The largest mortgage lender in the country HDFC is hopeful of achieving 19% growth this year, with housing loan as a proportion of GDP being at 8% against 20% in China. In an interview with The Economic Times, Keki Mistry, the company's VC and MD, said that though there could be some correction in real estate prices, it would not collapse. Excerpts:
Do you think high interest rates are holding back people from buying homes and affecting the mortgage market?
For the middle class, interest rates do not determine, affordability does. There are tax benefits on housing loans and repayment of housing loans is one of the avenues of saving tax. Total outstanding housing loan as a proportion to GDP is close to 80% in the US. But in emerging markets like China, it is 20%. In India, the total housing loan as a proportion to GDP is only 8%. We are talking of doubling it to 16% in 10 years. Saturation level for India is still very far away and our pace of business will continue to grow at 18-20% a year for a long time. Another factor that will determine high growth is demographics. We know India is a young country where 60% of population is less than 30 years. People think of buying a house and taking a loan when they are in their mid-thirties. Affordability is 4 to 5 times of their annual income.
There are not too many properties within Mumbai limits. Most of the demand is coming from Navi Mumbai and Kalyan area. Only Mumbai has variations like this where property prices could range from 3,000 a square feet in Virar to Rs 1 lakh a square feet in South Mumbai.
What is the competitive strength of HDFC?
We have core competence about the housing market: for us, housing is the only business. In the 90s, banks were aggressively getting into housing. We realised that we have to keep the cost low. We are operating at a cost-to-income ratio of 7.6%, compared to 30% for most banks. For us, asset quality has been very important. Our total loan loss has been 0.04% from the time we started writing business in 1977. We have four objectives: our return to equity must rise every year, cost-income ratio should be lower, NPAs should come down, and we should grow at a pace that we have set for ourselves.
What is your view on real estate prices in Mumbai?
I don't see any big collapse. Price of a product is the function of demand and supply. There is some correction in some places. The infrastructure in the city has to improve, with sea on three sides, sewage and healthcare. For a customer buying a house, the confidence comes from a steady job. If demand slows down significantly, prices will come down in big cities like Mumbai or Delhi. For a city like Mumbai, demand for a house is always going to be there. But transport has to be eased either through the coastal road or through bridges. Water, power, schooling, healthcare are relatively easier to solve than transportation. Housing in Mumbai is expensive. If you go to smaller cities, it's affordable.
You spoke of supply being short but inventories high?
What used to happen 7-8 years ago - builder announced projects with minimum tenure - have changed now. People saw delays happening in 2008. Now, they want to see a structure in place.
Is the average loan ticket size going up every year?
We have seen average ticket size going up: it ranges between 8% and 12%. Our average ticket size for new loan is Rs 21.4 lakh and the average price of a house is Rs 33 lakh. Mumbai used to be our biggest centre but now it has slipped to number 3. Today, Delhi NCR is No 1; Chennai is No 2, Pune 4 and Bangalore 5.
Do you see competition from banks?
We saw aggressive competition from a large bank two years ago when it came up with lower interest rate products. There was competition from other private and foreign banks in early 2000. Housing loans in the system grew by 14.7% but our growth was 19%. We have never been in the market share game.
Has there been a rise in defaults?
We have seen 30 consecutive quarters decline in non performing loans (NPLs) vis-a-vis same quarter previous year. We are seeing 1-2 basis points decline in NPLs. Our total non-performing level is 77 basis points fully provided for. Our NPLs are 0.79 and loan loss 0.04% cumulatively over 35 years. We recognize the fact that we are lending to middle class and the loan can stretch for 10-12 years.
Do you think inefficiency of banks will help HDFC grow?
Efficiency levels have changed over time. In the 90s, if you wanted to place a deposit, it used to take three months to get deposit receipts. It has changed a lot.
After RBI banned pre-payment charges on loan closure, do you see people switching loans?
Indians are debt-averse and that's why they come early and pay. In the past 10 years, 10-14% loans were prepaid either in full or in part. For the year ended March 2012, when charges were abolished, 12% went up to 13%. It is not a common phenomenon.
What proportion of housing is funded by bank loans?
In urban areas, a very significant part of over 80% is funded out of loans.
If you want to buy house from the secondary market, there's always a cash element?
Everyone knows there's a cash element. But over the past 20 years, the cash element has come down. There was a section in Income Tax, which gave tax authorities the right to acquire a house if they thought there was an under valuation. This section was deleted. Today, you can buy property anywhere in the country with cash payment.
Are you funding the builders?
Builders are making good margins, but not fancy margins. Builders are making not more than 15-20%. We are financing projects only for construction. All cash flow from sales of units in the project is escrowed, which ensures that HDFC gets the money.
Since the 2008 crisis, how has the builder community adapted to the squeeze in funding?
2008 was tough - things have not been so bad since then. The previous year was euphoric and every investment banker would suggest builders to do an IPO. They were building a large land bank. In those days, builders went for high-end apartments. Post Lehman, most builders have recognized that for every high-end project they also do one mid-income project. So, in difficult times, when the high-end projects may not sell, the low-end ones would. That's one change. The second change is that developers have stopped going on a land buying spree.