Annual Report - LIC Housing Finance - 2008-2009

LIC HOUSING FINANCE LIMITED

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

To
The members of
LIC Housing Finance Limited

The Directors have great pleasure in presenting the Twentieth Annual Report
together with the audited accounts for the year ended 31st March, 2009.

Financial results:

The profit and loss account shows a profit before tax of Rs. 727.23 crore
after writing off bad loans of Rs.5.40 crore and provision of Rs.8.12 crore
towards contingencies and considering the amount recovered of Rs. 8.26
crore out of earlier write off and taking into account all expenses,
including depreciation. Considering the prior period items of Rs.0.81
crore, the profit before tax is Rs. 726.42 crore. After considering the
provision for income tax, (net of deferred tax) including that of earlier
years and fringe benefit tax of Rs. 194.80 crore, the profit after tax for
the year is Rs. 531.62 crore.

Taking into account the balance of Rs. 101.38 crore being brought forward
from the previous year, the distributable profit is Rs. 633.00 crore.



(Rs. in crore)
For the year ended
31st March,
2009 2008
Appropriations:

Special reserve 128.00 100.00

General reserve 150.00 85.00

Proposed dividend 110.41 84.93

Tax on dividend 18.76 14.43

Market fluctuation reserve - 13.32

Balance carried
forward to next year 225.83 101.38

633.00 399.06

Dividend:

Considering the excellent performance during the year 2008-09, your
Directors have recommended a dividend of Rs. 13 per equity share (130
percent), for the year ended 31st March, 2009, as against Rs. 10 per equity
share (100 percent) for the previous year ended 31st March, 2008. The total
dividend outgo for the current year would amount to Rs.129.17 crore
including dividend distribution tax of Rs. 18.76 crore, as against Rs.99.36
crore including dividend distribution tax of Rs.14.43 crore, in the
previous year.

Performance:

Income and profit:-

Profit before tax and after tax stood at Rs.726.42 crore and Rs. 531.62
crore as against Rs. 532.30 crore and Rs. 387.18 crore, respectively, for
the previous year. Profit before tax has increased by 36.47 percent and
profit after tax by 37.30 percent as compared to previous year.

The Company earned a total income of Rs. 2,903.34 crore, registering an
increase of 33.59 percent. The percentage of operational expenses to the
housing loans, which was 0.59 percent in the previous year, has decreased
to 0.54 percent in 2008-09.

Lending operations:

Individual loans:-

The main thrust continues on individual loans with a growth of 25 percent
as against 20 percent in the previous year. However, project loans were
also given due weightage resulting in a modest growth of 20 percent over
previous year. During the year, the Company sanctioned 67,886 individual
loans for Rs.8,186.02 crore and disbursed 67,237 loans for Rs. 7,351.09
crore during 2008-09. Individual retail loans constitute 75.11 percent of
the total sanctions and 83.94 percent of the total disbursements for the
year 2008-09 compared to the last year's figure of 75.84 percent and 83.47
percent respectively. The retail (individual) loan portfolio grew by over
22 percent from Rs. 20,618.78 crore as on 31st March, 2008 to Rs. 25,252.87
crore as on 31st March, 2009.

The cumulative sanctions and disbursements since the incorporation, in
respect of individual loans are:

Amount sanctioned Rs.45,624.24 crore
Amount disbursed Rs.42,993.98 crore

More than 10,00,000 customers have been serviced by the Company up to 31 St
March, 2009 since its inception.

Project loans:

Growth in profit has been attributed amongst other factors to the growing
portfolio of project loans. The Company sanctioned/disbursed project loans
to select builders/ developers. The project loans sanctioned and disbursed
by the Company during the year were Rs. 2,712.45 crore and Rs. 1,407.22
crore, respectively. These loans are generally for short durations, giving
better yields as compared to individual loans.

Non-Performing Assets and provisions:

The amount of gross Jon-Performing Assets (NPA) as on 31st March, 2009 was
Rs.297 crores, which is equivalent to 1.07 percent of the housing loan
portfolio of the Company, as against Rs.372.92 crore i.e., 1.70 percent of
the housing loan portfolio as on 31st March, 2008. The net NPA as on 31st
March, 2009 is reduced to Rs.57 crore i.e. 0.21 percent of the housing loan
portfolio vis-a-vis Rs.140.90 crore Le, 0.64 percent of the housing loan
portfolio as on 31st March, 2008. The total cumulative provision towards
housing loan as on 31st March, 2009 is Rs.240.25 crore. During the year,
the Company has written off Rs.5.40 crore of housing loan portfolio as
against Rs. 38.99 crore during the previous year.

Fund raising:

The Company raised funds aggregating to Rs. 11,188.33 crore through term
loans from banks, Non-Convertible Debenture (NCD), sub-ordinate debts,
commercial paper, Public Deposit and others which were used for fresh
disbursements as well as repayments/prepayments of past borrowings. The
Company's NCD issue was rated 'AAA' and Public Deposit was rated as
FAAA/STABLE by CRISIL.

