Going by the number of committees he has been part of (the latest being on financial inclusion), HDFC Chairman Deepak Parekh seems to be the government’s Man Friday. Yet, he blames India’s archaic rules for the mess the real estate sector is in. In an interview with Shyamal Majumdar and Abhijit Lele, Parekh, 66, shares his views on a range of issues — the real estate loan scam, the Reserve Bank of India (RBI) discussion paper on new bank licences and the way forward for HDFC. Edited excerpts:
HDFC has managed to keep itself out of all real estate controversies, even though it is a large financier to the sector. You must be thrilled with your due diligence procedures.
HDFC has been lucky. I don’t want to criticise any organisation as one black sheep; one disgruntled employee can ruin your reputation. Having said that, I am immensely proud of the HDFC culture — it’s all about having proper systems in place. We have a three-person committee, including myself, that goes through all the large loan files. And our senior people have made it a practice to meet all large developers.
Most people in banks and housing finance institutions must be wary of meeting builders after all that has happened recently.
We tend to run down the builder community all the time. But look at the hassles they face in getting clearances. It is a nightmare. Even if you have a small plot of land where you want to build even a 2,000 sq foot house, I challenge you to get all the clearances. It is impossible owing to the number of approvals, the complexity of getting these approvals, the amount of harassment and the amount of money that you have to pay at different levels.
We hear from developers, that, nowadays, people are even demanding benami equity of, say, 10 per cent in large projects. Some are demanding money to be deposited abroad. So the system has collapsed. It’s unfair to blame the builders alone.
But you have been the government’s Man Friday of sorts, advising it on all sorts of issues. Haven’t you taken these things up?
We have discussed these various times, but no one can do anything because, sadly, corruption seems to have become a part of our culture. What we have to do is pay government employees better so that their living standards improve. They do real important work — approve buildings, completions and so on. Most of them find it difficult to make both ends meet if they want to live honestly.
Several banks and housing finance institutions have also given loans without approvals. So don’t you think due diligence procedures are to be blamed?
By and large, the due diligence is in place. We can’t make a general comment unless we look at each case. These things should not happen, but do happen because there are many cases in which a borrower wants more loans than his creditworthiness might warrant. As it is, land prices are shockingly high, and everyone wants money upfront. Look at NTC, which has sold a number of mills. It wants money upfront before giving possession and the amount is large, going up to Rs 1,500 crore. Which developer will have that kind of cash ready? So they all come to banks and want money — fast.
So what is the way out?
The archaic procedures and systems have to be overhauled. You need over 40 approvals for the construction of a building — that’s ridiculous. Urban planning is almost non-existent; no one is taking a futuristic view. Look at Mumbai: Lakhs of square feet are being built with no infrastructure in place. It can be a nightmare.
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Is that why HDFC is gradually shifting focus away from Mumbai?
Business in other cities is growing rapidly. Do you know the number of loans that we have disbursed in Chennai over the last six months is now more than that in Mumbai? Delhi was already way ahead. The city administrators there had a vision, have taken risks that have paid off. Now, even Chennai is getting ahead.
But Mumbai doesn’t have enough land.
It is because of vested interests, corruption and also a lack of desire to do anything. There is an artificial shortage of land in south Mumbai. I agree Mumbai is an island and there is a shortage of land. But when there is shortage of land, set up a transport infrastructure across the mainland by road, underground, bridge, some pass, some ways like the trans-harbour link that they are planning to at Sewri. Once you do that, once you can make it to the mainland in 20 minutes, all land prices will come down.
So is it tough to be an honest housing finance institution and prosper in India?
No, I don’t think so.
Despite all the problems you mentioned?
I will give you an example. I am told that 90 per cent of car registrations in India are done only after some extra money changes hands. You can’t say that auto manufacturers are responsible for this. The good news is that the illegal money in construction and housing has come down across the country. You can now get a house with a full cheque payment anywhere in the country; this was unthinkable a few years back. You know every flat in Mumbai had a cash element earlier; today there is not a single rupee of cash in 80 to 90 per cent of buildings.
But home buyers have a different view.
You find out.
Do you still see a slowdown in the real estate sector?
Yes. In commercial property, there is a huge slowdown. I can show you lakhs of square feet in Mumbai, built and ready for occupation, that are unsold or unleased. There is a surplus everywhere in the country. For example, Ahmedabad was known as the mall city. But there are many malls in that city that have zero tenants.
Are you happy with the RBI discussion paper on new bank licences. It has proposed a capital base of Rs 300-1,000 crore?
We should have Rs 1,000 crore. When we set up a bank (HDFC Bank) 14 years ago, the capital requirement was Rs 100 crore, but we started with Rs 200 crore. Going by that, the minimum paid-up capital should be Rs 1,000 crore. You must have that kind of commitment if you have to start a bank.
You are not against bank licences being given to industrial houses?
No. RBI has a tough job because I know at least half a dozen industrial houses want a banking licence. I think the bias will be towards the rural plans of the new aspirants. I personally don’t think we need too many new banks.
Why?
You see a bank branch in almost every corner of cities. It’s a different story in rural areas, but physical presence there is difficult. I have always maintained that of India’s 600,000 villages only 5 per cent are bank-conscious. Setting up bank branches in the remaining 95 per cent of the villages will take 100 years. So that model cannot work in rural areas. You have to find alternative ways. You have to look at technology, like mobile money transfer, which is happening in parts of Africa. We have a large number of people who work in urban India but their families live in rural India. So for them it is a nightmare to transfer money to their folks.
We are preparing a report on this. The prime minister has formed a committee headed by the finance secretary. Narayana Murthy, Sunil Mittal, Chanda Kochhar and myself are all members of that. We have the draft ready.
Are you planning something regarding HDFC Securities, considering the Axis-Enam deal?
No, we don’t want to buy any investment banking firm. We will develop it gradually in our own time.
But why have you been so cautious on this?
We feel there is not much money in this. IPOs are being done at ridiculous prices and the salary expectations of investment bankers are huge. You can make some money in M&As, but they are not happening every day. Plus there is already a huge number of players. So we don’t see the justification in paying that kind of money. For Axis, it perhaps made sense since it wanted to offer a total product. So I am not criticising the deal.