The present crisis might bring opportunities for Housing Development Finance Corporation (HDFC) group companies to grow through mergers and acquisitions and the subsidiaries needed to be beefed up with additional capital for that, chairman Deepak Parekh said in his address to shareholders of India’s largest mortgage lender in its annual report.
“We are now emerging into a scenario where there may be inorganic opportunities for our group companies. Some of our subsidiary companies will need additional capital for their expansion plans. We have also identified new investment opportunities that will help build the next generation of value creators for HDFC,” Parekh wrote, adding, “to support this, we are putting in place a roadmap for our future capital requirements.” He didn’t give any further details.
“We know our position is considerably stronger than most of our peers. We kept building buffers and erred on the side of abundant caution on provisioning requirements. Each time we did this, it was always from a position of strength,” Parekh said.
“The saga of the highest court of law questioning the RBI on the moratorium was indeed unfortunate. Why should a central bank have to be answerable to a court on basic principles which the financial sector operates on? Interest payments on borrowings and loans are contractual obligations. No laws are being violated,” Parekh said.
At this juncture all efforts should be made for an economic recovery, and the issues be sorted smoothly, rather than getting into legal wrangles, he said.
Parekh also dwelled upon a few instances where legal system “overrode our recovery efforts” on loans given to certain parties that had “long-standing relationships we thought we were confident about.”
“Through this, we have learnt to be patient as we have to respect the system. We know these loans did not constitute imprudent lending as we have more than adequate security backing them and we have always, as a policy ensured prudent provisioning. Yet, as we hold the trust of our stakeholders, we have to have the humility to own up to judgement calls that did not work as expected,” Parekh wrote, adding, HDFC consciously took a stance to prioritise asset quality over growth.
Parekh also called for a one-time restructuring of the real estate loans. “If developers do not have cashflows due to a slowdown in sales or delay in receiving requisite building approvals, they can neither complete the existing projects nor can they service their loans.” Any modification in the terms of the loans, including additional funding is considered to be a non-performing loan under the current norms.
“Allowing for a restructuring of these loans and categorizing them as standard assets will facilitate last mile funding for these projects,” Parekh said. Such ‘pragmatic approach’ will resolve the financial stress of the real estate sector without necessitating bail-out packages, he said. The value of the underlying land remains as security in such loans, but allowing the problem to fester may bring pile up bad debts even further.
At the same time, “real estate prices have to be realistic to reflect current market realities. This would help developers offload their unsold inventory and improve their cashflows. Simultaneously, there is a need for realignment of ready reckoner rates as well,” Parekh said.
There should be a system of enabling end-to-end mortgages online. While the sanctions can be done online, disbursements is a lengthy process as e-signatures is not allowed for property documents.
Like other NBFCS, HFCs should also be allowed to raise external commercial borrowings (ECB) for any of their needs. Currently, ECB is only allowed for affordable housing, in which the housing project must have at least half of the floor space index for dwelling units with a carpet area not exceeding 60 square metres.
The government’s thrust upon housing is right, as the construction sector is the second largest employment generator and triggers a multiplier effect.
According to Parekh, even after the crisis, people will want to own their homes, and will “go to any length to hold on to their homes.”
“The lockdown has reinforced the value of the essentials of life – food, clothing, shelter and now, the internet. There can be no better security in life than a home,” and that “there may be lags in terms of healing time, but we remain confident that the inherent demand for housing is intact.”
As for the economy, “India’s sheer numbers means domestic demand has to revive,” said Parekh.