipated a negative spill over impact of the NBFC crisis in the first quarter of 2019, housing sales and new supply assumed an upward trajectory. The sector is riding on a new wave of optimism following the triple benefits it received from the government in first three months of 2019. These sops have not only increased homebuyers sentiments but will also increase the confidence of builders and long-term investors. Of the 78,520 units sold in the quarter of 2019, NCR, MMR, Bengaluru and Pune together accounted for 84% of the sales. In terms of supply too, Pune and MMR were the top performers with new housing supply increasing by more than five folds and 183%, respectively. Pune added new supply of 17,520 units in the quarter, while Mumbai added 26,850 units. Despite a 1% hike in stamp duty charges in Maharashtra from February, 2019, MMR and Pune markets performed significantly in terms of new launches and housing sales. Most of the developers in these regions with approvals in place, had been waiting for an opportune time to launch their projects and the current upbeat buyer sentiment was a major fillip.

The top 7 cities recorded new unit launches of around 70,490 units in the quarter, up 91% from a year ago. Key cities contributing to Q1(Jan-March) 2019 new unit launches included MMR, Pune, Bengaluru and NCR, together accounting for 87% of new supply.

More than 45% of new supply was added in the affordable segment; while over 70% new supply was added in sub Rs. 80 lakh price bracket, indicating that developers are aligning their offerings according to the current market dynamics. Bengaluru added 9,070 units and of these, 64% new supply was added in sub Rs. 80 lakh price bracket.

Residential real estate has gone through a choppy ride this year, initially hinting at a recovery only to be sucked into a liquidity crisis later. The year also marked a significant rise in consolidation across geographies and the demand for affordable housing that saved the day for realty developers.

Armed with the Insolvency and Bankruptcy code, homebuyers get the same treatment as financial institutions when it comes to recovering dues from real estate firms that go bankrupt. The disruption caused by the implementation of the Real Estate (Regulation & Development) Act, 2016, and the Goods and Services Tax was quite evident on the sector.

With developers and brokers accepting the new market realities and beginning to fall in line, the residential sector began to regain visibility and viability. Transparency and accountability – never the defining characteristics of Indian real estate – became the ‘new normal this year. Realty developers aligned themselves with market realities by offering more ready-to-move-in apartments to provide more certainty to homebuyers than just selling off the plan. Homebuyers are also showing more preference towards picking up such properties.

Mid-income housing has clearly been the frontrunner in driving the housing growth this year on the back of the governments reformatory push and participation of private players leading to increased demand

Despite nearly 8% drop in unsold housing stock, the levels still indicate it is buyers market. The inventory in primary and secondary market has turned out to be a boon for homebuyers. It is raining homes, and prices are under check favouring buyers. The NBFC crisis has also led to a correction in some pockets, time and disguised correction continued in 2018 and is expected to prolong in major part of the next year.

KEY ADVERTISING JARGON TERMS EXPLAINED

For the benefit of our customers / potential customers / buyers in general, we try to decode the advertising jargon the developers / builder use on their hoardings:

Zero stamp duty:

It does not mean that there is no incidence of stamp duty charged on the property. The developer is going to pay it on behalf of the customer and has included it in the total cost of the property as well. Technically, buyer is not getting a discounted rate for his / her house as the composite cost is inclusive of the stamp duty.

1-BHK Rs. 40 lakh onwards…:

The quoted figure is only the Base Selling Price (BSP) of the property. It does not incorporate other charges, which will ultimately make a difference to the overall cost of ones property.

No GST:

Under-construction properties usually attract GST, and often developers pass this tax burden onto buyers by including it in ones final cost of the property. So, technically, one is not really waiving off any money. Also GST is not applicable for ready-to-move-in projects or properties that have been issued a CC.

OC Obtained:

Obtaining an OC is often an important milestone in the lifecycle of any under-construction project and market prices usually rise post the OC being obtained. Through this certificate, the local authorities declare a project as approved from all departments – fire, safety, water, environment, electricity, etc. – thereby giving comfort to buyers that there is no risk of delays.

RERA-compliant project:

As per the law, all projects have to be registered under the Real Estate (Regulation and Development) Act, 2016. Hence, it simply means that the developer has registered his project before initiating construction; however, there could be deviations during the construction phase.