Qualified Institutional Placement:

The Companywith a view to consolidate its financial position and networth,
plans to augment long term resources. For this purpose, and for general
corporate purposes including investments, as may be decided by the Board in
the best interest of the company, it is proposed to issue 1,00,00,000
equity shares of Rs.10/- each/other securities convertible into/
exchangeable with the equity shares of the Company to Qualified
Institutional Buyers as defined in the SEBI (Disclosure and Investor
Protection) Guidelines, 2000 (SEBI DIP Guidelines) whether or not such
investors are Members of the Company, in terms of the Guidelines contained
in Chapter XIII-A of the said Guidelines, including any statutory
modification or re-enactment thereof for the time being in force.

The details of the issue and other particulars are as under:

i) Securities to be issued: The resolution set out in the accompanying
Notice is an enabling resolution, entitling the Board to issue equity
shares or other securities convertible into or exchangeable with the equity
shares as may be deemed appropriate in the best interests of the Company.

ii) Pricing of Equity Shares : Each equity share of the face value of
Rs.10/- shall be issued at a price to be decided at the time of launching
the issue by the Committee namely, QIP Issue Committee formed by the Board,
keeping in view the prescribed guidelines, namely, SEBI DIP Guidelines.

iii) Terms of Shares: The equity shares to be issued as above shall rank
pari-passu in all respects with the then existing equity shares of the
Company. The equity shares shall be subject to the Memorandum and Articles
of Association of the Company.

Particulars of the proposed allottees: Qualified Institutional Buyers would
be decided at the time of launching.

Auditors:

Statutory auditors M/s. PC. Hansotia & Co., Chartered Accountants, Mumbai,
retire at the conclusion of the forthcoming Annual General Meeting (AGM).
M/s. PC. Hansotia & Co., Chartered Accountants, Mumbai has been statutory
auditors of the Company for last four years and the management is of the
opinion that it is a time a change be made for newer insights and different
perception. Accordingly, the Board of Directors recommend appointment of
M/s. Chokshi & Chokshi, Chartered Accountants, Mumbai and M/s. Shah Gupta &
Co., Chartered Accountants, Mumbai, as Auditors of the Company for
financial year 2009-10. The Company has received the requisite certificate
from them to the effect that their appointment, if made, would be within
the limits specified under section 224 (1 B) of the Companies Act, 1956.

The Directors recommend the appointment of M/s. Chokshi & Chokshi,
Chartered Accountants, Mumbai and M/s. Shah Gupta & Co., Chartered
Accountants, Mumbai as Auditors of the Company for the financial year 2009-
10.

Directors:

Shri K. Narasimha Murthy and Shri S. Ravi, retire by rotation at the
ensuing AGM and are eligible for reappointment.

Shri A.S. Narayanamoorthy had been appointed on the Board of the Company as
Additional Director with effect from 2nd July, 2008 subject to approval of
shareholders at the forthcoming Annual General Meeting.

The Directors recommend their reappointment/ appointment.

Corporate Governance:

A certificate from the Statutory Auditor of the Company regarding
compliance of the conditions of Corporate Governance as stipulated under
Clause 49 of the Listing Agreement is attached to the Corporate Governance
Report.

Your Company has been complying with the principles of good Corporate
Governance over the years. The Board of Directors support the broad
principles of Corporate Governance. In addition to the basic governance
issues, the Board lays strong emphasis on transparency, accountability and
integrity.

NHB guidelines;

The Company has been following guidelines, circulars and directions issued
by NHB from time to time.

Your Company has been maintaining capital adequacy as prescribed by the NHB
from time to time. The capital adequacy was 13.50 percent (as against 12
percent prescribed by the NHB) as on 3152 March, 2009 after considering the
loan to value ratio for deciding risk weightage.

Depository system:

The Company has signed an agreement with the Central Depository Services
(India) Limited (CDSL) for transactions of its shares in dematerialised
form, in addition to the National Securities Depository Limited (NSDL), to
give a choice to shareholders in selecting depository participant. As on
31St March, 2009 15,359 members of the Company continue to hold shares in
physical form. As per the Securities and Exchange Board of India's (SEBI)
instructions, the Company's shares have to be transacted in dematerialised
form and therefore, members are requested to convert their holdings to
dematerialised form.

Public deposits:

During 2007-08, the Company started accepting deposits from the public. As
on 31St March, 2009, the outstanding amount on account of public deposits
was Rs.161,77,88,000 and no maturity payment of deposits remained unpaid as
at end of the financial year. The interest due on the public deposits has
been paid on time.

Exemption from provision of section 58A (2)(a) & (b);

In exercise of the powers under sub-section 8 of section 58A of the
Companies Act, 1956, read with Companies (Amendment Act, 1977), the Central
Government has granted exemption to the public deposit scheme of the
Company from provisions of section 58A(2) (a) & (b) of the Companies Act,
1956 on following conditions:

i. Abridged advertisement shall refer to the statutory advertisement
published.

ii. Abridged advertisement shall be issued during the validity of statutory
advertisement.

iii. Abridged advertisement shall be filed with the Registrar of Companies,
Maharashtra, within 15 days of its publication.

iv. The exemption will not affect any legal rights available to any deposit
holder or any shareholder or creditor as per law enforced in respect of
recovery of any amount which has become due for repayment.

Statutory information:

The Company does not own any manufacturing facility. Hence the particulars
relating to the conservation of energy and technology absorption stipulated
in the Companies (Disclosure of Particulars in the Report of the Board of
Directorsi Rules, 1988,are not applicable. The particulars of foreign
currency expenditure and foreign currency earnings during 2008-09 are given
at Item No. 5 and No. 6 in the Notes to the Accounts. There are no
employees covered by Section 217 (2A) of the Companies Act, 1956, read with
the Companies (Particulars of Employees) Rules, 1975, as amended.

