In an interview, Keki Mistry, Vice Chairman and CEO, HDFC Ltd said that the demand for homes will pick up when the lockdown is over and confidence in the economy is restored.
As lockdown measures are easing in many parts of the country, there have been incremental improvements in the disbursement level, which is a positive sign, Mistry added.
Mistry said that as work from home becomes more relevant, demand for larger spaces will increase. “In fact, housing will now have another benefit — because now people will be working from home more often, the demand for homes with larger spaces will only increase over the long-term”, he said.
“As regards housing finance, my experience has shown that housing has proved to be inelastic to interest rates or slowdown in the Indian economy,” Mistry said giving the examples or earlier crises.
On the economy, Mistry said the key focus should be to revive the sentiments to kickstart the Indian economy. One of the solutions is to first identify the sectors which have been most affected by the pandemic and which are also substantial employment creators. The RBI can then allow a one-time restructuring of loans for these sectors such as hospitality, airline and real estate, Mistry said.
“An area which we have started to focus on intently due to Covid-19 is digitisation. We have created a special team to bring in new perspectives and strategies related to IT and digitisation. Senior management is in constant touch with the board regarding the steps we are taking in handling the Covid-19 crisis and how we are managing our current and long-term risks,” Mistry said explaining the strategy of HDFC Limited.
Analysts have pointed that the real estate sector has been the most impacted due to the Covid-19 crisis and pressure will trickle down to entities including finance companies. HDFC is the strongest in the sector, what will be the strategy to sustain growth?
Due to the unprecedented circumstances, a number of sectors apart from the real estate sector have been affected. I would like to point out that several sectors were under stress prior to the pandemic and the crisis has exacerbated the stress these sectors are undergoing.
As regards HDFC, the demand for homes will pick up when the lockdown is over and confidence in the economy is restored. Specifically, disbursements slowed down from the last fortnight of March (which is a crucial period) due to the disruptions caused by the national lockdown.
We are also observing an interesting trend as lockdown measures are easing in many parts of the country, there have been incremental improvements in the disbursement level, which is a positive sign.
I am optimistic about the future of the housing sector as demand for housing is immense. The mortgage to GDP is extremely low at 10 per cent. Housing is a basic necessity and not a luxury. Most middle-income people who are taking loans to buy a house are genuine end-users and intend to stay in the house. In fact, housing will now have another benefit — because now people will be working from home more often, the demand for homes with larger spaces will only increase over the long-term. The rise of nuclear families will also add to the demand.
One must not forget that structural demand for housing for India will always be strong due to factors such as improved affordability, government’s thrust on affordable housing, favourable demographics, increasing urbanisation and rising aspirations.
With interest rates dropping sharply, lending is not picking up much while the deposit rates are going down threatening the security needed from interest income in a volatile and uncertain environment such as now. What is your view?
Bank credit is not picking up as there is risk averseness in the system. The RBI has done a commendable job in continuing with its accommodative stance and introducing regulatory measures to revive the economy. In my opinion, the overarching concern is not interest rates but preventing job losses and creating new ones.
The key focus should be to revive the sentiments to kickstart the Indian economy. Despite ample liquidity in the system, the credit offtake is well below desirable levels. One of the solutions is to first identify the sectors which have been most affected by the pandemic and which are also substantial employment creators. The RBI can then allow a one-time restructuring of loans for these sectors such as hospitality, airline and real estate. The restructuring will allow the banks to shed their reluctance, thus stimulating confidence in the economy and allowing these sectors to come back strongly, which will then catalyse the creation of jobs. In the real estate sector, the one-time restructuring will help developers complete residential projects which have been stuck because of last mile funding issues or working capital constraints.
Put differently, an improvement in sentiments is the first sign of the revival in the investment cycle, which is so very critical in India. Investment in new businesses will create jobs which in turn will generate income, increase consumption and result in greater demand for goods and services. This will result in excess capacities being used up and create the need to build new capacities.
What is the post lockdown growth strategy for HDFC? What will be the tweaks required from earlier?
