Chairman’s Letter

To Our Shareholders

Numerous thoughts have been stirring through my mind as I write to you today. It is now just over 80 days since the national lockdown was first announced in India on March 24, 2020. While restrictions on the lockdown have gradually lifted, the sense of unease has not abated. The world's focus shifted so suddenly to a future that is unpredictable, unknown and consuming in its entirety.

Never before has the global economy simultaneously seen demand and supply evaporate overnight. Millions have been rendered jobless for no fault of their own. World over, the pandemic has revealed the fragility of health systems and the lack of social safety nets. The key question is how are countries going to unwind from the ‘HHEF crisis’, which is a health, humanitarian, economic and financial crisis that has morphed into each other?

The lockdown has reinforced the value of the essentials of life – food, clothing, shelter and now, the internet. There can be no better security in life than a home. More than ever before, people will want their own homes. People will go to any length to hold on to their homes. HDFC is in the right business and we have done business the right way. There may be lags in terms of healing time, but we remain confident that the inherent demand for housing is intact.

For individual loans, growth was on track during the year under review. We pursued our strategy of focusing on the affordable housing segment. We continued to support the government's flagship housing programme, the Credit Linked Subsidy Scheme (CLSS), which focuses on low and middle-income home loan borrowers. HDFC retained its position of having the largest number of beneficiaries under CLSS, with cumulative disbursements to nearly 2 lac customers under the scheme. To my mind, the financial inclusion bank accounts, digital payment platforms and the CLSS are three standout examples of successful partnerships between the government and financial sector entities in India. Much can be achieved with strong intent, well designed platforms, good execution and a consultative approach to identify solutions.

In good times as also in unsettling ones, the greatest solace for any institution is its core values. Honesty, transparency and integrity has always held us in good stead. Being honest with our stakeholders means we will not sugar-coat the truth. Transparency is owing up to mistakes we made and integrity is about shunning short-cuts and doing what is right not just for ourselves, but for other stakeholders as well. Over the years, companies within the HDFC group have steered through many crises, both global and local. Each time, it has been our ethics and values that has helped us surmount and emerge stronger.

While we delivered a good performance in FY20, it was by no means an easy year. Risk averseness in lending heightened, further choking credit where it was needed the most. With our nonindividual loans, we consciously took a stance to prioritise asset quality over growth. This was a decision that worked well for us. We resolved a few accounts by leveraging our existing relationships, including finding stronger partners for our borrowers. We had our share of disappointments too. These pertained to certain long-standing relationships we thought we were confident about. When hardships fell upon them, the legal system overrode our recovery efforts. Through this, we have learnt to be patient as we have to respect the system. We know these loans did not constitute imprudent lending as we have more than adequate security backing them and we have always, as a policy ensured prudent provisioning. Yet, as we hold the trust of our stakeholders, we have to have the humility to own up to judgement calls that did not work as expected. That said, our recovery efforts shall continue unabated. In the most trying times, recent resolutions in our favour have been encouraging, sparking hope of a changing tide.

The lockdown has reinforced the value of the essentials of life – food, clothing, shelter and now, the internet. There can be no better security in life than a home. More than ever before, people will want their own homes. People will go to any length to hold on to their homes. HDFC is in the right business and we have done business the right way.

We know our position is considerably stronger than most of our peers. We kept building buffers and erred on the side of abundant caution on provisioning requirements. Each time we did this, it was always from a position of strength. This prudence gives comfort to our investors.

We are now emerging into a scenario where there may be inorganic opportunities for our group companies. Some of our subsidiary companies will need additional capital for their expansion plans. We have also identified new investment opportunities that will help build the next generation of value creators for HDFC.To support this, we are putting in place a roadmap for our future capital requirements.