Auditors' observations:

No adverse remark or observation is given by the statutory auditors.

The Company has internal audit system which is being conducted in-house
instead of outside agency. Efforts are being continued to further
strengthen the internal audit system to make it commensurate with the size
and the nature of the business.

Systems and procedures are being upgraded to provide checks and alerts for
avoiding fraud arising out of misrepresentation given by borrower/s while
availing the housing loans.

Outlook for 2009-10:

The initiatives taken by the Company during the year are expected to
improve its operational and financial performance. Major initiatives taken
by the Company include:

* Expanding its operations by establishing new business centres.

* Increasing its distribution capacity by appointing 700 new agents.

* Supplementing its distribution channel by operationalising a new company
LICHFL Financial Services Limited.

* Streamlining the remuneration pattern of its marketing intermediaries for
improving productivity.

* Raising funds through loans at attractive rate of interest and terms.

* Maintaining good relations with lenders for reducing overall cost of
funds.

* Reviewing the existing lending rates at regular quarterly intervals in
view of the change in interest rate scenario, thereby insulating the
stakeholders of risk of interest fluctuation and passing on the benefits as
applicable to the customer.

* Strengthening its credit appraisal system to improve the loan asset
quality.

* Upgradation of its Information Technology platform to ensure prompt and
effective service to the clientele.

* Initiating brand building measures to generate general awareness and
improve the image of the Company and also increase the overall market
share.

* Swift, appropriate and competitive pricing of its existing loan schemes
to attract new customers.

Following the government's policy to provide shelter to a large number of
people, the government offers a number of incentives to boost housing and
housing finance activities. Some of these are listed below:

1. The Interim Union Budget 2008-09, continues with the tax concessions in
respect of interest paid on loan raised for buying / construction of house
property.

2. Rebate for repayment of housing loan under Section 80C of the Income-Tax
Act, 1961, of Rs. 1,00,000 is also continued for the year 2009-10.

3. Threshold limit of exemption from personal income tax in the case of all
assesses increased to Rs.1,50,000 and in the case of a woman assessee, the
threshold limit increased from Rs.1,45,000 to Rs.1,80,000; for a senior
citizens, the threshold limit increased from Rs.1,95,000 to Rs.2,25,000.
This will increase the surplus in the hands of the income tax payers and
will enable them to borrow higher quantum of loan.

4. No change in the corporate income tax, surcharge and cess rates.
Reduction in rate of service tax from 12 percent to 10 percent.

5. Income tax Act, 1961 to be amended to provide that reverse mortgage
would not amount to 'transfer'; and the stream of revenue received by the
senior citizen would not be 'income'.

6. Provisions of The Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, (SARFAESI Act) continue
which help housing finance companies to foreclose bad loans without the
intervention of the court and thereby improve NPA position.

7. NHB has lowered its interest rates on refinance to housing finance
companies.

8. The special refinance facility of Rs. 4,000 crore extended by RBI to NHB
will be on-lent by NHB to housing finance companies with the condition that
the refinance would be available at an interest of 8 percent, only for
loans below Rs. 20 lakh. The Company had availed its share of Rs. 400 crore
out of special refinance facility during the financial year 2008-09.

The management perspective about future of the Company:

In view of the huge shortage in urban housing units in the country, the
Union government has been providing continued support to make the sector
attractive, and giving it due recognition in the last three Union budgets.
It is estimated that during the Eleventh Five-Year Plan (2007-12), there is
an outlay of Rs.1,50,000 crore provided by the Union government exclusively
for housing and, therefore, the management reasonably foresees good
potential for growth in the business of the Company.

Directors' Responsibility Statement pursuant to Section 217 (2AA) of the
Companies Act, 1956:

In accordance with the provisions of Section 217 (2AA) of the Companies
Act, 1956, and based on the information provided by the management, your
Directors state that:

* In the preparation of the annul accounts, the applicable accounting
standards have been followed.

* Accounting policies were applied consistently. Reasonable and prudent
judgment and estimates were made so as to give true and fair view of the
state of affairs of the Company as at the end of 31st March 2009, and
profit of the Company for the year ended on that date.

* Proper and sufficient care has been taken for maintenance of accounting
records in accordance with the provisions of the Companies Act, 1956, for
safeguarding the assets of the Company and for preventing/detecting fraud
and other irregularities.

* The annual accounts are prepared on a going concern basis.

Human resources:

The Company aims to align HR practices with business goals, motivate people
for higher performance and build a competitive working environment.
Productive high performing employees are vital to the Company's success.
The Board values and appreciates the contribution and commitment of the
employees towards performance of your Company during the year. To create
the leadership bench and for sustainable competitive advantage, the company
inducted / promoted employees during the year. In pursuance of the Companys
commitment to develop and retain the best available talent, the Company had
organised various training programmes. for upgrading the skill and
knowledge of its employees in different operational areas. It had been
sponsoring its employees for training programmes/ seminars / conference
organised by reputed professional institutions.

Employee relations remained cordial and the work atmosphere remained
congenial during the year.

