Annual Report - LIC Housing Finance - 2010-11

LIC HOUSING FINANCE LIMITED

ANNUAL REPORT 2010-2011

DIRECTOR'S REPORT

To
The members of
LIC Housing Finance Limited.

The Directors have great pleasure in presenting the Twenty Second Annual
Report together with the audited accounts for the year ended 31st March,
2011.

Financial results:

The Profit and Loss Account shows a profit before tax of Rs.1294.16 crore
after writing off bad debts of Rs.0.63 crore and considering the amount
recovered of Rs.6.69 crore out of earlier write off and taking into account
all expenses, including depreciation and prior period items. The provision
for income tax (net of deferred tax) is Rs.319.67 crore and the profit
after tax for the year is Rs. 974.49 crore.

Taking into account the balance of Rs.361.40 crore being brought forward
from the previous year, the distributable profit is Rs.1335.89 crore.



(Rs. in crore)
For the For the
year ended year ended
31st March, 2011 31st March, 2010
Appropriations:
Special reserve 262.00 160.00
General reserve 350.00 200.00
Proposed dividend 166.13 142.39
Tax on dividend 26.93 24.20
Balance carried forward to next year 530.83 361.41
1335.89 888.00
Dividend:

Considering the good performance during the year 2010-11, your Directors
have recommended a dividend of Rs.3.5 per Equity Share of Rs.2/- each
(175%), for the year ended under review. The total dividend outgo for the
current year would amount to Rs.193.05 crore including Dividend
Distribution Tax of Rs.26.93 crore, as against Rs166.59 crore including
dividend distribution tax of Rs.24.20 crore, for the previous year.

Performance

Income and profit

Profit before tax and after tax stood at Rs.1294.16 crore and Rs.974.49
crore as against Rs.911.27 crore and Rs.662.18 crore, respectively, for the
previous year. Profit before tax increased by 42.02% over the previous year
while profit after tax increased by 47.16% as compared to that of previous
year.

The Company earned a total income of Rs.4868.72 crore, registering an
increase of 40.34%. The percentage of administrative expenses to the
housing loans, which was 0.48% in the previous year, has decreased to 0.45%
during the year 2010-11.

Lending operations

Individual loans:

The main thrust continues on individual loans with a disbursement growth of
41% during the year. However, project loans were also given due weightage
resulting in an overall disbursement growth of 34% over previous year.
During the year, the Company sanctioned 1,32,707 individual Housing loans
for Rs.20,227.35 crore and disbursed 1,61,466 loans for Rs.17,512.36 crore.
Housing Loan to Individual i.e., retail loans constitute 89.49% of the
total sanctions and 87.95% of the total disbursements for the year 2010-11
compared to the last year's figure of 78.43% and 83.81% respectively. The
gross retail loan portfolio grew by over 37.52% from Rs.34,031.64 crore as
on 31st March, 2010 to Rs.46,800.27 crore as on 31st March, 2011.

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

Amount sanctioned: Rs.81,317.35 crore

Amount disbursed: Rs.72,957.36 crore

More than 12,00,000 customers have been serviced by the Company up to 31st
March, 2011 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 after proper analysis and sanction by the
Executive Committee. The project loans sanctioned and disbursed by the
Company during the year were Rs.2,375.57 crore and Rs.2,400.03 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 Non-Performing Assets (NPA) as on 31st March, 2011 was
Rs.241.96 crores, which is equivalent to 0.52% of the housing loan
portfolio of the Company, as against Rs.263.15 crore i.e. 0.69% of the
housing loan portfolio as on 31st March, 2010. The net NPA as on 31st March
2011 is reduced to Rs.15 crore i.e. 0.03% of the housing loan portfolio
vis-a-vis Rs.46.36 crore i.e. 0.12% of the housing loan portfolio as on
31st March, 2010. The total cumulative provision towards housing loan as on
31st March, 2011 is Rs.483.73 crore as against Rs.216.79 crore in the
previous year. During the year, the Company has written off Rs.0.63 crore
of housing loan portfolio as against Rs.0.77 crore during the previous
year.

Fund raising

The Company raised funds aggregating to Rs.18,873.87 crore through term
loans from banks, Non-Convertible Debentures (NCD), upper tier II Bonds,
commercial paper, NHB refinance and Public Deposit. The Company's NCD &
Upper Tier II subordinate Bond issue and bank loans were rated AAA/Stable'
and Public Deposit was rated as FAAA/STABLE by CRISIL.

Sub-Division of Equity Shares

With a view to increase the liquidity of the shares in the stock market and
to make it more affordable to the retail investors at large and also to
have better comparability with share prices of other companies, the Company
after taking members' consent through postal ballot, sub-divided the
nominal face value of existing one equity share of Rs.10/- into 5 equity
shares of Rs.2/- each.

Auditors

Statutory auditors M/s. Chokshi & Chokshi, Chartered Accountants, Mumbai
and M/s. Shah Gupta & Co., Chartered Accountants, Mumbai retire at the
conclusion of the forthcoming Annual General Meeting (AGM). 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(1B) of the Companies Act, 1956.

The Board of Directors recommend appointment of M/s. Chokshi & Chokshi,
Chartered Accountants, Mumbai and M/s. Shah Gupta & Co., Chartered
Accountants, Mumbai, as Joint Statutory Auditors of the Company for
financial year 2011-12.

Directors

Shri Dhananjay Mungale, Director and Shri S. Ravi, Director retire by
rotation at the ensuing AGM and are eligible for reappointment.

The Directors recommend their reappointment / appointment.

