32 European Journal of Economics, Finance And Administrative Sciences - Issue 21(2010)
It may be mentioned here that cost-to-income ratio (which is the inverse of ‘operational
efficiency’ parameter under typical ROE decomposition analysis) is a better measure for profitability
analysis of banks, HFCs and other financial services. (See End Note 4). Being a vital determinant of
ROE of HFCs, it needs constant control in to enhance operational efficiency of HFCs.
10. Strategies for Enhanced Operational Efficiency of HFCs in India: an Analysis
In this section, an attempt is made to chalk out the major strategies that could be adopted by the HFCs
for enhanced operational efficiency. These are given below in Table XI
Table XI: Strategies for HFCs for Enhanced Operational Efficiency and Competitiveness.
Strategy Variable Strategy Suggested Remarks
Interest costs need to be closely monitored and brought under control. In
the current scenario, the following strategies are good:
(i) Use of external sources of funds (like, Foreign Currency
Operating Cost –
(ii) Cheap public deposits (core deposits)
Cheap external sources are, however,
accessible only to the large HFCs like HDFC
because of stringent norms (minimum capital
of the HFC, minimum loan amount etc.)
Adoption of modern ICT tools to cut down the cost and enhance the
service quality, like,
(i) “Single Window” service delivery by integrating the operating
subsystems like advances (credit), deposits etc.
(ii) Interconnecting branches for better service delivery, minimum
Operating Costs – Staff
(iii) Skilled and techno-savvy labour force for enhanced productivity
and cost savings.
ICT adoption has become an imperative rather
than an option for the HFCs. Apart from the
tremendous cost savings this would ensure high
quality service delivery, fast responses. Of late,
ICT has been proving to be a vital tool for high
Close control of establishment costs through:
Reducing paper work, say by ICT adoption
Establishment Expenses Reducing legal / processing charges by going for common legal scrutiny
(eg. in financing of Projects)
While interest costs of HFCs are by and large
market determined and beyond their control
establishment costs can be controlled to a large
Management For cleaning the balance sheet, by reducing the relatively illiquid assets
RMBS (Residential Mortgage Backed Securitization) is quite desirable
as a means of financing for HFCs.
RMBS is only slowly picking up in India
because of a few persisting problems in the
legal and regulatory systems.
Management (ALM) Proper ALM is one of the crucial pre-requisites for the long-term
survival and growth of HFCs because of the long-term nature of home
loans and relatively short-term deposits (sources)
Close monitoring of various sources and uses
of funds is essential for avoiding asset-liability
Timely repayment of advances is to be ensured for minimizing the
problem of NPAs (non performing assets). High level of NPAs has got a
direct adverse impact on profitability.
NPA management starts right from the stage of
processing of credit proposals. Due emphasis
on credit quality is essential.
Credit Quality / Due
Diligence Business is important. Equally important is the need for ensuring quality
of advances. Dilution of due diligence for increasing business may
ultimately lead to high NPA provisions and hence low profitability and
Ensuring high quality of credit is gaining
importance day by day. Because of the fierce
competition in the market, this is quite
challenging as well.
Source: Suggestions of the Author, based on analysis of the emerging market scenario in India
11. Concluding Remarks
In view of the foregoing, it may be observed that there exists quite significant difference in the
operational efficiency of major HFCs in India, primarily because of the difference in the cost structure
of the respective HFCs. While large HFCs (like, HDFC) have an advantage over smaller ones in
sourcing cheap funds, size alone is not the sole criterion for better efficiency. Equally important is the
need for ensuring credit quality. Large HFC like ICICIHFL is lagging behind in operational efficiency
because of its high cost-to-income ratio, primarily because of high level of NPA provisioning, poor
credit portfolio and poor recovery management systems. Asset Liability Management (ALM) is
growingly becoming significant for HFCs these days. So also, is the case of RMBS (Residential
Mortgage Backed Securitisation) and such other strategies for balance sheet management. By adopting
the strategies as suggested, HFCs in India irrespective for sizes and track record, can perform far better.