Subsidiaries and group companies:

The financial statements along with the Report of the Directors of the
Company's wholly owned subsidiaries namely LICHFL Care Homes Limited,
LICHFL Financial Services Limited UCHFL Trustee Company Private Limited and
LICHFL Asset Management Company Private Limited for the year ended 31st
March, 2009, are attached along with the statement pursuant to Section 212
of the Companies Act, 1956, with respect to the said subsidiaries. The
review of performance of the subsidiaries are as under:

1. LICHFL Care Homes Limited:

To address the crying need of housing for the senior citizens of tire
country, the Company had promoted LICHFL Care Homes Limited, to establish
and operate assisted community living centres. It launched its eco friendly
pilot project in Bangalore with cost-effective independent cottages and all
other on-campus amenities, fully structured and self-contained to address
every possible need of residents. It has library, community centre, home
theatre, meditation centre, and doctors on call and ambulance to take the
ailing to the nearest city Medicare centre - all that would make the lives
of senior citizens comfortable and satisfying. New such projects are
planned in Bhubaneshwar and Jaipur and the company is in the process of
finalising the purchase of land for a few more projects.

2. LlCHFL Financial Services Limited:

LICHFL Financial Services Limited was incorporated on 31st October, 2007
for undertaking non fund based activities like marketing of housing loans,
insurance products, credit card, mutual fund, personal loan etc. It has
become operational in 2008-09 and has already opened five offices in
Maharashtra and plans to open atleast another thirty offices during 2009-
10.

3. LICHFL Trustee Company Private Limited:

LICHFL Trustee Company Private Limited was incorporated on 5th March, 2008
for undertaking the business of trustees of venture capital trust, funds in
India and offshore fund. The Company would very soon launch its operations
- act as trustee of the fund raised through private placement, public offer
etc.

4. LICHFL Asset Management Company Private Limited:

LICHFL Asset Management Company Private Limited was incorporated on 14th
February, 2008 for undertaking the business of managing, advising,
administering venture funds, unit trust, investment trust in India as well
as abroad. The Company would launch its operations very soon.

Acknowledgments:

The Directors place on record their appreciation for the advice, guidance
and support given by the Life Insurance Corporation of India and the NHB
and all the bankers of the Company. The Directors also place on record
their sincere thanks to the Company's clientele and members for their
patronage. The Directors also record their appreciation for the dedicated
services of the employees and their contribution to the growth of the
Company.

For and on behalf of the Board

Place: Mumbai T.S. Vijayan
Date : 1st June, 2009 Chairman

Management Discussion and Analysis:

Macro-Economic & Monetary Developments in 2008-09.

Overview:

The global economic conditions deteriorated sharply during the year 2008
with several advanced economies experiencing their sharpest declines. The
associated adverse shocks spread across emerging market economies (EMEs)
particularly by the fourth quarter of the year and accentuated the
synchronised global slowdown.

Inflation conditions witnessed sharp volatility during the year as headline
inflation in major advanced economies firmed up considerably upto July'
2008, but declined sharply thereafter.

The global financial environment entered- a crisis phase in mid-September'
2008, following the growing distress among large international financial
institutions.

The knock-on effect of these unprecedented adverse global developments
became evident in the macroeconomic performance of the Indian economy, as
it experienced some loss of growth momentum with major drivers witnessing
moderation. While private consumption and investment are witnessing
moderation, the fiscal stimulus along with other committed expenditures of
the Government could, however, arrest the moderation in growth.

An important challenge in the macroeconomic and monetary policy making
during 2008-09 has been to manage the volatility emerging in respect of
several key economic indicators of the Indian economy. Notwithstanding
several challenges, particularly from the global economy, the Indian
economy remained relatively resilient, its financial institutions and
private corporate sector remained sound and solvent. Furthermore, the
macroeconomic management helped in maintaining lower volatility in both the
financial and the real sectors in India relative to several other advanced
and emerging market economies.

Output:

The global financial crisis interrupted the growth momentum of India,
despite the strong dominance of domestic sources of growth. There was clear
moderation in growth by the third quarter of 2008-09. In relation to the
agriculture sector, industry and services sectors have been affected more
by the adverse external shocks, with some contribution to their growth
deceleration arising from cyclical slowdown in certain sectors after a
prolonged phase of high growth.

The Central Statistical Organisation (CSO)'s estimates (February 2009) of
real GDP growth was placed at 5.3 percent during the third quarter of 2008-
09 as compared with 8.9 percent during the corresponding quarter of the
previous year, reflecting deceleration in growth of all its constituent
sectors.

During 2008-09, the area covered under sowing of various crops declined
marginally during the kharif season on account of moderate shortfall in
rainfall. On the other hand, the prospects for rabi production remain
favourable with area sown under rabi crops being higher than a year ago.
Total food grains production during 2008-09 was placed at 227.9 million
tonnes (Second Advanced Estimates) as compared with 230.8 million tonnes
during 2007-08.

The loss of growth momentum in the industrial sector was evident, as the
year-on-year expansion in the Index of Industrial Production was of2.8
percent during 2008-09 (April to February) as against 8.8 percent in the
corresponding period of the previous year. The manufacturing sector and the
electricity sector registered growth of 2.8 percent and 2.4 percent during
April' 2008 to February' 2009 as compared with 9.3 percent and 6.6 percent,
respectively, during the previous year period.

The infrastructure sector recorded growth of 3.0 percent during 2008-09
(April-February) down from 5.8 percent during the corresponding period of
the previous year, reflecting deceleration in all the sectors except coal.

