A 25 bps rate hike will be a good policy

Deepak Parekh, chairman of India's oldest mortgage lender Housing gage lender Housing Development Finance Corp. Ltd (HDFC), does not want India's banking regulator to raise rates aggressively in its monetary policy that is to be unveiled next week. “We have to live with some amount of inflation if we want high growth”, Parekh said in an interview. He also spoke on subjects ranging from inflation to the state of affairs in the real estate sector and so-called teaser home loans. Edited excerpts: What's your take on inflation and the interest rate scenario?

Inflation is high. It first started off in India due to food inflation.
Part of it was mismanagement. Suddenly sugar and onions disappeared from the market. I personally believe that it is the middlemen, the bad distribution channels and the poor ware- housing capabilities that we have for our agricultural pro- duce that are the causes of inflation.

It started with food inflation; got transferred to commodity inflation and finally to oil inflation.
The latest numbers are showing that we are seeing inflation in manufacturing as well.

Commodity prices have gone up. If you look at any commodity--whether it's steel, cement or copper--all prices of commodities have gone up. And that indirectly impacts the cost of pro- duce, the cost of manufactured goods.

We have to live with some amount of inflation if we want high growth. You cannot have a system where you have 9-10% growth and 2% inflation.

You are not one of those who believe that the Reserve Bank of India (RBI) is always behind the curve and that it should have been more aggressive?

I don't think RBI is behind (the curve). RBI has taken a very moderate view on the increase in interest rates. And I am happy for that because there is no point being totally different from the rest of the world. India's interest rates are perhaps the highest to- day in a large number of countries.

But still it's a negative--less than inflation?

It is negative, but you see what is happening all over the world.
Money is available at 1% and 2%, but there are no takers. Why should Indians pay 10 and 11% for money? We are paying the price because we are growing rapidly.

So whom do you blame for high inflation--RBI or the fiscal policy?

I don't think you can blame anyone. The food inflation was our own creation--because of lack of reforms in the agricultural sector. Commodity prices is a global phenomenon; we cannot help it.

So, a hike in interest rate would not help us.

I think a moderate RBI policy on increasing interest rates by not more than 25 basis points in every stage has been positive.

What do you expect RBI to do in its policy announcement next week?

May be another 25 basis points.

That will take us to 7%, will that be enough?

Well, it depends on what hap- pens in the Middle East, crude and commodity prices. But at least RBI is having a close watch on this, and I think RBI needs to be complimented for its baby steps and not disruptive steps.

You don't expect a 50 basis point hike?

No, I don't expect.

Do you see any impact of high interest rates on firms' investment plans?

I don't see any change in the investment plans, but I am con- cerned that the investment plans are not being fructified. Plans are there, but there is a wide gap between plans and putting them into action.

Is that because of lack of confidence?

No, it's not lack of confidence. It's the procedures... the approval process in India.

Investment in plant and machinery has slowed down; in- vestments in new factories have slowed down and this is not good in the long run for the economy. Companies have plans, but they are finding it difficult to put their plans into action. Getting all the approvals to put up a plant is a nightmare in India.

So as far as the monetary policy is concerned, there is nothing much to be done?

I don't think there's much to be done. A quarter percentage rate (increase) to tackle inflation is a good policy; it is not disrupting industry. The industry is not expanding not because of high interest rates, but because of other constraints and impediments. So, the government needs to be blamed?

Well, the government has to take some action to speed up processes, approvals, coordination.

But the government seems to have other priorities at this point of time.

That's true; they are preoccupied with other matters.

What's happening in the real estate sector today? The prices are back to the 2007 levels and even higher in some pockets. Do you see a bubble there?

When you talk of real estate in India, it's too broad a subject.
First of all, you have to segregate between urban and rural, and then you have to segregate among residential, commercial and retail.

Retail sector prices have come down; a large number of malls across the country are empty.
Existing tenants are not renewing leases because of lack of demand.

Rents across India have come down in retail space and will come down further because of empty space and new construction of malls and shopping are- as. I don't see that the commercial prices are going to go up in a hurry, whether for rental or for purchase.

Now we come to the big market--the residential market. Here Mumbai and Delhi are different from the rest of the country. If you look at the rest of the country, prices have not gone up significantly.

Mumbai being an island, we have our peculiar problems--there is not much new construction happening. We are not reclaiming more land; we are not increasing FSI (floor space index, allowing taller buildings), we are not willing to use our slum transformation agency; salt-pan lands are not used for construction; man- groves are empty, litigation of urban land ceiling cases is not removed--I can give you a number of examples. As a result, sup- ply is severely constrained. So, whatever the builder builds, he can demand what price he wants. But I don't think prices will keep on going up because there are no takers at even these prices.

