US-China trade war is advantageous for India; it provides an opportunity for growth: Keki Mistry, HDFC

HDFC vice chairman and CEO Keki Mistry says, “Job creation, rural economy and financial inclusion and taking more people in the tax net are going to be the three broad focus areas of the budget 2019”. In an interview with Swati Khandelwal, Zee Business, Mistry says NBFC is facing two issues and they are a liquidity issue, which has been solved out, and Risk aversion, under which the banks are reluctant to lend money to NBFCs. Excerpts: 

Q: Let us know about Industries wishlist from Union Budget2019?
A: I think the budget will have three focus areas and they are job creation, rural economy and financial inclusion and taking more people in the tax net. If you have a look on the first area of job creation then I feel the industries that can create more job opportunities will get a boost and they will be housing and infrastructure, SME segment, NBFC segment and manufacturing. But the most important segment, which creates the most number of jobs is housing and infrastructure sector. Housing sector creates several jobs like construction workers, carpenters, plumbers and engineers among others. More importantly, the housing sector also benefits the core sector of the economy like cement, steel, power and paint companies. So, there is a need to boost the housing sector. However, the housing sector is facing two issues and they are (i) unsold inventory – huge inventory has been created mainly in some big cities and (ii) there are certain stuck projects, which is not progressing, and it includes half done projects. Developers don’t have enough money to complete their projects. These are the two issues and they can be tackled by adopting two different methods. 

Q: There are certain liquidity concerns as it has not been resolved completely yet. How the problem will be resolved and how long will it be in the system?
A: The NBFCs are facing two different issues (i) Liquidity issue – Unavailability/lack of adequate liquidity in the system and it doesn’t exist any longer as it has been resolved and money is available in the system, which is running in positive liquidity for some time. (ii) Risk aversion – It is not something that RBI can easily tackle because the risk aversion has developed in the system and the reluctance on the part of the banks to lend money to some of the NBFCs because today’s regulatory environment is quite strong, rigid and well-regulated for the market. This is a reason that the banks are reluctant to lend money to NBFCs. In addition, the regulatory environment for NBFCs has been strengthened a lot in the sense, liquidity requirements have been imposed on NBFCs. The same regulations that are applied to the banks are applied on NBFCs. So, this should give confidence to the banks to start lending money again to the NBFC sector and RBI will have to play an important role in it. RBI and the government may have to talk the senior bankers and give them the confidence to start lending money again with proper safeguards. 

Q: Consumer demand is very weak at present and even the investment cycle is not picking up. So, suggest things that the government must do to revive the demand cycle?
A: There is a demand slowdown across the world and India is not the only one. In fact, we are comparing with the very strong situation that was a year ago and, in that context, things are looking weaker otherwise growth opportunities in India is far stronger than the other countries. But to pick up the demand, we will have to create more jobs and it can be done by boosting those sectors that can create jobs like the Housing sector and some tax incentives may go a long way in boosting demand, which will lead to some of the access supply being taken out of the economy and that by itself will lead to more developers constructing/developing more, which will lead to job creation. So, my hope with the budget is that there are 4-5 ways of tackling the problem and they are (i) the interest of the housing loan has a limit of Rs2 lakhs and that limit has been for a long period of time but in the midway the government created a special window where a co-additional benefit of Rs50,000 was available provided you bought a house within a certain period of time. And a lot of people did that, but that period is over now. So, the government, in this budget, should propose a clause that if you buy a house in the next 2-3 years than an additional benefit of Rs2-3 lakhs will be provided on the interest. (ii) Rental Housing – the income earned by renting out a property is fully taxed. And, in front of the same, the expenditure incurred by the person who has brought the property turns up to be an interest cost. However, complete interest cost deduction was available in the past (2-3 years back) and now it has been kept at Rs200 thousand and because of that, no one is buying a property today with an idea of investing in the property with an idea of renting out that property. This interest reduction should be at full levels and there should be no limit on deductions because the income earned through it is fully taxed. (iii) Stamp duty rates should be brought down, as it is too high in some states and it increases the cost of buying a house for a customer. 

Q: What is your view on the US- China trade war? Do you think it is a treat or an opportunity for India? 
A: I have the same view that our economy is a domestic economy and it is not an export-driven economy like China. So, if there is a trade war between the US and China then we can get an advantage out of it not a disadvantage. Our biggest import item is oil and it is something we must watch out as if the oil prices go up at the global level then it will put inflationary pressure on the economy, which will a slowdown in the economic growth of India. Except for oil, I think global events have a relatively far lesser impact on India as it has on other countries. It can be an opportunity for us to grow faster. 

Q: We have seen a growth of 12.3 per cent in the bank lending to NBFCs vis-à-vis to the previous quarter and better confidence is tricking in. Do you think that it is an impact of the back-to-back three consecutive rates cuts, which turns up to be 75 basis points, by the RBI and how it had an impact on the cost of the fund? Do you think that it will get better in future?
A: I feel that the risk aversion in the system will possibly become a little lesser. the complete credit market was frozen in September-October 2018 when the ILFS crisis came in light and compared to that things are a lot better but having said that even today risk aversion still exists in the system. So, this risk aversion should be removed, and it is very important that the government and the RBI meet senior bankers and give them the confidence that you should start looking at lending money in a much bigger way to those segments of the economy which needs funding and creates jobs. 

