Won't see much impact of new NHB norms: HDFC

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about HDFC See previous management interviews See what other Experts & Brokerages are saying about HDFC

The National Housing Bank (NHB), India's housing regulator, has tightened lending norms for housing finance companies (HFC). The new norms suggest that housing finance firms on one hand make greater provisions for loans extended to companies and builders, and on the other hand limit the amount a person can borrow against property.

Experts believe this will impact home loan seekers. Speaking about it, Keki Mistry MD of HDFC said they will not be impacted greatly by the changed norms.

Elaborating the situation, Mistry said the NHB has mandated that housing finance companies should keep aside 0.4% of the total loans outstanding by September 2011. "We are, in actual practice, carrying an excess provision of about Rs 400 crore in our books in September itself. So the excess provision will be used to take care of this provisioning requirement."

According to Mistry, marginal correction in real estate is possible.

Below is a verbatim transcript of his interview. Also watch the accompanying video.

Q: Minor set of rules that came in from the NHB. It was expected after the Reserve Bank of India (RBI) increased provisioning especially on teaser loans that the National Housing Bank (NHB) would follow suit. Does this radically change the cost of loans for you at HDFC?

A: Not really because as you mentioned it is something we were expecting. Once it became applicable for banks, it was only a matter of time before it becomes applicable for housing finance companies. So we are not surprised at all.

Basically what they have done is four things. One is they've said that for loans up to Rs 20 lakh the maximum loan to value ratio that we can use in future would be 90% and for loans above Rs 20 lakh the maximum would be 80%. It is not relevant from our perspective because the average loan to value ratio in the current year has been 68% at the time of granting a loan. So this is way above those limits. So again it has very little impact on us.

Secondly, they have said that for dual rate loans there is a requirement to do 2% provisioning. Now the total dual rate loans outstanding in our balance sheet is about Rs 200 billion or Rs 20,000 crore, on which a 2% provision would be about Rs 400 crore.

we are in actual practice carrying an excess provision of about Rs 400 crore in our books in September itself. So the excess provision will be used to take care of this provisioning requirement. So again it doesn't have an impact.

The third thing they have said is for loans above 75 lakh, the risk weight will now be 125% and not the 75-100% as it was in the past. Again very limited impact on us because average loan size is Rs 1.8 million.

Q: Would the cost of loans above Rs 75 lakh go up, will the interest rate shoot-up for that category?

A: Very marginally, not significantly because of the fact that we are carrying excess capital in our balance sheet, significantly excess. Our tier-I capital adequacy on September 30 stood at 13% and this is with a risk weight on loans which is significantly higher than what prevails in the Western world.

For example, if you take Basel II or risk weights on housing loans in the Western world, it is even today at 25-30-35%. In India it is at 80-90% on an average. So despite carrying these high risk weights, we still have more than adequate capital.

Q: Do you have any more dual rate loans at all or has the scheme been stopped?

A: The scheme has stopped from December 1 itself.

Q: On high value loans over Rs 75 lakh, while you may have the capital for the moment, would you pass on the cost, would all your loanees who have taken more than Rs 75 lakh from HDFC get a letter tomorrow?

A: People who have taken more than Rs 75 lakh loan, there won't be too many of them but the few who would be more than Rs 75 lakh will not have any additional cost passed on to them. That is for sure.

Q: For the larger issue: we have seen RBI announce those OMOs and buyback of loans. But there has been no meaningful fall in the cost of wholesale money. Bank CDs for three months continue to be above 9%, for one year it is 9.5%. Do you therefore expect that there will be a further round of interest rate hikes come January?

A: I have a different opinion from what I have heard from some of the comments on TV. I believe that interest rates will go up - of course they will go up over a period of time - but they are not going to go up sharply and I will tell you why I am making this statement. The liquidity in the system is very low and that is the reason why short-term rates have gone up a lot.

But if you look at long-term rates; long-term rates a week earlier were almost the same as they were six months earlier. So five-ten year rates have not gone up, what have gone up is short-term rates.

We don't take any mismatch on our funding. Whatever loan we give to our borrowers on a fixed rate basis we fund it out as fixed rate borrowing, floating rate loans out as floating rate borrowings and we take no maturity mismatch. So to that extent the impact that the longer-term borrowings have had on our cost of funds has been very limited. Of course we do some short-term borrowing. To that extent the costs have gone up, which has been passed on.

Now to the view on interest rates. I think if you look at the previous year's numbers, and if you look at inflation in the previous year, you will see a sharp uplift in inflation from December of last year. Therefore, arithmetically when you calculate the inflation for the next six months you will find that if everything had remained the same inflation would've taken a huge downward dip.

In reality it is not going to take a huge downward dip because we know inflation has gone up, oil prices have gone up and so on. But the fact is that the base effect will result in a situation where while inflation may again come down it may not come down as we see it as it otherwise goes. It's unlikely in my view that inflation will go up and therefore RBI will have to keep increasing interest rates.

Q: Will banks and housing finance companies have to raise rates in January-February? What is the hunch you have right now?

A: My hunch is certainly not in January. In February if they have to do it, we will have to wait and see what happens in January. My hunch at the moment is no.

Q: We had a discussion with a lot of real estate experts today and their forecast only for the city of Mumbai was that luxury housing prices would fall by 10-15% in 2011 and slightly cheaper houses, a little less but they would fall. Would you agree with that broad theory?

A: Mumbai is a very different market. As I mentioned earlier for us our average loan size is Rs 18 lakh and with a 68% on loan to value ratio, meaning you are looking at a property of around Rs 30 lakh. There are virtually no properties that you can buy in central or south Mumbai.

Q: My hunch is I am asking you about the limited category of people who will be taking high value loans. Is it that real estate prices could dip next year?

A: Marginal correction in real estate prices is possible. But I don't believe that it is going to be a huge correction. At the end of the day, people buy houses because of the fact that their incomes are going up. So as long as incomes are going up you will not see a massive correction in property prices. A little correction here and there could happen and logically it should happen because prices have run-up a lot in central and south Mumbai.