Economic growth has fallen off the cliff, currency has depreciated by 15 per cent and foreign institutional investors are jittery. A lot has happened over the last few months with the Reserve Bank of India battling a new crisis each month. In a bid to defend the currency, the central bank tightened liquidity, pushed up short-term interest rates and put capital controls in place. Most of these have boomeranged. Keki Mistry, Vice Chairman & CEO of HDFC Limited, spoke to Malini Bhupta and Vishal Chhabria at length on what bothers foreign investors, efficacy of measures rolled out to defend the currency and the real estate sector. Edited excerpts from the interview:
Of late the HDFC Group has seen major selling by the FIIs. What is your take on that and how are you addressing their concerns?
Whether it was stocks of HDFC group or any another, the fundamental problem is lack of confidence. When confidence got weaker and foreign investors got nervous when they saw the rupee depreciate. They had put money at Rs 53 or Rs 54 against the dollar a few months ago and then they saw that they were losing a lot of money once the rupee started falling by 60 or 70 paisa every day. Forget the equity risk, there was a currency risk too. FIIs saw that they were losing serious money. This put off a lot of people. In my view currency depreciation was exaggerated. I don’t think that the rupee should be at Rs 64/$ also, I think the rupee should be stronger. Whenever the dust settles and depending what comes out of the US Fed meeting on 18th September and RBI’s policy on 20th September, the rupee will settle between 59 and 62 against the dollar. I said this when the rupee was at 67 and I am still saying this. But it will be depreciate by 4-5% every year taking into account inflation. In the interim, if you have a war or oil picks up then it will depreciate further in the short term but otherwise rupee will settle between 59 and 62 like earlier it was between 52 and 57 against the dollar.
What are the concerns of FIIs?
FIIs are more interested in general questions nothing specific to HDFC. One real concern that FIIs have is how long will RBI continue with their liquidity tightening measures. The other concern is political and how long the uncertainty will continue. What party will come and will any party with majority will be able to carry out the agenda that is important. So these are major concerns that the FIIs have. There is the issue of oil prices and how that will put pressure on India’s current account deficit (CAD) and currency. Then there is also the issue of high interest rates, projects and investments slowing down. Will it result in a situation where medium and small-sized companies would have serious problems on repaying their debt given that their projects are stuck. There are also concerns with rising NPLs in the banking system. Fortunately we have been able to maintain good quality.
What is your view on these concerns?
Sentiments were weak but you can see how quickly sentiments turned a week after Dr Raghuram Rajan took over and made his opening speech. Sentiments can turn quickly. If Fed says that it is deferring its taper or announce a small tapering of $10 billion then markets will move up. On the other hand, if the Fed says that they will taper bond buying by $25 billion then markets will tank. A lot of this is sentiment driven.
There is no denying the fact that project implementation has been weak as process of granting approvals over the last several months or years has taken a lot more time so companies started projects which they thought they would complete within a span of time and now they have gone well beyond that time frame, which is causing strain in the system.
On the current account deficit, we have large resources of coal and iron ore. Yet we are importing, which is putting pressure on the current account deficit and trade deficit. Having said that if you look at last month’s trade deficit, it has come down substantially to $10 billion.
Don’t you think that control measures by RBI are hurting sentiments too?
In my view they are hurting sentiments. And I think these should be reversed very quickly. Take the example of the limit for individuals. The total money that goes out under this window is about a $1 billion. In fact in my personal view, even the tightening of liquidity in the system needs to be reversed because when currency is under pressure then interest rates are tightened. That works well when a country has free capital flows but in India it is controlled. More importantly, you expect money to come in debt and for that you need stable currency. FIIs will not put money even if they are getting two per cent more in terms of interest rate if there is a currency risk. In my view the best bet is equities because growth potential is huge. You need a facilitating environment for that. One of the ways to facilitate growth is having rates which are manageable. Keeping interest rates high is not bringing in more money into debt. Fundamentally, India is a good story as we have a young country and the requirement of various products will be high.
