 "Our home loans go to end-users not speculators: Keki Mistry")
In an interview with Sourav Majumdar, HDFC’s Vice Chairman and CEO Keki Mistry discusses his strategy and why he believes the bank can grow by around 20 percent on a sustainable basis.
Q: What’s HDFC’s market share now?
A: We’ve gained market share for sure. However, I’ve said in hundreds of interviews earlier that when you’re in the financial services business, the last thing you should think of is market share. When you’re lending, there’s no dearth of people who want to borrow. So, by sacrificing your margin a bit, by sacrificing asset quality or going a bit easy on appraisals, you can get all the market share you want. But that’s not our objective.We have very categorically laid down certain core objectives for ourselves at HDFC-not in recent times; it’s been there for probably two decades.The first objective is that the return on equity must rise by 100 basis points every year. If you see our track record from 1994 to now, every year, other than the year when we raised equity, the return on equity has gone up by 100 bps every year. We raised equity only twice-in 1994 and in 2007.Our second objective is asset quality. We’ve always said that asset quality is very critical for us and that is reflected in the fact that historically, over a period of 35 years, our total loan losses-money that we’ve not been able to recover-have been only four basis points of our disbursals.
Our third objective is operational efficiency, which is reflected in probably the lowest cost to income ratios you will see in the financial sector-not in India, not in Asia, probably in the world.
Our cost to income ratio for March 2012 stood at 7.6 percent. But then, we’re not a bank and we’re selling one product.
Our fourth objective is growth. It’s not that we don’t want to grow. We do.
We set a target for ourselves that we want to grow at a certain pace and we will ensure we will grow at that pace.
Q: Which is..?
[caption id=“attachment_671705” align=“alignleft” width=“380”] “We’ve always told investors over the years that we will never sacrifice asset quality or margins for market share. That is the basic philosophy we’ve ingrained within people here,” says Mistry[/caption]
Impact Shorts
More ShortsA: Typically, 18-20 percent. But it’s not as if we’re averse to further growth. So if you look at the current year, the first nine months, our actual growth in individual business after adding back the loans we sold in the last 12 months is as high as 31 percent, much higher than the target. The fifth objective is maintaining a balance sheet which is perfectly reconciled in the sense that we don’t take mismatches on interest rates or mismatches on maturity. So market share really does not figure in our objectives.'
But if you actually look at market share, there is some RBI data which comes out every month. If you see that data, housing loans in the banking system typically, in the past 12 months, have been growing at 13-15 percent and in our own case the growth we have seen in the balance sheet is 31 percent. So it’s much higher, and we’ve gained market share. But I repeat, that’s not our objective.
Q: For HDFC, asset quality has always been a very important factor. What are the key elements you consider when lending?
A: I don’t know how long this record can continue, but we’ve seen 32 consecutive quarters till December 2012, where the percentage of non-performing loans was lower than what it was in the previous year at that time. Now, 32 quarters is eight years. You can imagine how much the economy has changed in eight years. Interest rates went up, came down, went up again and are now starting to coming down.You had 2008-09, which was a terrible year in terms of global problems and India’s own issues. We’ve gone through that kind of a period. And to repeat what I told you earlier, it’s when you start going in for market share, when you start saying I need X amount of market share-someone else is growing and I need to grow faster than that-that’s the time when you start becoming a bit lax in terms of asset quality. We’ve never let ourselves become lax. Our focus has always been asset quality. We’ve always told investors over the years that we will never sacrifice asset quality or margins for market share. That is the basic philosophy we’ve ingrained within people here.When we give a loan to the customer, we never look at only the value of the property. We look at the repayment capacity of the individual, and based on that we decide how much loan we can give the customer. The property value only acts as a maximum. We will never lend beyond a certain percentage of the value of that property.The other strength is we’ve had very low staff attrition rates. People are experienced, they’ve been with HDFC for many years and have been trained in our way of doing business. Therefore, they’ve done so many appraisals in the past and know what to look for when a customer comes to them.
Q: RBI has been keeping a hawk’s eye on the real estate sector and its risks for quite some time now. How has that impacted HDFC?
A: Very little. What RBI obviously would not like to see is speculative activity in properties. Now if you look at our own business, our average loan size in the current year from April 2012 till December 2012, has been only Rs 21.5 lakh. That’s the average loan size for new loans, not the average loan size for the book. For the book it’ll be much lower-probably Rs. 8 lakh or Rs. 10 lakh because it’s historical. So on a Rs 21.5 lakh loan, if you take a 65 percent loan-to-value ratio, you’re looking at a property value of Rs 30 lakh. Now, Rs. 30 lakh is not the kind of property people speculate or make investments in.
Our loans go to middle income people who are looking to buy a house because they need a house to stay in. They are not investors, they’re not speculators, they’re end-users. Most of the loans will go to new properties, as they get constructed. Some of it will be for the secondary market, which are properties sold in the resale market, and that happens typically in big cities. So if you look at Mumbai, for example, if someone buys a property for the first time, he’ll buy a house or apartment in, say, Virar. Five years later, he builds up some savings, sells his house and buys something in, say, Mira Road or in Borivali. There’ll be someone who’ll buy his Virar apartment and we’ll be happy to finance that. So about 70 percent of our business is new properties and 30 percent is existing properties. I would say that almost everything-or a significant part of it, 95 percent plus-will be to people who are going and staying in the property. And they will typically be middle income, as reflected in the average loan size as well.
