Repco Home Finance Ltd Management Discussions.

I am delighted to write to you for the first time in my role as MD & CEO of Repco Home Finance Limited. Although the year gone by was an atypical one for doing business from both a microeconomic and macroeconomic point of view – moreso with the proliferation of trust deficit in the borrowings market leading to an acute liquidity crisis - we came out unscathed and stronger. From my new vantage point as MD & CEO I see a better future for the Company as we continue to focus on our granular retail only growth strategy. Our target segment will continue to be small salaried customers employed with MSMEs and SMEs and unsalaried customers running MSMEs, small shops and the like with aspirations to own a house in Tier 2, Tier 3 and Tier 4 towns.

Over the medium term, we will focus on 3 main aspects – sustainable loan book growth, reduction in non-performing assets and profitability. This focused approach will be guided by 6 pillars

A brief introduction to each pillar is as below

a. Analyze – To capture more data, identify patterns and warning signals and focus on fresh slippages and make decision making objective.

b. Preserve what is already going for us – superior risk based pricing, retain good customers, maintain granularity of loan book, employee loyalty and stakeholder faith in the Company.

c. Upgrade the transparency quotient by introducing the concept of minimum lending rate, which is a function of, among other things, our incremental cost of funds and expected return on equity. Other measures include, a new credit policy and a short term investment policy. In future, we intend to introduce verticalization in our organizational structure.

d. Diversify our 1) business sourcing mix to focus on digital marketing, involvement of selling agents and geographic expansion. In March 2019 we acquired a pool of small ticket housing loans spread across many States including National Capital Region, Madhya Pradesh and Rajasthan in April 2019 we entered the State of Rajasthan by opening a branch at Jaipur 2) revenue mix by cross selling insurance products that are value additive to our borrowers and 3) risk by hiring KYC consultants and in future by tying up with banks and other financial institutions for co-originating loans.

e. Transform by adopting best practices. We recently separated our credit and legal decision making to lower the turnaround time (TAT) and created asset recovery branches (ARBs) to test the waters if the same improves recovery performance.

f. Grow by blending the 5 pillars discussed above and achieve medium term objectives

1. Industry Structure and Developments:

Economic growth of India is estimated to moderate at 7.2% for FY19 as per estimates released by Central Statistics Organization (CSO). At that rate India will continue to hold the tag of the fastest growing economy in the world.

Sudden weakness in INR and surge in global crude prices moved the RBI to change its monetary policy stance from neutral to calibrated tightening and hike benchmark rates by 50 basis points in the first half of the year. Things began to change in the second half when globally crude started falling on supply and global growth slowdown concerns and domestically food inflation started falling. This moved the RBI to cut benchmark rates by 25 basis points each in its February and April 2019 meeting. With retail inflation within the 4% band, there is more room for rate cuts, which would support the housing and real estate industry and other domestic sectors like auto and consumption.

Global trade war and Brexit present risks that cannot be quantified immediately in terms of how the impact would affect our economy and more importantly what it could do to the real estate industry, which is already constrained by availability of funds and is debt ridden. It is my hope that the trust deficit will narrow and confidence will come back in the system now that a stable Government is in place and some of the high profile debt default cases are on the verge of getting resolved in a time bound manner. The fact that Indian corporate bond market is underpenetrated – forming only 4.5% of GDP – gives me confidence that there is headway for improvement. What also gives me comfort is Governments steadfast focus on keeping inflation low and reforming the banking sector, which will structurally lower the cost of capital in the course of time. Announcements pertaining to the housing sector in the interim budget 2019, which can improve demand for housing in the near term

• Income tax rebate for taxable income upto Rs. 5 lacs per annum.

• New allocation to Pradhan Mantri Sadak Yojna will see Government spending Rs. 19,000 crore on building road infrastructure. This can boost demand for housing in tier 4 towns and beyond cause broad-based increase in real estate prices.

• Permission to reinvest capital gains from sale of residential property in two houses.

• Notional rent on second self-occupied house scrapped.

• No TDS on rental income upto Rs. 2.4 lakhs per annum.