In the context of the severity of the impact of the crisis on the real
economy of countries around the world, the growth outcome reflects the
resilience of the Indian economy.

Aggregate Demand:

The role of aggregate demand in a phase of weakening growth impulses came
to the forefront of public policy in 2008-09. The sharp contraction in
external demand as evident in falling global output, employment and global
trade - clearly affected India's export performance.

Domestic demand, in the form of both private consumption and investment
expenditure moderated particularly in the fourth quarter of 2008-09.
However, Government final consumption, rose on account of discretionary
fiscal stimulus measures and committed expenditures of the Central
Government.

During 2008-09, the combined finances of the Central and State Governments
were adversely impacted due to the economic slowdown. The Central
Government finances came under stress during 2008-09, both on the revenue
and the expenditure sides, on account of fiscal measures taken to reduce
inflationary pressures during the first half and to arrest the moderation
of economic growth in the second half of the year. As a result, the key
deficit indicators viz., revenue deficit and fiscal deficit widened to 4.4
percent and 6.0 percent, respectively, in the revised estimates for 2008-09
from 1.0 percent and 2.5 percent, respectively, in the budget estimates.

The Union Interim Budget for 2009-10 has indicated the relaxation in the
Fiscal Responsibility Budget Management targets for 2008-09 and 2009-10, in
order to ensure expansion in aggregate demand through fiscal stimulus
measures. However, as a medium-term objective, it has recognised the need
to revert to fiscal consolidation process at the earliest.

Corporate performance remained subdued during 2008-09 with the impact on
profitability being particularly adverse during the third quarter.

The rate of Gross Domestic Saving (GDS) peaked at 37.7 percent GDP in 2007-
08, mainly due to improved saving performance of the private corporate and
public sectors. The rate of Gross Domestic Capital Formation (GDCF) also
peaked to 39.1 percent of GDP in 2007-08. The saving investment balance
widened during 2007-08 reflecting continuous surge in investment activity
ahead of the saving rate. The slowing of economic activity in 2008-09 may,
however, affect both saving and investment rates of the year. (source RBI's
recent statement on macroeconomic & monetary development - 21.04.09)

Housing Finance Industry Structure & Development:

India's housing finance industry comprises of banks and housing finance
companies. They have contributed to new residential home loans at a
compounded annual growth rate (CAGR) of more than 30 percent during the
period 2002-2007. This has been due to the combined effect of a booming
economy and low interest rates. Further, steady prices and continuation of
tax concessions to selfoccupied residential home borrowers are contributors
to the growth of the industry. The average age of borrowers has declined
over the years, while the number of double income households has grown
significantly which enabled them to borrow higher loan amount due to
repaying capacity.

The scenario of unprecedented growth in housing finance, driven by low
interest rates and home prices, has begun to show signs of change in the
past two quarters. There has been a decrease in home prices during the last
one year. Earlier to that i.e., 2006 to 2008 home prices increased at a
CAGR of 30 to 40 percent against a 20 percent increment in salaries
witnessed in metros and larger cities. This had affected the buyer's
affordability. it may be mentioned here that affordability index is defined
as a ratio of property prices to annual income of an average home buyer. A
dwindling number in the affordability index indicates higher affordability,
and an increase in number shows lower affordability. In the past, the
affordability index for home buyers in the metros and large cities was
largely stable, at around 4.4 times - it was down from affordability index
of 15 seen in the mid nineties. Thus, the average home buyer spent around 4
times his net annual income for purchasing a new residential home in the 3-
4 years till March 2005. (source CRISIL report 19th February, 2009).

As the borrowing cost for banks and housing finance companies steadily
increased in line with rising interest rates in the economy in the past two
years upto September 2008, banks and housing finance companies resorted to
hike in interest rates so as to maintain their interest spreads. Interest
rates on new home loan originations have increased significantly by 200
basis points during April' 2008 to August - September' 2008. As a result a
higher proportion of monthly income was being paid out as home loan equated
monthly instalments (EMI). The combined effect of an increase in property
prices and interest rates has meant that home loan buyers, who would have
had to borrow less at an interest rate of 8.75 percent a year ago, now have
to borrow more to buy the same property due to higher property prices at
higher interest rates of 10.5 percent to 11 percent. This trend has
resulted in both lower affordability i.e., an average home at a higher
multiple of annual income, and higher debt burden (meaning that a larger
proportion of income gets spent as home loan EMI). Further, the increase in
interest rates on fresh loans to 10.5 percent to 11 percent from 8.75
percent means increase in debt burden i.e., higher instalment to income
ratio. (source CRISIL report - 19th February, 2009). However, the scenario
has taken the reverse turn in the last quarter of the financial year 2008-
09 which was evident from the higher booking of flats and sharp increase in
the disbursements.

Looking ahead: improved affordability:

It is estimated that the housing finance industry will be able to maintain
a higher growth in fresh origination of residential home loans over next
three to five years mainly due to increased affordability of the borrower
i.e. ratio of average house price to average annual income mainly due to
the falling interest loan rates and decrease in house prices.

Competition:

The Housing Finance Industry is one of the most keenly competitive segments
of the Economy, with the Banking sector having a significant presence.
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 and requirement of
the customers as also assessing the risks in the industry.

