Global investors backing India’s pro-reform stance: Harshil Mehta
India’s improved regulatory landscape prompted housing finance companies (HFCs) and private equity (PE) firms to turn their attention to the affordable housing segment, Harshil Mehta, joint managing director and chief executive officer, Dewan Housing Finance Corp. Ltd (DHFL), said in an interview. The Indian housing finance industry is growing rapidly, and mortgage lending is a strong driver of growth for both housing demand and construction of houses, Mehta said. Edited excerpts:
When you meet investors in Singapore, what are they asking you about India and the Narendra Modi government? What are their concerns on India?
These are interesting times for the Indian economy and the world is taking great notice of India. According to the International Monetary Fund (IMF), such emerging markets will drive the global economic activity. Asian economies led by India are picking up speed as policy and consumption-led tailwinds have given businesses a positive fillip. Global investors are supporting the pro-reform stance taken by India. A fundamental premise of optimism stemmed from India’s strong socio-economic reforms that have already started aligning our country’s economic direction in a transformational manner.
You have a lot of exposure to the affordable housing segment. How do the margins stack up in that space?
The Indian housing finance industry is growing rapidly. Mortgage lending is a strong driver of growth for both housing demand and construction of houses in the country, driven by urbanization, especially in the affordable segment. Consequently, housing finance firms have witnessed an increase in total outstanding loans with a compound annual growth rate (CAGR) of 23% between fiscal year 2010-2011 and 2014-2015.
DHFL had assets under management (AUM) of Rs88,236 crore as of June 2017—the company has been reporting revenue growth at a CAGR of more than 20% for the past five years. Considering that two-thirds of DHFL’s home-loan portfolio are retail home loans wherein our average home-loan ticket size is below Rs15 lakh, we have endeavored to protect margins at 300 to 305 bps (basis points). In the quarter ending June 30, 2017, DHFL reported a NIM (net interest margin) of 305 bps. (One basis point is one-hundredth of a percentage point.)
With many banks and non-banking financial companies (NBFCs) pushing their efforts towards affordable housing now, how do you view the competition?
There is enormous market potential for the affordable housing sector in India. Over the past few quarters, the government has already been taking several noteworthy steps to build a conducive environment for the growth of the affordable housing sector. Although the industry is served by several large financial institutions, companies like us are well placed with strong competitive advantages to serve LMI (lower-middle income) customers in the tier-II and III markets, thereby driving financial inclusion across the country. I believe competition is healthy and HFCs not only help broad-base the market but also drive financial literacy, thereby creating opportunities and developing the industry landscape. We, through a deep understanding of this target segment and strong distribution network, have been leveraging these opportunities, which is reflected in our steady growth.
Do you see this sector going through a crisis as witnessed in the microfinance sector a few years ago, which led to tighter regulations and limited credit limits from banks?
The government has taken several noteworthy steps towards generating greater credit offtake and supplies in the affordable housing industry, while also putting in place a stringent regulatory environment.
The countrywide implementation of the The Real Estate (Regulation and Development) Act, 2016, (RERA) has indeed been a milestone step towards stronger governance and greater transparency for developers, customers, financial institutions such as banks and housing finance companies and other important stakeholders. It is a timely implemented initiative of the government’s mission towards industry development and a catalyst to meet the objectives of ‘Housing for All by 2022’.
Over the past three decades, we have been enabling affordable housing finance to the low- and middle-income segment wherein a majority of the lending has been towards self-occupied residential properties, which are backed with assets and lower LTV (loan-to-value) ratios, thereby maintaining the asset quality. We believe that this industry is poised for growth.
How do you view the current regulatory regime for the India real estate market and for lenders such as DHFL?
With the long-term aim of creating a growth-oriented environment for the housing industry—which is one of the contributors to India’s GDP (gross domestic product)—the government has undertaken several progressive initiatives over the past few months. Bestowing infrastructure status to the affordable housing industry, announcing a credit-linked subsidy scheme under the ‘Housing for All by 2022’ (scheme), to loans of value up to Rs12 lakh—from the Rs6 lakh earlier—and adding the middle income category to the economically weaker section (EWS) and lower income groups, are commendable efforts to stimulate the industry. Due to an improved regulatory landscape, a number of housing finance companies and private equity firms are turning their attention to the affordable home segment. A rapidly transforming environment has also compelled housing finance companies to broaden their focus on financial inclusion.
