In Conversation: Affordable homes are key
Aug 19 2016
Srinivas Acharya speaks to FC on the company’s expansion plans as well as the focus on rural and affordable housing segments
Sundaram Home Finance seems to be slowly establishing a pan-India presence. Can you elaborate on the growth path set for the company?
Yes, we are heading towards a pan-India presence without losing our grip in the south. While the overall market has been challenging, there have been certain pockets that have offered us opportunities for growth. We have opened over 10 offices outside of the southern market in the last two-three years. That is a significant expansion for us and we are confident that we will be able to garner good business from these non-south markets in the long term.
Our strategy is to expand to contiguous locations that are witnessing demand for housing. We are expanding slowly but steadily. We started with Maharashtra where we have established five branches. We have also expanded to West Bengal, Orissa, Madhya Pradesh, Rajasthan and Gujarat. Overall, we now have over 100 branches spread across the country and have also crossed the milestone of 50,000 customers. This will continue to steadily rise once the recovery happens in the real estate sector.
Which are the states that are doing well in terms of business potential?
Gujarat, Rajasthan, Uttar Pradesh, Bihar, Kerala and Karnataka markets are growing. However, traditionally, in terms of potential, Tamil Nadu and Andhra Pradesh are also good, though currently there is some slow-down.
The realty market, especially the residential segment, has been struggling for the last couple of years. How does a home finance company keep its head above water in such a situation, especially in a competitive market like yours?
We excel in turnaround time because of our specialised expertise. All our arrangements are in-house, including credit appraisal and legal. We also pride ourselves in understanding customer needs and adopting a customer-friendly approach. The key is to keep in touch with the builders on a regular basis and help them in sale of properties by marketing their projects to our existing customers. It is very essential to keep conducting various marketing events on a regular basis so that “you are not out of sight and out of mind”. It is important to maintain a sense of balance in the lending space and not go for high-risk deals, diluting the underwriting standards.
How does one identify and sustain a quality business – in terms of customers as well as assets being financed? How strong is the company’s financials in terms of non-performing assets (NPAs)?
The key is to evaluate the customer and his cash flows. We have an in-house team of professionally qualified officials who take care of the appraisal of the properties for enforceability and marketability. During times of cash flow stress, it is the property that helps us to realise the dues. So it is very essential that the properties are evaluated properly. In this slowdown phase, we have continued to focus on the quality of customers, a strategy that has helped us keep a tight hold on the NPAs, at well below the 1 per cent level.
Post this year’s Union Budget, there seems to be some real action on the affordable housing front. How will this help you, given that you have expanded your activities recently by buying portfolios of affordable housing finance companies (HFCs)?
Yes, there is a lot of buzz about affordable housing, with the government also encouraging investment in this sector. In order to test the segment, we have bought loan portfolios of some housing finance companies engaged in this segment. The time taken to appraise customers at lower price level segments is higher. We don’t have to do the initial marketing. Buying portfolio of smaller HFCs helps from a cost structure point of view. These deals have been very good for us. There is good potential for us to grow in the lower-priced segment. We will continue to explore opportunities in this space.
While we will continue with indirect finance to this sector, we are also evaluating our strategy for this segment for direct lending. This requires a different mindset, approach and skills. During the last one year, we disbursed close to Rs 40 crore under the portfolio buying facility. In the longer term, we do expect to see a good growth in this segment.
Are you focused on the rural market as well? If so, what are your plans and how big is the potential?
There is tremendous scope in the rural housing segment as there are many positives. The default rate is low there and a lot can be done in this space. This is an ideal solution to enhance rural prosperity. The average ticket size on rural housing loan is about Rs 10 lakh.
While the potential is good, when it comes to pure rural areas, there are challenges in terms of validity/ownership of properties as title documents and the chain of title may not be clear. Legalising titles will play an important role in making rural housing a success. The government, along with National Housing Bank, is working on this. Further, appraisal of the customer profiles and evaluation of their cash flows require a different approach.
Sundaram Home Finance is already present in many tier II and tier III centres. Rural housing will be a focus area for us in the long term. Our current level of assets under management (AUM) in the rural housing segment is close to Rs 70 crore and there is potential to double the business from this segment in the coming years.
How do you fund your expanded requirements? Do you have any plans to raise funds in the near term?
We are funding our requirements primarily by way of refinance from National Housing Bank (NHB) and issue of non-convertible debentures. For balance period of this fiscal, up to March’17, we propose to raise funds to the tune of Rs 1,800 crore, of which NHB refinance will constitute 30 per cent, NCD/other term borrowing will constitute 40 per cent and the remaining will be mobilised by way of public deposits and commercial paper issuances. The company’s fixed deposit base has been steadily growing and recently crossed the milestone of Rs1,000 crore. With a strong in-house treasury set-up, we are confident of meeting our funding requirements.
How would you assess the current scenario in the real estate sector and what is your outlook for the sector?
In the last couple of years, middle-class home buyers have been hesitant to make a long-term commitment. Smaller sized projects that are less than Rs 20 lakh have been doing well, as has been the premium segment of Rs 5 crore and above, but the mid-section is where the maximum buying happens and that is where prospective buyers have been deferring their buy decisions and have been in a ‘wait and watch’ mode. The salaried segment, and predominantly IT sector employees, has to regain their confidence for the real estate sector to start growing again. Overall economic recovery and the government’s initiatives on infrastructure development could help trigger a recovery in the real estate sector. The good news is that we registered disbursement growth in the first quarter of this year, though I would say that it is still too early to call it a turnaround in the real estate space. The next couple of quarters will provide a clearer picture as to whether we are finally seeing the much-awaited revival in this sector. When the recovery happens, the entire finished stock could get consumed quite quickly, because the demand is real and people are not likely to indefinitely defer their decision.