Book now and start living today – EMI starts from 2020:

Here, the buyer gets to enjoy the newly purchased property much earlier and at a relatively less initial outgo. However, such schemes often demand that buyers pay atleast 25 percent as booking amount. Once again, the developer takes the onus of paying the interest for the pre-defined period of a year or so. Not to forget, often such schemes are offered by the developer with a small consortium of financiers or banks. Therefore, it has been observed that bankers charge a relatively higher processing fee as a cover for risk.

Get assured returns till two years:

If a buyer has bought the house for an X amount, the composite price paid by the buyer is higher (if he is an investor). After all, the rules are different for an end-user. So, basically the money coming back to the buyer every month is ‘his only.

Pay 5% and bank pays next 65%:

Here the buyer pays five percent as down-payment, then the bank shells out 65 percent and eventually at the time of possession, the buyer pays the remaining 30 percent. Also, from the time the bank starts paying, the buyer simultaneously start disbursing his pre-EMI (interest on the amount). And the actual EMI(principal + interest) starts post possession of the property.

RISKS AND CONCERNS

Risk is inherent part of the Companys business. Effective Risk management is critical to any Housing Finance Company for achieving financial soundness. In view of this, aligning Risk management to Companys organisational Structure and business strategy has become an integral part in Companys business.

The management has to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. The Company is exposed to risks in the course of their business such as credit risk, interest rate & market risk, liquidity risk and operational risk. LICHFLs strategy in optimising business opportunities within the aforesaid constraints is assisted by a robust asset liability management. The objective can be summarised as below:

Reduce potential costs of financial distress by making LIC Housing Finance less vulnerable to adverse movements in liquidity, interest rates, and exchange rates (wherever applicable).

Create a stable planning environment, by ensuring that the business plan is not adversely impacted during the financial year due to any adverse liquidity situations, interest rate and currency fluctuations by using tools such as time-bucket wise liquidity statements, duration gap and Forex exposure reports. In other words, it is aimed at ensuring that the Net Interest Income (NII) is not adversely affected irrespective of adverse changes in the above risks as far as possible.

1. Credit Risk

Credit risk is the risk associated with the borrower defaulting on its obligation as and when it is due. A default by the customer is recorded as Non-Performing Asset (NPA) in the Companys books if the customer is not able to settle the dues within 90 days of due date. Also referred to as Default Risk, this risk is usually borne by the lender and is one of the most critical which can impact a financial institute whose main business is lending.

In case of LICHFL, the Company advances money in the lump sum to collect it over the forthcoming years by the way of Equated Monthly Instalments (EMIs). Selection of right borrowers is the first and the most crucial step of this process. The Company follows a rigorous methodology while selecting the borrowers. The Company scrutinises the documents carefully and the decision making is based on several parameters. After sanctioning the loan, monitoring of the accounts is done. If any irregularities are found, prompt action is initiated.

As Credit Risk is one of the major risk faced by the Company, the Standard Operating Procedures (SOP) document, clearly delineates the guidelines on credit appraisal, legal appraisal, technical appraisal, verification, valuation, documentation, etc. The same is reviewed periodically and, if need be, is revised in order to keep the procedures up-to-date.

2. Market Risk

Market risk is the risk of losses in positions taken by the company which arises from movements in market prices. Any item in the balance sheet which needs re-pricing at frequent intervals and whose pricing is decided by the market forces will be a component of market risk. There are items in the Companys balance sheet which exposes it to market risk like Housing loans at floating rate,loans to developers at floating rate, Non-Convertible Debentures (NCDs) with options, bank loans with option, Foreign Currency Bank Loans, Coupon Swaps, etc. This risk can be divided into following two types:

Interest Rate Risk

Interest Rate Risk refers to the risk associated with the adverse movement in the interest rates .Adverse movement for LIC Housing Finance Limited would imply rising interest rates on liabilities and falling interest yields on the assets. This is the biggest market risk which the company faces. It arises because of maturity and re-pricing mismatches of assets and liabilities. In order to mitigate the impact of this risk, the Company tracks the composition and pricing of assets and liabilities on a continuous basis. For the same purpose, the Company has constituted an ALCO Committee which actively monitors the ALM position and take appropriate action to avoid risk.

Liquidity Risk

Liquidity Risk implies the risk of not having sufficient funds to make good the liabilities. This risk has been the cause behind closure of number of banks in the international markets in the past. Various situations in which liquidity risk may arise include higher than estimated disbursements, stress on systemic liquidity due to CRR hikes, higher government borrowing program, advance tax outflows, etc. Therefore, it is imperative to anticipate the net cash outflows correctly, as well as have a contingency plan in case of any unforeseen outgo of funds. Another aspect of liquidity management is avoiding hoarding excess money than what may be required as the same would result in sub- optimal returns on the money available to invest. So every institution has to strike a balance between the two positions and manage the liquidity position actively.