With cost of money going up, do you see any impact on demand for home loans?

So far, we have not seen any impact on demand, but if it continues like this, I am sure we will see some slowdown. At the moment, what is spurring our growth is really smaller cities, is really tier II and tier III cities.

Is there something fundamentally wrong with the Indian real estate sector? It's not been blacklisted, but bankers are not very comfort able giving money to the sector.

RBI is categorical that any corporate house that has exposure to the sector will not get a banking licence; and we hear real estate money flowing into the tele com scam.

The real estate sector has lots of issues, but we don't have a regulator. You and I can raise money from the gullible public. People are willing to trust anyone and everyone because they are desperate to own a roof over their head.

Who do you blame for the problems? The builders or the system?

It's the whole system--every- thing, starting from the approval process. Why do you need multiplicity of approvals? Why can't we have a single point of approval in a city? Why can't the municipal corporation get other approvals for water, sewage. Why should we send everyone to 23-30 different departments? It delays the process; it takes more money and time. Builders run their operations on borrowed money; they borrow from informal market and (at) exorbitant rates of interest. All these add to the consumer cost.

The State Bank of India has finally closed its teaser loan scheme. Are you relieved? You were very upset and said the teaser home loan shouldn't be there.

It's not a question of getting upset or happy, or (that) teaser loan shouldn't be there. It is each organization's wish. We are in the business to make money for our shareholders, but if some institutions don't want to make money for their shareholders, it's their choice. Such loans tempt a borrower with lower rates of interest in the early years and later on he's subjected to higher rates. At that stage, if his income doesn't warrant paying a higher installment, it goes into a tailspin. The RBI rightly said that if you give teaser loans, you should have a 2% provisioning charge. You also sold such loans.

We also did it, but we provided 2% on our portfolio.
You did not want to lose market share.

No, we were forced to join; we were forced to introduce this be- cause when the big advertisements are there--interest rates 7.5%--and our rates were 9%, people would not come to us.

Going by the latest foreign direct investment (FDI) norms, HDFC is a foreign owned company and so is HDFC Bank Ltd.

We don't feel its right, we feel it's unfair. We have not gone and sold shares to foreigners. Foreigners have bought shares through the market mechanism over a long period of time. The control, the management, is entirely Indian; we have no foreigners on the board. We are only catering to the mortgage market in India and just because the shareholding is held by foreigners, you can't just say that we are foreign.

We have taken up the matter with DIPP (Department of Industrial Policy and Promotion), commerce and industry ministry.

Do you feel constrained because of this?

With downstream investments, we feel constrained. For instance, we invested a very small amount, `5-7 crore, in an affordable housing project, the first of its kind in Bangalore. The developer is a well-known professional; he is making homes of `3.5-5 lakh. They needed an FIPB (Foreign Investment Pro- motion Board) approval, which took three months. Their legal advice was that because we are foreign, they need to take an FIPB approval, which delayed our investments, the formation of his company, the project.

Would you like corporate houses to be allowed to set up banks?

My view is that RBI will permit corporate houses to enter into banking, but it will put stringent conditions on their expansion. Unless they are rural-based and the bias is toward small-ticket loans and financial inclusion, they will not be allowed.

Tell us about the creation of HDFC Bank.

Initially, we wanted to be a wholesale, corporate bank; but soon we realized that the big Indian banks can offer cheaper credit than us any time, so we completely transferred our mod- el to a retail bank. HDFC Bank concentrates on all retail products other than mortgages, but they source mortgage products for us. The reason of our success is we are a large retail bank.

Your dream has been to transform HDFC into the GE Capital of India.

Is there any plan of merging HDFC with the bank, or forming a new holding company?

At the moment, there are no plans. Both institutions are doing very well; we have growth in both institutions. The RBI will come out with holding company guidelines and we will see how it fits our business. Whatever we do has to be accretive to both the shareholders, it should not hit one shareholder.

What's your advice to home loan borrowers? Should they wait for property prices to come down?

What's ideal--fixed rate or floating rate loan?

My advice to any home owner is to always go for a floating interest rate loan. Interest rates come down and go up. Fixed- rate loans are about 200 basis points higher at any given time than floating interest rates; it is advisable to go for a floating-rate loan in a long-term mortgage.

If you are buying a home for investment, do not buy. But if you are buying a home for your- self to live in and you need a house for you and your family, any time is good time.

(Source-: livemint)