Is HUDCO Homing In On Retail Hometruths?

STRATEGY
Is HUDCO Homing In On Retail Hometruths?

CEO V. Suresh must transform the public sector, wholesale, housing finance giant to build on his bold retail gambit.

By Pranjal Sharma

V. Suresh, CEO, HUDCO: "We don't get any discounts for being a PSU" If you are one of the 100-odd chosen executives manning the call centre at HUDCO Niwas-the newly-created personal finance wing of the public sector housing finance company, Housing & Urban Development Corporation (HUDCO; 1997-98 loans: Rs 6,666 crore)-think twice before being curt with a potential customer. For all you know, he could be your cunning Chairman, calling only to check on you. ''I change my voice,'' confides the 55-year-old V. Suresh, Chairman, HUDCO. ''I want to catch them off-guard, and see how responsive they are to our customers.''

Obviously, Suresh is leaving no voice unchanged in his attempt to rebuild HUDCO into a retail finance institution that will, for the first time, lend directly to the customer. But his belated plunge into the Rs 6,000-crore per annum housing finance business will, by no means, be easy to pull off. In fact, he will need more than a dash of ventriloquism to successfully transform a laidback 29-year-old State-owned institution, engaged until now only in disbursing loans to (government) organisations-often, without a profit motive-into a nimble-footed player in a competitive market. Agrees Siddarth Yog, 26, an Associate Director at the real estate consultancy, CB Richard Ellis: ''The transition will not be an easy one. The fact that HUDCO is so big and strong will reduce its appetite for fresh business.''

He could be right. As a once-dedicated institutional lender to housing and infrastructure projects, HUDCO has loomed large over the wholesale market for 3 decades. Even in future, the company will have to continue to meet its social obligations, such as financing low-cost houses for economically-weaker people et al. In addition, the company must contend with a host of market-savvy banks, institutions such as GIC Housing Finance and LIC Housing Finance, and housing finance companies like the Housing Development Finance Corp. (HDFC) and Countrywide. Entirely possible, assert HUDCO's managers.

Avers S. Sundresan, 55, Director (Finance), HUDCO: ''We have our inherent strengths. We are competitively placed.'' Agrees Anuj Puri, 33, Managing Director, Chesterton Meghraj Property Consultants: ''I see HUDCO becoming the leader in 3 years because it offers the lowest rates.'' For instance, to gain an edge over its entrenched rivals, HUDCO actually revises your Equated Monthly Instalments (EMIs) every month on a diminishing balance basis, which means a customer-saving of Rs 2,076 per annum on a 5-year Rs 1-lakh loan. By contrast, the market-leader, HDFC, calculates repayments on an annual reducing balance basis. Also, it is the only one not to charge a penal interest rate on delayed repayments versus the norm of 2 per cent per annum. And HUDCO will, actually, waive the last 2 instalments if its loan is repaid by you on time.

If the competition is feeling jittery, well, it's doing a good job of not showing it. Dismisses Deepak Satwalekar, 48, Managing Director, HDFC: ''The enhanced income-tax benefits, coupled with the reduction in interest rates, will make housing more affordable. There's so much demand and so little supply that HUDCO won't threaten anyone's business.'' Agrees P.P. Vora, 55, Chairman, National Housing Bank (NHB): ''The rate of growth of outstanding loans by all the housing finance companies has exhibited an increasing trend. There is ample scope for all the financial institutions to increase their marketshares.'' Brave words.

Yet, within 72 hours of HUDCO launching its schemes on March 8, 1999, with interest rates that were a good 1 per cent below the competition's, HDFC too slashed its rates by between 0.50 and 1 per cent. Five days later, LIC Housing Finance (marketshare: 23 per cent) followed suit, with a discount of between 50 and 100 percentage points. Obviously, his arch-rivals cannot afford to be complacent since the astute Suresh seems to have worked out a brick-by-brick blueprint for customer satisfaction.

For instance, HUDCO's 18-city office-network is being touched up to create a congenial ambience, complete with touch-screen information kiosks. While they will work 7 days a week, Suresh is also planning to invest Rs 2 crore to network them in order to speed up decision-making. Knowing fully-well that the ''staid PSU'' mindset would have to be changed to build a team that would be motivated enough to try to excel, Suresh first advertised internally for people for the new business.

