In conversation with Mr S.N. Nagendra

HDFC Ltd is a leading private sector bank offering home loans to the Indian and NRI market. We met with Mr Nagendra, General Manager (Karnataka & Goa), HDFC Ltd. Here are excerpts from the interview.

Has the recent rise in interest rates perceptibly affected the demand for home loans in your opinion?
Not at all. Today individuals are purchasing more property because of two reasons: interest rates are low as compared to the earlier days and tax benefits. Also, the second or third house concept has definitely gone up with the boom. The interest rate factor will be there but in a booming market it doesn't become a major factor.

Mr Nagendra, GM (Karnataka & Goa), HDFC Ltd, in conversation with Ms Indira Sharma, VP-Marketing, Brigade Group

What are the various costs that a home loan covers?
We fund the basic cost, i.e., the flat cost, the cost of the car park, the deposits, the apex body charges and finally statutory services like service tax, and VAT. We normally fund all of this provided the property being purchased is in a location where there is some appreciation. It is a subjective matter. There is no industry norm for these things.

What are the requirements for a second loan or a top-up loan?
For a top-up loan the first condition is that there should be an existing loan that is still being serviced. If you have repayed the loan and are asking for a top-up, I can't give it to you as there is no base at all.

For a second loan, fresh equity has to be put in. Also the capacity to service two loans should be present and the repayments against loans taken should be regular. The third and fourth loan could be on a higher rate of interest than the home loan rate because you know very well that you are not going to live in four apartments at a time. When a speculative factor comes in, we as a commercial institution say that we have to charge extra. Our interest rates are determined by the market, at the rate we are able to mobilise our resources.

What is the thumb-rule for determining the eligibility of a borrower?
The basic factor is that he has to have the capacity to repay. Normally it is 45-50% of the income-to-installment ratio. But it may go up to 60-65% or just become 25% after the appraisal happens.

How can a borrower cover a home loan when he is shifting between jobs?
It seldom happens, but when it happens he can come and discuss the matter with us.

Is there an insurance cover that you would advise them to take?
This event will not be covered in insurance. It is probably a good idea that we can look at in the future.

What is the predominant age group of people who have been availing home loans in the recent past?
The age groups vary between 25-32 years. We even have 3-5% of people in the age group of 22 years. The latest trend is that the second loan is taken by the time you reach 35-38 years. Earlier people used to come for a house loan when they had 3 years of service left.

What is the profile of the NRI market segment?
We have opened a service unit in the UK. We find a lot of doctors and professionals from there. In Saudi Arabia, most of our borrowers are not professionally qualified. In Dubai, we have a mix…a lot of people from the construction industry, financial consultants, engineers and chartered accountants. We also have customers from Kuwait and Oman. In the US it's mostly post-graduate software engineers. We have a fair number of applicants from Australia too. The maximum is from the Middle East, then the US. Singapore is also catching up.

What are the loan options available in the market for purchase of commercial space for both companies and individuals?
Corporates are not really going into purchase of space. If they do, we give them about 60-65% of the total cost. With interiors this would add up to about 70-75%. The loans are short term, a maximum 4-5 years. We also secure loans against the bills of the contractor. The tenure of such securitisation is 24 months.

For individuals purchasing commercial space, we give them a loan provided the space is leased by reputed Indian companies or MNCs, where the repayments are secured by rentals.

How do you think VAT and Service Tax have affected both the home loan and the real estate industry?
It has definitely dampened the spirits of the people. It is nothing but double taxation. You are taxed five times now—registration charge, stamp duty, service tax, sales tax and VAT. I have told KOAPA to take up the matter with the government. Ultimately, your common man, the voter, gets affected as none of the builders or finance institutions are going to bear the cost. If the application is good and properly controlled, VAT is a very good method.

With all these factors, the real estate market is still booming. How do you think the prevailing market will impact the financing to developers with respect to residential and commercial projects?
Land acquisition cannot be financed. Possibly if there is a huge project coming up, we will also consider the land component. Probably out of the total loan, 20% can go towards the land and 80% towards the construction.

Land is a speculative concept. But if you purchase land and immediately start construction, we will participate. Once the plan is sanctioned for the building, then the normal term of construction financing ranges from 18-24 months.

HDFC Ltd has won many awards in the past. What do you feel is the single most important factor that has contributed to this success?
HDFC Ltd has won many awards including the Padma Bhushan for Mr Deepak Parekh, for being an innovative banker. I believe awards are given in recognition of our strong value system, which we adopt to serve people with the intent of assisting them to build their homes. Apart from that, the awards are also a recognition of our service standards and the element of trust that we have created in the minds of the public.

Today all said and done the industry is booming only because the finance is made available quick and cheap. If these two factors are not there you will find that there definitely is a downtrend in the market. Affordability has come not only because people are earning but also because the availability of using that earning capacity is there in the system.

How do you think the real estate and finance industry can work together to increase levels of customer satisfaction?
Finance can be made available but affordable homes need to be available too, if you expect the industry to retain interest rates that compare with international standards. We have kept the NPA controlled because of the appraisal systems that we have. We have also come up with products like improvement loans, equity loans, etc. So when we mobilise our resources at a particular cost and keep the same spread, why can't a builder or a developer who has purchased a property at a particular rate pass on those rates to the people? The day that happens, your question is answered.