Housing finance firm HDFC (Housing Development Finance Corporation) witnessed healthy growth in 2014-15 (FY15) with its non-individual loan book showing signs of improvement. Keki Mistry, Vice-Chairman and Chief Executive Officer, HDFC, spoke to BusinessLine on how he expects the loan book to grow further as the economy improves. He also expects interest rates to come down by a further 25-50 basis points (bps) if inflation remains subdued. Excerpts from the interaction:

What drove your profit in FY15?

The profit came from the individual loan segment.

Growth remained strong, spreads were marginally higher (at 2.32 per cent, up from 2.29 per cent), asset quality improved further, and the cost-to-income ratio came down to 7.6 per cent, which is the lowest we have had in recent years.

Your non-individual lending has also grown. Do you see a shift to more developer and construction loans?

On the non-individual segment, I definitely see more confidence in the market.

There are three categories in this segment — loans to companies to buy or construct houses for their employees or for their own clients (11 per cent of total advances), loans to property developers (12 per cent) and lease rental discounting (6 per cent). As the economic activity continues to pick up, I would expect the non-individual component to keep increasing.

But we need to bear in mind that it takes a while after the investment cycle starts for it to translate into growth numbers.

We believe our individual loans can grow 15-20 per cent over the next three to five years after adding back loans sold.

What are the reasons for the net interest margin weakening slightly (to 4 per cent from 4.06 per cent)?

If you look at the lending business, we need to raise money. That is by borrowing money, raising capital, or ploughing back profits.

We pay out a higher percentage of our profits as dividends, so we plough back lesser amount of profit into the business. We are not raising capital right now.

Hence, the incremental growth of our balance sheet is funded entirely out of borrowing…

A larger proportion (of liability) has come from debt and, logically, overall cost of borrowing increases and therefore the margins have declined.

Our margins will decline by about 5-6 bps every year.

The spreads will always remain within a band of 10 bps between 2.25 and 2.35 per cent.

What is your outlook on interest rates?

A base rate cut is a function of how borrowing costs move.

I think, inflation will continue to remain subdued notwithstanding the unseasonal rains because I think there is sufficient (food) stock with the government.

As long as the global economy is weak, one would expect inflation to remain under check.

And the RBI will have the ability to further lower interest rates by 25-50 bps in the remaining part of the calendar year.

From which regions have the growth come from?

It has come largely from Mumbai, Chennai, Delhi, Pune and Bangalore.

When we talk of these five cities, it is not in the heart but on the outskirts that growth has been more. There was growth also in tier-II and tier-III cities.

What about the affordable housing segment?

If you see our average loan (₹23 lakh), it does not reflect the kind prevailing in Mumbai and Delhi. I expect it (affordable segment) to grow, but whether it happens immediately or takes place with a lag needs to be seen.

First, people have to start building such (affordable) houses.

What is your take on property prices?

There will be parts of the country where there is possibility of some correction.

We could see some movement in central and south Mumbai as prices are very high and there is a lot of supply in the market.

Can you give us the status of HDFC and HDFC Bank’s reverse merger?

As of now, nothing is happening on the reverse merger. There is nothing on the cards today is all I can say.

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