Rise in risk-averseness after IL&FS created panic: HDFC CEO Keki Mistry

The worst of the liquidity crisis is over and confidence is returning slowly, but surely, says Keki Mistry

Keki Mistry, vice-chairman and CEO, Housing Development and Finance Corporation (HDFC), tells Advait Rao Palepu and Shreepad S Aute that the worst of the liquidity crisis is over and confidence is returning slowly, but surely. He believes that for the last few years, new non-banking finance companies (NBFCs) and housing finance companies (HFCs) were caught in a rat race for high growth at the cost of prudent risk and liquidity management, which was at the heart of the crisis. Edited excerpts:

What are your views on the situation in the NBFC and HFC space? 

My view is there was a lot of euphoria and optimism, and in the process, many new NBFCs and HFCs were set up. The primary objective of these NBFCs was growth. It became a common scenario where some of them were growing at 40-50 per cent, or even 60 per cent. However, the growth came at the expense of proper risk management systems. Everyone was primarily looking at their valuations and growth. This was the reason why the asset-liability management (ALM) mismatch came in as short-term funding was used to create long-term liabilities — a recipe for disaster. For some time, everything was fine because the short-term liabilities were getting rolled over leading to the term being extended for a long period. Something had to happen to break that (cycle). It came in the form of collapse of IL&FS.

Has confidence improved since September?

When IL&FS fell it created risk-averseness in the market. This got accentuated a few days after the analysts began to report ALM mismatches in different companies, and issues in their leverage. This created a panic in the market. Over the last two months, all of the commercial papers (CPs) that were to mature have been honoured. This has brought back a lot of confidence. I would not say the confidence level is at 100 per cent, but it’s a lot higher than what is was after the crisis began. Today, the availability of money is not as challenging as it was two months ago. I think, in the next two months, many CPs are coming up for maturity. Also, the credit markets have become easier now, compared to two months ago. I think these CPs will also get honoured on time leading to improvement in the confidence levels. There is much more liquidity in the market and more willingness to lend money today, than it was two months ago. So, the worst of time is over.

There have been calls for the Reserve Bank of India to provide a special window for HFCs and NBFCs. Also, the RBI has eased some of the norms for securitisation. What is the solution to the ALM and liquidity crisis during an industry-wide credit crunch?

A liquidity window gives confidence to the markets that money is available. I don’t think the problem is necessarily just liquidity but more than that, it is risk-averseness that has impacted the markets. Many HFCs and NBFCs were selling their portfolio to raise cash. With the new circular, they can sell their portfolio after six months of seasoning as opposed to twelve months of seasoning. This means a larger pool of loans is available to be sold to the banks, which will increase liquidity for NBFCs and HFCs. I think the RBI may introduce a restriction on the quantum of money that can be borrowed from the short-term debt markets. So, the cost of funds has gone up for the NBFCs, and the high margins, they have been earning so far, will shrink. Our spread for the last 25 years, irrespective of interest rates, has been in the range of 2.2 to 2.35 per cent, and should continue to be in that range.

Do you see pressure in the real estate space, particularly in terms of developer funding?

Housing will have a high growth in the country for a variety of reasons such as low penetration levels, very good affordability, housing been seen as a means to spur economic growth by the government, and the demographic advantage — two-thirds of the population is below 35 years of age. Apart from their own sales, developers draw their money from two other sources —either HFCs or NBFCs, and private equity or realty funds. As long as the project is viable, has viable financials, and the developer has the ability to execute the project, things should work. Funding for developers from some NBFCs and/or HFCs will slow down, while the realty funds will continue to lend. Existing projects will not be impacted, but sourcing funds for new projects will be impacted if availability of money is less. 

What is the position of the debt-equity ratio for the company today, given the recent capital raising exercise?  

We raised Rs 130 billion of equity capital a few months ago, and the purpose was to infuse it into our subsidiaries. So, we invested Rs 85 billion in HDFC Bank, and are happy to look at other opportunities in the future. We have not raised capital as frequently as banks do. If you go back into history, we raised equity in 1994, then in 2007, and then in 2018. This capital, which we raised after 11 years, must last us for several years. Our debt-equity ratio, as of September, 2018, is very low — 4.8x.