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Keki Mistry, vice-chairman & chief executive officer of Housing Development Finance Corporation (HDFC), the country's largest mortgage financier, talks on various issues with Manojit Saha and Sheetal Agarwal. Edited excerpts:
Now that the foreign direct investment limit in the insurance sector has been increased to 49 per cent, will HDFC’s insurance joint venture partner increase its stake? When are you planning to list the life insurance arm?
The idea is to first see how much stake Standard Life (JV partner of the life insurance arm, HDFC Life) wants to increase. By the agreement, they have the right to go all the way to 49 per cent. Whether they do so is under discussion. Once that is finalised and we sell shares to Standard Life, we will look to go for an Initial Public Offer (IPO).
The IPO will also require approval from the insurance and market regulators. Both HDFC and Standard Life are looking for an IPO some time in 2016. On the non-life side, ERGO (JV partner in HDFC ERGO General Insurance) is talking to us and they want to increase their stake from 26 per cent. That discussion is also on. My sense is both these transactions will take place sometime in 2016.
Banks now have the option of not maintaining a cash reserve ratio (CRR) and statutory liquidity ratio (SLR) if long-term resources are raised to fund infrastructure and affordable housing projects. Does that make a case for merger of HDFC with HDFC Bank?
The change in norms does not provide much benefit for the merger. Affordable housing, as defined by the Reserve Bank of India (RBI), does not cover a large proportion of our loans. The dispensation (of not maintaining CRR/SLR) is only in respect of individual loans up to a certain limit and it also depends on the value of the property. Fundamentally, a merger between HDFC and HDFC Bank always makes sense. It is only that on the existing balance sheet, the requirement to create CRR/SLR is very high. So, we have to continue our dialogue with RBI. There is no doubt that in the long term, the merger will make tremendous sense.
Your expectations from the coming RBI policy?
Clearly, inflation numbers are under control and, hence, my sense is that RBI will cut rates. The question is whether he (the governor) does it in June or waits for one or two more months to see how the monsoon shapes and then decides to cut. At the beginning of the year, I said we expect a 75-100 basis points (bps) rate cut in calendar year 2015; I maintain that view.
I believe RBI can cut rates by another 25-50 bps this calendar year and believe a 50 bps cut is more likely. SLR cutting will not really help because banks are sitting on excessive SLR but a CRR cut will have a much more direct impact. For, straightaway, liquidity in the banking system improves and then banks can pass on the benefits much faster.
Though rates have come down, credit growth has not improved. When do you think it will pick up?
My personal view is that credit growth will gather pace. We have to give it a little time. I believe private sector companies have not been investing as much as one would have liked to see.
The kickstart to the investment cycle would come from the government. In its earlier Budget, the government had increased the outlay by Rs 70,000 crore for investment in infrastructure projects having a quick turnaround time, such as building roads, bridges, rail lines or low-cost housing. With government investment, a lot of private sector investment will follow.
Your readings on current demand trends in real estate?
Commercial real estate has been soft for three-four years. Last year saw some pick-up in demand for commercial real estate, particularly at Bengaluru. The excess supply will automatically get absorbed when the investment cycle picks up and companies are willing to expand more; they will need more office space, more factory spaces.
If you look at the residential market on a structural basis, the demand for housing in India is always going to be strong, for multiple reasons. The penetration of housing in India is very low. The mortgage to gross domestic product ratio is only nine per cent in India. This number is 18 per cent in China and over 50 per cent for most developed countries.
The government is also rightly talking of creating ‘smart cities’, which will lead to migration of businesses and people from big cities to small cities. But these things take a little time to implement. Smart cities will boost demand for housing and, therefore, housing loans.
And, finally, the demographics in India are very favourable. About 60 per cent of the population is below 30 years of age. In India, the average age when a customer first takes a home loan is 35-38 years. On a structural basis, over the next 10 to 15 years, demand for housing will remain strong in India.
Will the incremental growth largely come from the rural and low-cost housing segments?
I think the growth will happen from everywhere. But, yes, the growth in low-cost housing and affordable housing will be much higher than in the high-end market. Demand for housing is coming largely from the outskirts of metros such as Mumbai, Delhi, Chennai, Bengaluru and Pune, not so much from within these cities.
On a year-on-year basis, how much of your cost of funds has come down and, therefore, the impact on your interest rates?
It is very difficult to generalise but we can say by whatever quantum it has fallen, it will be reflected in interest rates. We borrowed $300 million recently, at 40 bps lower than in the previous year. Spreads have come down internationally, so we took advantage of that and refinanced the existing facility. We have also planned to borrow another $500 mn. As funding costs come down, we will look at reducing interest rates.
Do you expect the loan spreads to improve since interest rates are expected to fall, which will have an favourable impact on cost of funds?
Normally, you expect spreads to improve when rates go down. You will not see that with us because we take a very limited maturity mismatch. So, if rates come down, we pass the benefit back to the customers. In the past 10 years, the lowest level of spread we had was in one year when it was 2.15 per cent. There was another year when it was 2.2 per cent. Barring these two, the spread has been 2.25-2.35 per cent for every other year. In March 2015, it was 2.32 per cent.
In the Jan-March quarter, HDFC’s net interest income growth was lower than the trend.
Quarterly comparisons will not give the true picture. One loan to the Hiranandani group was classified as non-performing in June 2013. So, when we did the accounts, we did not accrue income for the June 2013 quarter and for the next two. In March 2014, we auctioned the property and recovered the entire money, including interest and penalties for all the four quarters in that one, the fourth quarter of FY14. So, four quarters' income was reflected in the March ’14 quarter. Now, when you compare March 2015 with March 2014, you will not get the correct picture, as the previous year’s figure was bloated due to one exceptional item.
Do you see some slowing in the non-individual loan segment?
Of the total loan book, 71 per cent is individual loans. Non-individual loans are of three types – corporate, developer finance and lease rental discounting. Developer lending has always been between 12 and 14 per cent. The slight slowing is in the corporate segment and in the lease rental segment, as that is a function of investments in the economy. So, as people start new businesses, start creating new facilities, they also need to create more office space – for which, they would borrow money for us. But if the investment cycle is weak, people will not look to expand.