It may be mentioned here that with the decline in interest rates, LIC
Housing Finance has passed on 150 basis points rate cut to the customers
during the calendar year 2009 so far 75 basis points each on 152 January,
2009 and 12th April, 2009. Our interest rates are among the lowest in the
industry. This has helped our company in retaining customers and
maintaining high growth rates even in tough conditions. And interest rate
is just one of the factors. Transparency, hassle-free services, property
prices and customer affordability are equally important.

NHB has lowered its interest rates on refinance to housing finance
companies. Refinance for rural housing at concessional rate of 8 percent
per annum for seven years has also been provided. Its' PLR has been reduced
to 10.75 percent per annum. The refinance facility of Rs.4,000 crore
extended by RBI to NHB will be on-lent by NHB to housing finance companies
with a cap of Rs. 400 crore per housing finance company with the condition
that the refinance would be available at an interest of 8 percent, only for
loans below Rs. 20 lakh. This facility is available upto 31st March, 2010.
(excerpts taken from interview of ex-CMD of NHB).

Thus it may be reiterated in view of robust performance by LIC Housing
Finance, the Company, through its competitive pricing, transparency in
operations, wide distribution network and good customer service, has not
only been able to show a good growth in new business, but has shown an
improved retention rate, which is reflected in high growth of loan book.

Opportunities:

There are many unique characteristics of housing distinguishing it from
other goods. It is a universal necessity. Home ownership is a social goal,
bringing social status to the buyer. Housing is also a relatively expensive
asset, often soaking up a lifetime's savings. Housing properties have a
downward sloping demand curve, which means that less people would
effectively buy when prices are high and vice versa. At high prices, buyers
postpone their buying decisions and opt for rented accommodation. At law
prices, people often purchase more than one house. Disposable incomes
determine purchasing power. Government policies relating to interest rates,
mortgage subsidies, tax rebate and other taxes like stamp duty etc., also
impact the housing property market.

The housing sector is marked by a variety of taxes and regulations. These
are meant to ensure the safety of houses for occupation and to confer
rights of ownership to enable further transactions. Given that building or
acquisition of a house usually involves several intermediary agents (either
statutory like registration of various title documents or facilitating
agents such as brokers, builders or financiers), the final cost of
acquisition includes not just the price of the property that is paid to the
seller (in case the property is purchased) but also all the intervening
transaction costs.

As for the housing property market in India, the residential housing
property segment constitutes about 75 percent of the real estate market in
terms of value. Real estate development activity has shifted from metros to
their suburbs and tier-two cities. A gradual shift to tier-three cities and
rural areas is taking place. Easy availability of finance from the housing
finance companies and commercial banks at lower interest rates, increased
salaries and availability of fiscal and tax benefits are propelling the
demand for housing properties. The growth of the Information Technology
Enabled Services (ITES), industry has been a significant contributor of
housing property demand in recent years. ITES firms are moving from
traditional centres like Mumbai, Delhi, Bangalore, Hyderabad and Chennai to
the National Capital Region, Pune, Chandigarh, Jaipur, etc. in order to be
cost effective. This is resulting in not only the boom in residential
property markets but also in the institutional property markets in these
cities. There is great demand for modern office buildings and commercial
spaces in India.

Threats (bottlenecks):

* Impact of legal charges and documentation fees.

There are taxes / duties / fees payable to the state at the construction
stage. There are two aspects of the cost namely: i) monetary cost and; ii)
cost in terms of time devoted in obtaining various permissions and
clearances. The number of permissions and documentation required can be
quite large. Further, permissions have to be taken from different
departments and that too sequentially. This delays the process of housing
construction and occupation. The actual fees imposed by the government are
not necessarily high but the time taken to obtain requisite permissions is
very long, procedures cumbersome and sometimes involves extra payments to
facilitate the movement of files and getting the transaction through, is
significant vis-a-vis the statutory fees. The delays highlight the
sluggishness of the market by increasing the gap between change in demand
and the market response to it.

Thus it may be reiterated in view of robust performance by LIC Housing
Finance, the Company, through its competitive pricing, transparency in
operations, wide distribution network and good customer service, has not
only been able to show a good growth in new business, but has shown an
improved retention rate, which is reflected in high growth of loan book.

Opportunities:

There are many unique characteristics of housing distinguishing it from
other goods. It is a universal necessity. Home ownership is a social goal,
bringing social status to the buyer. Housing is also a relatively expensive
asset, often soaking up a lifetime's savings. Housing properties have a
downward sloping demand curve, which means that less people would
effectively buy when prices are high and vice versa. At high prices, buyers
postpone their buying decisions and opt for rented accommodation. At low
prices, people often purchase more than one house- Disposable incomes
determine purchasing power. Government policies relating to interest rates,
mortgage subsidies, tax rebate and other taxes like stamp duty etc., also
impact the housing property market.

The housing sector is marked by a variety of taxes and regulations. These
are meant to ensure the safety of houses for occupation and to confer
rights of ownership to enable further transactions. Given that building or
acquisition of a house usually involves several intermediary agents (either
statutory like registration of various title documents or facilitating
agents such as brokers, builders or financiers), the final cost of
acquisition includes not just the price of the property that is paid to the
seller (in case the property is purchased) but also all the intervening
transaction costs.

