Deepak Parekh, Chairman, Housing Development Finance Corporation (HDFC) in an interview with CNBC-TV18's Latha Venkatesh spoke on varied issues like revival in economic growth, affordable housing, the Real Estate (Regulation and Development) Act RERA, banking, NPAs etc.
Below is the verbatim transcript of the interview.
Q: Are you really that confident as the market is about affordable housing being the motor that will propel the economy forward?
A: This is the 40th year of HDFC and with the recent Budget; I am more excited today than I was 40 years ago, about the prospects of affordable housing. With the incentives given in this Budget, with the regulations coming in place, with the easier recovery of bad housing loans. So affordable housing is the biggest growth engine that India will have in the next five years.
Q: The Pradhan Mantri Awas Yojana (PMAY) is meant for first time buyers and there is a process. The National Housing Bank (NHB) has to approve it. Last time around, when that 6 percent interest loan was given, the NHB did not have a large number of houses approved. That is what gives me scepticism. Do you think this will pay off?
A: The first scheme which was announced under Awas Yojana was two years old. The scheme was for economically weaker sections (EWS) and lower income group (LIG). The scheme announced this year was for middle-income group (MIG) 1 and MIG 2. This is called Credit Linked Subsidy Scheme (CLSS). Now here, it is such a practical scheme and is extremely well thought out that it gives upfront money to a prospective home buyer provided he is not a homeowner, he is a first-time buyer. If your income is between Rs 6 lakhs and Rs 12 lakhs, you get a subsidy of 4 percent on a Rs 9 lakh loan and if your income is between Rs 12-18 lakhs, you get a subsidy of 3 percent.
Now, these are front-end subsidies, a 20-year loan, so what has the government done? The government has said that the down payment is not possible for most families. If you need 20-25 percent down payment, it is not possible because you do not have those savings. Abroad, you get 90 percent loans. We have 80 percent as a limit. This credit subsidy, which will be given upfront on a 20-year, amounts to anywhere between Rs 2-3 lakh. So, that adds to the down payment of the individual.
Q: But even then, the individual has to come with his 20 percent down payment.
A: Not 20 percent, this can be 10 percent. This can be 10 percent, he has to come with 10 percent and get the balance as a loan. So, what we need really is massive construction. Massive construction of homes of this type.
The other practical step here is, they have divided this into two parts -the four metros and the metros are only Mumbai, Delhi, Kolkata and Chennai and it is only municipal limits. Peripheral areas are not metros. So, Thane or Kalyan or Dombivali, they are separate municipalities. There, the limit of home is 60 sq mt, while this is 30 sq mt. Again, they have said carpet area. You add 40 percent to 60; 840 sq ft in Thane or outside the National Capital Region (NCR), you do not need larger flats and that is a reasonably sized flat.
Q: Yes, but I though already there are enough vacant flats almost finished buildings. It was announced in January and in March, we got the final rules. We have not seen that kind of movement.
A: We get to know from developers. Every developer, even the biggest of the developers who only build luxury homes have started looking for land for affordable homes, why? Single point agenda, it is tax-free. Show me one industry which has a tax incentive that whatever profits you make, there is zero tax. And this goes on till 2021 because we want more stock of affordable housing.
Now, if you have a 20-30 percent margin in a project and you pay zero tax, your returns will be phenomenal. Private equity from abroad are wanting to sign up with developers, sovereign wealth funds are wanting to come in to fund affordable housing, to buy land, to support developers. So, it is going to be a boom that we have not witnessed. Please believe me.
Q: What is the timeline?
A: Next five years.
Q: Five years?
A: Because it takes time to buy land, get approvals. I wish the approval process, the state government brings it faster, but the approval process in India takes too long.
Q: Can we see a bunch of home loans being signed up in end FY18 itself?
A: Why not?
Q: You expect?
A: You say demonetisation hit everyone in November and December. Our January sanctions were 21 percent more than December. Our February applications received were another 24 percent higher. March was 44 percent higher. So, the two months which were bad, November and December are all behind us. We see a massive growth already happening. Now, on the unsold stocks, most stocks that are unsold are higher value stocks. They are not the Rs 25-30 lakh flats. They are the Rs 50 lakh, Rs 1 crore and above flats. We need smaller flats, we need flats on the peripheral of big cities, we need flats which come in under the definition.
Q: So, in your estimate, how many lakh houses are you looking at under this scheme in FY18 and more importantly, in FY19?