Corporate Governance

A certificate from the Joint Statutory Auditors of the Company regarding
compliance of the conditions of Corporate Governance as stipulated under
Clause 49 of the Listing Agreement with Stock Exchanges 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.

Management Discussion and Analysis Report

Management Discussion and Analysis Report for the year under review, as
stipulated under clause 49 of the Listing Agreement with Stock Exchanges is
presented in a separate section forming part of the Annual Report.

Regulatory Compliance

The Company has been following guidelines, circulars and directions issued
by National Housing Bank (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 14.88% (as against 12%
prescribed by the NHB) as on 31st March, 2011 after considering the loan to
value ratio for deciding risk weightage.

The Company also has been following directions / guidelines / circulars
issued by SEBI from time to time applicable to the listed company.

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, 2011, 12,444 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, 2011, the outstanding amount on account of public deposits
was Rs.261.20 crore. 97 deposits amounting to Rs.15.41 crore which were due
for repayment on or before 31st March, 2011 were not claimed by the
depositors till that date. As on the date of this report, 30 deposits
amounting to Rs.9.62 crore thereof have been claimed and paid. The interest
due on the public deposits has been paid on time.

The Company through Registrar & Transfer Agent namely M/s. Link Intime
India Pvt. Ltd. has been sending reminders on periodical basis to the
depositors who have not claimed the maturity proceeds.

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
Directors) Rules, 1988, are not applicable. The particulars of foreign
currency expenditure and foreign currency earnings during 2010-11 are given
at item No.16 and No.17 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 an in house internal audit system for back offices
conducted by the audit department personnel and a reputed firm of Chartered
Accountants as internal auditor for Corporate Office. Continuous efforts
are made to further strengthen the internal audit system to make it
commensurate with the size and the nature of business.

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

Outlook for 2011-12

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 by appointing new agents and activising more
agents.

* Incentivising and motivating the marketing intermediaries systematically
for improving productivity.

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

* Strengthening and upgrading the existing Risk Management System.

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

* Steps to improve the recovery ratio and ensuring lowest NPA level.
Improving receivable management through support system.

* 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.

* Timely review of credit appraisal system to improve the loan asset
quality.

* Initiating steps to upgrade 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.

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.
The government said the country needs investment to the tune of
Rs.3,61,000/- crore to meet the shortage of nearly 25 million housing
units. There was approximately housing shortage of 24.7 million dwelling
units at the beginning of the 11th five year plan. The investment
requirements would be close to Rs.3,61,000/- crore for overcoming this
massive housing shortage 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 annual accounts, the applicable accounting
standards have been followed.

* Accounting policies were applied consistently. Reasonable and prudent
judgement 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, 2011 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
Company's 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. Apart from
fixed salaries and perquisites, we also have in place performance-linked
incentives which reward outstanding performers that meet certain
performance targets. It has 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 Consolidated financial statements incorporating the results of the
Company's wholly owned subsidiaries namely LICHFL Care Homes Limited,
LICHFL Financial Services Limited, LICHFL Trustee Company Private Limited
and LICHFL Asset Management Company Limited for the year ended 31st March,
2011, 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:

LICHFL Care Homes Limited was incorporated on 11th September, 2001. To
address the crying need of housing for the senior citizens of the country,
the Company had promoted LICHFL Care Homes Limited, to establish and
operate assisted community living centres.

The Company is on the threshold of commencing its construction and also
sale of flats at Bhubaneswar - the foundation stone for which has been laid
by the Chairman of LIC of India.

The tendering process for construction at Bhubaneswar project having been
completed, the environmental clearance obtained and the market survey for
sale revealing a healthy outlook, the company is poised for turnaround in
the current year 2011-12.

The Company is also in the process of getting the land converted for land
purchased at Jaipur and start phase II of Bangalore project besides
exploring the possibility of tie-ups for joint ventures / joint
development.

2. LICHFL 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 March 2009 and has already opened 33 offices across
the country. The Company earned profit after tax Rs.1.85 crore and declared
second dividend @10% for F.Y. 2010-11. The Company during the year under
review got 37 offices operational in various parts of the country. The
initiatives taken by the Company during the year are expected to improve
its operational and financial performance. The Company has plans to expand
in new locations and increase its marketing team strength. There is good
potential for growth of business in home loan and insurance sector.
Distribution of these products is expected to generate good revenue for the
Company. The Company has plans to expand its lines of business and would
evaluate right opportunities for growth, profitability and value addition
to shareholders.

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.

The Company has been appointed as trustee for LICHFL Fund on 27th August,
2010. The Company has appointed LICHFL Asset Management Company Limited as
Investment Manager on 27th August, 2010 and it is reported that the Fund is
registered with SEBI vide Registration Certificate No.IN/VCF/10-11/0193.
The Investment Manager has commenced the marketing of the fund 'LICHFL
Urban Development Fund' in February 2011 and it is expected that fund would
achieve closure around June, 2011.

4. LICHFL Asset Management Company Limited:

LICHFL Asset Management Company 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 has been appointed as the Investment Manager by LICHFL Trustee
Company Private Limited on 27th August, 2010 and has since obtained SEBI
registration of Fund and started marketing of LICHFL Urban Development Fund
initially to Banks and Financial Institutions in the first stage. Marketing
to others investors, HNI will commence with the appointment of Distributors
for this purpose which is expected by May 2011. The response from Banks and
some insurance companies has been encouraging and their commitments are
expected shortly and closure of the fund is expected by end of June 2011.
As banks and housing finance companies reduce their exposure to real estate
sector due to tightening of RBI norms, developers have started to reach
Private Equity Investors for funding. Budget for the year 2011-12 is also
encouraging for affordable housing segment.