Take for instance, financial services and within that mortgage. The total ratio of mortgage to GDP is eight per cent. Now compare this with US or UK and the ratio is in 70s or 80s. In China the ratio is in high teens and India is only eight per cent. Our penetration is low, so growth will remain high.
With short-term rates rising, will your cost of funds not increase?
It will increase but we have to manage our costs very well. We have to look at our various sources of funding, keeping changing our funding sources based on the cheapest source, which is an on-going process. And we will be able to manage our spreads between 2.15-2.35%.
What kind of trend you see in real estate and demand?
When you are talking of real estate you need to segregate between residential and commercial. Let’s look at commercial, there is a weakness and it emanates from increase in supply between 2007 and 2008. This happened simultaneously with a slowdown in demand. This surplus capacity has resulted in lower prices but that is not a segment we operate in. If you look at the residential market, we need to differentiate between central Mumbai and rest of the country. Property prices in Mumbai vary from Rs 3,000/sq ft to Rs 100,000/sq ft. People are buying property between the Rs 3,000 and Rs 10,000/q ft range as they need a house to stay and are not investors.
The high-end property can see a slowdown for the people buying these properties are probably buying a second of third one. The middle income segment and one we cater to will continue to remain as long as jobs are there. Also we need to differentiate between residential housing in India versus advanced country. In most cases, people outside India graduate and buy their first home. In India, family culture is very strong so what you find is that people are living with their families till they are in their 30s. They buy their first home when they are in their mid to late 30’s when their children grow older. It’s not people in their mid-20’s who are taking loans.
What about news of real estate prices coming down by about 30 to 35%. Is a crash imminent?
I don’t know where the information is coming from. If you look at the NHB residex, you don’t see that much change in prices. We don’t see a major price correction. I don’t think there is any real estate bubble happening. Supply of real estate has always been restricted in Mumbai due to slower approvals. Now a lot of projects have come in and supply has increased of late at a time demand is slower. But this is typical of some pockets, but it’s not a secular trend. If prices stabilise it’s a good thing. Prices are not coming down by 30-40 per cent anywhere. When you compare prices even in one particular pocket, you need to look at the projects and the amenities they offer.
What impact do you see on the sector with the RBI coming down on the 80:20 schemes?
The RBI has not said don’t do 80:20. Please don’t misunderstand 80:20 with upfront disbursement. They are two different concepts. All that RBI has said is that if someone is taking a loan for a property, the bank must disburse the loan depending on the progress in construction. The concept of 80:20 is misunderstood by most. For instance, we have an 80:20 scheme. Our loans are given to the customer depending on their loan repayment capacity. It is not based on some notional value of the property and that he will get the loan irrespective of his repayment capacity. The Chairman’s statement in our Annual Report has talked about issues which RBI has correctly raised. Regulators and RBI have helped as they have lowered risk weights and standard asset provisions.
A lot of builders have been defaulting, and there is a lot of stress in the system. What is your assessment?
I’ve heard of this stress for the last 20 years. If you look at our NPLs, quarter after quarter you will see how the numbers have come down. If you look at the June quarter, we have seen for the 34th consecutive quarter (Year-on-Year) NPLs coming down. The non-individual NPLs are 1.08 per cent and the same for individual is 0.61 per cent. So, individual NPLs came down, while non-individuals went up in June quarter because of one particular account but the underlying security and builder is good. There is a dispute in the family due to which the project is delayed. We expect this loan to come back into shape by March 2014 quarter.
Corporate loans, which account for a third of your total loans, have seen NPLs (non-performing loans) rise in the last five years from 0.4% to 1.08%? What explains that?
Look at NPLs in the totality (retail and corporate). If you look at the growth in loan book in the June quarter compared to March 2013 quarter, 102% of the growth in loan book came from individuals and non-individuals declined by 2%. The growth came from the retail segment and the non-individual loan book did not grow. So, if the book doesn’t grow, even if there is a slight increase in the absolute NPLs, then the percentage will go up.
