The Reserve Bank of India (RBI) is unlikely to reduce the policy rate in its July policy. However, the higher current account deficit coupled with the free fall in the rupee's rate against the US dollar would weigh on the RBI's policy decisions, said Keki Mistry, vice-chairman and CEO, HDFC - India's largest housing finance company.
"The benefits of rate cuts can be passed on if sufficient liquidity is available. Rate cut is not expected in RBI's policy," he told CNBC TV18 in an interview.
Since the beginning of 2013, RBI has so far slashed the policy rate by 50 basis points. However, lenders have not passed on the benefits of rate cuts on the ground of liquidity.
HDFC has already put in application to raise funds through external commercial borrowing (ECB) route. Last week, RBI had eased fund raising norms through ECB route for the low cost affordable housing projects. Both housing finance companies (HFCs) and developers are the direct beneficiaries.
Below is the verbatim transcript of Keki Mistry's interview on CNBC-TV18
Q: RBI has lowered the risk weights on certain categories of housing loans as well as commercial real estate which is into housing and is also already attracting lower risk weights. What is the net benefit to you? Your non-individual, non-retail loans are all to people with exposures in housing.
A: Looking at the retail segment, the bulk of our loans is to people who are in the middle income segment. If you look at average loan size, for the year ended March 2013 it was about Rs 21.60 lakh. A reduction in the risk weight for loans above Rs 75 lakh does not give us direct benefit on all these loans. A small segment of our portfolio will get a lower risk weight, but a significant portion of our portfolio would be at a level which is lower than Rs 75 lakh.
Q: We got some research reports saying that 15 percent of your exposure is to categories in commercial real estate that are into housing. Is there any monetary amount that you can tell us in terms of relief?
A: It is not a question of freeing up any monetary amount. It frees up capital. If you look at our capital adequacy, our capital adequacy is frankly quite high. Our tier-1 capital on March 31 stood at 13.8 percent against the regulatory requirement of 6 percent. So the tier-1 capital will now move up because of this change from 13.8 percent by about 2.5-3 percent odd. So there is an increase in tier-1 capital because of the reduction in risk weight, but it does not result in a direct reduction in cost of funds for us.
Q: Isn't there some relief on some standard asset provisioning as well?
A: Yes, there is a reduction in the level of provisioning for non-individual loans, but again there you need to keep in mind that we have always carried excess provisioning. If you look at year ended March 2013, we were carrying an excess provisioning of nearly Rs 300 crore and that Rs 300 crore will increase by another Rs 350 crore in this quarter. This is because the provisioning on our dual rate loans is now capable of being reversed if we wish.
We may just hold the excess provisioning in the books and thereafter make lesser provisioning in the monthly P&L account and that is the call we have to take. We already carry a huge amount of excess provisioning, nearly Rs 650 crore as of June.
Q: We have also seen some increase in the yields. The 10-year yield has shot up above 7.4 percent. HDFC Ltd. is a market borrower. Have we seen an increase in the cost of funds and the borrowing for HDFC Ltd. and if yes, by how much?
A: It is not that we go everyday to the bond market or to the outside market to raise money. It is an ongoing process. We have seen yields tightening in last three-four days. Today again yields have come off a little bit. If you look at five year paper for example, yields are down by about 15-20 bps compared to what they were on Friday. So this is a dynamic thing and we would raise money or would go to the market to get money only at a time when we believe that the pricing is just right. Today probably is not a time when we are looking at going to the bond market to raise money.
Q: What was your outlook in March and April? One was looking for at least some rate cuts and the yields reflected that. Now the sentiment itself has changed because of the rupee depreciation and hardening of yields all over the world. So, in this quarter or in the July-September quarter, do you think yields will be under pressure? Would you do 10-20 bps less than what you did in the fourth quarter of last year?
