Mumbai: India’s biggest mortgage provider, Housing Development Finance Corp. Ltd, (HDFC), had dodged the bad loans that plagued banks in the US and Europe and plans to increase lending more than 20% this fiscal year, said managing director Keki Mistry.

Stress-free portfolio: Keki Mistry, managing director, HDFC. Ashesh Shah / Mint

“India is not directly affected by the subprime problem, and should consequently have lesser concern about asset quality," Mistry, 54, said. “The penetration level of financial services products in India is very low as compared to the western world."

HDFC’s bad debts as a proportion to total loans stood at 1.04% on 30 September. That’s the lowest first-half figure in a decade, said Mistry. The firm’s average home mortgage of Rs15 lakh compares with the typical US subprime loan of $250,000 (Rs1.26 crore), according to estimates by Washington-based Inside Mortgage Finance.

Low default rates may help shield HDFC from the impact of an economic slowdown.

“Even in the boom period HDFC was careful in lending, doing lots of checks on credit worthiness, and stuck to the low ticket size of the loan," said Sam Mahtani, who manages $2.3 billion in emerging markets as a director of equities at F&C Investment in London.

Indian banks limit home loans to 85% of the value of a property, compared with 100% loans offered to some borrowers in the US. On average, HDFC’s mortgages amount to two-thirds of the value of a property, Mistry said. “We have seen no signs of stress on the portfolio," he added. “We give loans to middle-income people who are going to stay in the house. They are neither investors nor speculators."

Mortgages outstanding are worth 6% of GDP in India, less than one-tenth the penetration rate in the US and UK, ensuring demand will grow, Mistry said.

“Nobody has done as badly as the US banks in doing the checks," said Mahtani. “Balance sheets of US banks have been weakened by the toxic debt they hold."

Former RBI governor Y.V. Reddy two years ago began restricting mortgage lending to stave off a potential increase in bad loans. HDFC boosted lending by an average of 27% over the past five years, as a growing economy drove a surge in home prices.

RBI rate cuts have helped ease a shortage of funds caused by the collapse of firms including Lehman Brothers Holdings Inc. and lower borrowing costs may support demand for housing in the coming year, Mistry said. Overnight interbank rates in India have fallen to 6.5% after reaching 19.5% in October, the highest in 19 months.

India faces a shortage of about 25 million houses, a figure that may rise to almost 27 million by 2012, HDFC estimates. “There is large demand for smaller apartments," said Mistry.

Still, Goldman Sachs Group Inc. this week said prices in some cities may fall as much as 30%. Home prices in smaller towns such as Agra, Ludhiana and Kochi have already dropped an average 15% to 20%, according to Jones Lang LaSalle Meghraj Property Consultants Pvt. Ltd.

“House prices should come down," said Mistry. “They should correct because they have gone up too fast and too sharply, especially the high-value properties."