• Standard deduction increased by Rs. 10,000 to Rs. 50,000.

2. Opportunities and Threats in the Housing Finance Sector

Opportunities: Government‘s Initiatives

The housing demand in the real estate sector is quite robust largely due to the growing population (Growth at 1.2%-1.3% per annum) in India, which is complimented by acute housing shortage of 40 million houses (both urban and rural), favourable demographics, rise of concept of nuclear families, migration to urban areas, fiscal benefits, rising income aspirations could lead to a further demand for another 8-10 million houses. Now, the builders with strong balance sheet have shifted their thrust from luxury and mid-end houses to affordable housing which has received some significant impetus from the Government through its initiatives.

Housing for All 2022:

The Government of India has reiterated its commitment to Housing for all by 2022 in its election manifesto. The mission seeks to address the housing requirement of urban poor including slum dwellers through following programme verticals:

• Slum rehabilitation of Slum Dwellers with participation of private developers using land as a resource

• Promotion of Affordable Housing for weaker section through credit linked subsidy

• Affordable Housing in Partnership with Public & Private sectors

• Subsidy for beneficiary-led individual house construction The Mission will be implemented until 2022 and will provide central assistance to implementing agencies through States and UTs for providing houses to all eligible families/beneficiaries by 2022.

Pradhan Mantiri Awas Yojana - Credit Linked Subsidy Scheme (PMAY-CLSS)

With an objective to expand institutional credit flow to the housing needs of urban poor, the Government of India (GoI) has launched the Credit Linked Subsidy Scheme (CLSS) under its Housing for all Mission. Credit linked subsidy will be provided on home loans taken by eligible urban poor (Economically Weaker Section/ Lower Income Group and Middle Income Group) for acquisition, construction and improvement of the beneficiaries ‘ first house. The scheme is implemented through Nodal agencies like National Housing Bank (NHB) and HUDCO. Under this scheme, Beneficiaries of Economically Weaker section (EWS) and Low Income Group (LIG) seeking housing loans from financial institutions would be eligible for an interest subsidy at the rate of 6.5 % for tenure of 20 years or during tenure of loan whichever is lower. The subsidy will be available only for loan amounts upto Rs 6 lakhs and loans beyond Rs. 6 lakhs, if any, will be at nonsubsidized rate. Similarly, Beneficiaries of Middle Income Group (MIG 1 & 2) seeking housing loans from financial institutions would be eligible for an interest subsidy at the rate of 4 % or 3 % for tenure of 20 years or during tenure of loan whichever is lower. The subsidy will be available only for loan amounts upto Rs 9 lakhs or Rs 12.00 lacs respectively and loans beyond the limits, if any, will be at nonsubsidized rate Our Company being a prime lending institution has MoU in place with NHB for successful implementation of the scheme.

The aforesaid Government Initiatives are expected to keep the demand for housing robust.

Under penetrated Market:

Going by the metric of mortgage to GDP ratio of sub-10%, the Indian mortgage market is underpenetrated relative to global peers and significant growth is expected on this front translating into good growth rates going forward.


Notwithstanding that the growth in population may be showing a decelerating trend, the rapid urbanization in the country is showing a steady growth reflecting favourable prospects for the sector.

Favorable Demographics:

About 67% of our countrys population is comprised of persons who are in the mid-thirties age group and given that house purchase decisions are made roughly during this period presents a large opportunity for the sector.

Tax Benefits:

Apart from the measures announced in the interim budget 2019, home loan principal repayment upto Rs. 1.5 lakhs (Section 80C of the Income Tax Act) and interest payment upto Rs. 2 lakhs are eligible for tax deduction. This pushes down the effective interest rate paid on home loans.


