Expect most customers to start paying once moratorium is lifted: Keki Mistry

While everyone had the option to take a moratorium, only 21% of the people opted for it, says the CEO of HDFC.

Your numbers have got impacted because of extraordinary items. Could you walk us through the big picture and what has been the impact of lockdown in the March quarter?
Profitability has been impacted only to the extent that we did not see the growth that we would have seen in the second half of March this year. Normally a lot of people tend to take loans in the second half of March and that was not possible in the current year. So to that extent, the growth got impacted and there was marginal impact on profitability. But profitability has not been impacted because of Covid-19 or because of the lockdown at least till March.

Profitability has been impacted by completely different factors which were informed to the exchanges on 1 April. Last year in the fourth quarter, we had dividend income of Rs 537 crore from our subsidiaries HDFC Life, HDFC Asset Management and HDFC Home. This year, as against that Rs 537 crore, the dividend income we have received is only Rs 2 crore. The second reason is profit on sale of investments. Last year we had booked a profit of Rs 321 crore in the fourth quarter; this year the profit on sale of investments is only Rs 2 crore. And the third reason is the impact because of Covid; the extra provisioning that we have done taking into account the Covid requirement.

Now you must remember that we follow Ind-AS accounting. We do not follow the old accounting regime. Ind-AS accounting is little forward looking; so you anticipate or you try to get a feel of how recoveries are going to be and then on that basis you make provisioning. So you take into account macroeconomic factors and a whole lot of other management overlay and other things when doing the Covid provisioning. So provisioning is higher compared to last year. We provided Rs 1,274 crore in the fourth quarter of this year compared to Rs 398 crore in the fourth quarter of last year. So the only impact on profitability because of Covid-19 is the higher amount of provisioning that we had to do.

What has happened to the recovery? Due to lockdown, obviously NPA or EMI recovery is going to be a challenge. Where do you see the first recovery in gross NPA moving because of the lockdown?
You must understand that we do housing loans to individuals. That is the bulk of our business. We are not into corporate lending in any significant manner. 21% of our customers in value terms availed the moratorium. While everyone had the option to take a moratorium, only 21% of the people opted to take a moratorium; 79% said we are getting salaries, we have the money and we do not want any moratorium and want to continue making the payment on time. So that gives you a sense of the quality of the portfolio.

Now going forward, after the moratorium period is over, how recoveries will be is a very subjective question. My sense is that a housing loan is very different from a car loan or a consumer loan or credit card loan because a housing loan is a brick and mortar loan you have taken against the property and people will never as far as possible default on paying back a loan on the property. The other reason is that usually in all our loans, we have co-borrowers. So there is a husband-wife and both of them earn an income. Therefore, even theoretically if one of them does not have a job or has a salary income, the other one would be able to compensate.

But what about the collections in the month of April and May? Also, what are the kind of trends that you are picking up given that you have resumed most of your offices?
Collections have been alright. I do not think there is any extraordinary comment that I can make with regard to collections. People who have opted for a moratorium obviously have not paid. For people who have not opted for the moratorium, it is pretty much as usual.

But 26% of your loans under management have actually opted for moratorium and now the RBI has further extended the moratorium. What kind of impact would this really have in terms of the change in behaviour of non-delinquent customers?
It is a very subjective question. I do not think there should be a change in customer behaviour when it is a housing loan but it is something we will have to wait and see once the moratorium is lifted and whether people who availed of the moratorium pay their regular instalments or not. My sense is most of them will. Many of the people who have availed of the moratorium have written to us saying that our jobs are secured but at this point of time, there is a lot of uncertainty in the external environment and we just want to stay more liquid; so that is the reason why we have opted for a moratorium. So people have given reasons for moratorium and I think a very vast majority of people have not said that they have lost jobs or they are getting less salary or anything like that. They are just saying that in these uncertain times, we would like to keep more cash in hand.

What about construction finance that accounts for 11% of the book? Given what we are seeing in the real estate sector, are you seeing a deteriorating borrow profile? What is the outlook on that front?
No, not really. We will continue doing what we have been doing all along. If a project is good and we believe it is saleable, we will go and finance that project. Our preference is always to finance projects of smaller builders and smaller locations where we get retail business because when you give a construction finance loan to a builder, you automatically are able to get a lot of retail customers who take a loan from you; so that focus will continue. Now developer loans historically used to be about 14% of our total lending. In 2019, it came down to 13% and in 2020, it has come down to 11%. I do not think there is much to read in that. It is just that our focus has largely been on individual loans and individual loans have constituted as much as 89% of our incremental growth in the loan book in the current year and if you look at only the fourth quarter in isolation, then it is as much as 86%.

The NIM has improved by about 10 bps QoQ. What is your outlook on credit cost going forward; analysts are expecting them to rise sharply. Are you expecting margins to contract or do you also feel that some of the recent measures by the RBI and the government will provide some support and also see some amount of cushion for the margins?
First of all, you must understand that margin contraction and asset quality are two different things. In margin, you are looking at interest earnings, interest paid and in asset quality, we are looking at something completely different. So if your question is on margin, our spreads have historically been in the range of 2.2% to 2.3% and my sense is that going forward, we will continue to remain in that band. Our spread as of 31 March 2020 was 2.27%, which is exactly what it was in the quarter ended December and net interest margin which you are talking about was 3.4%.

What about the demand? When is it that we can actually expect some pickup in the credit growth to come by? What do you think you are going to be focusing on? Share with us really what is the strategy that HDFC would have post-Covid?
First of all, the first quarter of the year is going to be a very difficult quarter because we were in lockdown and second month in May, it has been partially lifted but it is not the kind of robust business that we would like to get. But having said that, many of the offices are open but Mumbai is not open. We are disbursing housing loans and we have been noticing this trend for the last couple of weeks that the amount of loans that we are disbursing is a little higher than what it was in the previous day. So that is to my mind a very positive sign. It is nowhere close to normal. We are still far away from being normal. But my sense is once the lockdown is completely removed and people can start moving around and we start coming back, I would expect growth to come back.

We must understand that the structural demand for housing in India is obviously always going to be high. I think what Covid-19 will do is two things; one is it will increase the tendency of more people to work from home rather than go to work or rather than go to offices and if that happens, then people will look for pretty homes, people will look for larger homes and will look for homes where there is a study room, where the husband can be there and a separate study room for the wife. So my sense is demand for certain categories of real estate or for housing will rise and the other reason is post-Covid, there will be a movement away from the joint family system. There are so many cases in India where we have a large number of people staying together in one house. I think that over a period of time will start easing as each unit of that joint family will start looking for its own house.

But please understand that this will take a little while. The first quarter is not going to show any significant business. The second quarter should be better than the first quarter. The third quarter would be better than the second quarter and I would hope that if Covid-19 is behind us by the time we get to November-December, then the January-March quarter should be pretty much close to 100% normalcy.