Have you seen an increase in default on loans on the back of demonetisation?
Buying a home for the security of his family is a very big decision in the life of an LMI customer and is not a mere investment instrument. We understand this sentiment, which is a key motivator. Our strong underwriting skills and our well-built system further protects and strengthens the asset quality. We maintain a high level of customer quality checks and have a robust collection machinery, supported by a strong back end for timely action in defending asset quality. In fact, DHFL has one the lowest NPAs (non-performing assets) in the industry of 0.97% (of the loan book). This has been constant pre- and post-demonetisation.
How does this exposure to the affordable housing space go with your investors in terms of margins and credit quality?
In addition to being among HFCs, we are also one of the largest players in securitization of home loan portfolios to banks and other financial institutions. We enjoy CARE’s highest ‘AAA’ (triple A) credit rating with our asset base growing towards Rs1 trillion. The company is well acknowledged and positioned as a leading core mortgage player in the industry with strong business fundamentals. We registered a net profit growth of 29% to Rs260 crore for the quarter to June. Our assets under management reported 23% year-on-year growth, reaching Rs88,236 crore as on 30 June.
We’ve been receiving an overwhelming response from the investor and analyst communities, which is evident from the positive reaction of the capital markets, steady margins and robust asset quality.
Our steady growth reflects the positive sentiment among our investors, who are extremely buoyant not only towards the growth of the affordable housing industry, but also confident of our concerted efforts towards driving financial inclusion across the country.
Apart from housing finance, DHFL also offers other financial instruments. Would you be interested in applying for a banking licence?
For over three decades, we reached out to millions of customers across India, and helped fulfil their dreams of owning a home. The expertise of servicing this particular segment has led us to evolve as a comprehensive financial services company that addresses various financial requirements of customers across the social spectrum.
As a group, our product offerings also includes insurance, mutual funds, education loans to service the full spectrum of the consumers loan and investment requirements. We believe specialization in the financial services space is the future of the Indian financial services ecosystem.
There were reports of DHFL planning to sell a majority stake in Aadhar Housing Finance Ltd unit. Is this correct?
The board of DHFL Vysya and Aadhar, respectively, have approved the amalgamation of DHFL Vysya and Aadhar, and both the entities have filed their respective applications to seek approvals. Both the companies are subsidiaries of Wadhawan Global Capital (WGC). International Finance Corporation holds a 20% stake in Aadhar Housing. The merger of the two entities will make it a pan-India company.
What is the average size of disbursement for DHFL now? How do you view this in the next few years, given the push towards affordable housing?
DHFL’s average loan ticket size at the portfolio level stands at Rs14.3 lakh. We offer a range of home loan products, including home loans, home extension loan, home improvement, plot loans and SME (small and medium enterprise) loans to all customer segments across India, retaining its concerted focus on the low and middle income segment.
The government has been taking several significant, growth-oriented steps to build wide-reaching, impactful policy frameworks towards greater financial inclusion and, in the process, paving the way forward for the housing finance industry. The supply of affordable housing, backed by strong government policies and measures, and demand in the affordable segment fuelled by the consumer will impact the average ticket size.
You recently divested your insurance arm Pramerica. Are there similar plans for any other unit?
Our decision to sell the entire equity stake in the JV (joint venture) entity DHFL Pramerica Life Insurance Co. to its wholly owned subsidiary was aimed at value creation for all stakeholders. It added to DHFL’s net worth and book value. It will ensure all our expansion plans are capitalized fairly. The enthusiastic response to the two public issues of non-convertible debentures (NCDs) of Rs14,000 crore—oversubscribed on the very first day across all three segments of retail, high net worth individuals and qualified institutional buyers—is testimony to the trust we enjoy among our stakeholders.
Would you require additional funding any time soon?
We are well capitalized for the next 18-to-20 months for all business expansion. We set a historic trend in the retail debt market through two public NCD issuances that have repositioned our borrowing portfolio and generated a much competitive cost of borrowing. The issuance has helped the company to diversify its borrowing profile.
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