Will pass on rate cuts only when cost of funds drops: HDFC

India's biggest mortgage lender's fourth quarter profit rose 16%, beating analysts' estimates, as demand for home loans in Asia's third-largest economy remained robust. Net profit increased to Rs 1,326 crore in the three months ended March, from nearly Rs 1,142 crore a year earlier.

HDFC's loan book increased to Rs 1,40,000 crore in the year ended March as against Rs 1,17,000 crore the previous year. Meanwhile, analysts have started seeing some signs of consumption tapering, which may lead to slower loan growth ahead. However, Mistry doesn't expect any significant loan growth slowdown in FY13. "Unless we get to a situation where people start losing their jobs, we should continue to expect a growth in-line with what we had expected last year, which was around 18%," he told CNBC-TV18. In fact, Mistry goes on to say that he expects to deliver better than guidance of 18% loan growth. Mistry says demand has been strong across the country, except for Mumbai. "The reason property prices are so high in Mumbai is because demand is always higher than the supply," he highlights. Also, the effect of the 50 basis points rate cut by the Reserve Bank of India has not been fully felt in the system and things could improve when banks start cutting their loan rates. Following the central bank's move, ICICI Bank, Punjab National Bank, IDBI Bank and Bank of Maharashtra announced 10-25 bps reduction in their base rates. "We will pass on the rate cuts only when our cost of funds comes down," reiterates Mistry. Meanwhile, Mistry expects to see lower inflation figures in the second half of the year. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: A word on the margin performance this time and spreads as well, sequentially it looks quite stable. Can that hold for the rest of the year? A: If you ask me today, we don't expect any change in spreads. Let's talk of the two differently. First, let's talk of spreads and then margins. If you look at spreads, spreads represents difference between lending and borrowing rates and if we take the last ten years, you will see that the spreads in the range of a low of 2.15 to a high of 2.35. If we look at last four-five years spreads, it has been between 2.25 and 2.35%. We don’t expect that to change and it will remain in the same range. When you talk of net interest income (NII), you talk of net interest margin (NIM), NIMs takes into account a whole lot of other things. For example, we have sold loans, now the total stock of loans that have been sold by us aggregates Rs 14,556 crore. On this Rs 14,556 crore, we will continue to earn income of 1.53%. We will continue to receive this 1.53% income as long as the loans remain outstanding. We are earning income on loans which are not there in the balance sheet and that then tends to increase the NIMs. _PAGEBREAK_ Q: What is the loan growth picture looking like because there are some signs across categories that consumption is beginning to wane a bit. Are you seeing any pressure points? A: You have to look at it this way – for the person buying a house in India, it's the single largest investment he makes in his lifetime. He is buying a house not because it is speculative activity, not because that is desirable, he is buying because it is essential. It is necessary for him. The average age of a customer when he takes a loan from HDFC is 35 years. It's not people in the 20's, like it is in the West. Its people in the mid-30s who are taking loans and today we know that 60% of the Indian population is below 30 years of age. So all these young people, over the next 5-10-15 years, will need housing and therefore, housing loans. We are reasonable confident that unless we get to a situation where people start losing jobs, we should continue to expect a growth in-line with what we expected last year, which was around 18%. Our guidance has always been around 18% growth. In reality, we have grown at a faster pace in the last three-four years. Q: Can you give us some sense of how demand is shaping across categories of cities including metros like Mumbai? A: The demand has been strong in almost every part of the country with the exception of Mumbai and maybe two-three pockets in some of the larger cities. But, on a pan India basis, demand has remained strong everywhere. The tier two, tier three cities have seen faster growth than tier one cities. But, that also emanates the fact that the base number is smaller. Obviously, a percentage growth will look larger. The big cities continue to grow well, barring Mumbai. If you look at the city-wise breakdown for lending this year, the Delhi-NCR region would be the largest, Chennai second and Mumbai would be the third largest. Then we would have Bangalore and Pune. Q: It’s a large market though. Can you quantify the kind of slowdown you see in Mumbai and the ancillary region? Do you also expect prices to start moving lower? A: Mumbai's biggest problem is the supply of real estate. It is very limited and the reason property prices are so high in Mumbai is because demand is always higher than the supply. Again in my view, the only way the property prices can come down in Mumbai in any substantive way is if we were to dramatically increase the amount of supply. That can only happen if the infrastructure improves in a big way. For infrastructure to improve, you need better connectivity, better roads connecting the northern part of the city with the southern part, probably from both sides. Several inlets into the city must be provided along with connection through east and west. If you were to do that and also improve water, sewage, education facility, health centers and hospitals, then you could permit buildings to go higher. That would increase supply and logically bring prices down. But, other than that Mumbai prices are unlikely to fall in any big way. So, Mumbai’s biggest problem is lack of supply. Q: For the banking space, people were a bit surprised at how little the flow through was for many banks in terms of what the Reserve Bank of India (RBI) decided to do on cuts and how little got transferred to the system. What did you make of that and is HDFC itself is considering more rate cuts? A: It’s a function of liquidity in the system. RBI has cut rates by 50 bps but if we actually look at bond rates in the market, if we look at AAA paper, interest rates in the market are actually the same or a little higher than what they were before the credit policy. Liquidity continues to remain tight and because of that interest rates have remained high. As far as we are concerned, whenever our cost of funding reduces, we will definitely pass on the benefit to our borrower. When interest rates were going up the last two-three times that RBI increased rates, we did not increase ours because our cost of funding did not go up in a manner that would warrant an increase in rates. I would expect that in the second half of the year, we would hopefully see lower inflation figure. If you look at oil prices, which used to run at around USD 122-123 per bbl not too long ago, is now back to USD 112 per bbl. That’s a very sharp pullback and that will be one of the major determinants for the inflation figure that we will get. If inflation is low, then interest rates will obviously come down.