India’s largest mortgage lender HDFC continues to grow its business banking on its core expertise on home loans and real estate. An impressive growth trajectory has made it a favourite with investors. Since last one year, HDFC shares surged more than 40 percent as against a rise of 23 percent in the sensitive index Sensex.
In between March 31, 2009 and March 31, 2013; the loan book nearly doubled from Rs 85,200 crore to Rs 1.70 lakh crore. During the same time, bank non-food credit grew nearly 90 percent to Rs 51.66 lakh crore from Rs 27.24 lakh crore.
However, the only challenge it faces currently is to sustain the growth momentum. According to its vice-chairman and CEO Keki Mistry, the lender is unlikely to see sharp fluctuation in its business growth.
“We will target individual loan growth of 18-20 percent over a sustained period of time on a CAGR basis. It might however, be a little higher or lower in certain years,” he told moneycontrol.com in an exclusive interview.
Moreover, he sees enough demand for home loans this year ruling out the possibility of any asset price bubble. He advocates the need of fast-paced expansion of housing sector. As many as 276 industries in India large and small depend on the housing sector bearing positive economic impact.
Under the government’s proposed ECB window for affordable housing HDFC may raise around USD 500 million (or around Rs 2,800 crore) for affordable housing.
Below is the edited excerpt of the interview:
Q. What is the secret sauce behind HDFC’s persistent growth story?
A. HDFC specializes only in home loans. Thus, we is in a position to understand the market dynamics better. Having been in this business for over 35 years, it has gained in-depth knowledge of the real estate market and constantly endeavored to empower the customer in making the right decision while buying a home.
The consumer needs solutions, not loans. Our systems are all centralized. For example, residing in Pune or elsewhere in India one can apply home loan for a property located anywhere in India.
Distribution is today one of the biggest strengths of HDFC. We are present in all major towns and cities. Last year, HDFC Sales, our wholly owned subsidiary sourced 46% of our loans, HDFC Bank generated 28 percent and other direct sales agents (largely comprising some banks and NBFCs) added another 15 percent. The balance is through walk-ins to HDFC branches.
Our entire loan appraisal process is carried out in-house. We ensure that the quality of loans originated is uniform irrespective of channel partners.
We have also tied up with developers all across the country. In addition, our subsidiaries including HDFC Red and HDFC Realty offer real estate services to assist customers to buy, sell or lease properties.
Q. Will you be able to sustain current pace of growth?
A. We have always said that we will target individual loan growth of 18-20 percent over a sustained period of time on a CAGR basis. It might however, be a little higher or lower in certain years. Despite economic slowdown, FY13 was an excellent year for us as the growth in retail loans (after adding back loans sold in the previous 12 months) was 31 percent year-on-year.
Q. How will expansion in housing sector add to economic revival?
A. In Budget 2014, the finance minister had provided some tax benefits to house buyers. If you are the first time home buyer and taking a loan of less than Rs 25 lakh and the property value is less than Rs 40 lakh, then in addition to the existing tax benefits, you will also be entitled to a one- time tax benefit of up to Rs 1 lakh in respect of the interest payment.
However the loan has to be availed between April 1, 2013 and March 31, 2014. The objective is to give a spurt to the economy as housing supports many other industries like cement, steel, paint, carpentry and others. According to an estimate, there are 276 industries in India large and small, which depend on the housing sector. It also generates large employment. Hence, the government is trying to push the growth in the economy.
Q. FII share holding in HDFC Ltd is pretty high nearly at 74 percent. What is the key trigger to attract overseas investment?
A. We have always been largely owned by foreign institutions. However these are all portfolio investors who have bought shares in the secondary market. If you look at the last 18-20 months, we have had nearly US$ 5 billion of HDFC stock (equity shares) that has come to the market. We had Citi Bank, which sold nearly 11.5 percent, private equity player Carlyle sold 4.5 percent.
In addition, we had warrants that were converted into equity shares. These have largely been purchased by portfolio investors and FIIs. We have more than 1000 foreign institutional investors (FIIs) who have invested in our stock from all over the globe and a large number of them have been investors for longer time.