• Economic slowdown and persistent high interest rate scenario could adversely impact the demand for housing and housing finance

• The ongoing chain of events concerning the financial sector resulting in trust deficit and liquidity tightening, if not addressed soon could catapult to a bigger challenge for all non-bank financial companies

• Companys ability to raise resources at competitive rates in an adverse scenario could impact profitability

• Companys ability to hire and train manpower for achieving Companys growth objectives outside south India

• Sizeable exposure to non-salaried segment could exert pressure on the Companys asset quality and increase credit cost in unfavorable economic conditions

• Inability of government to push through the envisaged reforms could result in significant opportunity cost

Strengths and Weakness Strengths

• Strong profitability ratios even in challenging times

• Robust off-balance sheet liquidity in terms of unavailed long term credit lines.

• There are abundant opportunities to tap in the affordable housing space the Company is present in. More so, in the backdrop of governmental focus on affordable housing

• The Company has demonstrated the efficacy of its business model by successfully replicating it in other prosperous non-south States like Maharashtra, Gujarat and the like

• Focus on tier II and tier III cities and peripheral areas of tier I cities results in less competition from banks and other HFCs leading to possibility of high advances growth

• The Company has over the years gained significant insights in underwriting the risks involved in lending to non-salaried class, which is highly underpenetrated, relatively less competitive and offers higher yields

• Proven track record of containing loan losses at very low levels

• Low operating cost structure 3-5 employees per branch on average, lower rentals in tier 2/3 cities, commission expenses capped, etc.

• Strong Tier 1 capital position; CAR 24.08%

• Expanding footprint sowing the seeds for the future


• Slowing loan book growth

• Over 90% of the loan book comes from southern

• States and points to existence of significant concentration risk

• High exposure to Tamil Nadu has resulted in greater susceptibility to State specific factors

• Credit rating of AA assigned by CARE Ratings constrains Companys ability to optimize cost of capital market borrowings in an environment where average marginal cost of lending rate of banks is higher than interest rates prevalent in debt capital market

• Constrained credit rating profile could cause a meaningful rise in cost of funds during times of distress in the economy as credit spreads widen. Worse still, it could restrict Company ability to raise resources, negatively impacting future growth prospects

• Higher NPAs and lower provision coverage vis-a- vis the industry although actual loan losses are amongst the lowest

• There is a lot of scope for improvement as far as technology initiatives within the Company is concerned


Going forward, loan book growth band of the Company would hinge on resolution of State specific factors, branch expansion strategy with focus on customer base expansion and profitability, ability to deepen presence in existing geographies, ability to quickly understand credit cultures of new states so the Company can venture into new territories

• Leverage Companys robust liquidity profile to buy retail loan portfolios from other HFCs/NBFCs via direct assignment

• Continue to target markets that are relatively under penetrated (lower competition, better yields)

• Continue to maintain an optimal blend of non- salaried and salaried loans in the loan book

• Maintain the non-housing book at or below 20% with continued focus on small ticket loans

• Deepen penetration in southern region markets and gradually expand into other regions/states on a contiguous basis.

• Diversify sources of borrowings and effectively manage borrowing cost if and when macroeconomic situation improves

• Focus on cross selling products and earning fee based income

• Exercise strict control on operating costs and improve employee productivity

• Give strong focus on improving the asset quality

• Innovative strategies to optimize productivity, reduce cost and boost profitability

Segment wise - Product wise performance is not applicable.

Corporate Overview

The Company is present in 2 segments – individual home loans and loans against property (LAP). The Company provides a variety of tailor-made home loan products to individual borrowers in both salaried and non-salaried (self employed professional and self employed non-professional) segments to suit various requirements.

Construction or purchase Repair and Renovation / Extension Loan against property
Repco Rural Loan* Home Makeover Prosperity Loan
Dream Home Loan Loan New Horizon Loan
Super Loan* Super Loan* Commercial Real
Fifty Plus Loan Repco Rural Loan* Estate (CRE) Loan
NRI Housing Loan
Plot Loan

* Overlapping multi-purpose products

100% of the loans extended by the Company is retail in nature.

Geographic Presence

170 points of presence comprising of 144 branches and 26 satellite centers; presence in 11 states and a union territory; greater focus on direct sourcing

During the year, the Company converted 6 satellite centers into branches, opened 7 new branches and 3 new satellite centers, taking the total network to 144 branches and 26 satellite centers. The Company didnt venture into a new state during the year with a view to penetrate deeper in existing regions. The retail network is spread across states of Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, Kerala, Maharashtra,

Odisha, West Bengal, Gujarat, Madhya Pradesh,

Jharkhand and the Union Territory of Puducherry.

