Banks must be allowed to fund developers for land acquisition: Parekh

The affordable housing segment has missed out on the housing boom that the country has been witnessing in recent years, says Deepak Parekh, chairman of HDFC Life Insurance and HDFC Asset Management Company. In a Fireside chat with Business Standard’s consulting editor, Tamal Bandyopadhyay, Parekh says there’s a need to provide builders with an impetus to launch projects in the affordable housing space, along with allowing bank credit for land acquisition, albeit with some conditions. The veteran finance czar said such a move would help bring down the cost of housing. Edited excerpts: 

The Maharashtra government reached out to you during the Covid period to revive the real estate sector. A committee headed by you came out with a plan to cut stamp duty and raise the FSI (floor space index), among other measures. This led to a revival in the housing market in Mumbai and Maharashtra. Other states rushed to replicate the model. Take us through these measures.

The decrease in stamp duty and increase in FSI was a one-time exercise to kick-start the housing sector, which was in the doldrums. There was latent demand but people were reluctant to buy. These measures gave an impetus as a time limit was attached to them. The developers got enthused to take on more projects and people started buying fast to save money on stamp duty. I don't think any time in the past, the housing market was as buoyant as it is today. In the top 6-7 cities itself, 500,000 residential units were sold in 2023. The number is 30 per cent higher than the previous year. This does not include (individual) houses built on land. 15 per cent of the 500,000 residential units were sold in the Mumbai Metropolitan region itself. There was a surge in new projects across the country, except for the north, where we saw a sharp decline in inventory. 

We believe that affordable housing needs to be looked at from a different lens. This is because the pricing is not suitable for certain locations, and people's ambitions and requirements have gone up after Covid. What is your take on it and what should be done to revive demand?

The impetus for affordable housing came when the government announced the CLSS (credit-linked subsidy scheme). We (HDFC Ltd) were the largest institution disbursing loans under the scheme. The scheme was very well managed and operated by the National Housing Bank (NHB). We used to fund buyers' up to 90 per cent of the house’s value. Hence, they had to put a very small amount up front. We used to get 10 per cent back from the NHB. The government subsidised only for first-time owners and there were other restrictions like size. It worked well as it led to a demand boost. Builders were encouraged to make small houses.

Unfortunately, today I see very few developers making affordable homes. Demand for luxury homes is so high that the focus is on this segment. Most of the flats sold in Mumbai cost  Rs 1 crore and above. We have to come up with something that incentivises the developer to build 400-500 sq ft homes. Otherwise, we are leaving the ‘mass janta’ behind. It is unfortunate that amid the housing boom, the affordable segment is getting less importance. In the Budget, the finance minister did mention that the government would come up with a scheme for urban middle-class housing.

After the HDFC-HDFC Bank merger, developers say there is no institution where they can go for finance. The RBI does not allow banks to give loans to developers to buy land. While on the demand side, the government is figuring out a scheme, the supply side faces issues related to funding. How can we address this?

I think it is a fallacy that banks are not allowed to lend for land. In any urban area, whether you look at London or Mumbai, land constitutes 60-70 per cent of total value of a house. It is the most valuable part. Construction and architectural costs are much lower. Given the high land cost, there is adequate security to lend some money against the land. What is happening is since banks are not giving money to buy land, developers have to resort to short-term borrowings from NBFCs and alternative investment funds, who charge 17-18 per cent interest and some of them as much as 22 per cent. As soon as the builder acquires the land and the construction starts, they go to banks and get the normal construction finance. The high-cost loan taken to buy land is then repaid.

I think this is a wrong policy. Nowhere (globally) I think banks don't lend for land. Why shouldn't banks be allowed to lend up to 50 per cent of the value of the land? I understand that there are title related issues in rural land. But in urban areas, lawyers can now do a 30-year check on title ownership. In addition, new residential land is getting unlocked in cities as factories are moving out. There are no such issues in these lands.

To encourage affordable housing, banks must be able to lend for land. It is a safe security, provided you do the title search and ask the developer to put 30-40 per cent on the table.

The second thing I don't understand is pre-payment charges. We are not allowed to take pre-payment charges. As a result, retail securitisation is taking place every day. Banks keep buying loans from each other. If you look at the amount of refinance that takes place in the first two years of sanctioning a loan, it is mind-boggling. The focus should be on incremental housing and not substitution.

HDFC has set high standards for risk assessment when lending to home buyers. What can others learn from HDFC?

Eighty to eighty-five per cent of our borrowers are salaried employees. It is easier to gauge their income and paying capacity. Though non-salaried people came to us, saying their income was higher than what is evident on papers, we only gave loans based on the income shown and tax paid. We did cash flow funding. Even if the person said he was paying 80 per cent and wanted a loan for only 20 per cent, we declined the loan if it seemed difficult for the buyer to repay. When extending a loan, you have to see the income and make sure the person puts in 20-30 per cent of the amount.

How did HDFC manage to give housing loans at an affordable rate, while also keeping investors happy by delivering on profit growth?

You do look at the topline of a bank and an NBFC… Consider at what rate do they get deposits and we get loans or term deposits and then account for the restrictions that banks have, the costs were similar. Banks have statutory liquidity ratio (SLR) and cash reserve ratio (CRR) restrictions and priority sector lending. NBFCs had minimal restrictions. However, that has changed now as large NBFCs too face restrictions. We took advantage of the arbitrage between banks and NBFCs when it was available.