The differentiation lies: in the core strengths of an organization... by Renu Karnad

<Learning Curve> The Indian Housing Finance Industry has come a long way since the days when HDFC was the solo player oin the Indian mortgage sector. Renu Karnad, Executive Director of HDFC Ltd., spoke to Dr Ranjan Das about the key forces that drive the housing finance sector, the emerging competitive scenario and which organizational initiatives have helped HDFC retain its position in the market.

What are key forces that have driven demand for housing during the last decade? To what extent has the demand been fuelled by factors such as changing lifestyles, the nuclear family concept, lack of robust investment options and the need for more luxury and comfort?

There’s been an evident shift in perception and mindset in the Indian middle class over the last five to ten years, thanks to the impact of liberalization and opening up of the Indian economy, a rise in average income across households, and a palpable desire to own things ‘now’. The most crucial aspect of this ‘shift’ in the consumer’s mindset is perhaps explained by the fact that the young (or Generation Next) are more in charge of their lives and eager and impatient to assume the world. It’s a generation that is independent, self-reliant and nuclear in nature. And it is this eagerness to succeed that has fuelled a drive to own what one desires the most: a home, a car and a healthy lifestyle. Other drivers have been incentives from the government to buy homes, improved quality of buildings and property services and a bouquet of financial options. Tax concessions, property price dips and lower interest rates have also helped. But what’s helped more is the change in consumer’s mindset over a ‘loan’ being a stigma, the extra freedom of making an informed choice, and flexible, customised finance options coupled with mutual trust. A broader issue has also been the migration of industries to smaller towns, leading to rural progress. With villages turning into towns and towns becoming metros, the property market is progressing steadily. This revolution has directly resulted in greater demand for not just housing but also for related facilities like sanitation, transportation, medical aids, power and water, and the overall infrastructure.

How has the nature of competition changed during the last 10 years? What are the key entry barriers to the industry? Is competition originating from organizations and sectors that were not active in housing finance before?

The housing finance industry has definitely gone through a major change, resulting in increased competition. HDFC was the only company back in the 80’s to offer home loans and related range of products. Today, it’s a different story altogether. The RBI’s guidelines for commercial banks to earmark 3 per cent of their incremental deposits for housing finance marked the entry of commercial banks also into this sector. Entry barriers are negligible if one looks at the demand for housing finance in the country today. A recent study by CRIS INFAC showed that the market requires funding of over Rs 140,000 crore over a five-year period. Banks have gone all out to address this demand. This has resulted in a significant increase in the number of distribution points for housing finance products and the emergence of alternative distribution channels like DSAs (direct sales agents). Another development is the amount of freebies on offer - from free insurance to products with fixed interest rates (but fixed for a certain period only). However, a lot of these freebies come along with a fine print. While there may not be any significant barriers, what is more important is to have efficient appraisal and processing systems in place, the domain knowledge, earn confidence and trust of people and the will to understand, innovate and provide customized solutions all the time while keeping the NPA’s and costs under control. The name of the game is profitability with growth and the ability to sustain this in the long run.

Besides the traditional parameters along which competition is normally differentiated, are there new dimensions/USPs emerging in the sector? How valuable are these offerings to the segments being targeted?

There is a lot of talk about USPs in financial services, but I think that the concept of having a USP by itself is being questioned. A lot of banks have entered the housing finance market, but without realizing that the nature of the industry is such that hard sell won’t work. For most of the middle class, buying a house is still a once in a lifetime decision, and it should be pondered upon with great care. Aggressive selling through DSAs can work to build volumes. But I don’t think they are equipped with the right kind of knowledge to provide value to the consumer in an issue as complex as this, especially when the situation changes from state to state and city to city. The consumer needs solutions, not loans, and that is the point that players need to understand. Product differentiation is also negligible since products can be easily replicated. Interest rates, though an important factor in the value chain, are still only one link in the chain. There are a lot of other aspects a consumer needs to consider, like the long-term implications of the entire transaction, how fixed is a fixed rate, property value and builder reputation including his track record, and, chiefly, the right to information to make a sound investment decision. Today, there is only one differentiator that decides the real value - the core strengths of an organization. It is the expertise of your people, your ability to handle technical and legal aspects, your systems and processes, the forward-looking vision of your technology implementers, and your organization’s service skills, which are the building block that predicates all one does. This is what any organization in the Indian housing finance sector should aspire to be.