Q. What is your outlook on interest rates?
A. I expect RBI to cut the repo rate by another 50 basis points in 2013.
WPI inflation has come down at 4.89 percent and commodity prices have also come off their peak. If this sustains, it will provide RBI the impetus to cut rates going forward. Further if we have good monsoon, inflation will steadily keep sliding downwards. However in my view, RBI will not indulge in aggressive rate cuts and would probably cut rates steadily over next six months.
We need to however keep a close eye on the currency. The fairly sharp depreciation in the rupee over the last few days is a worry – as it worsens the CAD and could fuel inflationary worries once again.
Q. Will you cut rates by the end of June quarter?
A. It all depends on cost of funds. Historically, our spreads (rate difference between funds borrowed and lent) have been in the range of 2.15 to 2.35 percent. Most of the time, it has been between 2.25 and 2.35 percent. We will continue to maintain this range. If there is any benefit in terms of lower cost of funds, which leads to enhancing our spreads, we will certainly pass on the benefit to our customers.
Q. RBI slashed the policy rate by 75 bps in 2013. Why are lenders not cutting lending rates?
A. The total amount of money in the banking system stands at around Rs 75 trillion (lakh crore). Banks have been borrowing about Rs 1 trillion (lakh crore) from RBI on a daily basis. So, when RBI cuts rate it is less than 2 percent of bank funds wherein they get benefit of RBI rate reduction while, the cost of funds does not change on the remaining 98 percent.
In my view, the ability of banks to cut the lending rates will come only when they start reducing deposit rates. To do that they probably need to see more liquidity in the system. I am reasonably sure that will happen in the near future. We must also remember that deposit growth in the banking system last year was fairly muted.
Q. How effective is repo rate cut for lenders? Is the clamour for CRR cut justified?
A. Repo rate cut is a signal to the market for a lower interest rate regime. However, it has to be followed through with a cut in the deposit rates by banks. When there is liquidity in the system, banks will be able decrease deposit rates.
The clamor for CRR cuts is linked with liquidity only. There are various ways of injecting liquidity in the system. CRR is only one of those ways besides government spending and RBI’s OMOs (open market operations).
Q. Tell us something about your borrowing book?
A. We have always kept an extremely flexible approach to funding. We will continue with that approach.
Deposits are 33 percent of funding. Term loans and bonds constitute 67 percent. Hopefully, we will also have the ability to raise funds through external commercial borrowings (ECBs). Government has said that one billion dollar can be borrowed through ECB for affordable housing. We may plan to raise around USD 500 million for affordable housing.
Q. How do you rank HDFC compared to other big home loan providers?
A. As I have explained earlier that we are a specialised home loan provider which helps us to serve the customers better. The focus on housing is always better in any housing finance company. For a bank, home loan is one of their multiple existing products. For HFCs, it is the only one with deep understanding of the product.
Q. What are hurdles for affordable housing in India?
A. The biggest hurdle is the high cost of construction and the high land price. In big cities, availability of land is a big issue. Also the process of getting various approvals can be very time consuming. This increases the interest cost for builders and is ultimately passed on to the buyers.
We have to find a mechanism to make land prices cheaper for low income projects and also each state has to expedite the process of granting approval if we want to make affordable housing a reality.
Q. Do you see any asset price bubble on the anvil?
A. The question of bubble comes in when people buy homes only for investment purposes and later, prices plunge due to indiscriminate selling. We don’t see that happening.
However, India is a large country. There might be some pockets where you will see some people investing in properties. In those parts, you could see some correction in property prices. It would not be a major event and cannot be categorised as a bubble.
Q. Do you see prices in Mumbai dropping any time soon?
A. For prices in Mumbai to come down, supply has to increase significantly by permitting existing buildings to go higher through FSI increase. However for that we need significantly better infrastructure wherein connectivity is good, supported with all amenities like roads, water, sewage, hospitals and schools.