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
Chairman
Mumbai
28th April, 2011

MANAGEMENT DISCUSSION AND ANALYSIS

MACRO-ECONOMIC & MONETARY DEVELOPMENTS IN 2010-11.

GLOBAL ECONOMIC CONDITIONS

Global economic activity in the second half of 2010 turned out to be
stronger than expected. However, the uneven pace of growth across regions
and uncertainty about the durability of recovery in the advanced economies
persist. The positive sentiments arising from the growth momentum in major
advanced economies was neutralised by the persistence of high unemployment
and downside risks from weak housing markets. The combination of these
developments resulted in additional policy stimulus. While in the US, the
second dose of quantitative easing (QE2) was followed up with extension of
fiscal stimulus, other advanced economies faced a difficult choice between
delaying fiscal exit to support growth and early exit to contain the
sovereign debt concerns. The risk of sovereign debt crisis spreading from
the Euro-zone periphery has resurfaced in recent months.

Emerging Market Economies (EMEs), which had recovered ahead of the advanced
economies, exhibited robust growth momentum driven by domestic demand.
Inflation and overheating risks have, however, prompted monetary tightening
at varied pace. Commodity prices also firmed up, largely reflecting easy
liquidity conditions in advanced economies, as well as growing demand
pressures in EMEs.

INDIAN ECONOMY: DEVELOPMENTS AND OUTLOOK OUTPUT

The robust GDP growth in the first half of 2010-11 suggests that the
economy has returned to its earlier high growth path. Satisfactory kharif
production and higher rabi sowing point to stronger contribution of the
agriculture sector to overall GDP growth in 2010-11. Industrial production
has exhibited near double digit growth but the significant volatility adds
uncertainty to the outlook. Lead indicators of the services sector show
sustained buoyancy. In certain sectors, particularly non-cereal food items,
however, the supply response to market signals in the form of higher prices
has been weak, thereby exerting upward pressures on inflation. Core
infrastructure sector has grown slower than both the overall GDP and the
industrial sector, suggesting that it remains a constraint to higher
growth. Capacity utilisation levels have generally remained steady.

AGGREGATE DEMAND

Growth in private consumption expenditure, after remaining subdued over
several quarters, exhibited significant acceleration in the first half of
2010-11. As per trends in the growth of gross fixed capital formation, the
recovery in investment demand that had started in the last quarter of the
previous year, has consolidated and remained strong. Fiscal trends during
the year to date suggest that the fiscal deficit could remain within the
budgeted level, but high growth in capital expenditure would add to the
overall growth momentum from private demand. Lead indicators of private
demand, such as corporate sales, capital expenditure plans, non-oil imports
and credit demand point to sustained momentum in growth. Weak demand

conditions in advanced economies have not affected the domestic growth
momentum much in 2010-11 so far, even though global uncertainty remains a
downside risk to the growth process.

EXTERNAL SECTOR DEVELOPMENTS

As expected, the current account deficit widened significantly in the
second quarter of the year. Even as exports expanded faster than imports,
the trade deficit widened. From the current account perspective, the
cushion to a widening trade deficit from net invisibles declined. While
higher net capital inflows did not pose any immediate challenge, unlike in
many other EMEs, because of the widening deficit in the current account,
the shift in the composition of capital flows, particularly the sharp jump
in portfolio inflows and significant decline in net FDI inflows raises
questions about the sustainability of the external sector in the medium-
term

MONETARY AND LIQUIDITY CONDITIONS

The liquidity conditions had started to tighten by mid-2010 reflecting the
normalisation of monetary policy and large increase in Government's surplus
balances with the Reserve Bank due to revenues generated through 3G/BWA
spectrum auctions. While sustained deficit liquidity conditions were
consistent with the anti-inflationary monetary policy stance of the Reserve
Bank during the year, the magnitude of the deficit widened significantly in
the terminal months of 2010 to the point of posing concerns for growth. The
severe tightness in liquidity was caused by both frictional factors
associated with unusually large surplus balances of the government and
structural factors as reflected in stronger credit growth relative to
deposit growth as well as higher demand for currency.

The growth in non-food credit has remained above the indicative trajectory
of the Reserve Bank since October 2010, reflecting growing credit demand
associated with robust economic growth. Flow of financing from non-banking
sources lagged behind the incremental flow of bank credit. Money supply
growth, however, was slightly below the projected level on account of
sluggish deposit growth as well as some moderation in money multiplier
resulting from higher growth in currency.

FINANCIAL MARKETS

The global financial markets continued to reflect the uncertainty about
sovereign debt sustainability and the changing growth outlook of advanced
economies. Markets in EMEs, including India, were influenced more by the
domestic growth outlook, normalisation of monetary policy, corporate
earnings prospects and the portfolio capital inflows that entailed a
potential source of pressure on exchange rate and asset prices. In India,
reflecting the tight liquidity conditions, interest rates in the money
market, particularly in CBLO, T-bill, CP and CD segments hardened
significantly. Recognising the structural imbalance between deposit growth
and credit growth as well as the underlying signals of the anti-
inflationary monetary policy stance, banks raised their deposit rates to
improve deposit mobilisation while also raising the lending rates, which
could be expected to moderate the aggregate demand, going forward. Asset
prices generally remained firm, notwithstanding some correction in equity
prices that partly reflected expectations about monetary policy actions
associated with the abrupt reversal in the inflation path. The pace of
increase in housing prices varied across cities. The Reserve Bank has
recently used macroprudential measures to restrain the role of excessive
leverage in asset price build-up.

