SC questioning RBI on moratorium unfortunate: HDFC chairman Deepak Parekh

In his frank address, Parekh was critical of the Supreme Court for questioning the Reserve Bank of India's (RBI) move to allow banks and housing finance companies (HFC) to charge interest

Housing Development Finance Corporation (HDFC) group firms have the opportunity to grow via mergers and acquisitions (M&As) on account of the ongoing crisis, according to Chairman Deepak Parekh.

Subsidiaries need additional capital to prepare for the same, and “we are now emerging into a scenario where there may be inorganic opportunities for our group firms. Some of our subsidiaries will need additional capital for expansion. We have also identified new investment opportunities to help build the next generation of value creators,” Parekh wrote in the annual report, addressing shareholders.

He added: “To support this, we are putting in place a roadmap for our future capital requirements.” However, he did not give any further details.

“We know our position is considerably stronger than most of our peers. We kept building buffers and erred on the side of abundant caution on provisioning requirements. Each time we did this, it was always from a position of strength,” said Parekh.   

Parekh was also critical of the Supreme Court for questioning the Reserve Bank of India (RBI) on its move to allow lenders and housing financiers to charge interest. “The saga of the highest court of law questioning the RBI on the moratorium was indeed unfortunate. Why should a central bank have to be answerable to a court on basic principles that the financial sector operates on? Interest payments on borrowings and loans are contractual obligations. No laws are being violated,” said Parekh.   

Parekh also cited instances where the legal system “overrode our recovery efforts” on loans given to certain parties that had “long-standing relationships we thought we were confident about”.

“Through this, we have learnt to be patient as we have to respect the system. We know these loans did not constitute imprudent lending as we have more than adequate security backing them. Yet, as we hold the trust of our stakeholders, we have to have the humility to own up to judgement calls that did not work as expected,” he wrote, adding that HDFC consciously took a stance to prioritise asset quality over growth.  

In addition, Parekh called for one-time restructuring of realty loans. “If developers do not have cash flows due to a slowdown in sales or delay in receiving requisite building approvals, they can neither complete existing projects nor service their loans.”

Any modification in terms of the loans — including additional funding — is considered to be a non-performing loan under the current norms. 

“Allowing for restructuring of these loans and categorising them as standard assets will facilitate last-mile funding,” Parekh said. Such a ‘pragmatic approach’ will ease financial stress without bail-out packages, he added.

While the underlying land remains ‘security’, allowing the problem to fester may lead to pile-up of bad debts. Again, “real estate prices have to be realistic to reflect market realities. This will help developers offload unsold inventory and improve cash flow,” said Parekh.

He noted that there should be a system of enabling end-to-end mortgages online. While sanctions can be granted online, disbursement is a lengthy process as e-signatures are not allowed for property documents.