With interest rates inching up, there will come a point when home loans will become expensive for borrowers, says Kotak Mahindra Bank joint managing director Dipak Gupta. While the demand for homes is unlikely to taper in the near term, financing a purchase will become increasingly costly, he tells Ajay Ramanathan. Excerpts.
Retail microfinance loans have grown sharply in the December quarter. How will you approach this segment going ahead?
For us, it will be limited and cautious. There is opportunity there and it is a very small base for us; total base for us is about Rs 5,000 crore. It will grow, it is an attractive area. But in the overall context, it will still be small. We do microfinance through our subsidiary BSS Microfinance, which is our business correspondent. They do the sourcing and we do all our sourcing through them. We are largely in Karnataka, southern Maharashtra, some parts of Gujarat and Uttar Pradesh. We basically are in these areas and we do not intend going significantly outside these areas.
What will you be focusing on growing within the retail portfolio?
Retail for us is basically home loans on the secured side. On the unsecured side, it is basically personal loans, microfinance, and credit cards. We expect both segments to be growing well. The home loan, and loan against property side as well as the unsecured side. The consumer side is growing at more than 20%. That is a healthy growth rate at this point of time.
How do you see home loans shaping up?
I think the demand on the home loan side is pretty robust. What we have to watch out for is interest rate. Interest rates have moved up quite a lot and at some point of time, the home loan itself will become expensive for customers. That is what we have to watch out for. We probably have not reached that stage yet. There is significant demand. People at the middle income level are very keen and anxious to get a home, and hence a home loan. I do not see that demand coming off in the near term. Finance will become increasingly expensive.
At what point of time will bankers get jittery on home loans?
It is a difficult question to answer. Let us say for example that overall interest rates move up by another 100 basis points. Today, a good AAA-rated customer will typically get a home loan at around 860-865 basis points. Another 100 basis points will make it 960-965 basis points. At that point, you take a 15-20 year loan at 965 basis points, it is an expensive proposition. It will start impacting demand at that point of time.
Do you have a target on net non-performing asset ratio?
Well, we want to keep the net non-performing asset (NPA) ratio as low as possible. You have to look at the net NPA in two parts. One is secured portfolio; even if the secured side is about 1%, it is okay. On the unsecured side, your net non-performing asset ratio has to be close to zero because ultimately, recoverability is very low. On the secured side, recoverability is still reasonable, which is why you can do with a 1% net NPA. But on the unsecured side, it has to practically be about sub-0.25%. If you average the two out, a net NPA of about 0.5-0.75% is okay. That will give you a provision coverage ratio of somewhere around 75-80%, which is okay.