INFLATION SITUATION

WPI inflation had witnessed modest softening during August- November 2010
after remaining in double digits for five consecutive months. In December
2010, however, renewed price pressures surfaced, driven by factors that
were largely unanticipated. Food inflation exhibited a strong bound, led by
onion and other vegetables, largely due to unseasonal rains and supply
chain frictions. The Reserve Bank has already recognised the upside risks
to inflation from higher global commodity prices, but this hardening
happened sooner than anticipated. The pace of moderation in WPI inflation
over a few months prior to December 2010 was also weak due to persistent
elevated levels of food and fuel inflation, which are largely insensitive
to anti-inflationary monetary policy measures. The expected significant
softening of food inflation after a normal monsoon did not materialise,
reflecting the impact of growing structural imbalances in certain sectors,
particularly non-cereal food items. While the high growth in per capita
income and the shift in the composition of demand have led to stronger
growth in demand for items such as vegetables, fruits, pulses, eggs and
meat, the supply response has generally lagged behind. The impact of this
imbalance on food inflation has been magnified by rigidities in the supply
chain management. Non-food manufactured inflation, which is a broad
indicator of generalised and demand side price pressures, has remained
stable in the range of 5.1 to 5.9 per cent so far in the year. Besides the
expected better supply response in non-food manufactured items to price
signals and the pressure of imports, normalisation of the policy rate would
have contributed to this trend. High month-over-month (annualised)
inflation in recent months as also the rising price index of the non-food
manufactured group, however, suggest the combined impact of both input
costs and demand pressures. The factors underlying the inflation process
pose a major challenge for monetary policy since the impact of
antiinflationary monetary policy measures on inflation expectations and
core inflation could be weakened considerably by structural factors,
particularly in an environment of firming global commodity prices.

GROWTH AND INFLATION OUTLOOK

The return to the high growth path in 2010-11 materialised despite an
uncertain global environment. Though the overall global outlook suggests
some moderation in growth in both advanced and emerging economies in 2011,
downside risks to India's growth momentum have receded considerably. The
inflation outlook, which is being conditioned by both demand side and
supply side factors, suggests slow paced moderation in inflation, with the
possibility of rigidity at above the comfort level in the near-term.
Recognising the need to firmly anchor inflationary expectations and contain
inflation, the Reserve Bank has raised policy rates six times since the
beginning of March 2010. As a result, along with the impact of the shift in
the LAF mode from reverse repo to repo, the effective increase in policy
rate has been 300 basis points.

Going forward, the Reserve Bank's monetary policy measures would have to be
guided by not only the anti-inflationary thrust that is necessary in an
environment of persistent high inflation, but also their expected
effectiveness in a condition of entrenched supply side pressures on
inflation. Oil prices moving permanently to a higher trading range looks
more probable now. Moreover, sectoral imbalances in several noncereal food
items that reflect weak supply side adjustments in response to rising
demand could persist in the near-term, and higher policy rates may not
ensure the desirable degree of demand adjustment, even with the usual
transmission lags, given the nature of the items in which the imbalances
are growing. Aggregate demand side pressures on inflation, however, would
have to be contained in a forward looking manner. Recent trends in sales
growth and earnings of corporates point to their improving pricing power.
MGNREGS, in turn, has the potential to raise the wage bargaining power even
in the unorganised sector, particularly in the agriculture and construction
sectors, besides raising rural demand at a faster pace relative to
production of cereals and non-cereal food items. The demand side risks are
also visible in the growing size of the current account deficit, and high
inflation differential is a potential factor for eroding export
competitiveness.

Thus, given the fact that elevated inflation and current account deficit
are the two major macroeconomic concerns at the current juncture, demand
management measures need to acquire centre stage in the near-term, with
structural measures in the medium-run addressing sectoral imbalances and
export competitiveness. The anti-inflationary focus of monetary policy
would have to continue, recognising though the limits of monetary policy in
dealing with structural pressures on inflation, and the need for forward
looking response to demand side pressures. Since a lower inflation regime
is essential for sustainable high growth, containing inflation becomes the
dominant policy objective in the current environment.

(source RBI's statement on macroeconomic & monetary development -
24.01.2011)

HOUSING FINANCE INDUSTRY STRUCTURE & DEVELOPMENT

India's housing finance industry comprises banks and housing finance
companies. Disbursements have improved in the financial year 2010-11 as
compared to lukewarm previous financial year. Given India's rapid
population growth, increasing urbanisation and rising affordability the
housing finance market will continue to grow. However, given increasing
competition in the sector from banks, Housing Finance Companies which have
access to low cost funds, better operational and credit cost control, and
better service quality will continue to grow.

As the year 2010 has ended, the real estate sector at large seemed to have
witnessed significant recovery during the year. Improved demand for housing
space during 2010 was witnessed across most residential markets mainly
driven by economic recovery and positive market sentiments, which also
resulted in improvement in supply during the year with the launch of new
residential projects.

The values across most micro-markets witnessed a strong upward movement
when compared to prices last year. Capital values in select micro markets
in the high end segment appreciated by over 30% annually in comparison to
the mid segment markets which witnessed appreciation between 8% to 14% in
these cities. After witnessing a slowdown in demand and construction
activity for most part of 2009, Mumbai's residential sector witnessed an
improvement in demand in 2010. When compared to values a year ago, Mumbai
has witnessed the strongest recovery (in the range of 5% to 15%, as per
Cushman & Wakefield India report) in most mid range macro markets. The
strongest gains were witnessed in Far North micro market of Andheri (W),
Malad, Goregaon due to large end user and investor demand for mid range
housing segment. Despite the buoyant demand and strengthening economic
sentiments, values are expected to correct in most micro markets especially
Central Mumbai, North and Far North Mumbai owing to large upcoming supply.
The rental market during the year also witnessed significant fluctuations.