In case of LIC Housing Finance Limited, the Company has to continuously borrow money from the market in order to carry on the business operations. This borrowing depends on the market liquidity conditions and as the liquidity conditions change in the market very rapidly, the Company may not get required funds at times. In order to avoid that situation, a thorough analysis of expected cash outflow is done and funds are raised in advance to make sure that net cash outflows remain less than cash inflows. The bu_er is appropriately deployed in suitable investments.

3. Operational Risk

Operational risk is "the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses". It can be sub divided into the following categories:

Compliance risk

It is defined as the risk of legal sanctions, material financial loss, or loss to reputation, the Company may suffer as a result of its failure to comply with laws, its own regulations, code of conduct, and standards of best /good practice. In case of LICHFL, the Company is regulated by NHB, registered with ROC and its equity shares are listed on the Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE) and the Luxembourg Stock Exchange, making it imperative that the Company follows all the applicable laws. In order to deal with the same, the Company has a designated Compliance Officer whose role entails complying with the statutory requirements of the Company.

Legal risk

It is the cost of litigation due to cases arising out of lack of legal due diligence. Litigation can also arise out of failure or frauds in project delivery. For LIC Housing Finance Limited, the main business is of lending money for/against mortgage loans and is therefore exposed to legal risk. For handling the same, there are robust legal systems for title verification and legal appraisal of related documents. The Company also has standards of customer delivery and the operational mechanism to adhere to such standards aimed at minimum instances of customers grievances

4. Regulatory Risk

Regulatory risk is the risk that a change in laws and regulations will materially impact the company. Changes in law or regulations made by the government or a regulatory body can increase the costs of operating the business, and/ or change the competitive landscape. The regulatory risk can arise due to change in prudential rules/norms by the regulators viz; NHB, SEBI, RBI etc. The Company is able to mitigate the same by anticipating the likely regulatory changes that may come in the short and medium term and is able to quickly change its systems and practice store align itself with the changed regulatory framework from time to time as required.

5. Competition Risk

Competition Risk is the risk to the market share and profitability arising due to competition. It is present across all the businesses and across all the economic cycle with the intensity of competition risk varying due to several factors, like, barriers to entry, industry growth potential, degree of competition, etc.

Housing Finance business is on an upward trajectory, perhaps due to growing economy, increased urbanisation, government incentives, acceptability of credit in society and rise in nuclear families. With the result, the Housing Finance industry has seen a higher growth rate than overall economy and several other industries since past several years. This has attracted lot of Companies in the market thereby increasing competition among the existing Companies to maintain/ grow market share and profitability. The Company is able to mitigate this risk by addressing to the customer needs with state of art infrastructure including IT interface aligning its practices with the market in order to attract customers and at the same time retain the existing ones. The Company has also been able to sense pulse of peer group in terms of their product offerings, pricing and other schemes and is better poised to meet the challenges through improved product offerings, prices and customer service.

ASSET LIABILITY MANAGEMENT:

The Company follows ‘The Asset Liability Management System for Housing Finance Companies – Guidelines issued by NHB. The Company has in place Board approved Risk management policy. The policy specifies the prudential gap limits and the tolerance limits and the reporting mechanism. The Asset Liability Management (ALM) reports are periodically reviewed by Asset Liability Committee (ALCO) and ALCO in turn apprises the Board on ALM issues periodically.

The average loan to value is in the range of 50-60 percent (as against the regulatory limit of 90 per cent for loans upto Rs. 20 lakh and 80 percent for loans above Rs. 20 lakh and upto Rs. 75 lakh and 75 percent for loans above Rs. 75 lakh) and its instalment to income ratio ranges between 30-40 percent, both being amongst the lower ones in the industry. The low average ticket size of the loan of Rs. 20 lakh and pan India spread of business adequately disperses the risk.

The Company has one of the best recovery machineries in its category, to address NPAs, supported by legislations such as SARFAESI Act.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

The Company has internal audit system which is effective and commensurate with the size of its operations. Adequate records and documents are maintained as required by law from time to time. Internal audits and checks are regularly conducted and internal auditors recommendations are considered for improving systems and procedures. The Companys audit committee reviews the internal control system and looks into the observations of the statutory and internal auditors. During the year, various guidelines / circulars were issued on the operational side to ensure better credit appraisal, as a result of which quality of portfolio should further improve during the years to come.