How does a market leader, who is also one of the pioneers, protect its hold in the industry in the long haul? What capabilities must be developed and reinvented continuously to ensure sustainability of the lead?
Home financing had been a safe proposition till now as instances of non-performing assets were minimal. This is no longer true today. A recent study by CRISIL revealed that non-performing loans (NPLs) in the housing finance sector stand at around 3.3 per cent today. In contrast, housing finance players in a developed country like the US have NPLs of only 0.78 per cent. This is in spite of the fact that property prices generally remain volatile in developed countries. We believe that issues like this need to be addressed by us internally if we are to maintain our leadership position in the industry. Therefore, we have ongoing training programs, which have role-plays, case studies, real-life examples, and functional training provided by in-house managers who are trained to develop our staff. Our training on recovery management is providing results, considering the fact that only 0.89% of our customers are defaulters. As an organization it will become increasingly important for us to know how to interact with customers who are in arrears and how to handle cultural and local sensitivities. It all boils down to how well you understand and treat the customer; the best strategies are established with long-term commitment and relationships.

What was HDFC’s positioning 10 years ago and how it is positioned now? Are there some aspects in HDFC’s offerings that are helping it stand tall in housing loan market?

Being the only housing finance company until the early 80’s, HDFC enjoyed a virtual monopoly in the field, without any real need to advertise. Our brand equity kept growing through word-of-mouth and to satisfied consumers, which resulted in HDFC becoming a trusted brand name synonymous with integrity, transparency and quality service. In terms of our positioning it had to change with changing times and we positioned ourselves as an organization that one could trust. Our crucial baseline “with you right through” evolved in the mid 80’s. Our entire service model and the delivery mechanism was based on the inverted pyramid with the customer at the top. In a conventional pyramid, the senior management resides at the top with several layers forming the bottom segment and the customer is at the very bottom. To facilitate, we broke the inverted pyramid into two parts - the top part (by far the largest in numbers) as the frontline - those who meet and serve customers and the rest as the back office who support the frontline. Our mission statement is derived from this demarcation: If you are not serving the customer directly, make sure you are serving those who are. This helped us to listen, understand, innovate and support our customers with a wide range of products and services. Further, as a premier Housing Finance Institution, we were the first to introduce products that supported housing loans on the basis of age and customer requirements: Floating rate loans back in 1999 anticipating market conditions on the interest rates going down; again in 2002 we came up with the ‘2 in 1’ loans which is part fixed and part floating, to enable customers to hedge their risks in an uncertain environment. Since we at HDFC meet the customers directly, we easily understand the unique requirements of a home loan consumer. In fact, we have customized our products to facilitate optimization of tax benefits and have created various repayment facilities that address different customer segments. We have regularly tied up with developers to offer special packages to our customers. Our product range includes ‘2 in1’ loans, a home conversion loan, bridging loan, home equity, etc. It’s like you dream about a house and provide comprehensive solutions. We also have loyalty programs where we offer special benefits to our existing customers. HDFC has always tried to reach out with regular visits to smaller towns and cities, which over a period of time, culminates into a service center or a branch. HDFC today has a network of over 175 offices across the country and a presence in all the GCC countries with an office in Dubai. This has resulted in supporting over 2.4 million families through home loan approvals of over Rs 70,000 Crores.

What major initiatives have been taken by HDFC in organization and HR areas to prepare the company to face the challenges of existing and future competition?

HDFC has an open and informal culture. It values integrity, commitment, teamwork and excellence in customer service, and has adopted a policy of “learning by doing.” We believe that the rate of learning has to be faster than the rate of change in the environment. Accelerated learning enhances competitiveness leading to increase in stakeholder value. To this effect, our employees, who are our greatest assets, are constantly trained on various aspects of housing finance, negotiating skills, customer service, real estate, technology and other relevant areas of our business. We train them on processes like “How do we probe for specific needs of consumers?” and “How do you create value-added solutions for HDFC’s consumers?” HDFC also conducts neuro-linguistic programs (NLP) for its employees, which enhances their ability to understand and communicate with its customers effectively. HDFC has set up its own training center, The Center for Housing Finance (CHF) at Lonavla (Maharashtra) since 1990, where it trains its employees.
We have initiated the Six Sigma program during the last two years whereby key processes have been streamlined for the benefit of our customers, i.e. reduced turnaround time, reduced waiting period etc. Our Executive Development Programs, Managerial Skills Programs and Train the Trainers programs are ongoing initiatives. Our intranet-based Knowledge Management System ensures that all learnings are shared amongst the employees in the organization. We identify, nurture, and retain talent; our attrition rate is less than two per cent (a surprise, perhaps, in this BPO age).
In short, we are an organization that offers total value-added housing solutions and expert advice when our consumers need it the most. As HDFC’s baseline elaborates “With you, right through”.

Renu S. Karnad is a graduate in law and holds a Master’s degree in economics from Delhi University. She has been employed with HDFC since 1978 and was appointed as the Executive Director of the Corporation in 2000. She is responsible for overseeing all aspects of lending operations of HDFC.
Dr Ranjan Das is the guest editor of GMR and also Professor of Strategic and International Management at IIM Calcutta.

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