According to Cushman & Wakefield India, among the major markets, NCR
witnessed strong signs of recovery when compared to markets like Bangalore
and Hyderabad which followed a relatively steady recovery pattern. In 2011,
the overall residential market across major cities of India is expected to
continue to witness growth in demand. Despite the increasing demand and
improving market sentiments, the large available supply is expected to keep
a check on the capital values across cities. Bangalore, Chennai and
Hyderabad which are largely driven by end user demand supported by growing
IT/ ITES and automobile sector are expected to remain strong in 2011
whereas markets which have witnessed strong recovery with capital values
reaching high prices points and significant supply, market like Gurgaon,
Mumbai and Pune are likely to see some correction in the coming year.

Regulatory pressures are likely to impact small developers due to tough
financing in the future which may result in dumping stocks by them at lower
price and therefore putting little pressure on big developers too.

CRISIL Research estimates housing finance disbursements to have grown by 16
percent in 2010-11 to Rs.1,67,200 crore as compared with Rs.1,44,100 crore
in 2009-10. The following factors have supported a healthy growth in 2010-
11:

a) Aggressive interest rate schemes launched by public sector banks led to
intense competition in the industry thereby benefiting the consumer;

b) Increase in balance transfer cases: Lower interest rates also increased
the incidence of balance transfer cases in 2010-11, thereby contributing
significantly towards disbursement growth.

c) Rise in average ticket size: The second half of 2010-11 saw property
prices rise in major markets (mainly Mumbai and Delhi), alongwith new
project launches with larger area by many builders. This led to an overall
increase of 8% to 9% in average ticket size of loans and contributed
towards value growth in 2010-11.

Housing constitutes over 70% of the real estate sector and is amongst the
three basic necessities of life viz. food, clothing and shelter. However,
it is largely ignored.

With increase in urbanisation and improving affordability, the demand for
mortgage loans will continue to grow at a healthy pace. Further, steady
prices and continuation of tax concessions to self-occupied 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 higher repaying capacity.

Looking ahead:

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 borrowers
i.e. mainly due to demand for affordable housing projects.

When the recession hit the real estate sector in 2008, it also saw the
emergence of a new buzz word AFFORDABILITY'. This was to be the key for
the revival of the real estate sector especially in the residential sector.
This was because it was felt that demand for affordable homes was recession
proof and would lead to faster turnaround of stock.

The spurt in sales immediately after the recession when prices reached an
affordable' level, should serve as a good indication to urge builders on,
in this direction.

Here is a message for some developers-the more affordability you make it,
the more you will sell, and the more you will gain in profits. It is a
straight business equation that benefits every one - the developers - with
increased sales and profits, the common man - with a more reasonably priced
home, and the government with the satisfaction that more of its citizens
are getting better homes.

The satisfactory monsoons this year indicate happier times for the people
and this festive season, especially, appears to be marked with great
optimism. This is a good time for the Government, the developers and the
common man to form a healthy triangle to enable a healthy growth of this
sector. It is an opportune moment for the buyers to go house hunting as the
developers are more generous at this time, with their offer of goodies
including heavy discounts, attractive freebies, and financial incentives.

The onset of the festivities is therefore the most auspicious moment to put
affordability' back to where it belong - right in the middle of all
action. Any sudden rise in prices will only serve to derail the recovery
process of the sector which is still looming under a financial crisis.
Certain Stray Sales' have created panic among the common man leading to a
fear that property prices may have risen to unaffordable levels. Even the
RBI expressed concern over the overheating of property prices in Mumbai and
Delhi in its report on the macro - economy and monetary developments in
2009-10.

This is the moment when the term affordability' could be launched once
again with renewed vigor since the developers are keen to SELL' and the
buyer is keen to BUY'.

In India, festival has been closely associated with taking important
decision and the auspicious occasion of Gudi Padwa is one such time. In
Maharashtra, Gudi Padwa is day chosen to start any thing new or make an
important investment, especially in property, gold and silver. It also
marks the end of one harvest and the beginning of a new one, signifying the
start of the festive period, is ripe as people want to buy during
auspicious times. Many developers take the opportunity to announce new
projects on this occasion and also offer attractive schemes.

Gudi Padwa is considered an auspicious day as it signifies new beginning
and is usually earmarked for major purchase decisions hence many builders
target this festival to launch their projects in keeping with the local
sentiments during this period. This year, the festival of Gudi Padwa
(celebrated on 4th April, 2011) is well timed, in terms of policy decisions
by the national and state government falling soon after the end of the
financial year. This may be a catalyst for some end users to reconsider
their purchase decisions. There is widespread optimism about this festival
marking the turning point for realty to make gains based on end user
demand.

Demand also comes up with attractive offers during festivals, which give
further boost to this sentiment. Even though buyers are in the wait and
watch mode, festival such as Gudi Padwa could prove to be the turning point
as there are many bookings around this festival. Indians are traditional by
nature and even younger buyers who are influenced by the older generation
do believe in this being a good time to buy. There are new launches of
projects as everyone considers this an auspicious time to buy. A lot of
developers tend to offer sops, freebies or discounts to prospective buyers,
booking a property around this time.