DISCUSSION OF FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE FINANCIAL / FUND MANAGEMENT

The Companys borrowing is planned taking into consideration ALM gaps, interest rate mismatches and the prevailing market conditions. LIC Housing Finance has got highest rating for bank borrowings, non-convertible debentures, commercial paper and public deposit scheme from CRISIL / CARE rating agencies, which has helped the Company to procure funds at very competitive rates. The prime lending rate of the Company is regularly reviewed and revised as it is a benchmark for asset pricing. Since 93 percent of the asset portfolio is on the floating rate, the Company re-prices the loan assets consequent upon the revision in prime lending rate of the company at specified intervals. The Company also reviews the fund position on daily basis and parks surplus funds in liquid mutual fund schemes, fixed deposits as per the Board approved policy with an objective of reducing the negative carry to the extent possible.

The derivative contracts selectively entered into by the company to manage risks associated with interest rate movement are regularly monitored and the company unwinds such transaction at the appropriate time.

The composition of outstanding borrowings as on 31st March, 2019 & the ratings assigned by rating agencies is as under:

Particulars Percent to total Borrowing Rating
Loans from 14.58% CRISIL AAA/Stable &
Scheduled Banks CRISIL A1+
Refinances from NHB 0.77% -
Term loans from LIC of India / HUDCO 0.12% -
Non-Convertible Debentures 74.71% CRISIL AAA/Stable & CARE AAA Stable
Subordinated Bonds (Tier II) 0.29% CRISIL AAA/Stable & CARE AAA Stable
Upper Tier II Bonds 0.88% CRISIL AAA/Stable & CARE AAA Stable
Commercial Paper 4.10% CRISIL A1+ & ICRA A1+
Public Deposit 4.55% FAAA / (Stable)
Total 100%

BASIS OF PREPARATION OF IND-AS FINANCIAL STATEMENTS:

In accordance with the notification issued by the Ministry of Corporate Affairs, the Company is required to prepare its Standalone Financial Statements as per the Indian Accounting Standards (‘IND AS) prescribed under section 133 of the Companies Act, 2013 read with Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015 as amended with effect from April 01, 2017. Accordingly, the Company has prepared these Standalone Financial Statements, which comprise the Balance Sheet as at March 31, 2019, the Statement of Profit and Loss, the Statements of Cash Flows and the Statement of Changes in Equity for the year ended March 31, 2019, and accounting policies and other explanatory information (together hereinafter referred to as "Standalone Financial Statements" or "Financial Statements").

The Standalone Financial Statements have been prepared on the historical cost basis except for certain financial instruments and certain employee benefit assets are measured at fair values at the end of each reporting period, as explained in the accounting policies below.

Fair value is the price that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for leasing transactions that are within the scope of IND AS 17 and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IND AS 2 or value in use in IND AS 36.

In addition, for financial reporting purposes, fair value measurements are categorised within the fair value hierarchy into Level 1, 2, or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurements in its entirety, which are described as follows: y Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; y Level 2 inputs are inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly or indirectly; and y Level 3 inputs are unobservable inputs for the asset or liability.

The financial statements are presented in Indian Rupees (Rs.) and all values are rounded to the nearest Crore except when otherwise stated.

PERFORMANCE / OPERATION HIGHLIGHTS

During the year, the Company sanctioned Rs. 59,309.22 crore and disbursed Rs. 55,315.47crore registering a growth of 8.17 per cent in sanctions and growth of 12.02 per cent in disbursements over the last year. For the year ended 31st March, 2019, the Companys revenue from operations was Rs. 17,355.02 crore as against Rs. 14,836.98 crore of previous year. Net profit before tax for year ended 31st March, 2019 was Rs. 3379.55 crore when compared to Rs. 2765.50 crore of the previous year, showing a growth 22 per cent. Net Profit after tax for the year ended 31st March, 2019 was Rs. 2430.97 crore as against Rs. 2002.50 crore during the same period last year, marking a growth of 21%. The outstanding loan portfolio as at 31st March, 2019 was Rs. 1,94,652.22 crore as against Rs. 1,67,471.45 crore as at 31st March, 2018 thus registering a growth of 16.23 per cent.

