Time has come for HDFC to find a new home: Deepak Parekh to shareholders
HDFC Ltd chairman Deepak Parekh in a letter to shareholders on Tuesday said he expected a fair and judicious response from the central bank on the project HDFC-HDFC Bank merger. The board of HDFC and HDFC Bank had approved the proposed all-stock merger on April 4, with regulatory approval expected within 15 to 18 months.
There are two dates that are perhaps the most important for HDFC. First, October 17, 1977. This date marked the realization of a dream of establishing India’s first retail housing finance company. The second important date is April 4, 2022, when the board of directors of HDFC and HDFC Bank, respectively, approved a merger of two equals.
For HDFC, between these two milestone dates lie several milestones and memories. During this period, HDFC seized the opportunity to create many new institutions, while continuing to fund more than 9.3 million housing units. Nothing has been more gratifying that HDFC has been described as an extraordinary company, run for ordinary Indians by ordinary Indians.
For many, myself included, HDFC isn’t just an institution, it’s a feeling. HDFC has always felt like home and family. Working with like-minded people who place honesty, integrity and transparency at the heart of everything they do is why HDFC is a cocoon of security and comfort. I can’t be more grateful to so many colleagues who are real ‘HDFC lifers’. They are the ones who patented the “HDFC way” of doing things and they are the ones who nurtured many others within the organization.
Every day, every year and every decade has been rewarding in building a customer-centric organization. I sincerely believe that our 45 years of expertise in housing finance in India is second to none. What sets us apart is our proven, efficient and low-cost operating model. This efficiency has been achieved despite a small staff base and supported by smart investments in processes and systems. It is our customers who help us evolve our product offerings and service delivery mechanisms.
Today, we have the scanning tools and expertise to deliver home loan in-principle approval in two minutes. To the same extent, we also recognize that many still want advice and support on their home buying journey. No two customer stories are alike. Yet all homebuyers are alike because a home is probably the biggest investment a person makes in their lifetime.
Housing finance products are largely standardized. The main differentiator between home loan providers is emotional quotient – empathy and understanding of customer needs and feelings. We remain committed to providing inclusive and personalized housing finance solutions across all income segments, increasing women’s home ownership, encouraging green housing and expanding our reach in deep geographies.
Over the past two years, I have repeatedly stated that I have never been more optimistic about the demand for home loans than I am now. Despite recent headwinds in the global macro landscape, I continue to maintain this position. India is on the cusp of economic transformation.
As the fulcrum of global growth shifts, India is expected to remain among the fastest growing major economies. Much of India’s growth will continue to be fueled by domestic consumption.
The aspiration to own a home in India will only grow further. The mortgage market in India is estimated at just over US$300 billion, representing a mortgage-to-GDP ratio of just 11%. Favorable conditions such as rising income levels, improved affordability and fiscal support bode well for housing demand. Real estate in India is booming. Developers are now financially stronger and more disciplined.
India should be able to double its mortgage lending to around US$600 billion in the next five years. This would coincide with the period when India would achieve its long-aspired goal of being a US$5 trillion economy. Despite the doubling of housing loans, mortgage penetration in India would still remain low at around 13% of GDP. Now is the time to ask ourselves, what will it take for India’s mortgage-to-GDP ratio to cross 20% and beyond? When looking at comparable Asian economies, average mortgage-to-GDP ratios vary between 20 and 30%. This implies that housing loans in India will experience an exponential growth trajectory for decades to come.
At HDFC, we know this is a good time to make strategic choices as we prioritize avenues for future growth. Our moment of truth is that the optimal path to develop housing finance must be housed within a banking structure. The pool of resources for loans will be significantly larger and at lower cost. From a regulatory perspective, it is prudent for all major housing finance providers to operate on a level playing field, with the same rules. Also globally, the magnitude of mortgage assets is exponentially greater in banks than in non-bank financial entities.
We have already explained at length the rationale for the proposed merger, which takes into account the future growth potential of the country, the evolution of the macro environment and changes in the regulatory architecture.
Trust is the basis of a successful merger. Fortunately, between HDFC and HDFC Bank, there is a natural affinity. Financial and human capital are essential in a merger process, as is a lucid communication strategy on the key developments of this period. We always strive to be available and accessible to all of our stakeholders to address concerns in an open and transparent manner. In addition, both entities are strongly committed to improving environmental, social and governance (ESG) information.
At this point, we await regulatory guidance on the way forward. We stay
respectful of all our regulators and are confident that the outcome will be sound and systemically fair. My only request to our stakeholders is your patience as we navigate the complexities of this transaction. More than ever, we need your trust and support.
All members of the Board of Directors and senior management, past and present, have individually and collectively helped the Company stand tall over the decades. I remain extremely grateful to them through the years.
After 45 glorious years of providing homes to millions of customers, the time has come for HDFC to find a new home.
With the blessing of our regulators, shareholders, creditors and other stakeholders, we look forward to being able to add the third and final significant date in HDFC’s history, which would mark the completion of the proposed merger.
Until then, I have promises to keep and miles to go before I sleep.