There is no doubt that the second homes wave is here to stay. The ever
growing size of homes buyers in the country is poised to drive the
phenomenon well into the future. In fact, there is now an established trend
of home buyers looking at options beyond the ordinary for their second home
purchasers both by geography as well as by residence formats. Looking
ahead, it is anticipated that the depth and size of the second home market
would improve further owing to the sophistication of buyers as well as pro-
activeness of developers to meet burgeoning demand for such products across
the country.

Affordable housing and integrated township projects should be given
infrastructure status. By providing this status, these projects will have a
better access to funds.

It is about time the Government introduced a single window clearance system
coupled with a rationalized tax system. At present, statutory approvals
have to be obtained through multiple procedures leading to delays at every
approval level, thereby translating to further increase in prices. Surplus
tracts of land that have been lying defunct for several years within the
city need to be released to capable builders and developers at reasonable
or subsidized rates to enable them to build affordable houses - since the
land cost inevitably forms a major part of the expenses for a builder.

Incentives in the form of subsidized tax rates should be offered to
builders who serve to build a social fabric of affordability'.
Simultaneously, it is important for the Government to introduce a
monitoring system to ensure that the incentives offered to the builder are
in the same way passed on to the end user'.

The Government should extend the scope of 36(1)(vii) of the Income tax Act,
1961 to include housing finance institutions.

Further, the Housing Finance Companies should be relieved from anomaly
inherent in section 43D read with rule 6EB of the Income tax Rules wherein
the housing finance companies are being taxed without booking the income
and also not allowed to claim as deduction when provision is required to be
made in respect of bad loans.

Housing Finance Companies should be allowed to access long term External
Commercial Borrowing (ECB) market, since these companies require long term
funding sources at the lowest cost possible, to pass on to the ultimate
borrowers.

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 of the customers as
also assessing the risks in the industry. With few signs of interest rates
easing, high demand for loans and the likelihood of many infrastructure
projects getting delayed due to tightening liquidity, banks may have to
settle for lower profits and revenue growth. Furthermore the Government's
pet agenda of financial inclusion and the entry of new banks will add to
pressure on human resources too, which banks would find tough to handle.

High inflation is the biggest threat that HFCs and banks face. Prime
lending rate is at 13.5%. While head line inflation is at around 8.31%.
Lending rates are highest in a decade and higher than the rates that
prevailed in the phase of pre-Lehman collapse when the cash reserve ratio
was 9% and inflation at 13%. To curtail inflation if the RBI raises policy
rates further, banks may be prompted to raise lending rates which may hurt
loan demand.

ETIG (Economic Times Intelligence Group) data on 44 banks shows in the
first nine months of 2010-11, the gross bad loans rose 23% to Rs.90,492
crore from a year earlier. To contain slippages of good assets to stressed
assets would be a challenge.

Most Indian banks have net interest margins of 2.5% to 3.5%. However, the
margin - a financial ratio that shows the profitability of a lender may be
squeezed this fiscal as banks are unable to pass on high liability cost of
borrowers. Banks have accepted liabilities at 10% at the year-end and with
the base rates pegged at around 9.5%, margins would come under pressure as
the cost of funds would rise and banks would have to increase their lending
rates to prevent any erosion in their margins. Conversely, if interest
rates moderate in the second half of this fiscal, it could again put
pressure on their margins. Banks have raised high cost deposits at the end
of fiscal 2010-11 which would be reprised immediately when lending rates
are revised. Thus, when rates fall, cost of deposits continues to be high
while interest earned on lending falls impacting margins.

Despite efficiency, interest rates have been one of the key
differentiators. Every borrower, corporate or individual is sensitive to
interest rates.

One of the key concerns emerging among developers is about banks getting a
little more cautious about lending to the realty sector. Banks are
reluctant to lend money to realty companies as RBI made it tougher for
banks to provide high value loans to properties costing over Rs.75 lakh.
The RBI had also raised the provision requirement for loans.

This move by RBI gives more space for HFCs to capitalize and consolidate
its market share by providing loans at very competitive rate to enable the
developers come up with affordable housing project and be part of the
Government's objective of providing housing for all.

Opportunities:

The aspiration to own a home remains a basic concern for anyone and
everyone. In fact, developers remain positive that it's this need-based
concern' which would ultimately help them to tide over the present lull
phase. And catering to this basic concern are several housing companies or
banks that extend various loan schemes.

Unlike earlier, home loans today continue to be 45% cheaper than what they
were in early 2001 according to an estimate. Because if statistics are
referred to, the interest rates which now range between 9% to11%, are still
much lower than what they were 10 years ago, at 16% to 17%. Buying or
investing in a property would continue to remain a lucrative option.
Besides building an asset, a buyer ends up reaping the benefits of
investment made already. Moreover, with an organized finance sector and
with the increase in transparency levels, it has become easier to create
financing vehicle. Home loans are being offered by HFCs at 9% to 11%
depending on the profile of a customer.

India is a country that is challenging the limits of aspirations and
possibilities every day. If there is one sector that reflects the changing
aspirations and growing needs of this new India, it is the residential
sector. Strong economic growth has led to rising incomes, better
availability of attractive home loan options, wide range of supply and
growing aspirations. All these factors have made buying an attractive
proposition.

In fact, in metropolitan cities, it is not uncommon to see young
professional aspiring to own more residence than the one they reside in,
thus leading to a Second Homes Wave' in the country.

Demand Drivers

Second homes in India is a relatively new phenomenon that gained steam in
the mid-1990s as the country went through its first real estate upswing. No
single factor can be attributed as the driver of the second home wave;
rather it was combination of a host of converging factors that led Indian
home buyers to explore second home purchases. Some of the factors include:

Strong economic growth: Emergence of a upwardly mobile consumer class.