KEY ELEMENTS OF STATEMENTS OF PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2019

• Profit before tax grew by 22.20 per cent and Profit after tax grew by 21.40 per cent on year to year basis. Net interest margin for the year was 2.38 per cent.

• Tax provision for the year amounted to Rs. 948.58 crore as compared to Rs. 763.00 crore in the previous year.

• Net interest income grew by 21.21 per cent year on year basis.

• For the year ended 31st March, 2019 dividend @ 380 per cent is being recommended as against dividend @ 340 per cent in the previous year.

The transition was carried out from Accounting Principles generally accepted in India (IGAAP), the reconciliations of the effect of Transition have been summarised below:

Equity Reconciliation for the year ended March 31, 2018 and April 1, 2017:

(Rs. in Crore)

Particulars Balance Sheet as at March 31, 2018 Opening Balance Sheet as at April 1, 2017
Previous GAAP * Effect of Transition to IND AS IND AS Previous GAAP * Effect of Transition to IND AS IND AS
ASSETS
Financial Assets
Cash and cash equivalents 1,908.34 - 1,908.34 1,448.32 - 1,448.32
Bank Balance other than above 188.10 - 188.10 267.08 - 267.08
Derivative financial instruments 43.65 - 43.65 85.77 - 85.77
Loans 1,66,177.49 (15.17) 1,66,162.32 1,44,470.96 245.75 1,44,716.71
Investments 1,953.08 19.09 1,972.17 3,348.99 20.41 3,369.40
Other Financial Assets 19.99 1.22 21.21 19.24 1.30 20.54
Non-financial Assets
Current tax assets (Net) 183.04 - 183.04 185.57 - 185.57
Deferred tax Assets (Net) (1,042.98) 1,485.26 442.28 (917.27) 1,177.37 260.1
Property, Plant and Equipment 94.71 - 94.71 92.88 - 92.88
Other Intangible assets 2.41 - 2.41 3.65 - 3.65
Other non-financial assets 61.68 9.91 71.59 23.48 8.09 31.57
Total Assets 1,69,589.51 1,500.31 1,71,089.82 1,49,028.67 1,452.92 1,50,481.59
LIABILITIES AND EQUITY
LIABILITIES
Financial Liabilities
Derivative financial instruments 39.43 - 39.43 88.61 - 88.61
Payables
(I) Trade Payables
(i) total outstanding dues of micro enterprises and small enterprises - - - - - -
(ii) total outstanding dues of creditors other than micro enterprises and small enterprises 61.29 - 61.29 58.97 - 58.97
Debt Securities 1,19,521.72 (0.50) 1,19,521.22 1,01,585.43 (0.22) 1,01,585.21
Borrowings (Other than Debt Securities) 16,517.05 - 16,517.05 15,939.25 - 15,939.25
Deposits 6,789.71 (18.04) 6,771.67 6,312.39 (19.82) 6,292.57
Subordinated Liabilities 2,500.00 - 2,500.00 2,500.00 - 2,500.00
Other financial liabilities 11,348.53 (30.37) 11,318.16 11,363.28 (58.79) 11,304.48
Non-Financial Liabilities
Provisions 117.64 - 117.64 98.03 - 98.03
Other non-financial liabilities 3.42 (1.24) 2.18 5.68 (3.16) 2.52
Total Liabilities 1,56,898.77 (50.15) 1,56,848.62 1,37,951.64 (82.00) 1,37,869.64
EQUITY
Equity Share capital 100.99 - 100.99 100.99 - 100.99
Other Equity 12,589.73 1,550.46 14,140.19 10,976.03 1534.93 12,510.96
Total Liabilities and Equity 1,69,589.51 1,500.31 1,71,089.82 1,49,028.67 1,452.92 1,50,481.59

*The previous GAAP figures have been reclassified to confirm with IND AS presentation requirements for the purposes of this note.