<Q Today there’s burgeoning activity in the tier II and tier III towns. Has that reflected on your loan book as well?
A: You know, 99 percent of middle class people may be aspirational and may want to buy a TV, air conditioner or a fancier car, but when they are buying a house they don’t like to leverage more than what is absolutely necessary. That is reflected in the fact that in all these years, our loan losses are only four basis points of our disbursements. Even though the loan is granted for say 12.5 to 13 years on an average, the duration of our loans is much shorter. The average duration of our loans will barely be five-and-a-half or six years. Anything between five and six years. So what happens is people keep prepaying loans all the time-about 12-14 percent of loans get prepaid every year. And every loan is an amortizing loan. It’s not as if people are buying properties they cannot afford to buy because there is an aspirational element.
Q: I was talking more about entrepreneurship growing in these towns, and whether more customers can afford to buy property now as economic activity grows in these areas…
A: Yes, that is true. If you look at our actual data, you will get the affordability ratio, which is the house price divided by the annual income. You will see that in the last 10 years, that has ranged from a low of 4.2 to a high of 5.5. This means a house costs roughly anywhere between 4.2 to 5.5 times the annual income of a customer. If you were to look at this number in the early-to-mid nineties, that ratio would have been as much as 20 times, meaning a house would cost 20 times the annual income of the borrower. Today that has come down to 4.6 times in the current year.
Q: But in general, the lower the affordability ratio, the better news it is for lenders like you.
A: Absolutely.
Q: Despite all the regulation, what are the risks you still see in the system?
A: I don’t believe there is a risk in the system unless some bank is going and lending money to property developers for buying land. There was this land buying spree in 2006 and 2007. All that has, by and large, come to an end. The 2008-09 slowdown in the economy has really had a sobering effect on most people. You know, in those days, in 2006-07, many developers wanted to tap the market and make initial public offers and investment bankers kept telling them that the more the land you buy, you will get a fancy value. The valuation of the companies was dependent on how much land they had. So many of these guys went on a land buying spree. They would go and buy a piece of land, pay 20 percent for it, buy another one, pay another 20 percent and a third. Then the time came to make the payment for the first piece of land and the crisis hit. And there was no liquidity in the system. That has not happened since then. We’ve not seen anyone being on a land buying spree.
The other thing was, till 2006-07, because there was euphoria-the economy was doing so well, the GDP was doing well and incomes were rising very rapidly-many developers went into constructing very expensive apartments. No one wanted to focus on the small apartment, one-or-two-bedroom small, affordable housing units. When the slowdown happened in 2008-09, those expensive apartments didn’t sell anymore. But the lower priced apartments continued to sell. So, post-2008-09, developers have become a lot more cautious and for every big property they construct, they also do one middle income, affordable kind of property. That’s as far as risk to the system went. But if you ask me what is the risk to growth, to my mind that would only be if people start losing jobs. Because in India we have a very conservative middle class population and if people feel they’re not confident of holding on to their jobs or not going to get their salaries, in that kind of an environment, people won’t go and buy houses.
Q: You’ve been having a 20 percent growth rate in general…
A: Yes. We had one year when growth was lower than 20 percent, which was 2008-09, at around 16 percent, but still in double digits.
Q: And you’re hoping to maintain that run rate?
A: I would hope 18-20 percent growth will continue not for one, two, three, five years but for a very, very long period of time. And I say this on the back of various reasons. One, if you look at penetration of housing loans in India, it’s very, very low. In the US, housing loans constitute 77 percent of GDP, in the UK it’s over 80 percent; Denmark is nearly 100 percent, China is 20 percent. India is at 8 percent. Even if 8 percent is to become 16 percent, we’re talking of a doubling of the existing stock of housing loans which would probably take ten years and even then we would be lower than where China is today.
The second thing which is known to all of us but maybe not so much to the outside world is, in India people don’t buy a house when they’re in their twenties. In the West, you pass out of a business school and you immediately want to stay separately from your parents and at 20, 21, 22 people go and buy houses. In India, people don’t do that. Here it’s in the mid-thirties. The average age of a customer when he takes a loan from HDFC would be anything between 35 and 38. With 60 percent of the population being below 30 years of age, all these people will, in the next five to ten years, need housing and go for housing loans. So I believe 18-20 percent growth is sustainable for a number of years. Now, it cannot be 18-20 percent every quarter. There will be quarters when it is lower and quarters when it’s higher. But on a CAGR basis, 18-20 percent over five to seven years is achievable.
Q: You don’t see this growth rate being impacted by a lack of availability? Like projects being stalled or scrapped?
A: If you look at 20 years ago, people were buying properties in six or seven cities-Mumbai, Delhi, Chennai, Kolkata, Hyderabad and such places. Today, the tier III and tier IV cities are growing so well. If you look at our January numbers, for example, Delhi NCR continues to be our largest business centre. Mumbai, which had slipped to number three for nearly two years, has started recovering from December. In December it was marginally higher than Chennai, and in January it is further higher. So Mumbai is number two. Chennai is number three. Bengaluru is four, Pune five and Hyderabad at number six. But when we talk of these cities, it’s not business generated in these cities itself. For instance, when we say Pune, it doesn’t mean loans given in Pune city itself. Pune would include places like Satara, Kolhapur, Ahmednagar. Pune is the hub. So the new places are clearly coming up.
This article first appeared in Entrepreneur India
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