Directors' Report The Members HDB Financial Services Limited Your Directors have pleasure in presenting the Sixth Annual Report on the business and operations of your company together with the audited accounts for the Financial Year ended March 31, 2013. DIVIDEND In order to conserve resources and in view of long term capital requirement, your directors do not recommend any dividend. RATINGS The Credit Analysis & Research Limited (CARE) and CRISIL Limited (CRISIL) have assigned ratings for the various facilities availed by the Company, details of which are given below: EMPLOYEES STOCK OPTION SCHEME (ESOS) The information pertaining to Employees Stock Option is given in the notes forming part of accounts. CAPITAL ADEQUACY Company's capital adequacy ratio as on March 31, 2013 was 18.34% as against the minimum regulatory requirement of 15% for non-deposit accepting NBFCs. MANAGEMENT DISCUSSIONS AND ANALYSIS REPORT Macro Economic and Industry Developments The economic slowdown persisting for last couple of years continued in the year 2012. The economic environment remained subdued for large part of year. Gross Domestic Product (GDP) growth is expected to decline to 5% for the FY 2012-2013 against 6.2% for the previous year. Against the backdrop of high current account deficit (estimated at around 4.2%) and sustained inflation (estimated at over 7%), the Reserve Bank of India has worked towards easing monetary and liquidity conditions in a calibrated manner. This is yet to translate to lower interest rates due to continuing liquidity concerns. The government had projected a fiscal deficit target of 5.1% of GDP. Revenues were under pressure due to a number of factors including weak economic growth, higher subsidy bill and low receipts from disinvestment initiatives. Government of India has taken a number of steps towards fiscal consolidation such as gradual increase in fuel prices, targeted subsidy through direct cash transfers and allowing Foreign Direct Investment in select sectors. Improvement in investment climate is a pre-requisite for economic recovery. Several measures are expected to be announced that will boost investment, reduce inflation and fiscal deficit. The economic environment prevailing in the country affected the NBFC sector also. Rainfall has been below normal, particularly in the key months of June and July. This affected sowing and resulted in a lower growth rate of agriculture and allied sectors. Global economic slowdown, depressed sentiments, high interest rates, moderation in credit growth and a deceleration in growth of investment also contributed to the reduction in growth of industrial sector. Lower growth in agriculture, industrial and mining sector has had an adverse impact on the growth of commercial vehicle and equipment segment. Reserve Bank of India's initiatives of reducing the CRR and Repo rate in the second half of the financial year will certainly help in reducing the liquidity pressure and softening the interest rates and thereby reducing the borrowing cost. The various pro active steps envisaged by the Government will also enable the NBFCs to achieve higher credit growth Source: Industry reports Opportunities Government has announced a number of policy measures to kickstart investments. This includes an investment allowance for manufacturing companies, policy measures for creating affordable housing and addressing requirements of agriculture sector through measures other than price supports. Steps are being taken to address requirements of mining and power generation sectors which will remove supply bottlenecks to a number of sectors. Deepening of financial markets especially the corporate bonds market and attracting foreign long term investment flows for infrastructure projects are likely to happen in future. Improvement in connectivity to rural areas will result in robustness of demand from semi urban and rural areas. With the government's initiative to boost infrastructure projects, NBFCs can also look for growth in asset financing. Threats Growth of the company's asset book, quality of assets and ability to raise funds depends significantly on the economy. Unfavorable events in the Indian economy can affect consumer sentiment and in turn impact consumer decision to purchase financial products. Competition from a broad range of financial services providers and changes in Government policy / regulatory framework could impact the company's operations. Operations Loans - The Company offers a range of loan products both in the secured and unsecured categories that fulfills the financial needs of its target segments. • Unsecured loans - The Loans are in the range of Rs. 100,000 to Rs. 2,000,000. These loans are offered as term loans with a maximum tenure of 48 months. Interest rates on these loans are higher than the rates on secured loans. • Secured loans - Secured loans are offered to customers to address the larger loan requirements or longer repayment requirements. Secured loans are in the range of Rs. 100,000 to Rs. 50,000,000. These loans are offered as term loans with the maximum tenure at 180 months. These loans are normally offered on a floating rate basis. The company provides loan against the following collaterals as security for the loans: • Commercial / Residential property • Cars / Automobiles • Shares • Marketable Securities such as Bonds • Gold Jewellery Commercial Vehicle Loans - The Company provides loans for purchase of new and used commercial vehicles. Construction Equipment - The Company provides facilities for purchase of new and used construction equipments. Fee Based Products • Insurance Services The Company is a corporate agent for HDFC Standard Life Insurance Company Limited and HDFC Ergo General Insurance Company Limited. The Company sells life and general insurance bundled with its loan as a value-add as well as a standalone product. BPO Services Business • BPO services - The Company has a contract with HDFC Bank to run collections call centres and collect overdue from borrowers. The Company has set up call centres across the country with a capacity of over 1700 seats. These centres provide collection services for the entire gamut of retail lending products of HDFC Bank. The company offers end to end collection services in over 200 locations through its calling and field support teams. The company is in the process of expanding capacity for this business and is adding 700 seats to cater to the expected increase in business. Infrastructure The Company has 230 branches in 184 cities thus creating the right distribution network to sell its products and services. The company has its data centre at Bangalore and centralized operations at Hyderabad and Chennai. The Business Process Outsourcing (BPO) vertical of the Company now operates from 6 collection centres with a capacity of over 1700 work stations. Internal Control Systems In the opinion of the Management, the company has adequate systems and procedures to provide assurance of recording transactions in all material respects. The company has appointed M/s. Contractor, Nayak & Kishnadwala, Chartered Accountants to conduct an internal audit covering all areas of operations and the reports are placed before the Audit Committee of the