Of the 240 who applied, only 100 were chosen. ''We asked them basic questions about what makes a scheme sell. How do you tackle disinterested customers? In the end, we got a lot of fresh blood, tempered by some experienced minds,'' says R.P. Singhal, 48, who heads HUDCO's retail finance division. To learn the myriad nuances of the market, HUDCO even roped in an erstwhile manager with a rival as a consultant. That's how HUDCO is trying to cut the red tape, and restrict to 48 hours the time between the receipt of an application for a loan and the final act of its disbursal. Only if it manages that will HUDCO be at par with its rivals.

Interestingly, HUDCO's institutional finance wing may provide the perfect base for its retail finance foray. It has asked the organisations that it finances to create HUDCO Niwases on their sites, which will benefit both HUDCO and the developers. For instance, if, say, the Kanpur Development Authority launches a scheme that is being part-financed by HUDCO, the retail finance wing will place an officer at the registration-counter. And all the loans booked by HUDCO Niwas will be deducted from the Kanpur Development Authority's liability. As HUDCO will manage the repayment of this money itself, the authority will end up with lower administration costs. (For the record, there are 700 such schemes in operation, covering 6 lakh housing units today.)

Strangely, Suresh also plans to start a mutual fund soon, which will focus on housing and infrastructure stocks. Budget 99 was the trigger for this since it made dividend-incomes from the mutual funds exempt from income-tax. ''This will generate money for the company, for the investor, and for our housing and infrastructure projects,'' explains Suresh, who admits that this is a completely new business for HUDCO. ''Even retail is new for us, but we are not doing too badly,'' he explains. However, that is still housing finance unlike the competitive mutual funds business, which could prove to be a different can of worms.

Meanwhile, HUDCO is taking steps to improve its cash-flows by securitising its lendings-first, Rs 1,000 crore, and then, a Rs 4,000-crore deal-to reduce the receipts cycle. Currently, the PSU has Rs 15,000 crore locked up in projects. Not that money is a problem for HUDCO, which raised Rs 3,240 crore in 1998-99, including an equity expansion of Rs 192 crore. Its other sources of funds in 1997-98: term loans from banks and insurance companies (Rs 1,729 crore), bonds (Rs 645.60 crore), loans from the oecf (Rs 41.39 crore), its public deposits scheme (Rs 36.90 crore), and loans from the other financial institutions. In fact, more than 95 per cent of the money raised by the company is long-term debt.

And HUDCO makes profits: last year, net profits, at Rs 60.55 crore, were up from Rs 40.54 crore in 1997-98. But they have actually plummeted from Rs 77.75 crore in 1995-96 since provisions had to be made for non-performing assets (NPAs) based on the Reserve Bank of India's (RBI) new norms for non-banking finance companies. Says Ellis' Yog: ''Retail finance is a logical extension of HUDCO's activities. But its success will depend on keeping its NPAs under control.''

Last year, HUDCO clocked record sanctions of Rs 6,666.67 crore-an increase of 118 per cent over the previous year's Rs 3,061.86 crore-and its disbursals too grew by 50 per cent to Rs 3,200.68 crore versus Rs 2,136.80 crore in 1997-98. Even construction companies appear to be happy with HUDCO's advent into the retail business. Says Sanjay Khanna, 30, Partner, Kailash Nath Associates: ''HUDCO's product is flexible, which makes it attractive. If the company can raise the maximum loan-period from 15 years, it could grab a large chunk of the market in double-quick time. Internationally, housing finance is given for 20-25 years. HUDCO needs to play on volumes if it is to make money in this business.''

Big is beautiful in this business, which is where HUDCO could score. Despite the presence of 24 players that are registered with the RBI, the housing finance sector is dominated by the HDFC and LIC Housing Finance, who together control 82 per cent of the market. In fact, the scale of competition can be gauged from the funds they disburse: HUDCO plans to lend Rs 350 crore in fiscal 1999, which is only 10 per cent of what the HDFC will disburse in the same period. And Suresh agrees that his company will make less profits from such loans than his competitors. But he is willing to fight it out.

Of course, Suresh doesn't see any help coming from the GOI. After all, it took 4 years of intense lobbying and persuasion to get the Ministry of Urban Development's nod for HUDCO's retail gambit. ''We don't get any discounts for being a PSU,'' he says, adding: ''Fighting the private sector will be the easy part.'' Jokes apart, Suresh knows that, before he manages to rebuild its future, HUDCO is going to have to learn several home truths.
Additional Reporting By Ranju Sarkar

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