LIC Housing Finance (LICHF) has turned in a fairly strong set of numbers for the June 2010 quarter with net profits coming in at Rs 212 crore, up 71% year-on-year. Profits were driven by a 36% increase in the loan book, which now stands at Rs 40,030 crore. Earlier this month, the stock price rose to an all-time high at Rs 1,074. RR Nair, director & chief executive, tells Saikat Das that the company hopes to grow the asset book by 35% to at least Rs 50,000 crore by the end of the year and is looking to borrow about Rs 20,000 crore to fund this growth.

What do you feel could be the impact of the new base rate system?

We believe there could be a 100 basis points higher impact on our cost of borrowing as far as loans from banks are concerned. Currently our cost of borrowing, on average, is below 8% and we are exploring options like commercial paper (CP), certificate of deposits (CD) and non-convertible debentures (NCD). Earlier, we were paying 7% on term loans. In the April-June quarter, 88% of our borrowings were through NCDs while 5% was from banks.

We have shifted our focus to NCDs from bank loans and, going forward, we will look for longer duration bank loans, of five years or so, at a cost of about 8%. On the other hand, for short-term money we will borrow through CPs, CDs and NCDs since banks are expected to lend more via these routes. Typically, a one-year CP or NCD money is now available at around 7% per annum, but the base rates of individual banks might change after six months and if they come down, there should not be any issue.

Is your current net interest margin (nim) sustainable?

Last year our average net interest margin was 2.7%, currently it is at 3%, and it?s possible it could fall by about 10-20 basis points by the end of 2010-11 because borrowing costs are going up. But it should not fall below 2.8%.

Your loan losses have risen sequentially?

Yes, they have risen in the first quarter because of the seasonality factor. The company’s gross net non-performing assets (NPAs) and the net NPAs rose 23 basis points in the June quarter sequentially to 0.92% and 0.35%, respectively. Typically, individuals divert money at this time of the year to college fees while business people use the money to pay taxes. Last year, too, the trend was similar and NPAs had risen by around 40 basis points sequentially in the same June quarter. We expect that in the later part of the year, NPA levels will come down as has happened in the past. We have tied up with Cibil to be able to better assess the creditworthiness of borrowers. By and large we have stayed with the salaried class?almost 85% of our loans are made to this segment—where the default rate is relatively low. We have a provisioning coverage ratio of 62% as at the end of June, 2010.

LICHFC?s ?Advantage 5? scheme offers borrowers a fixed interest rate of 9.25% for five years. Will you continue with this product in a rising interest rate scenario?

We believed there was a gap in the market because when interest rates rise, people look for stability in rates. This product is a win-win for both the customers and the company and we have taken a balanced view on interest rates while designing it. In a rising rate scenario, we may need to take a call on the product, especially if there is a significant variation in interest rates. Our current average borrowing cost is below 8%, so at a lending rate of 9.25% we are left with a margin of around 150 basis points. If rates rise dramatically, causing a reduction in the margin to below 125 points, we have to be careful because we are capable of absorbing a fall of just 25 basis points.

How do you see the growth of your loan book?

In the June 2010 quarter, our loan book grew 36% to Rs 40,030 crore. We hope to grow the asset book by 35% to at least Rs 50,000 crore by the end of the financial year 2010-11. We are also looking to borrow about Rs 20,000 crore to fund this growth.

Are ticket sizes going up?

We have have increased our average ticket size to Rs 15 lakh from Rs 14 lakh and we expect that this will go up by about 15% this year. That?s because we have repositioned ourselves and are now catering to the middle and higher ends of the market, earlier we were more comfortable with the lower end.

While we allow ourselves to lend with a loan-to-value ratio of 85%, the actual ratio now is 58%.

Our customer base is now spread across the country and at the end of June 2010, we had a total customer base of 5,25,000, of which around 25,000 were added during three months ended June. We have seen a 40% year-on-year increase in our disbursements in the April-June quarter.

How do you see the movement in real estate prices?

If prices of real estate are going up, there is clearly some demand and, therefore, chances of a correction appear remote. On the contrary, I see a 10-15% upward movement in prices over the next five-six months in Bangalore and Chennai, while the Kolkata market too could see a steady upward move. Prices have moved up in the National Capital Region, and Mumbai also is likely to see an upward movement in real estate prices.

Are you keen on funding nano housing projects?

In Chennai, we are already into a nano project being developed by Purvankara and have lent Rs 120 crore. We intend to encourage such projects.

What are your business expansion plans?

Our intention is to float a subsidiary every year. We have recently launched property services, which offers end-to-end solutions?from identifying houses to holding house- warming session and the idea is to grab those customers who are willing to buy homes but do not have necessary knowledge of real estate or those who cannot track such purchases properly because they are in a different geography. We charge around 1% of the property price for such services and we intend to hive off the business as a subsidiary next year. That apart, we plan to raise Rs 500 crore for a estate venture capital fund.

Should there be a base rate like system for housing finance companies?

I believe the National Housing Bank (NHB) is already looking into it and they are watching to see what the banks experience. Based on their experience and the response of borrowers, the NHB may take a call in another five-six months. However, I think, a base rate like system will not make much of a difference for us because we are factoring in our costs.