State-wise retail network March 2019
Tamil Nadu 82
Andhra Pradesh 15
Telangana 7
Gujarat 9
Karnataka 22
Kerala 9
Maharashtra 17
Odisha 2
Puducherry 1
West Bengal 2
Madhya Pradesh 3
Jharkhand 1
Total 170

The Companys sources of customer acquisition are loan camps, customer walk-ins, referrals, direct selling agents and direct sales teams. Of these, loan camps contribute to over 40% of incremental originations. Manager of every branch conducts a loan camp once in every 2-3 months where, a primary assessment of customer documents is done and an in-principle sanction given. The customer then approaches the branch for further processing of his/her loan. The branch personnel act as single point of contact to customers and are responsible for sourcing loans, carrying out preliminary checks on the credit worthiness of potential customers, providing assistance in documentation, disbursing loans and monitoring repayments and collections. This way the Company ensures that there is no conflict of interest and level of accountability is very high. The share of DSA driven business was about 10% of total incremental business generated in FY9.

Result of Operations (Discussion on financial performance with respect to operational performance)

The Company reported satisfactory performance and demonstrated its ability to create value for its stakeholders even during uncertain times. The Company grew at a decent rate given the macroeconomic conditions.

There are no significant in the key financial ratios of the Company Risk Management

The Companys business activities expose it to a variety of risks including credit risk, operational risk, interest rate risk and more recently (perceived) solvency risk. Risk management forms an integral part of Companys business. The objective of the Companys risk management system is to measure and monitor various risks and to implement policies and procedures to mitigate such risks. The Company recognizes that identification of risk is most important function in managing and mitigating the risk. The Company identifies the risks in each function / activity. In this process, inputs from all the departments are taken and their viewpoints are considered in totality to do a meaningful analysis for the organization.

The Company analyzes risks in terms of consequence and likelihood of its impact. The analysis considers the range of potential consequences and likelihood of those consequences to occur. The Company recognizes that risk cannot be eliminated while doing business. In fact, risk has to be leveraged to the potential extent. Taking various factors such as strengths, weaknesses, opportunities and threats, the Company assesses and arrives at the risk appetite to maximize the benefits. It is imperative that the level of risk be measured and evaluated to take calibrated measures to manage the risk at the appropriate level. As mentioned earlier, our pricing adequately covers the risks we take.

Rigorous credit appraisal keeps credit risk in check

The credit appraisal process, which happens both at branch and head office level ensures high level of checks. A preliminary appraisal is performed by the branch manager, branch-level valuers and lawyers. This again is revalidated at the head office level before sanction. Each borrower is rated based on a dynamic credit rating model comprising of 18 parameters carrying different weights. The interest chargeable is linked to the credit score. Credit bureau scores are tracked and taken seriously and proposals with scores below a threshold value are rejected (minor deviations are considered if backed by proper justifications).Apart from that, we are now moving towards capturing and analysing granular characteristics of loan accounts, identifying patterns and behaviours and making the credit underwriting process completely system driven. All efforts are made to ensure that our pricing covers the risk we underwrite. Such pricing discipline, we believe, will generate consistent and superior return ratios. The Company maintains a conservative loan to value (LTV) and documented installment to income ratio (IIR) on the loans. The average LTV was 59% at the forced sale value and average documented IIR was 35% as on March 31, 2019.

Operational risk is mitigated using various tools

An ongoing monitoring of loan accounts is ensured by credit monitoring department at the head office that tracks, among other things, early mortality cases and early warning signs and informs process owners immediately. Credit offsite team that sits out of a separate office at Chennai checks and double checks all KYC documents before giving disbursement clearance.

