I want you to break a myth. Do rising rates impact the demand trend? At some point in time, the price of a loan will pinch the borrower but does it have to be one on one correlation?
You have to understand that for a person buying a house, a quarter percent rise or reduction in interest rates is really not going to impact his decision. What is most important from a customer’s perspective is confidence. If he is confident of holding his job, if he is confident of the environment, there is a feel-good factor, then he will come and buy a house whether the interest rate is 8.25%, 8.5%, 8.75% or even 9%.
So, customers do not look at interest rates that closely, at the end of the day, there are fiscal benefits associated with taking a housing loan. The interest you pay on a housing loan is tax deductible every year to the extent of Rs 2 lakh. The principal repayment of a housing loan is considered as a saving and along with other avenues of saving qualifies for a deduction of up to Rs 1,50,000.
So, theoretically, if interest rates go up even by 0.25%, the actual cost to a middle income homebuyer does not go up by a 0.25%. It probably goes up by 15 or 16 or 16 bps depending on how his taxes are structured. Therefore, interest rates do not make that much of a difference.
What about HDFC’s own expansion plans? Competition is building in the sector, there is a struggle to enhance market share but on the flip side, housing is an underpenetrated sector. How do you see HDFC expanding with regards to gaining more market share? Is the path going forward one of acquisitions? Will inorganic growth help boost your revenues?
First of all, we are open to any kind of inorganic growth from a valuation perspective. if there is some synergy that we can get by looking at any particular company. We did look at CanFin Homes a few months ago but that did not work out for whatever reasons and as you know CanFin has not been sold. So, we could look at inorganic growth but more importantly we have to look at organic growth.
My sense is that the organic growth will continue to remain strong because of various factors I talked about. You mentioned competition, but I would just remind you that whilst we grew our loan, our AUM at 18% for the year ended March 2018, the sector as a whole grew at a much lower pace. So, in reality, we would have gained a little bit of market share but we have consistently told our investors over the years that we do not really pitch for market share.
We have four objectives that we have targeted very closely over the years; asset quality, operational efficiency which is reflected in the extremely low cost income ratio, the third is growth at a pace that we target for ourselves. The fourth, of course, is profitability which is reflected in profit margins, interest income and so on.