On the challenge from commercial banks to the traditional housing finance companies. Do banks have an edge in its low cost of funds?

Banks have been participating in the housing finance market but it has to be seen in the right context. HDFC's market share has increased from 56 per cent to 60 per centbetween 1997 and 1998. As far as the cost of funds of the banking sector goes, this financial cost is low only in the case of the savings bank and current accounts, but not from term deposits. For three-year money HDFC pays 10.5 per cent, whereas banks pay a minimum of 10.5 per cent for the same.

Banks however have a higher cost ratio. The expenses range from 3-3.5 per cent of its average assets for banks. These costs are likely to continue. There are several factors for this, such as continuing CRR and SLR requirements, and operating costs which are high. On the other hand HDFC has an expense to average assets ratio of 0.51 per cent.

Impact of the budget on housing finance companies?

The budget provisions have been helpful in increasing retail demand for housing. There has been a tremendous surge in demand since the budget announcements. This growth will reflect in the first quarter.

What about asset-liability mismatches?

In addition to cost of funds there is the problem of assetliability mismatch. HDFC is looking at long term sources of funds to match its long-term loans. The banks on the other hand are increasingly faced with an asset liability mismatch on the mortgage portfolio. Our average duration of loans is 4.9 years while the average maturity of our liabilities is four years. We have about 70 per cent of our assets in loans while the balance is in investments and current assets.

Further, non-performing loans (NPL) have not been a problem with us. We have more than provided for the existing non-performing loans in our portfolio. The net NPL is just 1.01 per cent. The NPLs work out to Rs 87 crore but we have made provisions for Rs 126 crore. The reason for the low level of non-performing loans is the overwhelming emphasis on retail assets. At least 69 per cent of our assets comprise of loans given to individuals, while 30 per cent are loans given to corporates and just one per cent of our assets comprise of loans to builders. The loans we give to corporates are not to financetheir business, rather to build housing for their employees or to on-lend it to their employees. But most of the recent NPLs have come from these corporate loans.

What about HDFC's marketing reach? How does it compare to banks?

We have a strong branch network, with 49 branches. In 80 other locations we have an outreach programme. These are for smaller towns. With this we have covered almost all the towns are cities where there is potential. But just physical reach is not everything, there is a need for technology. We have invested a lot in technology over the years and this fact is widely reflected in our operating costs. Our staff has not grown over the years despite a steep increase in our balance sheet size. In all these years our staff size has increased by just 80 people. That is also what has helped in constantly reducing our operating costs as a percentage of average assets. HDFC has financed 1.37 million units spread over 2,400 towns so far with 1.26 lakh units financed in the last oneyear.

What have been your sources of funds?

The profile of our sources of fund has changed over the years. The current break-up is this; international funding which has a term of 10-25 years comprises 10 per cent of the resource base; long term domestic funding comprises 35 per cent with a maturity ranging from 5-15 years; while retail deposits comprises 35 per cent with an average maturity of 4 years. Within the domestic market we are looking at alternative sources of raising funds. But there will be no more equity dilution.

On the future of the consumer finance business after HDFC's break-up with Countrywide Finance.

Consumer finance is a natural extension of our existing business and we are primarily targeting our existing clients. The people are known to us, they have a track-record of payments with us. We will now target them for consumer loans and car loans. There is a synergy. For instance, so far as security is concerned, we already hold a mortgage for the housing loan-this couldbe used as a security for the consumer loan too.

We had been intending to go ahead with a consumer finance business for a long time but were restricted by regulations in force then. Now we want to do it alone. There are other areas that we are looking at such as the insurance sector, in a joint venture with Standard Life.

On HDFCs low return on capital employed

For a business like housing finance it is more appropriate to use the criteria of return on average assets, rather than return on capital employed. Our post-tax return on average assets is 3.1 per cent. Our return on equity has been low for the last two years. But that is a function of leverage. We have a capital adequacy of 16.2 per cent. That would indicate that potential for increasing ROE exists. Our RoE is 12.8 per cent. The ideal capital adequacy ratio would be 10-12 per cent, which will increase the return on equity.