March 5, 2014
Interviewed by: David Snow
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India’s Growing Mortgage Market

New Silk Route Partners CEO Parag Saxena describes the Indian housing market, the dearth of loan opportunities, and how a division of a bankrupt securities firm was turned into a mortgage powerhouse that has grown remarkably over the past three years.

New Silk Route Partners CEO Parag Saxena describes the Indian housing market, the dearth of loan opportunities, and how a division of a bankrupt securities firm was turned into a mortgage powerhouse that has grown remarkably over the past three years.

India’s Growing Mortgage

With New Silk Route Partners Founder, General Partner and CEO Parag Saxena

David Snow, Privcap:

Parag, welcome to Privcap today. Thanks for being here.

Parag Saxena, New Silk Route Partners:

Glad to be here David.

Snow: Your firm has invested in a financial services company in India called Destimoney and I’d love to hear about the way that you have structured a value creation plan for that investment and how you’re executing it and how things are going. We can start with a focus on, in general, your thesis of the opportunity to invest in financial services in India and how Destimoney fits some play within that thesis.

Saxena: Sure, so again, you have to have this concept of what is called “the prepared mind.” Just as in telecomm when you think about the overall situation and its attractiveness, here too in financial services, part of what we had was the core group of people that had the expertise in the area. 

Twenty years of experience in India amongst other things that we could bring to the table. We knew that financial services in a macro sense were very attractive and by macro sense, India is very under-banked. India is very under-mortgaged. Coming quickly after the debacle of 2008 mortgages, what does that mean? It means that in India, people that buy homes with mortgages are less than ten percent of the population. It’s hard to get a mortgage and very few people have a mortgage. There are a large number of reasons that I’ll go into for that.

Financial services in general though, banks itself are very interesting. Here we said, “Okay, let’s augment this with a management team that could potentially run this company for us. Let’s recruit that management team and look at opportunities together.” 

We were fortunate, it was a team that had just sold a financial services company to HDFC, one of the very big, very well run companies in India and was available at that point in time. We recruited them, a three person team, and the three person team sat in our offices and worked together with our resources, the ex-CEO of Citi Bank and the vice chairman from JP Morgan etc. They worked together and looked at sector after sector in a deep dive, and said, “Is this attractive?”

The attractions of India were paramount. You’ve got this very large, wonderful demographic of a growing population. They’re all going to systematically get jobs and they’re going to find homes to live in and they’re going to need capital to buy those homes. 

Traditionally in India, real estate has been a haven for cash and going back 50 years, tax rates were very, very high, 70 percent income tax rates. People would do these cash transactions and never declare the actual value of the home, so if you bought a home for $100,000, you’d actually say it was $70,000 and you’d get cash for the remaining 30,000, an unfortunate practice. What that has meant is when people borrow money to buy a house that’s $100,000 but you are only declaring its value to be 70,000, and if as a lender, I’m willing to lend you 70 percent of that I’m lending you 70 percent of 70,000, $49,000. The lenders know the real value of this house is 100,000. You will rarely encounter the kind of situation that occurred in the West where when prices fell a little bit since mortgages were such a large part of the value of a home, people often had no incentive to finish paying the loan. You do not have that because of the practices that are here.

Effectively, a mortgage lender in India is lending only about half the money, so non-performing assets, NPAs in the jargon of mortgages, are very low. We thought this was an attractive business. We had a team of people that were familiar with it and we needed a vehicle to invest in. Low and behold, within six weeks of us starting this effort, there was a UK company called Donny Day and Donny Day declared bankruptcy in the UK. It had an underlying asset, a brokerage firm in India, a regular stock brokerage firm. We thought that we could use that machinery, that contact system, the recording systems, all of those things to also use the same people to sell loans rather than sell or buy securities. 

We got our very high-powered team of people to start off with this very small, little brokerage, but with absolutely fabulous equipment, state-of-the-art systems. We started doing that and started selling loans off of various banks. We went to a dozen banks because didn’t have any capital to lend ourselves, we were a mortgage broker, essentially. We matched buyer and seller and took a small fee, one percent, on these loans, then we had the second piece of luck and that was the second largest state bank in India came to us and said, “You’re doing an interesting job selling some of our loans” because we were one of the people that were selling our loans. “What would happen if you do this exclusively for us because we’ve been impressed by the way you’ve been able to place our loans. You were getting good quality borrowers. We haven’t seen glitches in the filling out of the paperwork, so how can we expand this relationship?”

They had capital. We had the selling ability and we said, “Why don’t we have a joint merger? This is the second largest bank, so they come with a certain amount of swagger and pride with that and they certainly did not want to be a minority in dealing with us. We thought the essence of what we had was a well-trained team and we didn’t want to lose that. It’s important for us to retain the ability to manage the company, to recruit the CEO, to recruit the direct team that reported to the CEO. That part was important. It wasn’t crucial if we were a minority or a majority if we had that particular ability. 

We proceeded to suggest to them a 51/49, we would be 49. They would provide all the capital and our team would make the loans. That is what we’ve been doing now for over three years and that worked out extremely well.

You win in this game because you make loans to people who pay you back. People come to you because you have an attractive rate of interest -that’s got to be part of it- and then the service has got to the part of it. If you want to look up your statement, you want to make sure that you’re paid, you want to accelerate something, switch the kind of loan you have. You want someone that has all of those features. We had the latter because we had global knowledge. We had seen adjustable rate mortgages, five-year mortgages and thirty years mortgages. Our team had the experience of all of that from all over the world and we had the lowest cost of capital because the provider of the capital is the second largest bank in the country, so its cost of capital is very attractive and we could not be beaten on price by our competition. 

Destimoney is a company, which could be sold -in fact, we recently had two offers to buy at an attractive price. We’re likely to just continue with the company at the moment and keep going with it because this is still a very, very large un-met need. 

The segment of the market that we’ve identified: first, homes for people who are professionals. We want people who have some credit history, are early in their career but we think that they’re going to be good borrowers for the next 25 to 35 years because we’ve caught them early.

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