With interest rates inching up, there will come a point when home loans will become expensive for borrowers, says Kotak Mahindra Bank joint managing director Dipak Gupta. While the demand for homes is unlikely to taper in the near term, financing a purchase will become increasingly costly, he tells Ajay Ramanathan. Excerpts.
Retail microfinance loans have grown sharply in the December quarter. How will you approach this segment going ahead?
For us, it will be limited and cautious. There is opportunity there and it is a very small base for us; total base for us is about Rs 5,000 crore. It will grow, it is an attractive area. But in the overall context, it will still be small. We do microfinance through our subsidiary BSS Microfinance, which is our business correspondent. They do the sourcing and we do all our sourcing through them. We are largely in Karnataka, southern Maharashtra, some parts of Gujarat and Uttar Pradesh. We basically are in these areas and we do not intend going significantly outside these areas.
What will you be focusing on growing within the retail portfolio?
Retail for us is basically home loans on the secured side. On the unsecured side, it is basically personal loans, microfinance, and credit cards. We expect both segments to be growing well. The home loan, and loan against property side as well as the unsecured side. The consumer side is growing at more than 20%. That is a healthy growth rate at this point of time.
How do you see home loans shaping up?
I think the demand on the home loan side is pretty robust. What we have to watch out for is interest rate. Interest rates have moved up quite a lot and at some point of time, the home loan itself will become expensive for customers. That is what we have to watch out for. We probably have not reached that stage yet. There is significant demand. People at the middle income level are very keen and anxious to get a home, and hence a home loan. I do not see that demand coming off in the near term. Finance will become increasingly expensive.
At what point of time will bankers get jittery on home loans?
It is a difficult question to answer. Let us say for example that overall interest rates move up by another 100 basis points. Today, a good AAA-rated customer will typically get a home loan at around 860-865 basis points. Another 100 basis points will make it 960-965 basis points. At that point, you take a 15-20 year loan at 965 basis points, it is an expensive proposition. It will start impacting demand at that point of time.
Do you have a target on net non-performing asset ratio?
Well, we want to keep the net non-performing asset (NPA) ratio as low as possible. You have to look at the net NPA in two parts. One is secured portfolio; even if the secured side is about 1%, it is okay. On the unsecured side, your net non-performing asset ratio has to be close to zero because ultimately, recoverability is very low. On the secured side, recoverability is still reasonable, which is why you can do with a 1% net NPA. But on the unsecured side, it has to practically be about sub-0.25%. If you average the two out, a net NPA of about 0.5-0.75% is okay. That will give you a provision coverage ratio of somewhere around 75-80%, which is okay.
How do you see the loan-deposit story playing out going ahead?
Loan-to-deposit is less of a worry. What you should really be watchful of is credit-to-deposit ratio. A credit-to-deposit ratio of somewhere between 85-90% is appropriate. It also depends on your capital adequacy. All of us are at capital adequacies of close to 20%. Our common equity tier 1 (CET1) ratio is practically 20%. That also gives you additional comfort. So at 20% CET1 ratio, a credit deposit ratio of 85-90% is okay.
Would it now be more conducive for banks to source funds from the debt market given that term deposit rates have inched higher?
Normally, funding from the market happens either in the form of certificate of deposits, which is for a tenor of one year, or it happens in the form of refinance instruments. Let us say from a Small Industries Development Bank of India or the National Bank for Agriculture and Rural Development, that type. This typically happens for a tenor of three to five years. Let us say it happens against infrastructure bonds. That funding is good because that gives you stability. If that cost is appropriate, you should always go in for that. Funding from the market in the form of bulk deposits is what you should be careful about. That is hot money and it is rarely available beyond one year. You should always be worried about bulk deposits. If interest rates move up, they will just take it out. It is chunky movement. That is why you need to be careful.
When do you see private capital expenditure picking up?
Every time someone has asked me this, I say at least 18 months away. So that still remains. I think it is still some distance away. Capacity utilisation levels are still very low.
How do you view startups from a lending point of view?
We normally are not in that segment. From a credit quality point of view, it is uncomfortable. You may fund the company against its deposits, that is possible. But pure unsecured funding to startups tends to be a risky proposition, credit wise. Our startup loan portfolio is negligible. Even if it is there, it will be against deposits from the startups.
Will we see lenders focusing more on the secured lending going ahead?
I think generally if you see, it will be unsecured for some time because at this point of time, the credit outlook is very benign and it is unlikely to change for the next six months or so. I would still expect unsecured to be high. What happens is most AAA customers will always borrow unsecured. You lend to a Tata or a Reliance, it is practically always unsecured. From a risk point of view, it is not risk-free. These are large exposures, mind you. I think for some time, the unsecured piece with remain. As long as the credit outlook looks benign, you will see more of unsecured than secured. Right now, we are talking of a risk-off scenario.
There is a saying in banking that ‘bad lending is usually done during good times and good lending is done during bad times’. How relevant is this today?
This is a very early stage. In the early stage, everyone is hungry for fresh assets. I think it looks okay for the next two to three quarters at least. It will start happening when growth is going to be high and demand is also going to be high. When the capital expenditure cycle starts for example, bankers want growth and asset availability is limited. That is when all these misdemeanours happen.