The Reserve Bank of India (RBI) has been at the forefront, shouldering a huge burden to maintain financial stability. The saga of the highest court of law questioning the RBI on the moratorium was indeed unfortunate. Why should a central bank have to be answerable to a court on basic principles which the financial sector operates on? Interest payments on borrowings and loans are contractual obligations. No laws are being violated. At this juncture, all efforts must be channelled towards economic recovery rather than getting into legal wrangles. These issues must be resolved smoothly and I remain hopeful that the authorities will find solutions to safeguard its stakeholders.

The woes of the Indian economy predate the pandemic. Given the immense constraints on fiscal finances, solutions have to be found which do not impinge on the limited resources of the government. The government has rightly recognised the benefits of encouraging housing. The construction sector is important as it is the second largest employment generator and has multiplier effects through its extensive backward and forward linkages with other industries. A few policy changes will go a long way in supporting housing and housing finance going forward.

First, is a call for a level playing field for external commercial borrowings (ECBs). Today, non-banking financial companies can access the ECB market for any of their lending business. Housing finance companies on the other hand, can only raise ECBs under a very confined definition of affordable housing, wherein the housing project must have at least 50% of the floor space index for dwelling units with a carpet area not exceeding 60 square metres. In short, a standalone home of 60 square metres would not qualify. This definition is at odds with the government's overall objective of enabling more individuals to become homeowners.

Recognising this hurdle, in September 2019, the honourable finance minister made an announcement that ECB guidelines would be relaxed to facilitate the financing of home buyers who are eligible under the Pradhan Mantri Awas Yojana, the government's Housing for All scheme. One sincerely hopes the finance ministry along with the RBI will expedite this to enable the raising of long-term resources from a diversified borrower base. With global interest rates being so low, there is an opportunity to raise large resources for affordable housing. The RBI has always had the necessary checks and balances on entities it deems fit to raise ECBs, so this should not warrant any regulatory concern.

Second, the RBI should permit a one-time restructuring for real estate loans. This has been a long standing request and a measure implemented in the past to revive the sector. If developers do not have cashflows due to a slowdown in sales or delay in receiving requisite building approvals, they can neither complete the existing projects nor can they service their loans. Even if a lender is willing to help the project stay viable, any modification in the terms of the loan, including additional funding is construed to be a non-performing loan under the current regulatory norms. Allowing for a restructuring of these loans and categorising them as standard assets will facilitate last mile funding for these projects.

These are unusual times and a pragmatic approach is needed to resolve the financial stress in the real estate sector, without bail-out packages. Allowing the problem to fester, may result in a rise in non-performing loans, which in turn will weaken the overall financial sector. It is important to recognise that unlike other loans, the underlying value of the land is always there as security. Further, to repair the sector, real estate prices have to be realistic to reflect current market realities. This would help developers offload their unsold inventory and improve their cashflows. Simultaneously, there is a need for realignment of ready reckoner rates as well.

Third, is the need to amend regulations so as to facilitate end-to-end execution of mortgages online. Currently, loans are being approved online, but disbursements cannot happen as e-signatures on mortgage documents or agreements pertaining to immovable properties are excluded from the purview of the Information Technology Act, 2000. With the immense thrust on technology in the financial sector, this amendment can easily be facilitated through an ordinance. This would go a long way in reducing timelines for home loan disbursements and bring in cost efficiencies.

None of these solutions can work unless there is a concerted and co-ordinated effort on the part of financiers, developers and central and state governments. The country is just beginning to recover from one of the longest and strictest lockdowns across major economies. India's sheer numbers means domestic demand has to revive. The challenges are daunting, but I remain confident that India will display its resilience.

To conclude, the future may look unsettling, but it is also a time when stronger institutions stand out. We see multiple roles for ourselves in this environment. We will work to build back demand, seek new ways of doing business, be a white knight where needed, but most importantly, we will stay compassionate, empathetic and kind with our people, stakeholders and communities. We feel a sense of unusual optimism which keeps us going and we stand privileged to have shareholders who have and continue to believe in the HDFC story.

I hope when I write to you next year, we would have put this period well behind us.