Reconciliation of Total Comprehensive Income for the year ended March 31, 2018

(Rs. in Crore)

Particulars Previous GAAP* Effect of Transition to IND AS IND AS
Revenue from operations
Interest Income 14,893.11 (163.40) 14,729.71
Fees and commission Income 206.38 (170.76) 35.62
Net gain on de -recognition of financial instruments under amortised cost category - 23.92 23.92
Others 49.65 (1.92) 47.73
Total Revenue from Operations 15149.14 (312.16) 14836.98
Other Income 3.63 - 3.63
Total Income 15,152.77 (312.16) 14,840.61
Expenses
Finance Costs 11,116.75 27.10 11,143.85
Fees and commission expense 339.67 (293.35) 46.32
Net loss on de-recognition of financial instruments under amortised cost category 23.29 23.29
Impairment on financial instruments 222.76 245.64 468.40
Employee Benefits Expenses 218.34 4.82 223.16
Depreciation, amortisation and impairment 9.98 - 9.98
Others expenses 160.11 - 160.11
Total Expenses 12,090.90 (15.79) 12,075.11
Profit/(loss) before tax 3,061.87 (296.37) 2,765.50
Tax Expense 1,072.28 (309.28) 763.00
Profit/(loss) for the period 1,989.59 12.91 2,002.50
Other Comprehensive Income
(i) Items that will not be reclassified to profit or loss - 4.01 4.01
(ii) Income tax relating to items that will not be reclassified to profit or loss - (1.39) (1.39)
Other Comprehensive Income - 2.62 2.62
Total Comprehensive Income for the period 1,989.59 15.53 2,005.12

* The previous GAAP figures have been reclassified to confirm with IND AS presentation requirements for the purposes of this note.

Reconciliation of equity attributable to shareholders of the Company as at March 31, 2018 (Rs. in Crore):-

Particulars As at March 31, 2018
Equity as reported under previous GAAP 12,690.72
Adjustment on account of effective interest rate for financial asset and liabilities recognised at amortised cost 4.87
Adjustment on account of expected credit loss 60.33
Tax effect on above adjustment (including reversals of Deferred Tax Liability u/s 36 (1) (viii) of Income Tax Act 1961 1,485.26
Equity under IND AS 14,241.18

IMPAIRMENT ASSESSMENT

The references below show where the Companys impairment assessment and measurement approach is set out in this report. It should be read in conjunction with the Summary of significant accounting policies. The Company applies General approach to provide for credit losses prescribed by IND AS 109, which provides to recognised 12-months expected credit losses where credit risk has not increased significantly since initial recognition and to recognised lifetime expected credit losses for financial instruments for which there have been significant increase in credit risk since initial recognition considering all reasonable and supportable information, including that is forward looking.

DEFINITION OF DEFAULT

The Company considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments. The three stages reflect the general pattern of credit deterioration of a financial instrument. The differences in accounting between stages relate to the recognition of expected credit losses and the calculation and presentation of interest revenue.

Stage wise Categorisation of Loan Assets

The Company categorises loan assets into stages based on the Days Past Due status:

- Stage 1: [0-30 days Past Due] It represents exposures where there has not been a significant increase in credit risk since initial recognition and that were not credit impaired upon origination. The Company uses the same criteria mentioned in the standard and assume that when the days past due exceeds ‘30 days, the risk of default has increased significantly. Therefore, for those loans for which the days past due is less than 30 days, the Company recognises as a collective provision, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months.

- Stage 2: [31-90 days Past Due] The Company collectively assesses ECL on exposures where there has been a significant increase in credit risk since initial recognition but are not credit impaired. For these exposures, the Company recognises as a collective provision, a lifetime ECL (i.e. reflecting the remaining lifetime of the financial asset)

- Stage 3: [More than 90 days Past Due] The Company identifies, both collectively and individually, ECL on those exposures that are assessed as credit impaired based on whether one or more events, that have a detrimental impact on the estimated future cash flows of that asset have occurred. The Company use the same criteria mentioned in the standard and assume that when the days past due exceeds 90 days, the default has occurred.

RETAIL LOANS:

Depending on the nature of the financial instruments and the credit risk information available for particular groups of financial instruments, an entity may not be able to identify significant changes in credit risk for individual financial instruments before the financial instrument becomes past due. In case of retail loans, the financial instruments are backed by sufficient margin of underlying security which absorbs the associated risks. Hence, the Company has performed the assessment of significant increases in credit risk on a collective basis for retail loans by considering information that is indicative of significant increases in credit risk on groups of financial instruments.

For the purpose of determining significant increases in credit risk and recognising loss allowance on a collective basis, the Company has grouped financial instruments on the basis of shared credit risk characteristics with the objective of facilitating an analysis that is designed to enable significant increase in credit risk identified on a timely basis.

PROJECT LOANS:

Project loans are far less in number and more in terms of value per loan. The loans are also credit rated internally. However, the Company does not have any history of the loan transitioning from one rating to the other over a fairly long period of time to arrive at a reliable transition matrix. The Company has used transition matrix compiled and published by a premier rating agency in India for arriving default rate.

