Capital for growth will not be a constraint for us: Kapil Wadhawan

Q&A with CMD, Dewan Housing Finance

After announcing mortgage guarantee on its pool of housing loans, Dewan Housing Finance's CMD, Kapil Wadhawan says that he has wants to grow his business financing lower and middle-income groups even if the costs involved are a little high. Excerpts:

Banking licenses could be differentiated in the future. What are your thoughts on this?

I am encouraged by the talk of differentiated banking and specialised banking licenses which I believe is the way forward because we are different to a normal lender. Housing finance should be be treated differently.

You have been in the business for 30 years, but growth has been slower than other housing finance companies. How are you planning to change that?

Housing finance is a high involvement business. It's not about building a large balance sheet. We started operations in 84. It takes time to build volumes. It took the likes of HDFC about 20 years to get to Rs 10,000 crore of assets. Today from Rs 45,000 crore and with a mere 20-22% growth rate, we are looking doubling our asset book in 3 years time. It's a time consuming process. DHFL operates in the lower and middle segment, which does not have access to money even with the banks and financial institutions having such a huge pan india geographical network.

With lower loan size, you will have to do huge volumes to reach your growth target. This will mean more costs..

We will do it. That's the path we have chosen. We will continue to focus on that segment and we believe that's the future. The real need is in the segment which we are serving. Today everyone talks about affordable housing, but we are serving that segment for the last 30 years, and will continue to so.

Your margins have shrunk in the last few quarters and your costs are rising. How will it pan out in the future?

The macro economic conditions have not been conducive. Interest rates have been on the rise. Outside of India, housing finance companies operate on very thin margins. Here you see some costs getting added up as our capital markets are not that evolved. Even then margins hover around 2.75-3% range, which by any standard are very good margins in any financial services business.

An improvement in earnings profile could change your perception from the stock market perspective. What's your view?

I don't think getting into a high margin area is going to change that. To be honest, we have had some legacy issues. There are certain perceptions which the market unfortunately carries which are unwarranted. We have a return on asset of around 1.7%. There are few companies that make that kind of money on their assets. Profitability is important and that's what drives us. But at the end of the day, we are also serving the lower income segment to build their dream home cause there is nobody out there funding them.

How do you plan to raise capital to fund such a high growth rate? You will require a high capital base..

We don't need capital over the next nine months or so. At the same time our base is growing. So this year we will end up with close to Rs 15,000 crore of incremental lending which itself is quite significant. We don't want to overstretch ourselves. We know that there is a potential market out there. We will find alternative ways of raising money. We have a strong presence in the tier 1 and tier 2 segments.

You acquired a life insurance business. How does it fit your strategy?

Life insurance is a very strategic acquisition, which is another underpenetrated business. Life insurance is being taken in India as a means of investment not as a means of protection. There is an element of evolution that has to come about in the long term. You also have a 20-25 year window right from day one when you sell a policy to a customer open. DHFL has a large distribution. Currently, the life insurance business is at a very low rank. We do protection of our own borrowers. We can do that in our own company now. And clearly we would like to get into top 10 companies list in the next five years. A lot of capital is already gone. We will be in a position to break even in that business in the next two years or so.