Reduced cost of funding, priority sector treatment for housing will give us long-term benefits: Dewan Housing Finance CMD
Dewan Housing Finance Ltd, which has applied to the Reserve Bank of India for a small finance bank licence, has started a division to lend to small and medium enterprises (SMEs) as part of its loan portfolio diversification strategy. According to Kapil Wadhawan, Chairman and Managing Director, housing finance companies can have a non-housing finance portfolio of up to 25 per cent of their total loans and the foray into SME lending is in keeping with this norm. In an interview to BusinessLine, Wadhawan elaborates on the rationale for getting into SME lending, why becoming a small finance bank is the next logical step for DHFL, and expectations from the Union Budget. Excerpts.
Why do you want to become a small finance bank?
This (application for a small finance bank licence) was something very, very logical. Whilst on the assets side we continue to do what is expected of us — providing housing finance to the low and middle income groups in Tier-II and Tier-III markets with strong hub and spoke lending operations, on the liabilities side, clearly, at the retail level we do not have much access to savings of the people. As a bank we can have access to time deposits, current and savings bank deposits and RBI’s (liquidity) window as well.
So, having seen the guidelines (for small finance banks) we felt encouraged. While we don’t want to lose our identity, we want to continue what we are doing in terms of asset creation, on the liabilities side we should have that benefit (that of deposit taking).
So, when the small finance bank guidelines came out, we felt it was a good opportunity for us to look at making that move and at least making our intent known to the RBI.
But won’t regulatory preemptions impact your margins once you get converted into a small finance bank?
Having been in the housing finance business as a group for three decades and if we look at the long-term perspective, some of those challenges (regulatory preemptions such as Cash Reserve Ratio, Statutory Liquidity Ratio, and Priority Sector Lending) or some of those costs associated with them are far less than the benefit that we would finally get in terms of reduced cost of funding and housing is accorded priority sector treatment. So, the RBI’s efforts to push affordable housing by allowing banks to raise infrastructure bonds is a good opportunity and that will also be available to a financial institution like us if we get that licence.
On the priority sector front, while housing will continue to be our core focus, we have created a SME division in-house (in December 2014). Over the last couple of months we have already started doing activity on the ground by going out, soliciting business and lending money. And that fits within the 25 per cent (of the total loan portfolio) that housing finance companies are allowed to do. Out of every ₹100 that HFCs lend, they have to allocate ₹75 to housing. The balance can be towards non-housing. We have built those processes, built those systems and built in the technology framework required to support SME lending.
On the education loans front, which also comes under the ambit of priority sector lending, we already have an education finance company – Avanse. And there again, over the last one-and-a-half years or so, we have been building our capability. In the first full year of operations, we have already gone out and lent about ₹200 crore.
On the agriculture front, honestly, I am sure like we have developed capabilities in the other lending classes we will develop capabilities in this area also. Many private sector banks, when they started standalone, didn’t have any focus or capability in agriculture lending. We will also develop the capabilities like them.
Do you have a plan B, if you do not get the small finance bank licence?
It will be business as usual. We will continue to focus on building our housing finance franchise. We have been growing at a fairly brisk pace in the last many years. As on December 31, 2014, our assets under management were at ₹52,600 crore and growing. So, to us it will be business as usual. We will continue to serve the underserved markets and segments, which do not have access to formal sources of finance for building homes. We will continue to build our franchise on education financing and small and medium enterprise lending. What are your expectations from the Budget?
Whilst we can keep on harping for incentives on tax, I would say that to propel the housing activity we need to make much more non-financial changes, which are extremely important. While the country needs a lot of capital in infrastructure, housing is clearly one of them and it is one of the areas that needs to be accorded infrastructure status, you require simplification in the clearance process for large projects.
The Government has already relaxed FDI limits for real estate investments. I think creating a conducive environment is more important. Housing, as we all know, is a State subject. It also is a big contributor to the State exchequer. So, instead of continuously increasing the cost associated with owning a residential property there should be more focus on ensuring that the cost gets rationalised. Stamp duty, for example, in many States is extremely heavy. For affordable housing projects, I am sure there could be bigger incentives available. So, single window clearances and cost rationalisation are some of things that FDI investors want to see. They don’t want to get stuck in bottlenecks when it comes to approvals. Further, simplification of the environmental clearance process, Airport Authority of India clearance, etc are required. So, some changes at the policy level are very important if we have to make it a very smooth functioning housing market.
There is merit in tax relief for housing loan repayments to go up as house prices have gone up. In order to pursue and fulfil the affordable housing agenda, this limit needs to be raised to between ₹2 and-2.5 lakh.
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