Need to cleanse realty sector, says HDFC's Parekh

'Developer loans carry a lot of risk'

 HDFC Chairman Deepak Parekh has described home prices in India — smaller cities included — as highly inflated and also urged builders to focus on affordable housing, rather than luxury homes.

Parekh in his annual letter to shareholders on Friday said that home buyers have to be cautious of ‘too-good-to-be-true’ offers from the property developers and especially warned them against schemes where builders claim to play interest on borrower loans.

Further, Parekh said, “Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower’s loan for a specified period. They have to be cautious in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impact his/her creditworthiness.”

He also asked financing companies to stay away from innovative and aggressive loans, including teaser rates where the interest rates rise gradually and lending money to developers at the same rate as being offered on individual home loans.

“It is a dangerous thing to lend aggressively to developers,” said Parekh. Continuing in the same vein, he said developers must realise that in the long run, a correction in home prices will benefit them and help their cash flows.

While lauding the growth in the home finance market over the years, Parekh said, “As a basic tenet, construction finance entails higher risks and, therefore, such risks have to be built into the pricing.”

“Construction finance should not, through any innovative structuring, be available to developers at the rate of interest being offered on individual home loans. Further, the complete upfronting of construction finance to developers, even before the ground is broken is dangerous,” he said.

Parekh also noted that the country continues to face acute housing shortage, but prices continue to remain high. Having spent so many years in this business, Parekh said, “One recognises that one's voice can never be loud enough when so many vested interests exist as far as land markets are concerned. Nonetheless, I believe that one must not give up or be beaten down to silence.”