Rising Aspiration

Sectoral

1. Real estate as an attractive investment option

2. Improved real estate transparency levels

3. Wider option to choose from.

4. Availability of high- quality residential formats.

5. Competitive home loan rates.

6. Flexible home loan financing-EMI holiday by developers.

7. Increased NRI buyer interests

All the above factors and a few more, led to the initial wave of second
homes in India. Consumers started looking beyond their first home in an
attempt to explore option of second home acquisition.

The Resurgence of the economy in the new millennium and the emergence of
end-user demand for homes, on the back of attractive mortgage rates as well
as rationalized home prices witnessed the emergence of the subsequent wave
of second homes in the country.

Urban home or suburban homes present an option beyond the limited inner-
city residence options. Suburbs across the country have emerged as a
preferred location for home buyers for premium residence, given the better
land availability in these areas as compared to city centers, yet away from
its hustle and bustle. Growing market maturity has ensured that a wide
range of top-end housing projects which are closer to nature are now
available. This category includes residence options along beaches, hill-
side homes, and riverside resorts and in other natural surroundings. What
is interesting is not only the geographical diversity of these homes, but
also the significant range of formats in which such projects are being
developed in planned communities across the country including villas,
townhouse, row-house and even apartments.

A subset within this category includes wellness homes, which allow-buyers
to rejuvenate themselves from demanding careers and stressful lifestyles.
Such homes offer relaxation and wellness centers that offer yoga,
meditation and other rejuvenation avenues.

There has been noticeable trend among home buyers exploring the options of
buying second homes in pilgrimage centers as trips to such places tend to
be periodic. Homes in pilgrimage centers serve the dual need of being a
holiday home and a good investment.

Threats (bottlenecks)

In an ideal scenario, affordable housing is meant for lower middle class
and middle class segment groups. However, in the present context, it is
proving difficult for many aspiring homebuyers from this particulars
segment to afford buying a property in Mumbai. This despite the fact that
the government announced the housing policy in 2007. Realty experts
maintain that the main reasons remain the scarcity of land and
infrastructure development, which needs to gather pace. There still remains
a short-supply of shortage of land and infrastructure. The government can
introduce certain policies whereby reserve certain chunk of land that could
be given to developers to promote affordable homes. A large chunk of land
remains under utilized due to archaic rules.

Additionally, the developers maintain that with the government increasing
taxes including stamp duty, ready reckoner, among others the overall cost
of construction has also shot up. The developers are unable to create a
stock of land for affordable housing because current legislation provides
no sops for the purchase of land or infrastructure facilities at
concessional rates, and this prevents the prices from coming down. Without
these, the developers won't be able to build affordable houses.

There is no proper co-ordination or equation between various governmental
agencies such as MMRDA or any municipal corporation.

In Maharashtra, the discussion over repulsion of the Urban Land Ceiling and
Regulation Act (ULCRA) has been on since 1999.

However, with the introduction of VAT of 1% from April 2010, the service

tax of 10.3%, the revision of the ready reckoner rates and the anticipated
rise in the interest rates on home loans (Every increase in interest rate
by 0.5% reduces home loan eligibility by approximately 7%), there is every
possibility that the prices could escalate in the near future.

The Bombay High Court's order striking down the state Governments move to
charge a premium for 33% extra FSI in the suburbs, is also expected to
further hike up the property prices, since builders will now have to buy
Transfer of Development Rights (TDR) which is controlled by traders with
vested interest. Besides, the increase in the difference between carpet and
built-up areas of apartments by as much as 40% to 50% at certain prime
places may also not be favourable to the potential buyer.

As always been the case, the blame game continues with both the developers
and the Government accusing each other for their respective and relevant
actions. To add to the controversy, the proposed model Real Estate
(Regulation of Development) Act, in its present form, has been severely
criticized as it could further escalate the prices of the housing stock in
the country by almost Rs.250 to Rs.300 per sq. ft. since it would lead to a
multiplicity of procedures resulting in enormous delay in starting
residential projects. The prices may rise in the near future because the
real estate sector, in its present avatar is distorted, although the same
can be averted by taking steps in the right direction. This calls for
immediate correction and unstinted cooperation between the developers and
the Government, as the unaffordable prices' will price out the main buyers
from the market i.e the common man.

As a concern for the common man, the government therefore, needs to promote
the affordable housing sector. Ideally, it should provide a big stimulus
package for the real estate sector to promote affordable housing in the
country.

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

If 2008 was the year of shock, 2009, the year of discovery and
introspection and 2010, the follow up experiment, then 2011 could will be
the year of comfort, for the Indian real estate sector. The turmoil of the
last couple of years seems to have made everybody (investors, developers,
lenders and end users) smarter. The critical approach adopted by all
stakeholders may be an indicator of the sector maturing. Nevertheless, the
increasing input costs, commodity and oil prices, overcautious foreign fund
inflows indicate that the mayhem is far from being over. Realty
consultants, developers, investors, bankers, HFCs, end-users have expressed
guarded optimism that the year 2011 will be comfortable one, for Indian
realty.

With India being a safe investment option, long term investments like
pension funds will come into realty sector. With the economy expected to
grow by 8.5% to 9% and an average increase of 20% in salary levels being
projected by HR surveys for 2011, the realty sector is expected to do much
better than it did in 2010. In 2010, the industry was mostly trying to
catch-up' after two bad years.

There has been a clear shift in the market of late, with actual users
constituting a majority of the buyers. In 2011, this trend will continue
and consolidate in favour of end users.

