Why did you choose to pursue a career in finance?
After I finished my accounting degree, I entered the world of banking and did stints with Grindlays then Chase Manhattan Bank. I had been with Chase for three years and was running its branch office in India when my uncle and the founder of HDFC, the late HT Parekh, asked me to join a new business he was setting up. I joined HDFC in the first year of its existence in 1977.
What are some of the challenges you faced in the early days of HDFC?
Almost immediately after I joined, we had an initial public offering (IPO) of HDFC. The issue did not do well and had to be bailed out by underwriters. It listed and went on to trade below offer price. A number of people who did not share our vision of creating a housing finance business in India and had told us this, felt vindicated.
In our first few years raising finance for our business was very difficult. The International Finance Corporation had taken a 5% stake in HDFC and given us a $4 million line of credit. However, we could only draw down on this line if we raised $12 million from the local market. At that time it seemed like a Herculean task!
What made you confident about the business?
At the time there was no institutional mechanism in India to buy a house û something all developed markets offered. My father, who worked for a bank all his life, could only afford to buy a house with his retirement benefits. This was the norm at the time. The salaried class had no way to accumulate the principal amount necessary to buy a home. The existing banking system was reluctant to finance individuals to buy homes.
We intuitively knew there was a need for an institution which would provide the youth of a country, who had a good education and good jobs, loans to buy their own home.
What was critical to making the business a success?
It was imperative that we developed a business model with low defaults. Bear in mind that in India, defaults on mortgages are civil and not criminal offences, thus redressal is not easy. We set in place stringent rules. We only lend a maximum of 70% of the value of the asset to ensure our borrowers have a substantial investment. We lend on cash flows and not asset value. We do detailed due diligence.
All this has stood us in good stead and I can proudly tell you today that as at December 31, 2007 our loan portfolio (including loans outstanding, deposits and investments in debentures for financing real estate projects) amounted to Rs681.5 billion ($17.3 billion). On this, our non-performing loans, defined as loans where the instalments are outstanding for more than 90 days, stood at 1.12%.
How has the profile of your borrower changed?
When we started housing finance our average borrower was in his late 40s. This has come down now to mid 30s and I fully expect that in five years it will be the late 20s.
This also reflects the difference in the mindset of India. Consumption was a bad word in the seventies. Today this has changed. It is the middle class which is pushing India forward on the back of its earning, spending and borrowing power.
What prompted you to diversify beyond housing finance?
In the nineties, when the financial sector started opening up, we saw opportunities to move into new business areas. We were the first to get a domestic banking license from the Reserve Bank of India, subject to meeting minimum equity ownership and arms length dealings guidelines, and set up HDFC Bank.
We also set up HDFC Mutual Fund in association with Standard Life Investments, (UK), HDFC Standard Life Insurance with Standard Life, (UK), Home Loan Services India, a distribution arm to offer doorstep service to prospective clients of the HDFC group and HDFC General Insurance with Ergo, Germany.
Today HDFC is both the largest housing finance provider in India and an investment company, rolled into one listed entity.
What are your views on the subprime crisis in the US? How can India safeguard against such a situation?
If you look back in recent history, of the three major financial crises in the US, two were housing driven: the Savings and Loans crisis of the 1980s and 1990s, and the subprime crisis (the third was the dotcom bust). In the US, Ninja loans (no income, no job, no assets) were gaining momentum. Credit history of borrowers was becoming irrelevant. Highly structured transactions were becoming the norm.
Now housing prices have collapsed and it is the middle class which is hurting.
As far as India is concerned, our regulatory framework helps prevent such things. Instruments like collateralised debt obligations and in general, a securitised mortgage market, do not exist in India. Our regulators are very cautious. At HDFC, we have always followed cautious lending policies and the lesson for us is to be even more cautious. To mitigate risk, we insist our borrowers have around 25% equity in their house. Due diligence on our borrowers has always been paramount to us. We err on the side of conservatism and donÆt mind losing some business because of this.
How much will India be hit by a slowdown in the US?
The Indian economy is driven domestically, both in terms of production and consumption. Physical exports from India are quite small. So, India may not face the same problems as other Asian countries in terms of physical exports.
But Indian service sectors, specifically information technology (IT) and IT-enabled services, are vulnerable to a US slowdown. It is currently not clear how this will play out. On the one hand, companies in the US, which are large customers for Indian IT and ITES firms, may have budget cuts and reduce the business they give Indian suppliers and service providers. On the other hand, companies that want to save costs will look at India as an alternative. We will have to see.
Housing prices in India have gone up very quickly over a short period of time, causing concerns of a bubble. What is your view?
In some parts of India, the rise in housing prices is not sustainable. The increase over the last few years has been of a magnitude to make them out of reach of most salaried individuals. But this is difficult to generalise. In South Mumbai or æLutyensÆ Delhi where supply is limited and cannot increase, demand is driving prices. And this will probably not change.
Reclamation of land, as has been effectively done in Hong Kong and Singapore, could address some of the problems in Mumbai. In Delhi, an increase in the allowable height of buildings will make a quantum difference to South Delhi.
Part of the reason for the increase is faulty land policies, such as the Urban Land Ceiling Regulation Act (ULCRA), rent control, rigid floor space index norms and other rules that keep real estate prices high.
These laws need to change. The government has a responsibility to house every Indian. This must be met. There is still value to be found in India. The outskirts of some towns will yield investment opportunities. In the long term, the only way to bring prices down is to increase supply.
Who are people you admire?
My uncle, HT Parekh, was truly a visionary and both an inspiration and a mentor to me in my career.
Keshub Mahindra (the Wharton-educated chairman of Mahindra & Mahindra, IndiaÆs tenth largest company and a leading tractor and vehicle manufacturer) was one of our first directors and has been on our board for thirty years. He is currently our vice chairman. I have learnt a great deal from him.
What is your personal philosophy?
The first 25 years of our life should be devoted to learning, the next 25 to earning and the next 25 to returning. Everyone must follow this if we want to have an inclusive society. This is not something I believe in publicising. It is just something I live by.
This interview first appeared in the February issue of FinanceAsia magazine.