A: Till March, this year, a lot of planning because there is now demand for big lands. We have got a private equity fund with almost USD 500 million from a sovereign wealth fund only for affordable housing, 12-year money and they are willing to put more money. So, we have already supported three developers in different parts of the country where we are saying we are funding you for the land through our private equity vehicle and affordable housing will come up there and we are looking at prices of Rs 3,000, Rs 2,999 to start off with and Rs 4,000 per sq ft. So, we need a large number.
It is not going to be tomorrow. The activity has started, the hunt for land has started. The hunt for equity has started and the benefits will come over three years.
Q: Do you expect this to satisfy a bunch of sectors? The big problem for us is really employment. We have had for too long, a no job growth kind of economy. Do you think that also gets addressed?
A: Biggest multiplier effect in any industry is housing. It impacts practically every sector of every industry, every part - cement, steel, sand, labour, skilled labour, unskilled labour, professionals, engineers, architects. The number of industries housing touches and connects is the largest in the world.
Q: So, in three years you will be back to that 25 percent kind of home loan growth that we did see in 2003-2008 period?
A: I expect it to happen. I expect maybe even more. We need supply. Funding is there, raw materials are there, labour is there, we need quicker approval from state governments.
Q: Now in that process you have the RERA?
A: The tax incentive is a very bold move by the government and I give full credit to the government that because it impacts so many industries and we are saying why the Indian private sector is not increasing investments, steel and cement will be in short supply if this happens, if this kicks off.
Q: By, when do you think? In two years?
A: I have got some cement companies saying we are looking at putting an expansion next year. Starting the expansion, it takes 2-3 years to build those plants.
Q: But they are all at 70 percent capacity.
A: Yes, but still, the new ones will take 3-4 years. You cannot build a cement plant in a short time.
Q: You think capital expenditure (Capex) is around the corner for India?
A: At least in steel, you have seen again, the government has come out with a very ambitious and a very practical solution. Now, every 2-3 steel companies I have talked to in the last weeks are saying we are planning an expansion. It takes 3-4 years to build a new facility. Please understand.
Q: The real estate regulator. How do you see that in the scheme of things?
A: RERA is a new era in real estate. We will have a new transparent, efficient era is being developed because real estate has been - most individuals have suffered by getting delayed housing or inferior quality or not getting it or money being siphoned away. Again this has taken some time but this government had the courage to bring out RERA. Although land is a state subject it was introduced as a central act. All states have been asked to follow it. What will happen is, it brings transparency, it brings professionalism, it brings standardisation and symmetry of information will be there. All the builders today in the last one month are using consultants, advisors and accountants to fill up what to submit.
They cannot advertise a single flat, no paper is advertising flats now. Front pages of all your newspapers were all full of advertisements. Now no one can advertise till you register the project.
Q: Do you think real estate prices have troughed or do you think we can expect a little more?
A: RERA is not going to increase or decrease prices. Prices have subdued, prices have come down to some extent, sales of larger flats have been extremely tepid and slow. Those developers if you go and seriously show intent to buy they are willing to bring down prices.
Q: Black money is hopefully out?
A: Black money is out in large numbers of projects. 95 percent in Mumbai you can get housing with full cheque payments. Certain parts of India it is still there but it will come down.
Q: You think that real estate prices for a home buyer can still ….
A: Interest rates are down, interest deduction is there, subsidy is there, tax benefit is there. If now housing doesn't pick up, it can't pick up. I think the government has used its last thing - courage to give tax exemption. No one has tax exemption, tax exemption for so many years but you build affordable home of the size they want.
Q: Are you getting a sense that the economy is turning? We see here and there some good numbers being announced by some companies, say a paint company here or an air conditioner company there but largely earnings growth has not picked up and capex has just not picked up. Are you smelling a turnaround?
A: I am certainly smelling a turnaround, maybe the turnaround will start slowly but I am confident. My view is, the worst is over. You will see capital spend, boardrooms are discussing what to do. There will be more capital spend, there will be more investment in different sectors.
Infrastructure has taken such a big leap which creates your jobs and requirement of funds. For instance in Mumbai the 3-4 large projects that we are doing - the Metro connection - underground from Colaba to Seepz, that is a massive project. Contracts have been given for that, you need labour, you need technicians, you need engineers, all that is happening. So, infrastructure spend across the country, whether it is Metro here or Metro there or underground or sea link, large number of road projects have been given.
