‘Interest rates will come down over time, but the pace will be reasonably slow’

MUMBAI: HDFC is India’s largest mortgage lender with gross outstanding loans of `253,333 crore till March 31, 2015. Keki Mistry talks to HT about housing loans, interest rates and why e-commerce can be good for home loans. Excerpts:

How is the demand for housing shaping up?

On a structural basis, the demand for houses in India will always be strong. Some 62% of our population is below 32 years of age. Since the average age of a home buyer is 35-38 years, the demand for buying houses is going to rise steadily.

The cost of houses seem to be quite high…

The cost is high mainly because interest rates are high and land is dearer. A developer buys land funded by a private equity player or a non-banking financial company (NBFC). Most of these PE or real estate funds expect a 20% return. This is loaded onto the cost of construction.

Banks should be allowed to fund land transactions. Open funding of land will not lead to escalation of land prices, or non-performing assets.

What can correct this anomaly of high home prices?

The government has been taking various steps — Smart Cities is a great idea. As businesses move, jobs will be created and people will buy houses. Prices will be lower as land in such cities will be cheap. That’s one way of addressing the issue of high prices. Then there is also the issue of infrastructure. Today, if you build better infrastructure and connectivity, price differences will dip.

There has been growth in e-commerce of late. What are your views on that?

E-commerce has its positives and negatives. There are certain items which can be bought online. A lot of job creation has also happened because of these startups. More jobs will lead to more people wanting to buy houses. Till March 2015, Bangalore saw the second-highest absorption of commercial real estate in a decade. This was due to e-commerce.

On a macro level, how do you see interest rates shaping up?

Economic revival in India will happen, but the starting point has to be government spending. Sectors which need investments are filled with companies without the capability to borrow. And there are companies in sectors with excess capacity. So who is going to invest? That has to be played by the government. Then the private sector will also come in. A combination of public and private sector investment will lead to jobs.

Rates have a limited role. Lower interest rates can improve sentiment. But interest rates have to come down in a very, very significant manner for a real impact on the investment cycle. That to me looks unlikely now. Having said that, wholesale inflation rates are low. As long as the rest of the world is weak, wholesale inflation will also remain weak. Consumer inflation is influenced by domestic factors. I would say rates will come down over time but the pace will be reasonably slow.

Why is that?

Because the RBI will always have to keep inflation under check. As the base effect starts setting in, wholesale inflation numbers will start turning positive. Rates can come down but it won’t be a dramatic drop.

What will be the quantum of the rate cuts this year?

At the beginning of the year I had said about a 100 basis points (bps). Of that 75 bps has happened, 25 bps is remaining. It could be 25 now and then wait for one or two months and see what is happening in the rest of the world.

Coming to HDFC, what kind of growth do you see?

We have two parts of our business – individual (71%) and corporate (11%). The corporate segment, up to March 2015, has been relatively weak for three to four years. That reflects the investment cycle. The January-March quarter did see a reasonably good pick-up. We hope the momentum continues.

Lower interest rates can improve sentiment. But interest rates have to come down in a very, very significant manner for a real impact on the investment cycle