Mumbai: Housing Development Finance Corp. Ltd.(HDFC) vice-chairman and chief executive officer Keki Mistry sees no risk of a property bubble or a big decline in real estate prices. Because of a slowdown in property sales, prices could correct by between 5% and 15% and “not more than that”, Mistry said. In an interview, he also spoke about how the rapid depreciation of the rupee should be stemmed to arrest imported inflation. Edited excerpts:
You have hiked your rate thrice during this fiscal year. What’s the implication for the latest rate hike for HDFC? (On Tuesday, RBI expectedly raised its policy rates by a quarter of a percentage point in pursuit of its fight against inflation.)
We will have to take a call on how will our rates pan out over the next week or so. We keep watching interest rates as they settle in the system and whether we increase rates or not is a function of whether our cost of funding increases or not.
You don’t want to commit at this stage.
I don’t want to commit because it’s too early. We will wait for a little while, see how cost of funding changes and then take a call. If you look at the records, we have not raised rates the last time RBI increased rates.
But you still have hiked your loan rates by 125 basis points. (One basis point is one-hundredth of a percentage point.)
If you calculate the total number of hikes that we have done in terms of amount and the total hikes that RBI has done, we have not hiked as much as RBI has. Even when you calculate since March 2010, it’s the same scene.
At a recent conference, you did speak about tackling inflation through the currency market, basically allowing the rupee to appreciate. Recently the rupee crossed 50 (against the dollar). What exactly do you mean?
There are a few causes for inflation. The fundamental cause is on the supply side and the supply-side constraints are not in the hands of RBI. The central bank can do very little to tackle this. The food inflation is high because of a number of reasons—the minimum support price paid to farmers has been increasing at a very rapid pace over the last five years. Also, you have the NREGA (National Rural Employment Guarantee Act) scheme which has its advantages, but also causes inflationary pressures in the economy. The other cause for inflation, is global inflation and part of it could be arrested if the rupee appreciates. If we permit foreign currency to come in with greater ease, it would at least stop the depreciation in the rupee and that could partly help in tackling the inflation.
Should RBI actively intervene in the foreign exchange markets?
Yes; some active intervention in the forex market would help. But the other thing is, it can permit foreign currency borrowings in a big way. For example, we would like to borrow money from overseas; we can raise a billion dollars from overseas at very fine rates. Even after fully hedging it and paying all the applicable taxes, the effective cost to us would be 150 basis points lower than what our rupee cost is. If more institutions are allowed to borrow money from overseas and more dollars come into India, it would help the rupee to appreciate.
You grew at about 19% in the September quarter. Had you not sold some of the loans, it would have been 24%. Where is the slowdown?
The slowdown would be in places like Mumbai. The city clearly has seen a slowdown. Mumbai used to be one of our two biggest centres three years ago, along with Delhi. Now Mumbai has slipped from being number 1 to being number 3. Mumbai, Delhi, Kolkata, Chennai—all the big metros— they would account for more than two-thirds of our business. But the growth that is coming in these big cities is coming not from the centre of the city, where prices are high, but from the outskirts of the city.
Strategically, HDFC is spreading its reach beyond cities and metros to distant suburbs and outskirts?
That is something we have been doing over the last many years. If you look at Mumbai, property prices here can range from Rs.100,000 a sq ft. in south or central Mumbai to Rs 2,500-3,000 a sq ft. at the distant outskirts of Mumbai. Our average loan size pan-India this year has been Rs 19 lakh. It was Rs 18.6 lakh last year.
What’s your sense of the real estate market? Mumbai prices are now not only back to the pre-Lehman collapse days, they’re actually higher than that.
It’s very difficult to make a call on these things but I will give you my personal view— you could see some correction in prices, but you are not going to see a big fall in prices, for the very simple reason that the supply of real estate in India is very limited.
Therefore, the limited houses that are available for sale obviously carry a premium. Having said that, because there is a slowdown in sales, one could expect some correction; in my mind it could be 5-10-15% and not more than that.
You are not seeing any bubble?
No, I am not seeing any bubble there for the simple reason that as far as we are concerned, more than 95%, probably 96-97% of our borrowers are people who have taken loans for houses where they are staying. They are not investors or speculators.
How many of your borrowers take loans for a second or third house?
