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Started last year, LIC Housing Finance Ltd plans to open a new subsidiary each year over five years. R R Nair, director and chief executive, speaks about the company and its plans in an interview with Parnika Sokhi and Neelasri Barman. Excerpts:

What are your growth targets for this financial year?

We are targeting about Rs 20,000 crore disbursements this year. Last year it was almost Rs 15,000 crore. Net interest margin (NIM) on an average for the last year was 2.7%, so for this year we expect NIM to be 2.9-3%. For the fourth quarter last year, NIM was 3.3%, and that was after we passed on the lower cost benefit to our existing customers. Our gross non-performing assets (NPAs) last year were at 0.69%, which we aim to bring down to 0.5% this year. Net NPAs were at 0.12% last year, which will come down to 0.11% or lower. Our market share improved by 3.5% last year and is at 11%. This fiscal, we will target 13-14% of the total market share.

How have you managed to keep the NPA levels low?

We not only look at the loan-to-value ratio (LTV) but also the repaying capacity of the customer via the monthly loan servicing charge (MLSC). We have a cap of 50% MLSC which means that 50% of the income of the customer should only be the EMI. The MLSC in effect is at 35%, which means that customers have sufficient buffer, so even if there is an upward movement in the EMI, people will not have a problem. Secondly, 84% of our customers are from salaried class who normally prefer to keep their accounts clean. We also have tie-ups with Crisil and Cibil to check the credit quality of the customer before disbursing the loan.

Any fund raising plans for this year?

This year, we will need to raise Rs 20,000 crore to meet our disbursement targets. Last year, we raised Rs 17,000 crore. Our total cost of funds - domestic and foreign borrowing - is reasonably good, less than 8%. Non-convertible debentures, bank term loans and commercial papers are the options available along with public deposit channel. External commercial borrowings do not look lucrative at the moment, so we will be exploring domestic market only for now. We have already raised Rs 2,000 crore in different installments this year. Recently, we got three-year money at 7.4% and one year money at 5.9%. On Tuesday, we raised Rs 296 crore for 10 years at 8.6%. This month we will be raising Rs 1,000 crore through whichever proposition is better.

What is your investment portfolio currently?

It is our company policy to maintain Rs 500 crore investment in liquid funds at any point of time.

What is your capital adequacy ratio?

The CAR is at 14.5% with 10.5% in Tier-I capital. Last year, we raised Rs 500 crore for upper tier and the Nomura stake sale will be infusing Rs 138 crore in Tier-I, so we do not need any capital infusion as of now. LIC holds 36.5% stake and the rest is held by public and institutional investors. LIC's stake came down from 44% because it did not participate in the QIP last year.

What are your plans on venturing into new forms of business?

Our plan was to open a new subsidiary company each year for five years. We have already launched the financial services subsidiary last year that sells financial products of other companies as well with insurance products and home loans products restricted to LIC and LICHFL only.

The next subsidiary is the venture capital fund which is expected to start operations by September this year. We have started a separate division in our company called the property services division, which provides end-to-end property solutions. So the idea is that once it gets established, we may have it as a different company. Then we are also waiting for the guidelines from Reserve Bank of India to apply for a banking licence if we fit the eligibility. A microfinance subsidiary is also an option, because it needs a different business model and a different set of rules depending upon the income stability and concessional needs of the people targeted. About 80% of demand is from the low-income segment, so for long-term sustenance of business growth I think the microfinance business is necessary.

How will base rate regime change the home loan scenario?

We have still not withdrawn our fixed-and-floating home loan scheme with 8.9% fixed for first 3 years. We have been disbursing about Rs 1,200 crore every month since the launch of this scheme. I expect the base rate to be around 7% in the banking industry if their existing target group has to be captured. If they choose to place it on higher levels, they may loose out on short-term loans because corporates have other options to avail of short-term requirements. So we will have to see where the base rates settle. Our cost of funds is close to 8%, so if base rate is at these levels or higher, then we will not have any issues. But revision of interest rates on home loans does not only depend on base rate. It will depend upon the cost of borrowings also. Last year, we passed on 200 basis points of benefits to our existing customers in three installments. As long as there is no significant rise in cost of funds, we will continue the scheme. We can absorb up to 25 basis points of upward movement in cost of funds.

Are you looking at the reverse mortgage business?

We have developed a product, but the tax issues need to be worked out. We will earn income only after the lifetime of the borrower, but we have to treat it as accrued income and pay the tax which will impact the cash flow of the company. This has already been taken up by National Housing Bank to the finance ministry. So once that clarification comes, and if there is concession or respite in that aspect, then we will be launching the product.

Source: http://digital.dnaindia.com/