Housing Development Finance Corporation (HDFC) has been able to tide over rough times even though several other players have been hit by the liquidity crunch. While the retail segment has been doing well for HDFC, growth in the wholesale segment has slowed considerably. This is mainly because of the company’s conscious call to cut back lending to the segment, given the uncertainty in the space. In an interaction with BusinessLine , Keki Mistry, Vice-Chairman and CEO of HDFC, said the last-mile funding issue for the developer needs to get resolved for the risk aversion to ease. The Centre’s recently announced stressed fund for the real estate sector could help ease the pain, he adds. Excerpts:

The real estate sector has been facing turmoil.

What is the real pain

point for the sector?

Real estate is one of the biggest employment generators in the country and has a massive multiplier effect on the economy. What is ailing the sector is that the sales of under-constructed property have slowed down, particularly in the high-end segment. The lower-end, or affordable space, is doing well.

Typically, what happens in a project is that when it is undertaken by the developer, about 75 per cent of the funding is tied-up or arranged, while the remaining is raised through sale of the under-constructed property. In other words, the advance money paid by the home buyer partly takes care of the funding requirement of the developer.

In the past two to three years, people are wary of buying under-constructed property and, hence, the last-mile funding the developer was getting is not available anymore for these projects.

Therefore, if a loan given to a project is non-performing owing to non-payment of dues to one lender, then regulations provide that any subsequent loan given to the project by the same lender or another will be treated as an NPA. This is irrespective of how much equity is left in the project, how much cash flow is generated, etc. Hence, the last-mile funding is the crux of the issue.

How can this be resolved?

The recently announced stressed fund for the real estate sector can help address some of these issues. The other way, of course, is to start lending to the segment. For that, the sentiment has to improve.

So, is the ₹25,000-crore fund sufficient? Some reports suggest that the value of such stalled projects is to the tune of

₹3-lakh crore and more...

What one needs to understand is that the numbers put out may reflect the value of the entire project. But as I mentioned earlier, it is only the last-mile funding that is required and, hence, I feel that the amount set aside for the stressed fund is sufficient as of now.

The disbursal from this ₹25,000-crore fund will be gradual — over the next two to three years. Hence, it should be enough to kick-start these projects and offer respite to home buyers and developers. Of course, processes have to be in place.

What will help draw in money into the stressed fund? Will the returns

be high? Will HDFC

also invest in the fund?

The scope of the fund is good and the returns could be good if it is run well. But we will have to be realistic about the returns. In reality, some of the projects may be stuck because of liquidity issue and not because of solvency risk.

Hence, some of these projects — backed by good amount of equity — may be sound projects. So, the returns for investors in the stressed fund may be better than normal projects, but may not be extraordinarily high. Hence, return expectations need to be tempered.

While HDFC’s retail segment continued to see healthy traction in the September quarter, growth in the non-individual/wholesale segment has been modest. When do you think

the risk aversion in

the wholesale

segment will ease?

On a balance sheet basis, 76 per cent of our loans as of September pertains to the retail segment, 12 per cent is construction finance, 8 per cent lease rental discounting, and 4 per cent corporate loans.

However, on an incremental basis, 94 per cent of our growth in loans in the first half has come from the retail segment. This kind of risk aversion to the wholesale segment is not new and it has happened in the past, too.

Currently, we are looking at the market and are waiting for sentiments to improve. Some news reports suggest that a one-time restructuring of real estate loans is under consideration. If that comes through or fund flow increases for the stressed projects, then we could see things improve.

Also, property prices have been stagnant. When prices start to move up, then the sentiment and demand will also improve.

With banks moving to repo-linked loans, do

you see any pricing

pressure for HDFC?

Repo-linked loans lead to more volatility for a borrower. Also, the repo rate is already down 135 basis points since January. Repo-linked loans will only get cheaper hereon if the RBI cuts the repo rate further. At this point in time, the number of rate cuts appear limited.

At HDFC, we would look to offer such products only if we are able to link some of our liabilities and assets to an external benchmark. So, we need to see how this product takes off. As of now, we do not think it will impact us very significantly.

On the ongoing resolution of DHFL, do you expect any spill-over effect on existing players, particularly if large haircuts are undertaken

on the wholesale book?

The DHFL issue has been known for a year now and the market has discounted it. There is no fear of a contagion impact. If the resolution requires haircuts it may have to be done. But I don’t think it will impact other players in any way.

The one thing I would expect from the resolution process is that there is complete clarity in law on the rights of the secured creditors.

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