Accordingly, loans have been identified into different groups as given below:

Credit Quality Analysis – Classification on basis of risk pattern (Collective and Individual Basis)

(Rs. in Crore)

Stage 1 Stage 2 Stage 3 Total
Outstanding Balance Impairment Loss Outstanding Balance Impairment Loss Outstanding Balance Impairment Loss Outstanding Balance Impairment Loss
As At 1,83,129.59 23.90 8,564.12 111.53 2,952.64 1,524.04 1,94,646.35 1,659.47
March 31, 2019
As At 1,59,789.46 283.99 6,386.32 116.71 1,290.80 908.43 1,67,466.58 1,309.13
March 31, 2018
As At 1,39,516.98 303.32 5,418.99 119.65 627.34 427.90 1,45,563.31 850.87
April 1, 2017

37.4.2.4 ECL MODEL AND ASSUMPTIONS CONSIDERED IN THE ECL MODEL

The Company has used Markov chain model for estimating the probability of default on retail loans. In a Markov chain model for loans receivable an account moves through different delinquency states each quarter. For example, an account in the "Regular" state this quarter will continue to be in the "Regular" state next month if a payment is made by the due date and will be in the "90 days past due" state if no payment is received during that quarter. Another valuable feature is that the Markov chain model maintains the progression and timing of events in the path from "Regular" to "Defaulted". For example, an account in the "Regular" state doesnt suddenly become "Defaulted". Instead, an account must progress monthly from the "Regular" state to the "90 days past due" state to the "180 days past due" state and so on until foreclosure activities are completed and the collateral assets are sold to pay the outstanding debt.

The transition matrix in the Markov chain represents the period-by-period movement of receivables between delinquency classifications or states. The transition evaluates loan quality or loan collection practice. The matrix elements are commonly referred to as "roll-rates" since they denote the probability that an account will move from one state to another in one period. The transition matrix is referred to as the "delinquency movement matrix".

The loan portfolio for the past several quarters are analysed to arrive at the transition matrix. Each loan is traced to find out how the loan has performed over the last several quarters. The days past due is grouped into 6 buckets namely Regular [0 days past due], 1 to 90 days past due, 91 to 180 days past due, 181 to 270 days past due, 271 to 365 days past due and above 365 days past due. In a subsequent quarter, the loan may continue to remain in the same bucket or move into the next bucket or previous bucket depending upon the repayments made by the customer. The bucket intervals are 90 days and the data points considered are also quarterly. The occurrences of every loan over the past several quarters are considered to arrive at the total transitions happening from different buckets in the previous quarter to different buckets in the current quarter. The Company has considered the quarterly loan performance data starting from the quarter ending 30th June 2013 onwards to compute the transition matrix. The total number of such transition occurrences are converted as a percentage to arrive at the transition matrix.

The Company has used transition matrix compiled and published by a premier rating agency in India for arriving default rate for Project loans since the Company do not have any history of the loan transitioning from one rating to the other over a fairly long period of time to arrive at a reliable transition matrix. Accordingly, the transition matrix is computed using matrix multiplication.

Probability of Default

Stage 1 – [No significant increase in credit risk]: Based on Markov model, the quarterly normalised transition matrix is converted into a 12-month transition matrix for determining the probability of default for those loan accounts on which the risk has not increased significantly from the time the debt is originated. The Company use the same criteria mentioned in the standard and assume that when the days past due exceeds ‘30 days, the risk of default has increased significantly. Therefore, for those loans for which the days past due is less than 30 days, one-year default probability is considered.

Stage 2 – [Significant increase in credit risk]: The credit risk is presumed to have increased significantly for loans that are more than 30 days past due and less than 90 days past due. For such loans, lifetime default probability should be considered. Based on the maturity date of the loan, the probability of default is arrived at to determine the quantum of the loan that is likely to move into the buckets ‘90 days past due and greater. The quarterly transition matrix is used to find out the transition matrix applicable for the loan considering the maturity date of such loan.

Stage 3 – [Defaulted loans]: As per the standard there is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. The Company assumed that the default has occurred when a loan moves into ‘90 days past due bucket.

EXPOSURE AT DEFAULT

The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the clients ability to increase its exposure while approaching default and potential early repayments too.

