Neeraj Swaroop | IDR is not a misadventure

In an interview, Swaroop also strongly defended the UK bank’s decision to float Indian depository receipts and said there is no Reserve Bank of India (RBI) probe into the bank’s alleged involvement in buying shares of Tamilnad Mercantile Bank and it does not hold more than 5% stake in the bank. Edited excerpts:

While announcing the first half earnings of Standard Chartered in India, you had said in August it was a very challenging time. What’s the scene now?

Is the time more challenging?

I wouldn’t say so; in some ways we got most of the bad news out on the table. That’s the good part. We have had high inflation for the last 12-15 months. We have started to see that stabilize even though it’s not coming down as yet. But probably the worst is over. We believe that somewhere by March inflation should start to moderate and come down to 7%. It seems to have peaked.

Interest rates have gone up further since August and we still think that from the tone of the Reserve Bank’s statement last time that there could be another hike. But it’s more or less at the top of the cycle.

I am more optimistic now than I was a few months ago about the state of the economy because consumption and demand by consumers continue to be strong across industries.

With the rupee weakening, there will be further pressure on inflation.

The rupee has deteriorated about 12% but along with most other Asian currencies at the same time. It has been a universal phenomenon, seemingly driven by flight to safety. The rupee is always under pressure because India is a current account deficit country but fundamentally, given the differential rates of growth and the strength of the Indian economy, our view remains that in the medium term, the rupee will appreciate against the dollar. It will come back to about the 45 range by middle of next year.

Should RBI strongly intervene in the market to protect the rupee?

It is something that the central bank should consider seriously, because while market should be left by and large to itself, the currency movements have been very sharp and they do hurt the real economy in the immediate term, whichever way they move. Whenever there is a strong appreciation or a strong depreciation, they do hurt people who have got transactions in the pipeline and transacted at a certain assumption. To the extent the central bank interventions dampen those movements, they are welcome.

Are you seeing a dollar shortage in the market?

Not severe, but there is a shortage of dollar supply, especially through the European banks. There is some amount of shortage but it is not drastic.

Are you asking RBI for dollar support?

No. We have some amount of availability of dollars through our line from group borrowing as well as ability to raise dollars through the ECB (European Central Bank) window or through the committed windows for our clients. We will not see that kind of a shortage, but there is tightness in dollars.

Will there be one more rate hike?

We think it should be the peak but it’s very difficult to say. The prime assumption now is that the inflation has peaked but given the dollar-rupee exchange rate movement and the impact on the cost of imports, we don’t know whether inflation has peaked. There are many factors at play but assuming that inflation has peaked, which is what we think it has, this could be the last (rate hike) or we might be nearing the end of the rate increase cycle.

Are companies postponing decisions to borrow from banks?

If we look at the numbers, the credit growth continues to be quite robust on a year-on-year basis. If we look at the first five months of this financial year, it is lower. We are seeing a slow down in the immediate term, but if we look at a 12-month period, it is not showing any signs of being much lower. I think the RBI’s estimate of 17-18% full year credit growth seems to be right. This is where we will probably close down, with a slightly slower credit growth in the second half of this financial year than the first half.

But the more important piece within that is the composition of the credit growth…While we continue to see working capital-led credit growth being strong, there is a slowdown in credit growth related to term financing, long-term credits, especially for new projects. The effect of that will be felt more into next year than this year, but we are starting to see some of these signs of slowdown.

What’s the reason for this?

There is delay in investments for long-term project finance... It’s a combination of both high interest rates and other non-interest rate factors as well—land acquisition, things to do with environment ministry clearances, reforms that were to happen, the FDI (foreign direct investments) decisions and some of the scam-related stuff that has come out. The sentiment gets depressed by all of that. It’s a combination of many macro factors… We are seeing a slowdown in new projects being announced.

What about your own credit growth?

The year-on-year growth is about 21-22% and we are predicting a year-end number of 17%, in sync with the industry. We are slightly stronger than what we had normally done in the past. We have always grown between 14% and 18%. This year we are growing 20% plus. But in the first five months, like the industry, we are seeing low growth of credit. This is because in the first half of last year we had a strong (credit) growth.

