Despite the slowdown in the economy, the home loan segment continues to see strong growth. Keki Mistry, vice-chairman & CEO, HDFC Ltd, in a conversation with Ira Dugal, explains that FY14 could be another year of good growth in home loans as customers bring forward home purchases to take advantage of tax incentives announced in this year?s budget. However, Mistry cautions that home loan rates may not see a steep reduction in the next six months as the cost of funds for lenders is still to come down in a sustainable manner. Excerpts:
Is there any hope that loan rates will start to come down? Banks are still saying rates are sticky?
If you look at different sources of funds for HDFC, deposit rates and base rates of banks have not come down. Bond yields have started coming down. Further, if you look historically, rates always tend to tighten in February and March. When you get to April, the government starts to spend, liquidity starts to enter the system, interest rates start to soften, and bond yields start to come down. Fortunately for us inflation numbers are headed lower and that would probably facilitate lower rates. What we have to understand is that when RBI cuts rates, in the media everyone says banks should cut rates. But that?s not the most important thing because, at the end of the day, RBI cutting rates doesn?t throw liquidity into the system. It reduces the amount of interest a bank pays and it is a signal to the market. But the signal can?t be followed till there is liquidity in the system. So, the ability of banks to cut rates will not depend on when RBI cuts rates but when they can reduce their deposit costs.
But if I take HDFC as an example, at least market rates and bond yields are coming down. Does that not bring down your cost of funds and allow you to cut rates?
Only bond yields are coming down. Nothing else. New funding costs do come down when bond yields come down. But it is only new funding costs and not the old existing liabilities on the balance sheet. We always watch our cost of funds and whenever our cost of funds comes down we always pass that benefit to our customers. Our target is to keep spreads in the range of 2.25-2.35%.
So, it hasn?t come to a point where you feel you can pass on a rate cut without impacting spreads? Some brokerages are expecting an improvement in spreads for you?
Not yet. But when they do, we will pass the benefits on. We have to look at spreads on a balance sheet basis.
Are you also watching banks and seeing whether they reduce rates?
I don?t think we will follow the banks. If our cost of funding comes down to a level where the cost in the balance sheet is down, then we will pass it on.
In terms of growth, the home loan market seems to be doing
well. Has there been any change in the environment, one way or another?
If you see our March numbers, the growth in individual loans was 31%. Further, there is an additional tax benefit that has been provided in this year?s budget. So, if you are a first time home buyer and you are taking a loan of less than R25 lakh after April 1, 2013, and before March 2014, and your property is less than R40 lakh, you will be entitled to an additional benefit of R1 lakh that has to be exhausted within a period of 2 years. So, what customers may do is think of bringing their purchases forward and take the loan by March 2014.
Are there specific home loan markets where you are seeing strong growth?
I think it is across the country. It is not growth only in the tier-2 and tier-3 cities but also from the periphery of the large cities. So, for example, if you look at the Pune region, the growth is happening in places like Kolhapur, Solapur and Sangli. Similarly, in Delhi, there is huge demand from Noida, Ghaziabad and the entire NCR region.
Is demand being supported by a drop in home prices?
I don?t think prices have dropped. I think the price increases last year were slightly muted but prices by and large have kept going up and so have income levels. At the end of the day, the affordability ratio, which is the most important ratio you should look at, has remained stable, notwithstanding the fact that property prices have gone higher and this is because of a rise in income levels.
Is competition getting intense? Because banks are now under pressure to push retail loans since corporate loans are not growing.
Competition has always been there. We watch competition carefully but I think the market itself is so large that everyone will grow. The most important thing in India is demographics. In the West, people in their late 20s will be moving out and buying their own houses. In India, that does not happen. The average age of a customer when he takes a loan from HDFC is somewhere in the mid to late 30s. As much as 60% of India?s population is below 30 years of age. All these people, in the next 5-15 years, will need houses and hence housing loans. The shortage of housing in urban India is 26.53 million units. Further, there is rapid urbanisation and hence all these factors make us believe that there are ample growth opportunities. But, in all of this, you have to grow profitably and without compromising on quality.
But you are not seeing any unhealthy competition, are you? For instance, under-pricing.
I don?t think so. There is no under-pricing.
What about banks pushing customers to transfer loans?
That?s not a new thing. It is just that it has been pushed a little more now through advertising. Prepayments, which include part prepayments for us, have been usually between 11-14% for many years now and it is no different this year or a year before. Also, the 31% growth that we talked about at the end of the March quarter included pre-payments. Indians, by nature, are debt-averse by and large. So, middle income people will also look to pre-pay when they get a bonus at the end of the year or if they have some surplus money they may have generated by way of sale of some asset, etc.
So, with banks aggressively marketing transfer of loans, that ratio hasn?t moved?
Not really. In that band of 11-14%, it might be 11% one year and 13% another year.
Let me come back to the economy, what are you picking up from foreign investors you speak to on how they see India right now?
There is a lot of global liquidity that is driving markets higher. Everywhere in the world there is a slowdown, so, in that sense, India is not very different. We were in the US a week ago. The big worry that investors have with reference to India is that investments are not starting. The other thing is that we have elections coming. Every time there are elections, there is uncertainty about which party will win, whether the policies adopted by the previous government will continue, etc. So that concern is there at the back of the mind of investors. Last year, people were much more concerned about the economy, the fiscal deficit and inflation. That worry does not seem to be there now in any significant manner. This time around, not too many people asked about the current account or about inflation. So, from that point of view, investors seem more optimistic.
Do you think we will see some improvement in the savings
cycle this year as inflation comes down?
I think you will. Savings were relatively low last year if you look at the deposits in the banking system last year. They were a lot more muted than what we have seen historically. That is what is stopping banks from cutting rates. Most banks have seen a drop in their CASA ratios.
So, the big pending problem, as you said, is investment?
There is no sign of pick up in investment. We talk to a number of businessmen and we don?t see a change in the environment. If you look at the government, they set up the CCI. I believe the CCI has cleared a number of projects. In addition, what will happen realistically is that as the government starts spending, giving out contracts, that will push some amount of investment and, as a result, growth this year should be better than next year. How much better? One will have to wait and see.