The probability of default (PD) of a loan which is less than 30 days past due [Stage 1] is represented by the one-year transition matrix. This PD is used to measure the quantum of the loan that is likely to move into the buckets 90 days past due and above over the next 12 months. The PD of a loan which is 30 days past due and less than 90 days past due [Stage 2] is represented by the transition matrix of the corresponding maturity period of the loan. This PD is used to measure the quantum of the loan that is likely to move into the buckets 90 days past due and above over the remaining life of the loan. The probability of default (PD) of a loan which is 90 days past due [Stage 3] is 100% as the loan has already defaulted. This PD is used to measure the quantum of the loan that is defaulted as on the valuation date over the remaining life of the loan.

Loss given default

Value of collateral property: The loans are secured by the adequate property. The property value for those loans which are over 90 days past due are regularly updated. The present value of such collateral property should be considered while calculating the Expected Credit Loss. The Company initiate the recovery process of NPA accounts within the statutory time limit as per SARFAESI and other applicable laws and accordingly the realisable period has been considered for computing the Present Value of Collateral.

Asset-Liability Management (ALM)

Assets and liabilities are classified on the basis of their contracted maturities.

Housing Finance being our core business, maintaining the liquidity for meeting the growth perspective in the business as also to honor our committed repayments is the fundamental objective of the Asset Liability Management (ALM) framework. Investment being our ancillary activity is derived of this ALM requirement and it is imperative to constantly monitor the liquidity of our investments to achieve our core objective.

The Asset Liability Management Committee (ALCO) of the Company oversees efficient management of risk associated with derivative transactions. Company identifies, measures, monitors the exposure associated with derivative transaction. For effective mitigation of risk it has an internal mechanism to conduct regular review of the outstanding contracts which is reported to the ALCO & Risk Management Committee of the Board which in turn reports to the Audit Committee and to the Board of Directors.

The Asset Liability Management Committee (ALCO) of the Company oversees efficient management of risk associated with derivative transactions. Company identifies, measures, monitors the exposure associated with derivative transaction. For effective mitigation of risk it has an internal mechanism to conduct regular review of the outstanding contracts which is reported to the ALCO & Risk Management Committee of the Board which in turn reports to the Audit Committee and to the Board of Directors.

MARKETING

LIC Housing Finance is one of the largest housing finance companies in India having one of the widest networks of 273 Marketing Offices, 23 Back Offices to conduct the credit appraisal and administrative functions and 1 Customer Service Point as on 31st March, 2019 across the country and representative offices in Dubai and Kuwait. The Company continues to serve the customers at their door step through Home Loan Agents, Direct Selling Agents and Customer Relation Associates. During the year, the Company also participated in property exhibitions in various parts of the country and the same has been an impetus for successful marketing.

RECOVERY MANAGEMENT

The gross Non-Performing Assets (NPA) as on 31st March, 2019 stood at Rs. 2971.69 crore as against Rs. 1,303.61 crore as on 31st March, 2018 registering an increase of 127.96 per cent. The gross NPA ratio of the company stood at 1.54 percent as on 31st March, 2019 as against 0.78 per cent as on 31st March, 2018. Net NPAs excluding provision on standard assets as per NHB norms as at 31st March, 2019 stood at 1.08 per cent (Rs. 2081.20 crore) as against 0.43 per cent (Rs. 711.66 crore) on the corresponding dates last year. The provision cover on the NPAs stood at 29.97 per cent (excluding provision on standard loans as per NHB norms) as on 31st March, 2019.

The aforesaid figures are as per IGAAP. As per IND-AS, the provision on per ECL is Rs. 1659.48 crore as at 31st March, 2019 as against Rs. 1309.13 Crore as at 31st March, 2018.

HUMAN RESOURCES DEVELOPMENT

The Company has staff strength of 2309 employees who have been contributing to the progress and growth of the Company. The manpower requirement of the offices of the company is assessed and recruitment is conducted accordingly. Personal skills of the employees are fine-tuned and knowledge is enhanced by providing them internal and external training from time to time keeping in view the market requirement. Outstanding performers are rewarded 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 perform better.

Loan assets per employee as at 31st March, 2019 was Rs. 83.58 crore and net profit per employee Rs. 105.28 lakh.

CONCLUSION WITH CAUTION

Statements in this report, describing the Companys objectives, projections, estimations, expectations are "forward looking statements" within the meaning of applicable laws, guidelines and regulations. These statements are based on certain assumptions in respect of future events and Company assumes no responsibility in case the actual results differ materially due to change in internal or external factors.