Ms Madhabi Puri Buch is a PGDM (MBA) from the IIM, Ahemdabad. She possesses commendable retail banking experience. Ms. Buch started her career with Indiaís largest financial institution, ICICI, in March 1989, as an officer in the Project Finance Department. She also worked at British Home Stores, UK, in 1994 as sales associate and as head of ORG Marg financial research during 1995-1997.
Ms. Buch became part of ICICIís retail business team in January 1997. She has been responsible for the retail bonds initiatives of ICICI, its web trading business and setting up of ICICI Capital Services Ltd. She has recently taken additional charge, as MD and CEO of ICICI Home Finance. Ms. Buch expects housing finance market to grow at healthy rates in the next five years, which would enable ICICI to garner significant market share backed by its aggressiveness.
In an interview with Equitymaster, Ms. Buch spoke of trends in the housing finance industry and the managementís vision for the company in the coming years amidst potentially over crowded market.
EQM: What prompted ICICI to venture into the housing finance market?
That was a very central decision. Five years ago, when we thought about building a retail franchise, we were very clear that the success would really lie in being able to deepen your relationship with a customer. In the financial sphere, lot of your products and services get commoditized very quickly. Therefore in order to offer more value to the customer you need to offer convenience to him. Convenience usually comes from being an aggregator across all your products. One of the strategies we thought was, how would the person make his personal financial management hassle free. We have the full portfolio of products and the customer can almost select the products from it like a menu card. We have to offer everything and a retail customer is important to us.
If you look at todayís environment, the entire real estate market offers good growth potential. In that sense we entered at the right stage to ride on the wave of lower interest rates and low real estate prices, when people are in the active mode of acquiring property. Itís a very good business to be in today, with robust growth rates, 35% per annum, in an environment when the other sectors are showing slow growth. Also, the delinquency rate in the sector is comparatively lower. People move between heaven and earth before falling into default situation. Over a period of 10 years, housing finance business helps you in building good customer relationship.
EQM: What trend do you see in the housing finance industry? What kind of growth rates the industry would be able to sustain in the next five years and what will drive this growth?
Well, the correct thing to say is that the industry will continue to show growth rate in the range of 30%. For ICICI Home, we are expecting a 50% growth next year. And the reason is quite simple. There are two types of data. One of them deals with the demography, the age profile of the people who are buying the property. The other deals with the developer and builder community itself. If I were to look at the borrowers, even two and a half years ago, most of our customers were in the late 30s and early 40s. But now if you look at the age profile, there is a very large proportion, borrowing from the mid 30s. It has enlarged the entire pyramid of the working population. The affordability of housing has become very high with lower interest rates and stagnant real estate prices. When you shift, let say from an average age of 35 to an average age of 32, number of customers are increasing significantly because the pyramid base has become very broad. Given the fact that the home loans are available at such all time lows, post tax the cost of a loan is about 8.5%. This is below the return on RBI relief bonds (post tax). You canít get a house better than this. My own belief is that we will see not just 30%-35% growth in the sector but it will be over 50%.
This is one aspect. The other factor is the developersí community, which have started to become professional. Today the fact is that developers are picking up land, which is clean, there is no under hand dealing of the land. They are constructing the property on time. The delays, which we used to see in the early years, are reducing gradually. They are becoming much more organized. Also, the other phenomenon is, people are now not being forced to buy property, which is under construction. The builders themselves are getting financed for the under construction property. Consumers can just walk in to the already completed house and can decide whether he likes it or not. So the risk associated with the under construction property has been eliminated for the customer. Again the level of confidence has gone up and the people are saying that I am happy to put my money in that. Of course the third issue is psychological evidence. There is actually feedback coming from younger people that today I am earning well and by nature I am not that disciplined financially and I am likely to blow up my earnings. Whereas if I take a home loan it is the way of ensuring that every month I am forced to put aside some amount of money and at the end of 20 years, I will have a house. So rather than taking a loan as a negative thing, its become positive that I am imposing financial decision on myself. So itís a very different way of looking at a loan. All these factors put together is certainly contributing to the growth of the sector.
EQM: What is the disbursement made by ICICI Home Finance in the current year and what is the average loan size? What is the default rate in the companyís home loans business?
The average loan size for ICICI Home is about Rs 450,000, which is significantly higher than most other players. The industry average is about 450,000 Ė 600,000. Most of our loans are in between 10-20 years maturity. Again, if I were to split that up, I would say, salaried professionals would probably be classified in the maturity of 15 years. This is a very reasonable number. Since we started on a lower base, you canít really compare our high growth rates to HDFC. Similarly our delinquencies are much below the industry average (3% - 4%) due to small asset size.
EQM: What is your current market share and where do you see ICICI Housing Finance business in the next five years?
The nature of housing loan business is not like car loans that you repay in the short term. Disbursements happen over a period, which is generally stretched between 4-9 months. So if you see todayís disbursements, it reflects sanctions given 4-9 months ago. So to my mind, there is a lag indicator, which is not a good thing to go by, for arriving at current market share. In todayís market, I think you should go by sanction number. Last month we disbursed over Rs 5 bn of loans and a similar figure in the December month. So we are growing at a faster clip. We are likely to end the year, with a disbursement market share of 10%. On an incremental sanction basis our share would be significantly higher.
