Deepak Parekh stresses on importance of borrower's cash earnings in loan approvals
Housing Development Finance Corporation’s (HDFC's) former chairman Deepak Parekh on Thursday delved into the institution's loan philosophy and the challenging decision he faced regarding his leadership role. In an exclusive interaction with CNBC-TV18 on the sidelines of Global Fintech Fest 2023, he spoke about HDFC's unique approach to lending.
Parekh emphasised their scrutiny of borrowers' financial profiles. He highlighted that loans were granted based on an individual's cash earnings, particularly for self-employed individuals, such as doctors, businessmen, or lawyers. HDFC's evaluation included checking CIBIL scores and reviewing three-year income statements. Parekh noted that this approach had contributed to their loan recovery record.
"We never gave a loan on the asset value. We gave a loan on the cash basis of the individual. What is his cash earnings? What is his take-home pay, and how much can he afford to repay? So for self-employed individuals, we relied on CIBIL scores and the last three years' balance sheets and income tax returns," Parekh told CNBC-TV18.
“Since the loan was linked to the income, we had a good record of recoveries because we never gave a loan on the asset value. We gave a loan on the cash basis of the individual,” he added.
Notably, the lender has the ultimate power to decide the loan amount they wish to offer to borrowers based on several factors, such as repayment capacity, income, and others. A repayment tenure and interest rate is associated with every loan. The bank may apply several fees and charges to every loan.
Here's a look at recent personal loan rates of key banks:
| Bank | Interest Rate (p.a.) | Processing Fee |
| HDFC Bank | 10.5% p.a. - 21.00% p.a. | Up to 2.50% |
| ICICI Bank | 10.75% p.a. - 19.00% p.a. | Up to 2.50% |
| Yes Bank | 10.99% p.a. onwards - 20% p.a. | Up to 2% |
| Kotak Mahindra Bank | 10.99% and above | Up to 3% |
| Axis Bank | 10.49% p.a.- 22% p.a. | Upto 2% of the loan amount |
| IndusInd Bank | 10.25% p.a. - 27% p.a. | 3% onwards |
| HSBC Bank | 9.99% p.a. - 16.00% p.a. | Up to 2% |
| IDFC First Bank | 10.49% p.a. onwards | Up to 3.5% |
(Source: Bankbazaar)
Furthermore, Parekh discussed the evolution of HDFC's lending practices, acknowledging the firm's willingness to take calculated risks, particularly with unsecured loans. He noted that the company's approach differed for housing loans, which remained secured, compared to unsecured loans, where HDFC conducted on-site visits and assessed clients' businesses.
Reflecting on a pivotal moment in his career, Parekh disclosed that the most challenging decision he had to make was stepping down as the executive chairman of HDFC at the age of 65. He shared his motivation behind this choice, saying, "I thought if I continued, it would come in the way of the next generation of leaders."
First Published: Sept 7, 2023 1:57 PM IST
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