HDFC our role model, says Indiabulls Fin Svcs CEO Banga

Indiabulls Financial Services , which focuses on retail mortgages, is confident of growing "20-25% on all operating parameters", including its loan book, for the next few years, Gagan Banga, chief executive officer, said in an interview to Moneycontrol.com. IBFSL will be shortly merged with the Indiabulls group's wholly-owned subsidiary, Indiabulls Housing Finance, subject to regulatory and shareholder approval. The promoters will be infusing Rs 451 crore through share warrants into the merged entity. The company's loan book currently is over Rs 27,000 crore, of which 71% comprises of retail mortgages.

Banga is banking on a combination of favourable demographics (more young home buyers), wage inflation and the low mortgage to GDP ratio in the country to drive his company's growth in the coming years.

"Our company is no longer in an evolving phase. Having seen a volatile interest rate environment over the last four years, we are well positioned to capitalize on the big opportunities that exist in the mortgage business," says Banga.

Given the aggressive approach that the Indiabulls group is known for in each of the businesses--NBFC, realty, power, broking--it operates, rivals would be watching Indiabulls Housing Finance's (once the merger happens) moves closely.

Does Indiabulls Housing see HDFC as its main rival?

Banga dismisses the comparison, given the difference in the size of the two companies, despite IBFSL's rapid growth in the last few years.

"Of course, HDFC is our role model, but it would be silly to think that we would try to match up to them," Banga says with a straight face.

At over Rs 1.40 lakh crore, HDFC's loan book is more than five times as big as that of Indiabulls Financial Services.

But as Banga himself says, both are targeting the same set of customers, chiefly those looking to buy around Rs 40 lakh value property, with an average loan size of around Rs 22 lakh.

The home loan segment grew at a slower pace last year and industry players say the trend is likely to continue this year too because of costly property prices and high interest rates. In addition, both the Reserve Bank of India and the National Housing Bank have scrapped pre-payment penalty on home loans. This gives customers the flexibility to switch their lenders more easily than in the past. All this means increasing competition in the home loan segment. But Banga is confident of maintaining margins in a difficult environment.

"Our net interest margin last year was around 3-3.5%, and we hope to sustain that spread this year too," Banga said, adding the company was adquately capitalised and had no plans to raise additional funds in the near future.

While demand for residential property has declined somewhat over the last year, Banga does not see it having a major impact on his guidance numbers. The slowdown is mainly in the Rs 5 crore plus homes in Mumbai and Delhi, and the Rs 2 crore plus loans in other parts of the country.
"Last year, average salary hike was between 12-15%, this year, it maybe around 10-12%. But jobs are still being created, and even at a 10-12% hike, 20-year loans that were five times annual salary to begin with, reduce to three times within three years. The average tenure of a home loan is now down to around seven years, as most customers prepay their loans by then," says Banga.

Some housing finance companies are worried that the scrapping of pre-payment penalty will hurt housing finance companies more than banks. That is because mortgage loans are a low margin business for banks and so the loss of a few customers to rivals will not impact them (banks) as much as it would a housing finance company, as mortgage is their core business. Also, some bankers have voiced concerns that it could lead to predatory pricing of loans as customers will be able to switch their lenders without incurring any extra cost.

Banga disagrees. "The rate gap between competing mortgage lenders will not be more than 100 basis points at any given time. Most mortgage lenders are already giving an option to their customer to switch from fixed to floating or the other way round. Also, even there is no pre-payment penalty, there is still processing fee and other administrative charges to be paid to the new lender. Instead of that, the customer would find it convenient to switch products within the same lender," says Banga.