Inspection of each branch is performed by an internal inspection team and an audit by an external audit firm at regular intervals. Concurrent audit is done at key branches identified in terms of loans outstanding. Senior Company officials also make surprise visits to branches to check if all processes and best practices are followed. Apart from that, we take the help of external KYC agents to perform KYC and risk checks for all non-housing loans (LAP) and housing loans above a predefined threshold value. We have also recently shifted our attention from non-performing assets to likely non-performing assets. Our recovery team now starts following up with customers and stands ready to take action the moment an account defaults on a payment.

To improve operational efficiency, quarterly Board level discussions are held on reports shared by recovery officers, external audit firm and vigilance officer, who oversee monitoring of Companys offsite transactions and Know Your Customer related compliance. New learning is put to use immediately.

Performance review of all branch personnel is undertaken twice a year by senior management team. It is a platform where performers are rewarded in front of all employees and others are motivated to do their job efficiently.

Interest rate risk

The Company has formulated an asset liability management (ALM) policy, which lays down mechanisms for assessment of various types of risks and altering the asset-liability portfolio in a dynamic way to manage such risks. There is an ongoing monitoring of the maturity profile of assets and liabilities by Asset Liability Management Committee (ALCO) - a strategic decision making body constituted by the Board, to mitigate the risks arising from cash flow mismatches, comprising of the Managing Director, Chief Development Officer, Chief Financial Officer and others.

At any point in time, an optimal balance between short term and long term borrowings is maintained in sync with extant asset and liability profile. Most of the long term borrowings and on-lending happen at floating rates, which acts as a hedge in times when interest rate volatility is high.

Solvency Risk

Recent events have brought solvency risk in spotlight. To mitigate this perceived risk we have a short term investment policy in place. The idea is to create and maintain an emergency buffer of upto Rs. 500 Crs to be used in the unlikely event things go out of hand.

The ALCO members are also part of the Investment Committee (IC). In the year ending March 2019, the Company did not feel the need to do any short term investments considering the robust nature of Companys off-balance sheet liquidity in terms of available lines of credit. Not to mention, such short term investments will have a negative carry and dampen profitability. On the other hand, the Company leveraged its comfortable liquidity position to acquire a housing loan pool via direct assignment route.

Borrowing Profile

The Company has diversified its sources of funding across five verticals viz. refinance from NHB, long-term bank loans, working capital loan from Repco Bank, non-convertible debentures (NCDs) and commercial papers (CPs). As of 31st March, 2019, 72.7% of Companys borrowings were by way of borrowings from commercial banks, 9.7% by way of refinance from the National Housing Bank (NHB), 8.6% from Repco Bank and 8.9% by way of non-convertible debentures (NCDs). Although there were no commercial papers outstanding as on March 31, 2019, the Company took advantage of attractive interest rate offered on commercial papers maturing before the Balance Sheet date. The total outstanding borrowings stood at Rs. 9,279.0 Crs as against Rs. 8,137.0 Crs in the previous year.

Going forward, if the prevalent elevated interest rate scenario subsides, the share of NCD, CP borrowings is likely to go up to be offset by declining share of bank borrowings. In a low interest rate scenario, the Company will also explore the option of securitizing its assets via PTC or/and direct assignment route,

As of March 31, 2019, 15.1 % of overall borrowings were on fixed rate basis and 84.9% on floating rate basis. The average tenor on borrowings was 7.7 years.

Borrowing source Rs. Crs
Repco Bank 798.7
Non-Convertible Debentures 827.0
National Housing Bank 903.6
Commercial Banks 6,749.7
Total 9,279.0

Credit Rating

The Companys short term and long term debt facilities are rated by two rating agencies – CARE Ratings & ICRA.

In FY19, credit rating agency CARE Ratings maintained the AA rating assigned to Companys term loan and non-convertible debenture facilities. Companys commercial paper facility continues to enjoy A1+ rating by CARE Ratings.

Rating agency ICRA maintained AA- rating assigned to Companys term loan facilities and A1+ assigned to Companys commercial paper facility.

