‘We will enter builder financing at a later stage'

The Managing Director of Sundaram BNP Paribas Home Finance, Mr Srinivas Acharya, spoke to Business Line last week on the impact of the changes made in the Budget for the housing sector. He also provided an update on the company's plans, its resource mobilisation efforts, and his take on teaser rates as well as the interest rate scenario. He said that his company was a bit weary after multiple rate increases over the past two years and hoped to adopt a ‘wait-and-watch' policy for a few more months. While expressing caution about entering into the area of builder funding immediately, Mr Acharya did say that he thought the company will have to consider this in future because of its potential and when the company achieves a reasonable size. He said that the retail market of home loan borrowers is itself big enough to keep the company going for some more years.

Excerpts from the interview:

Your comments on the change in the limit from Rs 20 lakh to Rs 25 lakh (for inclusion under priority sector lending) and the extension of 1 per cent subvention on housing loans up to Rs 15 lakh (compared to Rs 10 lakh earlier) on the cost of a house of Rs 25 lakh. Will that make a difference?

Yes, it will. For HFCs (housing finance companies), lot more loans qualify for priority sector lending. Fund raising can be far more easier. A Rs 15 lakh loan out of a Rs 25 lakh value assumes a low loan-to-value (LTV). Ideally, we would give him up to Rs 20 lakh (permissible LTV is up to 80 per cent).

If he has to get the benefit of this direction, he has to add another Rs 5 lakh, which can be a constraint for him. The Government does not want to play on LTV. It is taking into account that the category of people who it wants to help can only pay so much of EMI. Therefore it is 25:15.

Most of our home loans come under the priority sector value. So we are able to raise funds because banks cannot meet priority sector targets through their own funds. They largely rely on HFCs for home loans. It facilitates their meeting the priority sector targets by buying our portfolio.

Priority sector is not inclusive of equity but 1 per cent subsidy is inclusive of the total cost, which means the customer's security is Rs 10 lakh and for the financier it is Rs 15 lakh.

Do banks buy a lot of your loans and the loans of other housing finance companies?

Banks sometimes set up a separate cell to buy this portfolio. To do housing finance on their own at a retail level is difficult. There are legal, technical teams to be set up, construction has to be monitored and payments released accordingly and, hence, an exclusive infrastructure is required to do this. Banks find it much easier to buy the portfolio from HFCs who have all of this.

For the banks, the benefit is having access to a pool. At the time of buying the pool, the banks set some criteria.

About 10 per cent of our portfolio is securitised. Current standards require you to book the income upfront and pay the tax. We would ideally like to phase out the appropriation. IFRS may mandate that this be appropriated over the tenor of the loan.

Did your asset quality suffer during the credit crisis?

No, In fact our asset quality has remained the best in class in the industry. Last year, we were at a gross NPA of 0.35 per cent and a net NPA of 0.10 per cent. We expect to maintain that this year as well against considerably larger volume.

What's your view on teaser rates in the backdrop of different views emerging from the RBI and the Finance Ministry?

We were not in favour of teaser rates but we did introduce the teaser rates some time last year due to competitive pressure. But we pulled back in November, one month ahead of the industry. We welcome two important developments — one, the embargo on teaser rate loans and, two, the restriction on LTV to 80 per cent. It has brought sanity to the market. Otherwise, all you needed to buy a Rs1 crore house was Rs 10 lakh. It improves the safety margins for HFCs.

Out of about Rs 1,000 crore we disbursed till February, loans under teaser rate scheme would constitute hardly about Rs 200 crore.

What are your views on builder funding? Does your company provide such funding?

We don't do builder funding at the moment as there is enough retail business available in keeping with our resources.

However, I don't think an HFC can manage without builder funding for long and I don't think that is bad. Unless the HFCs fund the builders and help them acquire land, they cannot come up with new projects. But HFCs have to have proper norms and should ensure the proper end use of funds.

The National Housing Bank (NHB) should have a mechanism whereby they get all data on builder financing from the HFCs. They should be the aggregator of the data and this can be made available exclusively to the HFCs.

Otherwise, this information is not available to the HFCs. NHB should be the repository of all information relating to housing finance, be it disbursed by HFCs or banks. NHB understands this industry very well. They are now creating a registry for mortgage.

Irrespective of institutions (HFCs or banks), the housing finance sector, in terms of sectoral funding, should be regulated by one body and that should be NHB. Provisioning on teaser rates provides that it should be continued for one year after the first reset. If three months after reset, it continues to be performing, you should write back the provisioning. Two per cent is hefty. NHB is also forming a company for mortgage guarantee. I draw comfort from the fact that in India there is a LTV restriction which, in itself, has a safeguard.

What are your funding plans, given your aggressive expansion?

We are well funded for the moment and are quite comfortable. The growth has to be manageable and backed by the right kind of skill. Our late chairman, T.S. Santhanam, used to say, “Administration should not lag behind the business.” He would not allow us to open a branch if we were to post a very inexperienced staff to a new branch.

The South is still largely untapped for us. We are currently present in 51 places and plan to take this up to 75 by next year, of which, five could be outside South. Currently, about 50 per cent of the business is from Tamil Nadu, about 25 per cent from Andhra Pradesh and the balance in Kerala and Karnataka.

About 44 per cent of our business comes through Sundaram Finance (of this, 30 per cent are existing SF customers), another 40 per cent comes from our own staff and about 15 per cent from others. We have the unique advantage of tapping into the SF branch network.

What about the deposit base. Is it duplicating the Sundaram Finance customers?

Not really. As an HFC, we can accept deposits from Trusts and the interest income qualifies for income-tax rebate. About 20-25 per cent of our deposits is from trusts. We also have distributors and we mobilise deposits through that source as well. So it is not entirely a shared portfolio with SF. Our deposit base is about Rs 500 crore. Our total loan book is about Rs 3000 crore, including securitisation. We have around 31,000 customers.

What about the deposit rate increase?

We are just tired of increasing the rates. Banks seem to be hard-pressed. We would like to adopt a wait-and-watch approach. One school of thought is of the view that interest rates will soften by Q1. The other school is of the view that this will continue for the whole of this year. Both of them, I think, have no logic. I don't see any reason as to why interest rates will have to keep increasing. Also, I don't see a reason for it coming down.

What is your outlook on the housing finance sector?

In the southern market, there is a lot of potential for growth. Kerala is expected to witness a 25 per cent growth while Tamil Nadu, especially Chennai, is expected to grow by 20 per cent in the next couple of years in terms of housing demand.

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