N.K. Kurup

Mr K. M. Mistry.

Mumbai , March 11

DEMAND for home loans would continue to be strong even if interest rates firm up in the short to medium term, according to Mr K.M. Mistry, Managing Director of Housing Development Finance Corporation Ltd, the country's largest mortgage financier.

"Interest rates on housing loans may at best go up by 25-75 basis points in the medium term, but these rates cannot be significantly different from those in other sectors," Mr Mistry told Business Line during an informal chat.

A severe shortage of housing, especially in big cities and towns, falling property prices and increasing individual income levels would combine to keep the housing loan market buoyant. Mortgages contribute only two per cent to India's GDP compared to 51 per cent to the US GDP and 20 per cent to that of some other Asian nations.

Plummeting interest rates have triggered a retail credit explosion in the country and a large chunk of new credit goes to financing individuals' housing plans.

Mr Mistry expects surplus short-term liquidity in the system to keep interest rates subdued. "But in the long term, interest rates may go up as inflation rate is unlikely to come down," he said.

Some bankers have recently expressed concern over the poor quality of credit in the housing finance sector and the possibility of interest rates moving up. A recent study by rating agency Crisil found that home financiers' overall profitability could come under pressure since incremental return on equity is low. The study had suggested that the current low returns were unsustainable and would pressure banks and finance companies to jack up interest rates by 50-100 points in the long run.

"In our case, the situation is different," Mr Mistry said, pointing out that HDFC was excluded from the study. "One can analyse our figures. Our return on equity has increased to 24 per cent for March 2003 from 22.9 per cent a year ago."

The Crisil study had showed that the return on equity of housing finance companies dwindled from 20.53 per cent a year ago to 6.93 per cent now. It also said that ROE for banks' home loan business narrowed from 18.8 per cent to 9.01 per cent during the same period.

HDFC, leadership is, however, being challenged by private banks that are now aggressively expanding retail credit, particularly home loans. For example, its fiercest competitor ICICI Bank funded homes worth Rs 3,500 crore during the third quarter ended December while HDFC gave out only Rs 2,900 crore, a whopping Rs 600-crore lead.

Mr Mistry brushes it off: "We are not in the business to win market share. We are in the business of making profit and providing service to our customers. We have never diluted our credit standard. Our asset quality is the same as it was five or seven years ago. Our non-performing assets ratio at 0.92 per cent (of total assets) is the lowest in the industry."

Taking a shot at the aggressive methods of newcomers, he said, "Some banks, of late, are going for market share without looking at asset quality. They are looking at growth without looking at fundamentals such as security, asset quality etc. which we have developed over the years."

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