Q: The proposal of NHB calls for high capital adequacy and leverage for house finance companies (HFCs) but the analysts say that it will have a negative impact on ROEs and flexibility of growth of the HFCs. What is your opinion on it and how it will impact the sector? Will you increase your CRR to about 15 per cent in a phased manner over the next few years?
A: I don’t agree as I don’t feel that the analyst is saying the right thing. Yes, some of the very old average companies which need capital will have to raise capital and therefore ROE may get impact to a certain level, but I think that it is good for the system. I fully support the move of the RBI as it is a correct move. There is a need for increased capital adequacy and it has been increased. They not gone overbought with the capital adequacy requirement. Today, the requirement is 12 per cent of that 6 should be Tier I capital and other 6 per cent can be Tier II capital and they have increased the 12 per cent over the period of three years from 12 to 13 to 14 to 15 per cent. And, this, 13, 14 and 15 is a combination of Tier I and Tier II capital. Tier II capital doesn’t decrease your return on equity, but it happens with Tier I capital, which has been increased by 13, 14, 15 is not the quality of Tier I capital but a part of it is Tier I capital. So, it was needed, and I think NHB has done the right thing. 

Q: Analysts says that they are quite bullish on HDFC and it is well placed among peers and players in that segment. What is that thing that HDFC is doing but others are not able to do? Inform us about your secret success formulae?
A: Earlier in the early 1990s, we during our meets with the investors used to tell them that we have set four objectives for ourselves and they are (i) the asset quality (ii) operational efficiency (iii) growth in a measured manner and (iv) overall efficiency in asset liability management, balance sheet management, customer service and things like that. I think the biggest thing between us and some of the NBFCs which are under stress has been the fact that in last four-five years many of the NBFCs went on a very aggressive growth path and people were aiming at a 30-50 per cent growth. Under the system, the idea of 30-50 per cent growth is never a good idea because growing in the lending business is never difficult. If the lending norms are tweaked a bit and you become a little more lenient in lending, sacrifice your margins and you can achieve huge growth but that is not something that can lead to long-term success. So, you should calibrate on your growth and then grow in accordance with the same. 

Q: HDFC has acquired Apollo Munich Health Insurance in the recent past. What is your outlook on health insurance companies and their business in India?
A: We are not seeing anything else at present. I had said a year ago that we are looking at the health insurance space in a very big way and also informed that either it could be organic or inorganic growth. And, got an inorganic growth opportunity with Apollo Munich and we seek to seize that opportunity. I think there are synergies and we will first acquire the company and then it will be merged with HDFC Ergo, which is already in the general insurance business and there will be a lot of reduction in cost by the virtue of IT cost coming down, infrastructure cost coming down among others. Because of the reduction in cost, profitability can increase significantly. 

Q: But the market analysts say that the deal is not too lucrative for HDFC and they feel that the deal is expensive for HDFC at least when we see the poor matrix of profitability of health insurance companies that are functioning in India. What is your take on it?
A:  I would like to say that we have studied it thoroughly and have done thorough due diligence on the company and I feel the synergies that will prop up will lead to a significant increase in profitability. And, keeping that in mind we have invested in it and we believe that the investment is a very good investment at that price.

Q: HDFC has gone for two rounds of stake sale of Gruh Finance to meet the RBI norms. What are your future plans in that regard and the next stake sale will happen and what will be its quantum, and do you have any timeline for it?
A: We would have been happy to hold a larger stake in Bandhan Bank, but RBI has said that we can’t hold more than 9.9 per cent and that’s why we have to sell some shares in Gruh so that whenever the conversion happens we end up with 9.9 per cent in Bandhan. Most of what we have to sell, we have already done and one more round may happen much later as we don’t have any plan to sell anything more. But, when we will get the shares of Bandhan then we intend to hold the shares of Bandhan and we have no plan whatsoever of selling our stake in Bandhan. I think that micro-finance business is quite attractive and it an important sector for financial inclusion. Thus, the sector will be encouraged. 

Q: Reports were there that you have plans of listing HDFC Credila. By when the listing will happen and also update us about other segments where you can see growth and opportunities? 
A: We have two unlisted companies and they are HDFC Ergo, but acquisition has happened of health insurance in recent past and it will be merged and after that when everything settles down and the integration process is completed, we will examine when we should look at listing and it probably happens over a period of 2-3 years. The second in Credila, which has done extremely well and its asset quality has been impeccable but we want to grow more but in due of course over the period of time we will definitely look when it should be listed.  

Q: What is your outlook on capital raising plans and loan growth in FY20?
A: I think that housing demand is to structural in the system that the individual demand for housing is going to be very strong for the next 5-10 years. So, that continues unabated and the growth that we have seen in the last two-three decades will continue for a long period of time.