Dewan Hsg aims to trim bank borrowings to 30-35% by FY17 end

Mortgage lender Dewan Housing Finance Corporation's (DHFL) maiden issue of non-convertible debentures (NCD) worth up to Rs 4,000 crore was fully subscribed today, the very first day of the issue. Talking about the overwhelming response seen by the issue, Kapil Wadhawan, CMD, DHFL it would be a game-changer not only for the company but for the industry as a whole. It shows the appetite in the market for such issuances, which is the first of its kind in the housing finance space.

Wadhwan said the money raised from the issue will help them shave off a fair degree of high cost of funds that they borrow from banks and the target is to bring down bank borrowings from the current 50 percent to 30-35 percent by FY17 end. "Till about 2 years ago, bank borrowings which was close to 70% of my total liability, is down to 50%. Post this issue, it will come down by almost 5%. Our targeted number for this financial year end is closer to 30-35%," he said.

He is also hopeful of keeping the net interest margins stable at 2.9 percent going forward. "Our net interest margins have been fairly stable at closer to 2.9-2.95% and with this money coming in, and probably a series of such issues planned over the next couple of quarters, my cost of funding may actually come down by more than a 100 bps," said Wadhawan.Below is the verbatim transcript of Kapil Wadhwan's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: DHFL made Rs 1,000 crore non-convertible debenture (NCD) issue with a green shoe of Rs 3,000 crore yesterday and on day 1, I believe they have been oversubscribed 4 times and subscribed 5 times which means Rs 20,000 crore. Are the numbers right?A: That is right. We broke a record yesterday and this overall response that we have got was extremely overwhelming.Latha: We understand it is a 9 percent rate.A: That is right, there is a range from 9.10 percent to 9.3 percent for various category of investors including qualified institutional buyer (QIBs) and the retail high networth individuals (HNI).Sonia: Who were the big investors that invested into the NCD?A: There has been an overall response coming from the mutual fund industry, pensions, large HNIs contribution as well and more importantly it has been the retail investors that have come out in hoardes and made investment in this instrument.Anuj: Are you surprised by the kind of response you have got, Rs 1,000 crore you have green shoe of Rs 3,000 crore but to get demand of Rs 20,000 crore?A: This clearly becomes a game changer not just for us but for the industry as a whole because it has clearly moved the myth away. It basically has surprised us, it has surprised the markets in general because this is the first of its kind of issue in the country with such large volumes and it is honestly taking everyone by surprise.Anuj: We have all been talking about liquidity, finding ways to various asset classes. So in that sense, it was a bit surprising to see this kind of oversubscription for corporate NCD?A: It breaks the myth away from what we believe is the right appetite in the market and especially at the retail level for investors to come out and make investments.Latha: What is the impact on cost? You have got Rs 4,000 crore at 9.1 percent I would assume. There will be a temptation to immediately issue one more NCD series since there is pent up demand?A: This has opened our eyes as well. We have been a fixed deposit accepting company in the market. We have a good outstanding Rs 5,500 crore of FDs, which are unsecured in nature but this was the first time that this was attempted and at such a large scale. So, the overwhelming response that we have clearly means they will be going out there in the market again raising money from this alternate source than the banks and whilst it helps us in our onward lending business, it also will help us in refinancing some of the high cost money that we from the banking sector.Sonia: How much has your cost come down on an average?A: It has been down from Q1 while incremental money that we have raised is at 8.7 percent but my weighted average cost still stands at 9.5 percent because 50 percent of my borrowing comes from the banking system and this clearly will mean that we will be able to shave off a fair degree of high cost money which comes from the banks.Latha: So what will be your net interest margin (NIM) or your spread, this quarter versus last quarter and this quarter versus year ago quarter or year on year (YoY) average?A: Our NIMs have been fairly stable at closer to 2.9 to 2.95 percent and with this money coming in and probably a series of such issues planned over the next couple of quarters, my cost of funding may come down by more than 100 basis points (bps).Latha: So your spread is 3.9 percent in a year?A: 2.9 percent.Latha: You said now it is 2.9 and you wouldn’t be surprised if your cost of money came down by 100 bps. So should we expect that for FY17, your spread could get to 3.5 percent?A: Very difficult to say that because the real impact would be felt over a period of time, it may not be immediate. At the same time, we also believe that lending rates will come down going forward and surely some of that benefit will be passed on to the end consumer as well. So though, it will have a positive impact on my cost of funding, margins will move up but by what percentage, it is difficult to determine at the moment.Sonia:  I wanted to come back to your point that you were making about your dependence on bank borrowings and how much that has gone down. You said about 50 percent comes from bank borrowings now, do you expect that to go down further as you tap into low cost bonds borrowings?A: Till about two years ago, my bank borrowings was close to 70 percent of my total liabilities. It is down to 50. Post this issue, it will come down by almost 5 percent. Our targeted number for this financial year-end is closer to anywhere between 30 percent and 35 percent. So this response has been astounding.Latha: We spoke to Aberdeen, a very important point he said is that at a time when there is cheap money available, it is also lent a little less responsibly. What is your sense, how much might your bad loans look like last year and how might it look this year?A: We are a housing finance company and the asset class is much safer than all the other asset classes.Latha: It is safer but there is always a relativity even within the housing finance. I just wanted to know what were your default levels last year and what are you looking at this?A: We have been at below 1 percent at the gross level and net NPA is nearing zero. So more than 80 percent of our book is basically for small retail borrowers and there we have not seen much stress at all. We are in this business for almost two decades ensuring that the highest quality credit is financed, it is something that we always do.