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HDFC Bank Embarks on First Debenture Issue

Housing Development Finance Corporation Bank (HDFC Bank) notches yet another historic milestone in its thirty year history, debuting an Rs 1 Bn Debenture Issue, with expectations of increasing it by a second Rs 1 Bn in the event of full subscription.  The entry by this state owned Bank which is listed on the Colombo Stock Exchange, adds crucial impetus to the Bank's ethos of being 'The Housing Bank', which serves a market segment to who the primary need of shelter has remained elusive due to economic and social diktats.  With the issue date set on 21st October, the secured, senior, rated and listed debentures will have a maximum tenor of five years, affirming a fixed rate quarterly interest of 14.5% for three years, 15% also quarterly for four years and 15.5% annually for a five years. 

Tracing the history of the Bank which began as a building society, transforming later into a corporation and then a Bank which it has functioned as for a decade, Chairman Siromi Wickramasinghe is adamant that HDFC's entire business model and philosophy is one of social responsibility.  "Housing finance options is our business but these are options that reach out to the masses, the lower and middle income groups which encompass about 75% of this country's population.  We strongly believe that these income groups infuse considerable impetus into the country's economic development but are most often, unable to gain funding access to own a home.  With the Millennium Development Goals and the Mahinda Chinthana very emphatic about ensuring housing for all, as a corporate leader, we have an inherent responsibility to ensure that this becomes a reality." 

She explains that the Bank's mortgage backed housing loan portfolio which forms the security for the debenture issue, constitutes smaller loans on average, "As we cater to a segment that sometimes puts their entire savings into building their home.  This is a social strata that sometimes have no collateral or have no knowledge or awareness of saving and investing through official financial channels.  Some of our customers are the lowest of the low income earners, yet those who aspire to own a home, though requiring guidance and counsel, both of which HDFC's team excels in."  HDFC Bank therefore goes beyond housing rudiments, helping homeowners with household requirements, education and micro financing of micro and small entrepreneurs. 

And this would be the dynamics therefore that propels the Bank into using this maiden debenture issue to fund its social ethos, which surely can be challenging.  "The trend has been to borrow at normal rates in the short term, but given the characteristics of the Bank, we lend long term, which doesn't augur well for maintaining prudence," asserts Wickramasinghe.  "This means that it's challenging to meet the entire purpose of our founding tenets, while maintaining a sustainable business operation.  We've always been a Bank that has presented a corporate presence that goes beyond compliance, whether in governance, transparency, risk management, ethics or accountability and similarly, we are answerable not only to our shareholders, but also to the Securities & Exchange Commission, Central Bank of Sri Lanka and the Parliament of Sri Lanka."  With sustainable development being the strategic focus and the core determinant for HDFC, the astute step for the Bank therefore was this debenture issue, which has gained a positive nod from all leading financial players including being rated by RAM Ratings (Lanka) Limited.  The Trustee is Deutsche Bank AG Colombo, the Banker People's Bank and Managers to the Issue, People's Bank Investment Banking Unit. 

In addition, HDFC Bank's key performance indicators are most encouraging despite ambitious goals and objectives.  While end 2012 saw it post a 13.4% growth in income despite an exorbitant interest rate incline of 33%, eight months on, as at end August 2013, HDFC Bank posted PBT of Rs 239 Mn and PAT of Rs 108 Mn, compared to Rs 51 Mn and Rs 2 Mn respectively for the same period in 2012.  The forecast at end 2013 earmarks PAT of Rs 250 Mn and a Balance Sheet growth of Rs 26 Bn, from the current Rs 23 Bn.  The housing loan portfolio forecast is for Rs 27 Bn at end 2013, compared to last year's Rs 17 Bn. 

In a nutshell, Wickramasinghe posits three dynamics that have propelled the debenture issue.  "Firstly, the companies purchasing debentures seek short term funding which we can fulfill, while also addressing the gap prevalent between long term loans and short term borrowings; secondly, we revert to our promise of sustainable housing for a majority of the population who cannot be neglected because this is where the fundamentals of poverty alleviation lie; thirdly, we are a very stable bank, spearheaded by a competent Board of Directors and professional management team who are focused on consistent growth in a milieu of prudent governance and risk management."  The three tenors with attractive interest rates add to the lustre of the issue, as with market interest rates being volatile, this instrument presents an attractive investment option. 

Reiterating the Chairman's sentiments, General Manager/CEO Nimal Mamaduwa signals confidence in the first offering being oversubscribed and HDFC going in for the second Rs 1 Bn issue as well. "It can be easily seen that HDFC's financial fundamentals are very solid, strong and sustainable.  We have continued to maintain housing as our core business while transforming our business model into being a true Housing Bank, where we focus on continuity of the loan and the sustainability of the borrower.  However, that business model has also seen some compelled changes where we have had to work at short term products to address bottom line profitability and growth rates, while re-balancing our business operations." 

Clarifying that while numerous financial entities do offer housing loans, HDFC caters to a society segment that sometimes cannot venture into a bank due to lack of security and education, Mamaduwa says,  "This is why we reach out to the people rather than expect them to come to us."  Employing numerous avenues including business loans, micro finance, mobile banks, doorstep banking and a shared ATM service with Sampath Bank for extensive accessibility, the Bank's product portfolio is highly diversified.  Added services encompass utility bill payments and with the license granted by CBSL, will soon add leasing to its business dynamics.  "Our network stands at 32 branches and covers all districts in strategic locations, a focus we will continue to maintain as expansion will be based on the requirements of our cleintele."   The Strategic Plan currently in its formulation stages, will become the blueprint from 2014 for a period of three years mapping out the Bank's journey. 

"In providing responsible housing finance, we must have unequivocal focus on the path we take to achieve our goals," says Wickramasinghe.  "There's a multi-dimensional approach mooted towards constructing new houses, rehabilitating existing facilities and relocating from low quality to better standards as well as resettlement as part of the Government's 'House Ownership for All by 2016'.  For HDFC Bank, this is where our target segment lies and one which requires vital impetus.  Given the stability of the Bank and the professionalism and governance tenets within, we are confident of the trust and confidence we have imbued as a leading and trusted housing finance institution in the country and that this envisaged new avenue will hold us in good stead to step into a new era of possibilities."