Corporate loan book is not a third as it appears because we also sell loans. All the loans we sell are only individual loans and once sold these loans do not appear in our balance-sheet. We sell individual loans is because they qualify for priority sector loans. So, to the extent these loans to individuals do not reflect in our balance sheet, on an outstanding basis the component in the balance-sheet is low. But, the loans we sell, we continue to service the customer and get a fee on that. On an adjusted basis, the ratio of non-individual to individual loans would be around 29:71.
Now that almost all the subsidiaries of HDFC have turned profitable. What are the plans here, including the need to infuse further cash, and the way forward?
In future, unless we do something new then that’s a different question, but as of now there is no need for fresh capital infusion in any of our existing subsidiaries. About the future plans, take the asset management company where we hold 60% and we are comfortable with that. It never required huge capital, nor does it require capital currently. Life insurance, some point in time in future and in consultation with our partner Standard Life, we will take a call whether we should do an IPO, at what stage and how. But, we would like the markets to stabilise. We would also like to see some change in the foreign ownership limit. As the Insurance company does not require any capital we are happy holding on to whatever we have invested till such time the environment and the markets become more conducive and the foreign ownership limits in insurance increase.
When you look at our results, you must look at it from a consolidated basis and not on standalone basis. Because now, if you see, in the June quarter 34% of our profits came from subsidiaries. This figure stood at barely 15% a few years ago. So you will see that the share of subsidiaries as a percentage of the consolidated profits will be higher.
Overall, HDFC has been maintaining profit growth in the range of 18-20 per cent. Can we expect a similar trend going forward?
We don’t make forward looking statements. But, generally, we have said that if you take a 3-5 years view, we will be reasonably comfortable in saying that the growth in the loan book or the demand would increase by 18-20 per cent. We had a higher growth last year as well as in the first quarter, but you have to adjust for periods when growth is much higher and periods when it is much lower. But, if you take a CAGR (compound annual growth rate), 18% growth in loan book is pretty comfortable.
Accounting profits, however, is totally a different thing. Because in accounting profits, for example, when we do individual loans, we don’t reflect accounting profits in our books because of the fact that we debit upfront our P&L account with the commission that we pay to agents. We don’t amortise that over the life of the loan or the day we do our loan we do the provisioning, which again goes as a debit in our P&L account. So, there is an upfront debit to the P&L account, and the gain in the form of revenue, net profit, spread and margin is reaped over a period of the loan.
On the whole, are you seeing any kind of stress on your books either from corporate or retail side?
In any period when there is a slowdown in the system, you will see recoveries getting, particularly from the non-individual segment, pushed namely, getting delayed by a few days in a few cases. But, there is nothing out of the order or to worry about. On the individual segment, there is absolute nothing at all.
Is it fair to assume there is no slowdown in the real estate market?
I don’t know what you mean by slowdown. If growth was 31% last time and now I am saying that over 3-4 years the CAGR in loan growth would be 18%, would that mean slowdown, I would have still told you the growth will be 18% even one year ago which we did say then.
On the macro front, GDP growth has fallen off quite a bit. Where do you see India going?
As I said earlier, the potential growth for India is very strong because of its young population, under penetrated markets and so on. Whatever attracted foreigners 20 years ago, nothing has changed. Now, the slowdown you are seeing is because the investment cycle has slowed down, as projects got delayed, inflation was high, oil prices went up. So, there are factors not necessarily all of them within the control of the authorities in India. There are global factors also which have impacted like see how oil prices have changed in the last 10-15 years, and we import such a large component of our oil requirement from overseas. Now, with higher requirement and higher prices, it means higher cost of imports, pressure on trade deficit and CAD. And that impacts our currency, sentiments, so it’s a chain reaction. And, we saw that in one day, the markets went up by crazy levels when Syria agreed to inspection, Obama made statements of holding back of attack on Syria. All that gave confidence to markets and it zoomed. A lot of this noise or sentiment you hear in the market is more built around what people are feeling at that point of time. So, sentiments improve, markets improve. What the markets lost in one full month, it recovered in a few trading days. The volatility will continue till a week more, till we have clarity on what the Fed and RBI will do.