A: I do not believe so. There will not be any change in the level of yield simply because when you are comparing India with the western world and saying in all over the west yields have increased, you need to keep in mind that in India interest rates were always very high, whereas in the western world interest rates were brought down a lot. Therefore, from those extremely low levels you might see yields going up a bit, but in India we kept interest rates very high. So, I do not see significant increase in the level of yields.
AAA bond paper for five years is down by nearly 15-20 bps and so, I do not see there will be any significant change in cost of funding. If you were to look at the bond market there has been a significant reduction in cost of funding in first couple of months, right from the middle of April till middle of June.
Q: When we had no rate cut in the June policy, everyone hoped that it would come in July policy, but now with the rupee falling all the way down to 59-60 level, do you expect a rate cut in July policy?
A: No, I do not think we will see a rate cut in the July policy. If you look at the macro and the fact that inflation is down to a significant low, inflation is down to a three year low in terms of wholesale inflation and that warrants a rate cut. At the same time, the volatility that we have seen in currency markets, the pressure that we are seeing on the current account deficit (CAD), the fact that oil prices still hover between those levels of USD 102-103-104/barrel, all of that will result in RBI holding on, not doing a rate cut now.
We have seen a couple of rate cuts by the RBI and have not seen them getting passed on in the system. We have seen lower lending rates by banks and for that you need to understand that if you look at the balance sheet of a bank a significant portion of the funding of a bank comes from deposits, the total funds in the banking system is nearly Rs 75 lakh crore and out of that the amount of money that banks borrow from RBI on a given day is roughly about Rs 50,000 crore to Rs 1 lakh crore.
When RBI cuts rates, it is a small portion of the funding of a bank where the interest rates comes down. Therefore, their ability to pass on the rate cut, or the ability to reduce interest rates stems in only when there is sufficient liquidity in the system which enables them to cut deposit rates.
The growth of deposits in the banking system so far has been fairly muted. Last time the number was about 13.3-13.4 percent. We need that number to go higher, for which we need more liquidity in the system.
Q: The RBI has opened a crack in the door for you to get external commercial borrowings (ECB) in. When we last spoke you had put in an application, have you got any money?
A: No, we have not. We have put in an application. This door was opened just in the middle of last week. It has to get approved by the National Housing Bank (NHB), then we have to go to RBI and then we have to watch the market. It is not that we would go to the market on any given day and raise money.
When we are looking at the possibility of raising, let us assume we do a three year borrowing. If we were to do a three year borrowing a week earlier, forget the volatility we have seen in markets in the last one week then the fully hedged all-in funded cost to us would have been somewhere in the vicinity of about 8.5 percent or so. This is pretty much in line with what are marginally lower then domestic rupee funding cost today would be. Therefore, there is an advantage at that time in raising foreign money.
With the depreciation in the rupee forward, yield curves would have come down a bit, which means hedging costs should have come off a bit, because when the spot rate go higher the forward rate generally does not move at the same pace. So we had to review these costs once we get the RBI approval and that is the time when we will go to the market to raise money.
Q: Deadline for new bank licenses falls today. It is all going to be future competition for you. What is your own estimate in terms of how many new banks you may have six or nine months down the line?
A: This is a bit of a guess work. We do not know how many licenses RBI is going to put out, or how many people are going to go and put their application in. RBI would look to give about 5-6 banking licenses. In the long-term, there is little bit of competition, but we have always been mindful of competition. We see what competition is doing, but we are not unduly worried about competition.
Q: With regards to non-banking financial companies (NBFCs) and the banking sector person who knows both these sides very well given the exposures of your group, when does competition really kick in? All these guys start with a huge disadvantage in terms of having to adhere to cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL) norms from the day they get the license. To that extent, do you think competition for you is postponed by three-four years?
A: I would think so. Today, every bank can give housing loans, but if you look at the overall growth of housing loans in the banking system till March, it was only some 16.4 percent. It is not that banks are being stopped from giving housing loans, but they find that there are other products which they can lend, where they can get a much higher margin. So just because we have new banks, does not mean that every bank is going to start rushing into do housing loans.