With the Indian economy improving and global markets also strengthening,
all segments of Indian real estate will improve in 2011. In the residential
vertical higher demand as compared to supply indicates a price
appreciation. The robust GDP also points towards increasing demand in the
retail space. The demand for commercial real estate is dependent on the
global economy. Since global market conditions are much better today, as
against the last two years, India stands out as the best investment
opportunity in this segment. There is tremendous shortage of housing in
this country and until the gap is narrowed down, there is only one way
prices will go and that is up. There might be minor price corrections in
certain over heated sections of metropolitan centres, towards the second
half of 2011, but by and large, the outlook for 2011 is very bullish.

Homes are evolving and so is consumer's aspiration. Having seen the world,
literally Indians are finally realizing that homes can be developed to be
more than just a roof to sleep under. While a home is all about the things
that stimulate happiness and contentment such as family, love, care,
leisure and play, the core concept of home has far evolved from being a
basic need' to being desired'.

And exactly for such reasons residential offerings have evolved to
accommodate concepts of themed projects, designer homes, green homes etc.
Today people want to live, work, play entertain, be entertained, flaunt,
relax, rejuvenate, study, exercise when it comes to where' they stay.

In order to bring the construction quality at par with the global
standards, developers, have introduced contemporary technologies such as
Mivan and PERI to their construction. The advanced technologies have not
only reduced the cost of construction, but also brought down construction
turnaround time significantly in the recent past. There has been greater
awareness about green building construction in the late decade.

Apart from above, the government has eased its import policies for the
construction industry besides introducing amendments to bring in more
transparency. Now a developer can import more material than before. So
glasses and specialized fittings are generally imported. At the same time,
there has been improvement in the quality of materials being produced by
Indian companies offering better volumes and satisfaction to the buyers of
materials.

Affordable housing is the only way to accommodate people in the suburbs of
Mumbai. Commuting will not be much of a problem because of development of
infrastructure projects like upcoming Metro, flyovers, skywalks, better
roads and increase in the frequency of rail connectivity. So, if the price
is right and there is scope for good lifestyle development, people would be
open to relocate themselves. This would mean that any neighbourhood can
benefit from affordable housing projects of mid to large scale and
ultimately, with the added infrastructure and support systems coming into
aid the projects, property price will only get better.

Housing sector is bound to receive attention of Government because it is a
major sector of the Indian economy. Housing is the largest component of the
financial sector, of the construction sector and is central to economic
growth and the related multiplier effects on employment, poverty reduction
etc. It has also impact on several other connected industries. It has
implications for the healthy growth of households, their optimism and

investment opportunities and it creates an environment conducive to a
positive outlook in society. Housing helps to provide a stable platform for
future development of a democratic society. Globally, there is a strong
correlation between economic development and housing and housing quality.
It is said that alleviating the urban housing shortage could potentially
raise the rate of growth of GDP and have a decisive impact on improving the
basic quality of life.

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 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 2010-11, the Company has unwound 2 swaps
and received an amount of Rs.1.97 crore as unwinding value.

The prime lending rate of the Company is regularly reviewed and revised as
it is a benchmark for asset pricing. Since more than 85% 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, 2011 & the
ratings assigned by rating agencies is as under;

Particulars % to total Rating
Borrowing
Term loans from
Scheduled Banks 27.78% 'AAA/Stable'/ P1+ by CRISIL

Refinances from NHB 3.40% Not applicable

Term loans from LIC
of India 1.66% Not applicable

Non Convertible 58.39% 'AAA/Stable' by CRISIL /
Debentures 'CAREAAA' by CARE

Subordinated Bonds
(Tier II) 3.33% 'AAA/Stable' by CRISIL &
'CAREAAA' by CARE

Upper Tier II Bonds 3.33% 'AAA/Stable' by CRISIL &
'CAREAAA' by CARE

Public Deposit 0.57% 'FAAA/Stable' by CRISIL

Commercial Paper 1.13% P1+ by CRISIL

Others 0.41% Not applicable

Total 100.00

Performance / Operation Highlights:

During the year, the Company sanctioned Rs.22602.92 crore and disbursed
Rs.19912.39 crore registering a growth of 25.27% and 34.06% respectively.
For the year ended March 2011, the Company's total income from operations
was Rs.4680.08 crore as against Rs.3456.24 crore during the same period
last year. Net profit for year ended March 2011 zoomed to Rs.974.49 crore
when compared to Rs.662.18 crore in the corresponding period last year,
thereby achieving a growth of 47.16%. The outstanding mortgage portfolio as
at March 2011 was Rs.51089.84 crore as against Rs.38081.38 crore on March
2010 thus registering a growth of 34.16%.

Marketing

LIC Housing Finance is one of the largest housing finance companies in
India having one of the widest networks of 181 marketing offices as on 31st
March, 2011 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 non performing assets (NPA) as on 31st March, 2011 stood at
Rs.241.96 crore as against Rs.263.15 crore as on 31st March, 2010
registering a reduction of 8.05%. The gross NPA ratio of the company stood
at 0.47% as on 31st March, 2011 as against 0.69% as on 31st March, 2010.
Net NPAs were 0.03% as against 0.12% on the corresponding dates. The
provision cover on the NPAs stood at 93.78% as on 31st March, 2011. The net
interest margin for the year stood at 3.08%.

Human Resources Development

The Company has a dedicated team of 1190 persons 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
views 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
motivates them to perform better.

Loan assets per employee as at 31st March, 2011 were Rs.39.67 crore and net
profit per employee Rs.81.89 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.