For us, we have consistently relied on our core principles along with inherent faith in the Indian economy. I am hopeful that from late third and early fourth quarter the economy will start showing green shoots and during the course of the next financial year, India should achieve its normal growth rate.
Coming to HDFC’s core principles, some of our mantras or objectives have been (i) stable spreads through asset-liability management; (ii) maintaining asset quality; (iii) achieving operational efficiency; (iv) profitability and (v) quality customer service.
We have always believed and will continue to focus on prudent lending – there is no substitute for prudent lending. When you are in the business of lending by sacrificing margins or appraisal norms you can capture all the market share you want. However, this type of approach will not lend to sustained long term success.
An area which we have started to focus on intently due to Covid-19 is digitisation. We have created a special team to bring in new perspectives and strategies related to IT and digitisation. Senior management is in constant touch with the board regarding the steps we are taking in handling the Covid-19 crisis and how we are managing our current and long-term risks. Of course, attaining operational efficiencies in this new working style environment and health and safety of employees remain a priority.
How does HDFC see the emerging picture on housing loans given the pandemic?
Over the past decade, India has endured several crises such as the global financial crisis of 2008-09, the US Fed’s taper tantrum in 2013 and the IL&FS default in late 2018. The common thread was that it created an atmosphere of risk aversion but regulatory measures and the inherent strength of the Indian economy with its strong fundamentals has led to recovery. India has proved to be a resilient economy.
This crisis is unique as it is a health crisis and not a financial crisis. The pandemic has affected the global economy by causing both aggregate supply and demand shocks. Of course, apart from regulatory measures, signals of flattening of the infection curve and development of the vaccine will play a role in providing confidence to the economy.
As regards housing finance, my experience has shown that housing has proved to be inelastic to interest rates or slowdown in the Indian economy. Once must remember that housing is the single largest investment a person does in his or her lifetime and is a long-term loan unlike a car or consumer loan. If the property is liked by the family, is affordable in context of the income of the individual and the cost of the house, most people would go ahead and buy the house.
In the current scenario, most homebuyers will adopt a wait and watch stance till the situation tends towards normalcy. I then expect the pent-up demand to unfurl with homebuyers showing strong inclinations to purchasing a house. Whilst other factors will come into play when consumers decide to purchase a house such as decentralised working and social distancing, the demand for housing finance remains insatiable in a country like India which has a huge housing shortage and as I mentioned before, the penetration levels are extremely low compared to other countries.
A theme that is playing out is a wave of consolidation in India Inc due to Covid-19 pressures. Does HDFC plan to do acquisitions as valuations have come down and the larger players are expected to gain? Are there any new businesses that HDFC plans to incubate or diversify?
HDFC’s investment strategy is based on a number of factors such as matching synergies, identifying acceptable levels of risk, recognising opportunities and importantly, optimising the level of return for our shareholders and long-term growth potential. If you see, over the years we have promoted a number of companies engaged in financial services such as Bank, life and general insurance, asset management, venture capital, property funds and education loans.
For instance, our decision to acquire a stake in Apollo Munich Health Insurance (and its subsequent merger with HDFC Ergo) was based on the under penetration of health insurance in India compared to the global average and also the advantage of combining the expertise of HDFC Ergo and Apollo Munich. Health insurance is still at a very nascent stage but is expected to drive growth of the general insurance industry.
On May 18, RBI had directed HDFC to reduce stake in HDFC Ergo and HDFC Life to 50 per cent or below. What will be the timeline since six month’s time has been given?
I believe this is in line with measures that require NBFCs / HFCs not to hold more than 50% in insurance companies. In HDFC Life we have to reduce our holding by 1.43 per cent and in HDFC Ergo, we have to pare only 0.58 per cent.
As regards HDFC life, we have six months to reduce the stake. For HDFC Ergo, we have time till six months after the approval of the merger between HDFC Ergo Health and HDFC Ergo, for which clearance is awaited from the National Company Law Tribunal. Thus, we have sufficient time.
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