As for the housing property market in India, the residential housing
property segment constitutes about 75 percent of the real estate market in
terms of value. Real estate development activity has shifted from metros to
their suburbs and tier-two cities. A gradual shift to tier-three cities and
rural areas is taking place. Easy availability of finance from the housing
finance companies and commercial banks at lower interest rates, increased
salaries and availability of fiscal and tax benefits are propelling the
demand for housing properties. The growth of the Information Technology
Enabled Services (ITES), industry has been a significant contributor of
housing property demand in recent years. ITES firms are moving from
traditional centres like Mumbai, Delhi, Bangalore, Hyderabad and Chennai to
the National Capital Region, Pune, Chandigarh, Jaipur, etc. in order to be
cost effective. This is resulting in not only the boom in residential
property markets but also in the institutional property markets in these
cities. There is great demand for modern office buildings and commercial
spaces in India.

Threats (bottlenecks):

* Impact of legal charges and documentation fees

There are taxes / duties / fees payable to the state at the construction
stage. There are two aspects of the cost namely: i) monetary cost and; ii)
cost in terms of time devoted in obtaining various permissions and
clearances. The number of permissions and documentation required can be
quite large. Further, permissions have to be taken from different
departments and that too sequentially. This delays the process of housing
construction and occupation. The actual fees imposed by the government are
not necessarily high but the time taken to obtain requisite permissions is
very long, procedures cumbersome and sometimes involves extra payments to
facilitate the movement of files and getting the transaction through, is
significant vis-a-vis the statutory fees. The delays highlight the
sluggishness of the market by increasing the gap between change in demand
and the market response to it.

Thus it may be reiterated in view of robust performance by LIC Housing
Finance, the Company, through its competitive pricing, transparency in
operations, wide distribution network and good customer service, has not
only been able to show a good growth in new business, but has shown an
improved retention rate, which is reflected in high growth of loan book.

Opportunities:

There are many unique characteristics of housing distinguishing it from
other goods. It is a universal necessity. Home ownership is a social goal,
bringing social status to the buyer. Housing is also a relatively expensive
asset, often soaking up a lifetime's savings. Housing properties have a
downward sloping demand curve, which means that less people would
effectively buy when prices are high and vice versa. At high prices, buyers
postpone their buying decisions and opt for rented accommodation. At law
prices, people often purchase more than one house. Disposable incomes
determine purchasing power. Govemment policies relating to interest rates,
mortgage subsidies, tax rebate and other taxes like stamp duty etc., also
impact the housing property market.

The housing sector is marked by a variety of taxes and regulations. These
are meant to ensure the safety of houses for occupation and to confer
rights of ownership to enable further transactions. Given that building or
acquisition of a house usually involves several intermediary agents (either
statutory like registration of various title documents or facilitating
agents such as brokers, builders or financiers), the final cost of
acquisition includes not just the price of the property that is paid to the
seller (in case the property is purchased) but also all the intervening
transaction costs.

As for the housing property market in India, the residential housing
property segment constitutes about 75 percent of the real estate market in
terms of value. Real estate

* Impact of stamp duties:

(i) High stamp duties propel the buyers to either under-record the value of
transaction or not record it altogether. As a result, the government loses
revenue. However, implication for the land/housing market is the incomplete
knowledge about the state of the market.

(ii) Many sales take place on power of attorney basis. Power of attorney
does not confer ownership right on the person holding power of attorney.
This leads to deficiency in land records.

* Impact of property tax:

Most local authorities still base their property tax on ratable value. The
ratable value is calculated as a percentage of the cost of construction and
the price of land at the commencement of construction. In a scenario of
continuously rising land prices, newly constructed properties would pay a
much higher property tax than the older properties - even when the ,market
value of the two might be the same. Even in the unit area system of
property taxation, older properties pay lower tax than the new properties,
age being a variable in determining the tax. This would not only distort
the market, but would also have a negative effect on investment in new
housing.

Taxes, legal charges and legislative policies have been introduced at
various points of time with varying objectives, at times working at cross
purposes, nullifying to a large extent the net impact on the housing
sector. The prime example of such a situation is the combination of
policies of Rent Control Act (which freezes rents at low levels); property
tax (with higher rates of property tax on rental properties) and fiscal
policies which boost investment in rental housing through tax deductions.
The net effect of all these policies is low or at times negligible
investment in rental housing. On one hand, the government loses revenue on
account of tax concessions, while other policies neglect the intended
outcomes. Similarly, legislations like ULCRA have led to phenomenal
increase in land prices, but excluding large sections of the population
from formal housing markets or forcing them to opt for inferior housing.
The huge increase in the price of land has aggravated the housing problem.

Segment wise Reporting:

Segment has been identified in line with the Accounting Standard on segment
reporting, taking into account the organization 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:

The property market has undergone a significant correction. As per report
from PropEquity, a firm that maintains data on real estate, in the first
quarter of the financial year 2008-09, the Mumbai market saw an average
correction of 42.84 percent compared to the corresponding quarter last
year. Prices in other major metros too have seen significant correction in
the past six months, according to the PropEquity report. These include
Gurgaon (24 percent correction), Chennai (13 percent correction) and
Hyderabad (10 percent correction) for the same time period.

There has been a decline in the average age of borrowers over the past few
years; this allows banks to sanction higher loan amounts as the borrower
has a longer earning period over which the loan can be amortised.
Borrowers' salaries have also increased at an average of 20 percent over
the past 2-3 years. These factors have significantly enhanced borrowers'
affordability, reflecting the comfortable growth rate of the housing
finance sector.