Not a very large number for the third house, I don’t think there will be a lot, may be one or two here and there. For the second house, may be in a few places. What happens is if you are a government employee who hails from Pune and have a transferable job, as you advance in age you will probably buy an apartment in Mumbai and rent it out till such time you retire. Those could be the second houses we are talking of, but I don’t think it will be a big number.
What are the pockets of demand?
Everywhere, I mean really if you leave out Mumbai and leave out one or two other places… Chennai, Delhi NCR (National Capital Region) are growing very well. Smaller places like Indore, Chandigarh, Jaipur on the northern side and Ahmedabad, Borada in the west have been doing well. In the south there are few places which are doing extremely well.
So you will continue to hold on to 20% growth.
We talked of a growth of around 18-20% on a gross basis. That’s a historical number and we are reasonably comfortable with an 18-20% growth.
The National Housing Bank (NHB), your regulator, has told you to stop charging a penalty for early mortgage repayments. What kind of impact will it have on your balance sheet?
Now there are two circulars which NHB has issued—one is that you cannot levy a pre-payment charge. As far as pre-payment charge is concerned, historically or at least current practice is that we don’t levy a pre-payment charge if the pre-payment is made out of savings. The quantum of pre-payment charges that we collect is not very large. If you take the first six months of this financial year, the total pre-payment charges that we have collected on a net of tax basis is about Rs 17 crore. To put the number in perspective, our standalone post-tax profit in March last year was Rs 3,535 crore. Hopefully this year’s profit would be higher.
The second circular says that old borrowers, new borrowers pay the same rate. Now we have always had that facility where existing borrowers can shift to current rates if they find that their rates are higher and lots of people have been doing that over time.
Will banks aggressively refinance your loans?
I don’t think so because for any bank to do that, they would have to price their existing portfolio at that same rate. If a bank wants to take over our loans, they would have to offer an interest rate which is lower than what we are offering. Now if they offer a lower interest rate to a new customer they would have to offer that same rate to all their customers. It means the entire book has to get repriced, which I don’t think many banks can do.
What’s your take on affordable housing that’s the buzzword now?
I think many developers have taken up this task of constructing affordable housing. I think the whole buzz of affordable housing started in 2008-2009, the year of slowdown. The high-priced apartments were not selling and developers, therefore, resorted to this affordable housing segments. It has caught on, there are lots of people who are doing it.
Is it a solution in a country like India where a sizeable section of the population does not own houses?
Ideally, what one would like to see is that the process of construction should become easier, because you need so many approvals to carry out a project which creates delays and the delays means that the interest cost to a developer goes higher and it also means that the labour cost goes higher. The process of granting of approvals should be expedited. That would help in bringing down prices, and land prices should come down.
What else is needed to be done?
Better infrastructure, because if you have better infrastructure, you will have more supply. At the end of the day, you have to understand that the price of any item is a function of demand and supply. If the demand is higher than the supply, prices can only go higher and if the supply is more than the demand then prices can only go lower. The only way you can tackle this issue of property prices is to increase supply. To increase supply, you need better infrastructure, roads, transport facility, sewage … Only then the real estate prices can be brought down.
When will you merge HDFC with HDFC Bank?
These are things which are speculated by the media all the time…
We have always said that a merger would make sense in a regulatory environment where we don’t have the CRR (cash reserve ratio) and SLR (statutory liquidity ratio), which is a huge cost. So if the RBI for example, was to say ‘no CRR, SLR’ on the existing balance sheet, then it’s something we would talk to the bank (about) and see, but that is unlikely to happen.
You also had some plan of forming a holding company.
When the laws are framed then this structure is something which would interest us. Today as HDFC we are playing two roles—a mortgage company and we are also a financial holding company as we hold equity in the bank, life insurance and asset management and so on. The mortgage business is profitable and the profits are used for making investments in our subsidiaries on a post-tax basis. Now if we were to have a holding company structure, then the mortgage business would become a 100% subsidiary of the holding company. So the profits made by the mortgage business would move to the holding company and attract withholding tax. Now that withholding tax would be exempt if we pay dividend to our shareholders, but if we use that money for re-investing into our subsidiaries then there is no tax exemption. So there is a little bit of a tax leakage in the current tax rules. These things have to be plugged before we move to a typical holding company structure.
