HDFC is known for its sound value system!
3^rd Feb 2010

Q. As a specialist Housing Finance player, what special benefits does the customer get by dealing with HDFC?

Be it developers or retail customers, we have maintained a long-term relationship with everybody. There are many big developers who took their first loan from HDFC and till now they are with us. Thus leading to a lasting relationship. Our service ambit is not just confined to loans, we also advice people on issues like - what to buy, what price to pay, in which location to buy and from whom to buy. We clearly advise our customers if we are not comfortable with a particular builder, but ultimately it is their call at the end of the day. If we know of a builder who does not have a good track record or has not completed projects in time, then we advice our customers accordingly. In all of our 30 years of business, we do not recall that documents given by the borrower to us has been misplaced which indicates the type of systems we have been able to build . Besides we often negotiate with our developers on behalf of our customers. This way we have been successful in reposing trust not only with our customers, builders but also in our investors.

Q. So you mean that particularly when you are buying an under construction property, the relations HDFC is having with the developers, ensure that documentation is proper. Is that correct?

Yes, we not only ensure that documentation is proper but also ensure that the documents which are handed over to us for our possession are safe with us. The safety of their documents is our utmost priority. As you know that a house is the single largest possession for any family, and what represent ownership of the house are documents. So documents are very crucial and important and we take care that they are in order and are safe in our custody.

Q. World over under construction properties are typically funded by institutions. When it is ready for possession only then individual’s risk begins. Can HDFC play a role in taking over this risk from the consumer?

In USA, people generally buy a piece of land and construct the house, so they are taking the risk themselves. Apartments are not bought when they are under construction, apartments are bought when they are ready. But here in India people mostly buy under construction apartments, hence scenario is different. Institutions fund under construction (developers) property.

We are willing to fund a developer. We maintain database of all the developers across the country and with many of them we have a relationship as well. All of our branches have information about developers across the country. Tell me which bank’s particular branch has the information about developers across the country? So this is the value addition which we give. We are a stand alone specialized housing finance company and generations have known us, what we stand for.

Q. The other big issue is of the transparency or the lack of it in the floating rates. It is a problem across all genres be it PSU bank or private bank. How do you view this?

We are a Housing Finance Company ( HFC) and not a bank. Our funding resources are either retail deposits or wholesale which comes largely from the banks. So unless our funding costs change, we cannot change the PLR. So one year G-Sec going up or down does not impact the cost of fund hence it is not going to increase or decrease the PLR. Still whenever the cost of fund has come down, we have reduced the costs, similarly when costs have gone up, the prices have been increased. If you see our spreads, you will find that they have been consistent from the day one.

Q. If you see from the consumer’s perspective, your own, Fixed Deposit rates present a clear criteria as a basis for a floating rate. But linking it to the cost of fund which has touch and feel…is it right to do so?

We will be happy to look at that but Fixed Deposit rates do not constitute 100% of our borrowings. Also Fixed Deposit rates may turn out to be more volatile than interest rates. If you look at the interest rates in, 2008-09 when the liquidity in the banking system had dried up, not much retail funding was available, the deposit rates were much higher then. In that case if we had revised in accordance with the fixed deposit rates then our lending rates would have been much higher than what we offered.

Q. Still fixed deposit rates are more transparent…

They are…at the same time more volatile which will affect the customer more.

 

Q. According to the latest RBI report on BPLR, though it is not directly applicable to HDFC, but applicable only to the banks. How do you view this?

It is a good report but it needs to be modified in relation to the HDFC. The BPLR cannot be linked to the one-year deposit rate.

Moreover I do not agree that you can categorize your one year Fixed Deposit rate for benchmarking your BPLR across products because at the end of the day for regulatory purpose, a lending institution must have a matched balance sheet. You cannot absorb either interest rate mismatch or maturity mismatch. The problems which happened in the Western world were due to the huge mismatch in their balance sheets. Regulators would need to see that institutions are well balanced.

Now to bench mark a 15 -year loan to a one year deposit rate would not be appropriate. It should be benchmarked for the longer maturities. But if the cost of funding increases for banks and old cost does not change for them, then to expect the change in the interest rate, assessing that it may be advantageous or disadvantageous to the customer or the bank, is not right. Unless every body’s cost of funds is linked to the external benchmark like a 5-year G-Sec it will not be fair.

Q. Do you think this way Institutions will be able to manage the spread risk between the rates with the external benchmark and their cost of funds.

You don’t have to manage anything because your cost is linked to that. So if everybody’s borrowing cost is linked to 5 year G-Sec then we will link it too. If you say that 5 year G-Sec is going to be the benchmark, and all the borrowings that you do will be linked to this benchmark, then its fine. But if you ask to take one year as benchmark, then volatility will be much higher.