Property in the metros and other major cities are increasingly being bought
by households with two or more earning members. Over the near term, gains
from capital markets and large bonuses and other monetary benefits offered
to employees in PSUs and financial services will also support the demand
for second and third homes.

The growth drivers will continue to increase demand for self-occupied
residential housing, revival of economy will certainly lead to a steady
increase in monthly incomes across key sectors and rising proportion of
double income applicants and good availability of financing options are
stimulant for growth of the housing sector. All these factors will further
boost the impact of increased affordability, providing for the sector's
steady and comfortable growth.

Risks and concerns:

LIC Housing Finance is exposed to risks such as liquidity risk, interest
rate risk, forex risk, credit risk and operational risk which are inherent
in the financial intermediation business. The risk management process of
the Company will proactively manage the uncertainty and volatility in the
net interest income of the Company by prescribing maximum exposure
limits. The objective can be summarized as below:

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

* Create a stable planning environment by ensuring that the business plan

is not adversely affected during the financial year due to any adverse
liquidity situations, interest rate and currency fluctuations by using
various tools such as time-bucket analysis, liquidity statements, duration
gap and forex exposure reports;

* Minimise the credit risk by adopting scientific techniques for credit
evaluation, prescribing exposure limits, portfolio composition and periodic
review of the portfolio;

* Minimise the operational risk by strengthening the internal control
procedures and making systemic corrections to address the deficiencies
reported by the Internal Auditors.

Internal Control Systems & their Adequacy:

The Company has internal audit system which is more 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 auditor's
recommendations are seriously considered for improving systems and
procedures. The company's 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 loans has improved during the year.

Discussion of Financial Performance with respect to Operational
Performance:

Financial / Fund Management:-

The Company's borrowing is planned taking into consideration ALM gaps,
interest rate mismatches. But, this depends on 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 Company is selectively entering into
derivative contracts with sole objective of managing risk associated with
the interest rate movement, balance sheet management, converting fixed /
floating coupon of the underlying liabilities, switching from the existing
benchmark to favourable benchmark so as to prevent cost escalation on
account of unfavourable benchmark and also as a tool to manage the asset
liability mismatch.

As derivative transactions are linked with risk, the status of each and
every transaction is regularly monitored and the Company has unwound some
of the transactions at the appropriate time to mitigate the risk associated
with it. During the financial year 2008-09, the Company has unwound 3 swaps
and booked profit of Rs. 6.38 crore into money.

The prime lending rate of the Company is regularly reviewed and revised as
it is a benchmark for asset pricing. Since more than 95 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 debt oriented mutual fund schemes, fixed deposits, certificate of
deposits as per the board approved policy with an objective of reducing the
negative carry to the extent possible.

The composition of outstanding borrowings as on 31st March, 2009 & the
ratings assigned by rating agencies is as under:

Particulars percent Rating
to total
Borrowing

Term loans from Scheduled 31.93 'AAA/Stable'/ P1+ by
Banks CRISIL

Refinances from NHB 5.81 Not Applicable

Term loans from LIC of India 5.27 Not Applicable

Non Convertible Debentures 49.58 'AAA/Stable' by CRISIL /
'CAREAAA' by CARE

Subordinated Bonds 3.94 'AAA/ Stable' by CRISIL

Public Deposit 0.64 'FAAA'-by CRISIL

Commercial Paper 2.32 P1 by CRISIL

Others 0.51 Not Applicable

Performance / Operation Highlights:

During the year, the Company sanctioned Rs. 10,898 crore and disbursed
Rs.8,762 crore registering a growth of 26 percent and 24 percent
respectively. For the year ended March' 2009, the Company's total income
from operations was Rs. 2880 crore as against Rs. 2146 crore during the
same period last year. Net profit for year ended March' 2009 zoomed to
Rs.531.62 crore when compared to Rs. 387.19 crore in the corresponding
period last year, thereby achieving a growth of 37 percent. The outstanding
mortgage portfolio as March' 2009 was Rs. 27,679 crore as against Rs.21,936
crore on March' 2008 thus registering a growth of 26 percent.

Marketing:

LIC Housing Finance is one of the largest housing finance companies in
India having one of the widest networks of 130 marketing offices as on 31st
March, 2009 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 tool.

Recovery Management:

The gross net performing assets (NPA) as on 31st March, 2009 stood at
Rs.297 crore as against Rs. 373 as on 31st March, 2008 registering a
reduction of 20 percent. The gross NPA of the company stood at 1.07 percent
as on 31st March, 2009 as against 1.70 percent as on 31st March, 2008. Net
NPAs were 0.21 percent as against 0.64 percent for the corresponding dates.
The provision cover on the NPAs stood at 81 percent as on 31st March,'

2009. The net interest margin for the whole year stood at 2.95 percent.

Human Resources Development:

The Company has a dedicated team of 1160 hands 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 keeping in
view the market requirement from time to time. 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
motivate them to perform better.

Loan assets per empbyee as at 31st March, 2009 is Rs. 21 crore and net
profit per employee as at 31st March, 2009 is Rs. 41 lakh.

Conclusion with Caution:

Statements in this report, describing the Company's. objectives,
projections, estimations, expectations are 'forward looking statements'
within the meaning of applicable securities laws 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.