So you are not particularly talking about RBI intervention in the market
Intervention has got its downside. When you intervene in the forex market effectively, you are selling dollars in the system and you are sucking liquidity out of the system which then creates an interest rates crises. So you have to support that by releasing more liquidity in the system, which the RBI at this stage might not be comfortable doing
You are being held 74% by FIIs. Are there any concerns on that front?
Even in 2008-2009, we were largely held by foreign institutional investors. Historically FIIs are the ones who are always been large share holders in HDFC because they look at things like a higher return on equity. They look at low cost-income ratio, asset quality, etc. Historically, over a period of 33 years now, our total loan loses, money that we have to right off, has only been 0.04% of our cumulative disbursements. So people look at that kind of thing and therefore we have a large quantum of FIIs.
Citibank bank is our largest share holder, holding about 9.5% odd of our equity. They have no plans of selling our shares. We have over 1000 foreign institutional investors — it’s very wide spread and most of the investors are long term investors. We have long only funds; they are not hedge funds who have the habit of buying and selling at short notice.
And what’s the average loan maturity?
At the time it is granted it is between 12 and 13 years, but the duration of our loans is very short term. All loans are repaid through equated monthly instalments and the instalments start the moment the loan is fully disbursed. So with every passing month, the loan amount keeps declining and that, coupled with the fact that people tend to pre-pay some of their loans, results in a duration of just around 5-5.5 years for a loan.
What’s the average age of your customer?
The average age of a person at the time he takes a loan from HDFC is 35. It has come down but not to the extent that people believe it would. About 15 years ago, it was probably about 38-39.
About a 70% plus of your loan book is for retail customers?
At the time of origination, about two thirds is retail and one third is non retail. But what we also do is we sell loans, we don’t retain all the loans we carry in our balance sheet.
When we sell a loan, we don’t book profits upfront, the way you would under IFRS or the way you would under US GAP. Let’s assume that the underlying interest rate on a loan, for argument sake is say 11% and let’s assume we have sold the loan at 9.5%. We continue to service the loan, so the customer continues to pay 11% to us. In this example of the 11% that we collect, we retain 1.5% as our income and pay 9.5% to whoever we sold the loans to. So that then creates a stream of income for future years. What that means is that we are earning income in our balance sheet on loans which no longer appear, because the loans have been sold off.
How do you manage your efficiency — your cost income ratio will continue to be 7.5% or 7.7, your gross NPA for the last 27 quarters have been coming down and all only 71 basis point.
That is probably one of the reasons why we get the kind of valuation that we get. I will tell you why, for example, lets talk of spreads and profitability….Spreads are a function of the way you manage your assets and liabilities. So if you manage your assets and liabilities well, than you can manage the spreads reasonably well. Let me explain what I am saying, we give fixed rate loans and we give floating rate loans to borrowers on the asset side. So what we have to ensure in order to be able to maintain a stable spread is that on the liability side also we have a similar profile, which means that we give in fixed rate loans out of fixed rate borrowings and floating rate loans out of floating rate borrowings. This ensures that if cost of funds goes up, we increase lending rates, when cost of funds comes down we reduce lending rates and spreads are maintained. Historically the range is between a low of 2.15% to a high of 2.35% — the difference between the lending rates and the borrowing rates. The net interest margin is a little different, it takes into account the income we are earning on loans which are not in our balance sheet. So margins tend to be higher and can fluctuate, depending upon how much loan you have sold and things like that.
With interest rates going up, you shifted from bank loans to individuals FDs
That’s right, we have a significant portion of our funding which has been done through bonds debentures, which are wholesale instruments and retail deposits… At this moment they are much cheaper than bank loans. In a high interest rate environment, retail funding is always cheaper than wholesale funding. In a low interest rate environment, wholesale funding tends to be a lot cheaper than retail funding.
IFRS would also give us a choice of reflecting investments at original costs. IFRS would probably result in an increase in profits of around 25% to 30%?
Again for a variety of reasons, today everyone looks at stand alone results no one looks at consolidated results. When you look at stand alone results, it only reflects the dividend that we receive from our subsidiaries. There is a huge amount of under statement of income and because we are not able to recognize the entire income. When we move to IFRS, all the cost come to the P&L account, all the revenue will come to the P&L account and that together with the other profits of our subsidiaries would probably increase our accounting profits by above Rs 600-700 crore.