Budget 2020: Focus should be on job creation & capital market reforms, says HDFC’s Keki Mistry

Keki Mistry, vice chairman and CEO, HDFC, one of the most definitive voices from India's financial sector shared his views and expectations from the budget 2020.

“To my mind there should be 4 broad themes of the budget. The first should revolve around job creation. Housing is one of the biggest job creators in the economy, so we will talk about housing in a bit. The second area for the focus should be on capital market reforms. Third area of the focus should be on re-alignment of personal tax rates - particularly to my mind, the withdrawal of the high surcharge, which was introduced last year on high tax payers because that is slowing down consumption and the forth focus area should be the rural economy, these are the four broad focus areas,” he said.

With regards to real estate sector, he said, “The sector faces two issues. The first stuck projects. There are so many projects spread all over the country particularly in the big cities like Mumbai, Delhi, Bangalore, Chennai, Pune, which are 75-80 percent completed and not getting the last mile funding that is required to complete the project. We have to find a mechanism to ensure that these projects get the required funding, so that these projects get completed and all the home buyers who bought apartments in these projects get a house to stay in. Second issue is with regards to oversupply in the market and therefore how do we revive demand.”

Sharing his views on one-time restructuring for real estate projects, Mistry said, “Today under the regulations, if a loan is a non-performing loan (NPL) in someone's books, then any fresh lender coming and providing funds to that project notwithstanding to the fact that new money could be completely safeguarded, completely ringfenced, properly secured and so and so forth - notwithstanding all of that - the new lender has to classify the loan as a non performing loan from day 1. In which case, nobody would want to lend money to a project."

Therefore when a project is stuck, it is stuck forever. There are no lenders and there is nobody who will buy the apartment. We have to find a solution to this because there are hundreds of thousands of home buyers who have bought apartments in these projects, he added.

"My solution to this would be very simple - we should permit a one-time restructuring of such loans. So, if there is a one-time restructuring of such loans, let us say 3-6 months then new lenders can provide funding to that project with proper safeguard and security and ensure that it gets completed and the homebuyers gets the house which they have paid for. This was done in 2008-2009 very successfully and the whole real-estate sector revived as a result of that,” said Mistry.

Further focusing on housing, he said, “To improve demand, I would suggest, 3 or 4 things. One, the interest that is payable on a housing loan currently is tax deductible at the extent of Rs 2 lakh. We probably need to increase that limit to Rs 4 lakh or Rs 5 lakh and then link it to inflation. So, every year it keeps getting adjusted depending on what the inflation for the previous year was."

"Two, the quantum of revenue that the government must be collecting on LTCG for real estate must be extremely limited after you consider the various deductions that are available but it results in a lot of administrative work from the perspective of someone who is planning to sell a house. So, I would suggest doing away with long term capital gains on sale of residential houses provided that the person has occupied that house for a minimum period of time. Let’s say 5 years - if you occupy the house for 5 years, you should not be required to pay any capital gains at the time of selling the property," he said.

"Three, is with regards to rented property. Today, there is no demand for rented property. Nobody wants to buy a property with the idea of renting it out because of tax disadvantage. What happens is that in a rented property, the entire rent which is received is taxable. But the expense that you incur for earning the rent which is really the interest that is paid is not tax deductible and therefore the landlord ends up paying a large burden of tax. So, my suggestion is that the entire interest payable on a rented property should be tax deductible,” he further mentioned.

When asked if the National Investment and Infrastructure Fund (NIIF) limit of Rs 25,000 crore for the last mile funding needs to be expanded, he replied, “Let me compliment the government. I think it was a fantastic initiative on the part of the government to set up this fund. So full compliments to the government. However, at the end of the day what we must realize is that there are thousands of stuck projects all over the country and one fund, so how quickly it will able to dispense money to these thousands of projects after doing due diligence is something that we will have to wait and see."

"So, along with the fund, we should also have one-time restructuring of real estate loans, which will enable lenders like banks, non-banking financial companies (NBFCs), housing finance companies (HFCs) with proper safeguards to lend money to these projects. I think the amount is sufficient. I don't think we need to worry about the size of fund. That is more than adequate,” he stated.

Speaking about the additional liquidity window for HFCs and NBFCs, he said, “There are two issues around this, when IL&FS happened in September - first was the availability of funds and second was willingness on the part of banks to lend money to NBFCs or HFCs. The first part has been fully addressed by Reserve Bank of India (RBI), so full compliments to RBI for addressing the issue of liquidity. There is more than adequate or enough liquidity in the system and I don't think that is a cause for concern at all."

"Second issue is with regards to the willingness on part of banks to lend money to NBFCs, that risk averseness has not gone away. The good, strong NBFCs and HFCs get money with relative ease but the weaker and not so strong ones are finding it difficult to raise money. This issue needs to get addressed. It can be addressed if RBI sits with the bankers and tells them that, we strengthened the regulatory environment, you should now feel more confident to go and lend money to these NBFCs of HFCs, " he said, adding that the other way to do it would be to set up a separate entity, which buys over these toxic assets of some of these NBFCs or HFCs, leaving behind assets, which are of better quality. If that is done, then the banks will again have the confidence to go and provide funds to the NBFC or the HFCs.