Housing Development Finance Corporation, the country’s largest mortgage lender, does not foresee any slowdown in the demand for home loan because of rising interest rates. In an interview with Somasroy Chakraborty and Niladri Bhattacharya, Vice-Chairman and Chief Executive Officer Keki Mistry shares HDFC’s plan to expand its balance sheet in a rising rate environment. Edited excerpts:
Home loan rates have gone up sharply in the last six months. Are you witnessing a slowdown in demand for housing loans?
We give loans to middle-income borrowers who are looking to buy a house so that they can stay there. These borrowers are not investors or speculators. A house is a necessity for them. So, a 50-basis-point rise in interest rates will not stop them from taking a loan to buy an apartment. Our average loan size last year was Rs 18.6 lakh and the loan-to-value ratio was just under 68 per cent. So, the property value for these loans will be somewhere around Rs 28 lakh, which is affordable in today’s context. Hence, interest rates will have a much lesser impact on the demand for loans than other factors like unstable employment and very high property value. The cost of a house as a multiple of the annual income of a borrower is currently estimated at 4.8 times. In other words, it takes about 4.8 years’ income to buy a house. As long as that ratio stays in the range of 4.2-5.5, the demand for housing loan will be there.
What is the credit growth target you have set for this financial year? Do you think rising cost of funds will squeeze your margins in the current financial year?
We have always targeted 20 per cent growth in our approvals and disbursements and we are reasonably confident that it will happen this year as well. As far as margins are concerned, we have never taken a mismatch on our balance sheet. We give fixed-rate loans to our borrowers for which we raise funds at fixed rates. Similarly, if we give loans at floating rates, these are funded out of our floating rate liabilities. We usually pass on the higher costs to our borrowers. But when costs come down, we also pass on the benefits of lower cost to them. In the process, our margins remain stable.
Do you foresee any stress on your asset quality in coming quarters?
We have always maintained that we will never sacrifice margin or asset quality for higher market share. Our focus has always been on the quality of our assets. It is reflected in the fact that historically over a period of almost 34 years, the total loan losses we incurred are only 0.04 per cent of our cumulative disbursements. We have seen 25 quarters in a row a lower percentage of non-performing assets in our books than what it was in the corresponding period a year earlier and I don’t see any deterioration in our asset quality in coming quarters.
Inflation is a key concern for the Reserve Bank of India (RBI). Do you expect the central bank to raise policy rates in June? Will further tightening of monetary policy reduce inflation?
I don’t think we are going to see a sharp decline in inflation in the near term. In the coming months, we are going to see a hike in petrol and diesel prices, which will translate into higher inflation. There are supply-side issues as well. In my view, there will be a gradual reduction in inflation over a period of time. Monsoon will also play an important role in determining food prices.
Inflation cannot be tackled by monetary policy alone. In my view, RBI will wait a little longer before increasing rates again. Growth cannot be totally ignored because if the economy slows, then there may not be fresh employment generation. For a country like India, employment is equally important.
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RBI has recently released a discussion paper on the structure of financial holding companies in India. You are part of the RBI committee which released this paper. What is the broad objective of this structure?
The holding company structure will apply to new entities in the business and not necessarily to existing businesses. It should be ensured that no company is disincentivised or disadvantaged by moving into this structure. The success of the structure will depend on how the fiscal side and tax laws are handled. Fundamentally, the idea is to remove the risk associated with other businesses like insurance, asset management from banks’ business. Regulators around the world are sometimes uncomfortable that the depositors’ money in a bank is being used for investment in other businesses that are not directly related to the bank. That is where the concept of holding company comes into the picture.
Don’t you think this will lead to a conflict among regulators of different sectors on who should regulate a holding company?
There cannot be three regulators regulating a holding company. RBI is the regulator for banks and non-banking finance companies (NBFCs). In the proposed structure, every holding company will necessarily have either a bank or an NBFC, or both. However, there may not be an insurance or asset management company in a holding company. Hence, RBI will be the regulator of holding companies.