The recent success of IRB InvIT issue also is enormous.
Q: Do you think InvIT can be an engine which will allow infrastructure companies, construction companies to get funds quickly?
A: They have raised this money, it was heavily oversubscribed. They will have a second round of InvIT when more roads become eligible because you have a two year track record. The negative of that is, when they raise money, they are paying the banks off. So, the bank's credit goes down and these are good assets. So, banks are being paid back from the money raised.
Q: The one reason why people are not being hopeful about the economic recovery is this big financial sector is saddled with Rs 7-8 lakh crore of bad loans. You have seen this in a micro case like Satyam or UTI, you have been instrumental in the turnaround and you have seen the macro cycles as well. How does one solve this big elephant?
A: We are solving step by step, various steps have been taken, various efforts have been made and disclosures have come out openly. So, there is nothing much likely to be hidden under the carpet now, everything is above. Now action needs to be taken. The recent ordinance by the government was necessary because government is the owner of public sector banks and not the Reserve Bank of India (RBI). The ordinance has now directed and enabled RBI to initiate bankruptcy proceedings under the new act, to initiate recovery from these people, to form an oversight so that the protection of the employees, senior management is there - a outside agency which will support their decision to take a haircut or to sell loans to an asset reconstruction company. So, we are getting there but it is a slow process, it is a difficult process. Who is going to bell the cat, how much haircut can banks take and what happens to the promoters after the haircut?
Q: That is the whole problem, I don't think the government wants to sign off on a haircut because they would be pardoning big business of paying back, the RBI will certainly not want to do that, the bankers don't want to sign on and say yes this man with Rs 40000 crore need pay back only Rs 30000 crore, who will have the spine to say that, that problem keeps coming back?
A: The joint lenders forum with the support of the board, with the support of the oversight committee, will have to take these hard decisions. Easy way out would be to take the equity of the company. Take the equity of the company because the promoters cannot flourish after banks right off massive sums of money. The pain has to be shared more by these promoters than by the bankers. The banker is willing to share some pain but you cannot continue flourishing and starting new companies if banks or consortium of banks have written off large sums of money.
In many cases which are under discussion at the moment, the bankers are insisting on equity to be given also. Some preference shares or some zero coupon also to make it that payment may come at a later date.
Equity is a good solution because if the company does well, if the basic product is good, if the company is good, if the turnaround happens say in steel, the equity which the banks take will make money. So, to some extent it will offset what they have written off. They may have to provide now but it can come back later. So, taking equity from promoters is absolutely a must.
Q: Equity from promoters in that company itself is actually leading to problem for the banks because then they have not paid sales tax, they have not paid probably employees, they are all coming and asking the banker to pay. What about the equity they hold in other group companies?
A: In many cases the bankers were smart enough to have cross default clauses. So, where cross default clauses are there, you take equity of a running company or a viable company if they have cross default clause. However they can pressurise them.
The problem we have and India cannot be stronger economy with weaker banks. Banking sector has to be strong for the economy to grow faster. This fact is known to everyone and therefore everyone in the financial system whether it is the regulator, the finance ministry, the government, RBI, are all working towards resolution of NPAs on case by case basis in a structured manner.
I know there have been many frauds. These frauds we hear on your channel and newspapers that some diamond person has got this much or some pearl company somewhere I read has got so much. We don't know how they will - because if a collusion has happened, if a fraud has happened, if the person is swindled and there are no assets, those are the cases where taking equity is not going to help, where we will have to recognise. Again the RBI has asked the banks to sell the non-core assets and sell some equity in their mutual fund, insurance companies, book your profits and make a provision.
Q: Rosneft has no haircut, there are only 2 or 3 foreign banks and Indian private sector banks. After backing the highest parties, Prime Ministers of two countries, we are still 7 months into signing it and not resolved.
A: I am not sure what is holding it up. I am not sure what is the reason of a hold up. Apparently I am told that one or two institutions have not agreed.
Q: Do you think therefore that we will see some resolution at least before FY18 is out?A: I am sure you will see some resolution, some action will happen. At least the problem is out in the surface. Problem is open, action is needed, maybe we need capital. Some of the banks have raised perpetual bonds. Now perpetual bonds for an investor is very attractive. 10-11 percent perpetual bonds, they can increase their tier II capital, they can increase their capital base to use that money to provide. So, there are various things happening, it is not just one. The problem is being attacked and tackled from all angles. I see some headway, some solution.