EQM: What has been the impact on interest spread due to increasing competition?
Our interest spread has not come down due to competition because our cost of funds have reduced significantly. What have actually come down are processing fees, from 1.8% to 0.8% and it can come down to 0.5%. On a floating rate basis we have the advantage, considering the fact that we will be merging with the bank at a later stage. Already, assets are booked into the bankís accounts and not into the HFC.
EQM: How is the Indian housing finance market different from global markets?
In terms of types of products, I would say that the amount of flexibility available Internationally is currently not available here. But I donít think that it will take more time to get introduced in India. When certain players are serious about business and competition, you will always find niche markets and niche products.
Internationally the big difference is the method of funding loan. If you look at the US markets, 80% of loans are funded by asset-backed securitization, which is a large market. In fact in the US, after the treasury bills, the next most traded instrument is the mortgage-based securities. Now that is something which we believe is absolutely essential and why it is essential because mortgaged based securities allows certain specialized entities into the financial system to do the loan originations and credit assessment and operations, which is highly specialized. It allows them to sell this portfolio to whoever is the best in terms of sourcing low cost of funds. Itís a complicated business. We certainly expect a shake out in the industry over the next two three years, as everybody today is entering into the segment. This is because the expertise, people like HDFC have built in the last 25 years is difficult to replicate. It just cannot happen overnight. Our expectation is that there will be many people entering into the market and many of them will eventually burn their fingers. Managing delinquency is not an easier job. You will have 2-3 strong players in the next few years with consolidation speeding up in the industry. Rest will be buyers of mortgage-backed securities, similar to the trend observed in US and Australia.
EQM: Is this the right time to take a housing loan or is there a possibility of interest rates coming down further?
Interest rates like any other thing is the function of demand and supply. Now the question is, when will industrial credit once again pick-up. If that happens the demand for money will go up. Growth rates for banking system in the last 15-16 years have remained more or less constant and it will continue to remain the same, in the range of 16%-18%. Supply side of money is anyways very predictable. The reason why interest rates have declined because credit offtake on the industrial side has slowed down tremendously. The view that one has to take is that when will credit offtake from the industrial sector pick-up. Because the day credit offtake picks up, it will absorb relatively large sums of money. That is the day when interest rates will pick up.
But in terms of choice between floating and fixed rate, there are players like us where we mention it very categorically in the agreement that we would allow you to switch, provided you pay us the fixed amount of fees (0.5% to 0.8%). In todayís situation, anyone would be better off by taking floating rate instrument. The catch comes when the financier donít mention it explicitly in the agreement, then they can charge you anything. There are, unfortunately, players in the market who charge 4% when the customers want to prepay. This happens because the loan agreement is loosely worded. Itís appalling.
EQM: What is the average cost of borrowings for the company and what is the funding mix used?
If we want to leverage the bank balance sheet, we have the freedom of booking the assets either in the home finance company or in ICICI Bankís accounts. It depends where the cost of funds and ALM position is better. We will be competitive whichever way. Interest rates movement affects me if I am lending at fixed rates, but most of my loans are at floating rates. If the interest rates goes up, my PLR will increase and customers will pay me more. On an incremental basis, you can consider ICICI Home Finance as a marketing company. But historically we have booked loans in our balance sheet. In the month of January, the HFC was operating as marketing and an operating arm and the loans were parked in ICICI Bankís book.
EQM: Expectations from the budget
Alignment of some of the administered rates like post office, PPF and small saving rates to the market benchmark. For example linking it to the interest rate on the government security. But I donít think so that will happen. There could be some change in absolute terms. A further tax incentive to individual is expected. If tax incentives on housing are increased, cost of funds for him will come down further. Already it is 8.5% and it could come down to 8.25%. That will make a difference of Rs 50 - Rs 70 per month in the EMI per month, for a loan of Rs 100,000. So certainly the impact of that on market expansion is quite significant.
We are hoping that certain steps for mortgage-based securitization should also emerge in the budget. But to change the securitization law, many changes are required. In the first place, mortgage based securities have to be defined as security in the Securities Regulation Act. Apart from this, stamp duty rationalization is required.
EQM: A word on your favourite books/personalities.
There are two types of book, which I read. One is to allow me to switch off, any thriller. The other is to keep up with the latest thinking on the management practices. Here I prefer journals rather than books since its easier and faster to read. For example Harward Business Review can give you an opportunity to read in a short concise way.
In terms of personalities I admire, which might surprise you, its Walt Disney. Itís not financially the most successful organization but I think the passion that man had, to create something out of nothing and to really think about it. The entire concept of the different characters of Disney World is all out of his mind. There was no raw material. The only raw material was his thinking, and everything was constructed from that. To my mind, the whole concept of creating something out of nothing is a very powerful concept. Second reason why I admire him and his organization is two fold from an organization perspective. One was very single-minded focus on the customer. Being in service industry it amazes me that how well an organization can manage a 360-degree customer experience. You really feel it is magic and get transported into the different world. I think it epitomizes for me the concept of customer experience. For a service industry, that is the whole model. If you can become the Disney of the financial world thatís the nirvana. The other thing, of course from the organization point of view, is the kind of emphasis they have on human resources and training policies. Admiring the two, how do you train your people in order to deliver that superior customer experience and the tools and techniques that they use are just fabulous. Again a role model for any service company.