Capital Adequacy

RHFLs capital adequacy ratio (CAR) as at March 31, 2019 was 24.08% consisting entirely of Tier-1 capital. Over the medium term, as and when the interest rates soften and risk spreads revert to mean, the Company has plans to securitize its loan assets and issue Tier-2 bonds (as and when required) to maintain its capital adequacy to support its growth ambitions.

Asset Quality

Over the years, the Company has developed robust risk management systems & processes in all areas of operations like loan origination, credit appraisal, loan disbursement and collection & recovery. However, given the tilt of the loan book towards the unsalaried segment and focus on tier 2 & 3 areas of the country, the asset quality of the book exhibits volatility intra-year. Majority of our salaried customers work for micro, small and medium enterprises and have volatile cash flows. Although the market segment we operate in results in volatile asset quality and relatively higher credit costs, the actual losses are quite low. Cumulative since inception write down of less than Rs. 10 Crs as bad till date (excluding technically written off loans) bears testimony to the aforementioned statement. Gross non-performing assets (GNPA) and net non-performing assets (NNPA) are 2.95% (Rs. 325.75 Crs) and 1.37% (Rs.207.90 Crs) respectively as on 31st March 2019 as compared to 2.87% (Rs. 282.65 Crs) and 1.29% (Rs.125.48 Crs) in the previous year. The Stage 2 provision coverage ratio stood at 36.1% at the end of FY19.

During the year, the Company opened a total of 2 Asset Recovery Branches (ARBs) at Chennai and Bangalore and transferred some of the non-performing assets from aforementioned regions. The focus of the ARBs will just be on recovery. It was also done to make better use of available manpower resources and to preserve the existing hierarchy by creating a proxy for CO level verticalization. This move will also free up business development resources at branch level, who could now solely focus on growth and containing fresh slippages.


The Company has investments in the equity of unlisted associate Company, Repco Micro Finance Limited to the extent of Rs.22 Crore (2,20,00,000 equity shares of Rs.10/- each).

Purchase of Loan Portfolio

The Company invested Rs. 36.5 Crs (our Companys share) to acquire a pool of housing loans from another housing finance Company via direct assignment route.

Financial Performance Summary

Ratio of income and expenses to average loan assets (ROA Tree)

Metric FY17 FY18 FY19
Net interest margin 4.4% 4.9% 4.5%
Other income 0.4% 0.0% 0.1%
Non-interest expenses 0.8% 0.9% 0.9%
Credit cost 0.6% 0.8% 0.2%
Income Tax 1.2% 1.1% 1.2%
Return on assets 2.2% 2.1% 2.2%

Internal Audit & Control

The Company has put in place organized adequate and effective internal control systems. The Company gets internal audit done by an external chartered accountant firm twice every year. Besides, efforts are made to carry out a full-fledged inspection of every branch once in a year by the head office inspection team. There are stringent systems in place to ensure that the assets and properties of the Company are utilized in the best interest of the Company. The internal control systems and internal auditors reports are reviewed by the Audit Committee of the Board at regular intervals so as to ensure transparency and proper compliances.

Information Technology

All branches of the Company are connected wirelessly with the head office at Chennai. One of the USPs of the Company is quick processing of loan applications, which is facilitated by the Companys adequate IT infrastructure that ensures all borrower specific documents are transferred online. Automated SMS alerts are also sent to borrowers to remind them of upcoming payments so they can ensure availability of sufficient funds in their bank accounts. The Companys ability to operate and remain competitive depends in part on its ability to maintain and upgrade information technology systems and infrastructure on a timely and cost-effective basis, including ability to process a large number of transactions on a daily basis. An Information Technology audit is conducted every year via an external agency to ensure safety of protocols and data.

Human Resources

The Company believes in attracting, nurturing and retaining a qualitative workforce to accomplish its long-term objectives. To achieve this, the Company provides the necessary internal and external training to keep employees updated in tune with prevailing benchmark practices in the housing finance industry. The Company provides a professional work environment and maintains healthy relations with its employees. As on March 31, 2019, the Company had 929 employees on it rolls. For and on behalf of the Board of Directors

Yashpal Gupta
Managing Director
Place : Chennai
August 14, 2019