Board. Outlook The markets will continue to grow and mature leading to differentiation of products and services. Each financial intermediary will have to find its niche in order to add value to consumers. The company is cautiously optimistic in its outlook for the year 2013-14. FIXED DEPOSITS The company is a non deposit taking company (NBFC-ND-SI). The Company has not accepted any fixed deposit during the period under review. The company has passed a resolution for non acceptance of deposits from public. INCREASE IN PAID UP SHARE CAPITAL During the period under review, the paid up capital of the company increased to Rs. 410.77 Crores from Rs. 410.60 Crores. The company allotted 160150 shares to employees whose shares had vested and option exercised by the employees during the year. ISSUE OF DEBENTURES AND SUBODINATE BONDS During the year, HDB raised Rs. 1356 Crores by issue of secured Non-Convertible Debentures ("NCD") on private placement basis. The NCDs are rated "AAA" by CARE and CRISIL, indicating highest degree of safety with regard to timely servicing of financial obligations. The NCD's are issued with maturity period ranging from 2 to 5 years. The Interest payable thereon would be annual and/or on maturity and no interest was due as on March 31, 2013. The company has not received any grievances from the debenture holders. The company has appointed IDBI Trusteeship Services Limited as trustees for the debentures. The assets of the company which are available by way of security are sufficient to discharge the claims of the debenture holders as and when they become due. During the year company has issued subordinate bonds (Tier II Capital) of Rs. 600 Crores on private placement basis. The subordinate bonds are rated "AAA" by CARE and CRISIL indicating highest degree of safety with regard to timely servicing of financial obligations. The subordinate bonds are issued with a maturity period upto 10 years. The Interest payable thereon would be annual and no interest was due as on March 31, 2013. The company has not received any grievances from the subordinate bond holders. The company has appointed IDBI Trusteeship Services Limited as trustees for the subordinate bonds. INTERNAL AUDIT AND COMPLIANCE The Company conducts it's internal audit and compliance functions within the parameters of regulatory framework which is well commensurate with the size, scale and complexity of operations. The internal controls and compliance functions are evolved, installed, reviewed, and upgraded periodically. The internal audit function is being carried out by an external firm of chartered accountants and their reports are placed on quarterly basis to the Audit committee. The Audit Committee reviews the performance of the audit and compliance functions, the effectiveness of controls and compliance with regulatory guidelines and gives such directions to the Management as necessary / considered appropriate. The company has framed a compliance policy to effectively monitor and supervise the compliance function in accordance with the statutory requirements. RISK MANAGEMENT AND PORTFOLIO QUALITY The Company recognizes the importance of risk management and has accordingly invested in appropriate processes, people and a management structure. The function is supervised by the Risk Committee. Risk Committee reviews the asset quality at frequent intervals. Product policy programmes are duly approved before any new product launches and are reviewed regularly. The asset quality of the company continues to remain healthy. The ratio of gross non-performing assets to gross advances and net non performing assets to total assets stood at 0.44% and 0.25% respectively as of March 31, 2013. The specific loan loss provisions that the company has made for its non-performing assets continue to be more conservative than those as prescribed by regulators. RBI GUIDELINES The company has complied with all the applicable regulations of the Reserve Bank of India. HUMAN RESOURCES People remain the most valuable asset of your company. Your company continued to build on its capabilities in getting the right talent to support different products and geographies and is taking effective steps to retain talent. The total number of employees was 6404 as on March 31, 2013. During the year, the company put in new training programs for employees with focus on skill development and customer service. STATUTORY DISCLOSURES 1. The information required under Section 217(2A) of the Act and the rules made there under are given in the Annexure I appended hereto and forms part of this report. 2. The provisions of Section 217(1) (e) of the Act relating to conservation of energy and technology absorption do not apply to your Company as it is not a manufacturing company. 3. The Company had no foreign exchange inflow and outgo during the period under review. DIRECTORS' RESPONSIBILITY STATEMENT The Board of Directors hereby state that: 1. In preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures. 2. Appropriate accounting policies have been selected and applied consistently and judgments and estimates made are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period. 3. Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Company's Act, 1956 for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. 4. The annual accounts have been prepared on a going concern basis. DIRECTORS During the period under review Mr. Anil Jaggia was appointed as director and Mr. G. Ramesh was appointed as Managing Director of the company. Mr. Pralay Mondal resigned as director of the company. Your directors would like to place on record their appreciation of the contribution made by Mr. Pralay Mondal during his tenure as director of the company. Pursuant to provisions of the Companies Act, 1956 and Articles of Association of the company, Mr. G. Subramanian will retire by rotation at the ensuing Annual General Meeting and being eligible, offers himself for re-appointment. AUDITORS M/s Haribhakti & Co., Chartered Accountants, have been our statutory auditors since inception of the company. They will retire at the conclusion of the forthcoming Annual General Meeting and are eligible for re-appointment. However, they are not seeking re-appointment. The Company has also received a letter from BSR & Co., Chartered accountants seeking appointment at the ensuing General Meeting. Members are requested to consider their appointment on remuneration to be decided by the audit committee of the Board. CORPORATE GOVERNANCE REPORT A report on Corporate Governance is set in the Annexure forming part of this report. ACKNOWLEDGEMENT Your directors take this opportunity to place on record their appreciation to all employees for their hard work, spirited efforts, dedication and loyalty to the company which has helped the company to maintain its growth. The directors also wish to place on record their appreciation for the support extended by the Reserve Bank of India, other regulatory and government bodies, company's auditors, customers, bankers, promoters and shareholders. On behalf of the Board of Directors G. Subramanian Chairman Mumbai, April 17, 2013 Regd. Office:Radhika, 2nd Floor, Law Garden Road, Navrangpura, Ahmedabad 380 009 (Gujarat) |