The Hindu Business Line : LIC Housing to pursue project finance focus

Mumbai, July 4 Despite real estate prices going up and home loans becoming costly, the ‘genuine’ demand for houses will continue as there is a large demand-supply gap in the housing sector. The current scenario of rising interest rates may discourage speculative activities and that will benefit genuine home buyers, says Mr R. R. Nair, new Chief Executive of LIC Housing Finance Company.

The second largest housing finance company in the country recorded a 38 per cent growth in disbursements last fiscal, much above the industry average of 12 per cent. Mr Nair who has been with LIC, the parent company, for more than three decades, is quite confident that the housing subsidiary could maintain the current growth rate even in this uncertain year ahead. He spoke to Business Line on the outlook for the housing sector and how his company will weather the expected slowdown in demand.

Excerpts:

There has been an across-the-board increase in interest rates, following the hike in repo rates and CRR by RBI recently. Do you think the demand for home loans will slow down?

The hike in rates by RBI was a two-pronged strategy to counter inflation. Increasing CRR will suck out the extra money from the market. Increasing the repo rate will induce appreciation in the rupee and help in attracting inflows as well as tackling inflation. This may lead to increase in interest rates and a temporary slowdown in demand. But the future is positive as there is potential demand for housing from 40 million people. Even if there is a 5 per cent or 10 per cent slowdown, there is still a huge potential market.

What would be your strategy in dealing with this slowdown?

The demand has not subsided. Builder or project-oriented demand is actually driving the market. Builders are creating the market not just in Tier I and Tier II, but also in Tier III cities.

Basically, we would like to have a very reasonable growth in the retail segment. Holding on to that growth, we would like to further expand our project loans.

Traditionally, we have been doing only retail business. Out of our Rs 22,000 crore portfolio, Rs 1,300 crore came from project finance in the last fiscal. We have a good relationship with all the leading builders and we get a lot of retail business from these builders. This is why we have large proportion of retail business.

As a strategic decision, we have been giving more attention to project finance since last year. We have disbursed Rs 1,300 crore last year against Rs 250 crore in the previous year. This strategy will continue without compromising the retail business.

Where do you see LIC Housing Finance headed this year?

We have been here since 1989 and we are one of the few long-term players in the industry. Last year, we registered a growth of 38 per cent in disbursement which was more than the industry average of 12 per cent. Gross NPAs have been reduced from 2.46 per cent to 1.7 per cent. On the whole, the bottomline looked very good with the profit after tax up at 39 per cent .

The outlook for the current year is also optimistic. But there is a psychological feeling that the market is slowing down because of higher interest rates. We, however, think this is a temporary aberration and it will be beneficial for genuine customers. With this peculiar uncertainty in interest rates, speculators will withdraw from the market. Genuine buyers will help us in sustaining our growth in disbursements.

How will you manage the rising cost of funds? How much money do you plan to raise from the market this year?

The company’s cost of funds has increased to 10 per cent in June from 9.1-9.2 per cent earlier.

Based on our target of around Rs 10,000 crore of disbursements this year, payouts of Rs 4,000-5,000 crore in the past as well inflows from existing portfolio, we will be raising around Rs 8,000 to Rs 10,000 crore this year. It could be through bond issuances, term loans, Tier II or Tier I capital.

How do you see prices moving in commercial as well as residential segments?

In commercial real estate, there has been no fall in prices. In residential areas, in the suburbs in particular, the rates have been stagnant. There are not many fresh bookings taking place, but builders are waiting. While builders are not reducing rates, they are offering incentives like an 18-month EMI holiday, free furnishing or free car parking. They are hoping that this will generate demand.

From our perspective, if real estate prices come down to a reasonable level, it compensates the increase in interest rates on loans.

Do you see defaults going up as interest rates edge up?

In a high interest rate regime, there is a fair possibility of defaults going up. We have to have an appropriate valuation process and step up the necessary due diligence before granting loans. We may also keenly look at the income to EMI Ratio and also tighten the loan to value ratio. I don’t see higher NPAs in the current year because we have streamlined our processes and have a sound recovery mechanism.

What has been the progress with LIC Care Homes?

We have set up a property in Bangalore. In Bhubhaneswar we are in the process of getting construction started. In Jaipur, we are in the process of acquiring land. And in Kerala we are looking for land. The aim is to set up a total of 10 properties across the country and we hope to finish the acquisition of land this year. We will also be approaching the government for allotment of land.

When will you be actively marketing your reverse mortgage product?

The National Housing Bank is in the process of issuing the final guidelines for this product. We have the product ready; based on NHB guidelines, we will make modifications and start marketing it. Some banks have already introduced the product, but it has not yet found favour with customers. If this product has to take off, players will have to come together and create an awareness campaign.

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