Stanchart’s first half earnings was one of the worst performances during your six-year tenure—39% drop in net profit, 12% drop in income.

It’s good to have some variety, right? On a serious note, I think you have to judge any financial performance over a period of time. Over six years, the performance of the bank in India has been outstanding. Yes, it has been a phase where all banks have done quite well in the industry but I think we have outperformed. It’s over 35% growth in revenue and profit for five years in row. We measure our performance not just by the revenue and profits but the underlying momentum of the balance sheet. Even in the first half of this year, we are seeing 20% plus growth on our advances, deposits, forex flows, non-interest income and we are seeing very robust growth across all products. We will be back to reporting the kind of numbers that we are used to but yes, we have had one discontinuity which I said is good for variety, if nothing else.

So, it’s a one-off incident.

I wouldn’t use the word one-off, to be honest, because it’s a fact. A group of factors influenced the result and all those factors will not play out in the same manner over a period of time—they will balance out. But it’s not that there aren’t challenges. In the near term, there are challenges on the macro front which we have to remain watchful—both on the impairment side and there is pressure on margin—but they are industry level issues.

Your net interest margin dropped from 3.8% to 3.1%. Will you be able to hold on to this?

This is a margin which we should be able to hold in the near term. We believe that 3.8% was exceptional, some kind of a peak. You have to set aside about $125 million for bad loans. A big chunk was for one particular corporate $53 million. Let’s just segregate the two—one specific impairment that we provided for and the general portfolio. The specific provision we made as precautionary and that’s what it remains as of now. It’s not even recognized as a non-performing asset in our books.

If we look at the portfolio as a whole, which is a second part, I would say we are concerned that it could get worse but we haven’t still seen any material deterioration in either wholesale or consumer portfolio and this seems to be in line with the industry. But persistent high interest rates and various other factors worry bankers—they can lead to stress in SME (small and medium enterprises) and portfolios of those clients which do not have very strong balance sheets, but so far we are seeing the portfolios holding out.

Are there instances of corporate borrowers asking for restructuring loans?

Not so far. We are not doing any restructuring at this point of time and we don’t have any demand for this.

So you are just seeing that corporate India is going slow on investments.

Yes, for new projects.

About 45% of your income comes from fees but with the slowdown that will sharply come down.

Yes and no. If we look at the components of our fee income, the M&A (mergers and acquisitions) and advisory is only one part of it—one of four big streams. Another big stream is forex related. We continue to see very strong economic activities which are leading to the forex flow and the business continues to generate good income. Then, we have a big line on distribution of wealth management products; there is also the consumer bank portfolio. Then we have fee income from all other activities—things like guarantees, other transaction-based services.

Out of the four lines, only in one—the M&A and corporate finance-related activities—we are seeing a downfall. As a diversified bank we have multiple product lines and multiple segments.

Any slowdown in retail banking?

On the retail side we are seeing static growth for both customer advances and deposits—in the order of 20% each. We are seeing significant growth in our SME book; we are growing our mortgage book; we have grown our unsecured loans book.

What would be the percentage of your unsecured loans?

About 15% would be unsecured. Between 10% and 15% is a fair level—we believe to balance the secured or unsecured.

You have not got any new branch licence for the past two years.

Most foreign banks would want more branches … The last branch that we got in 2009 is what we opened by December 2009 and for the last 18 months, we haven’t got any.I think the whole discussion on branches and annual plans got slightly diverted to the new model of operation which is through the subsidiariation route... I presume that once that clarity comes in and that becomes more stable, we will start to get new branch licences. That’s the expectation.

You have demonstrated your commitment to India by listing India depository receipts (IDR). Will you go for local incorporation?

Let’s see the guidelines. We don’t need to prove that we are committed to India again and again. I am not saying that we will not subsidiarise....India being a core market and a strategic market for Standard Chartered, we will take every opportunity to strengthen this commitment but we will do it if it has to make economic sense, because we also have share holders.

The big issue is to do with the one time capital gains in stamp duty and some clarity on what the benefits or how the almost national treatment on branch licensing will actually work.

We would like to get a level playing field and treated like a local private sector bank from the purpose of getting branch licences. We will obviously pursue that objective but we also to watch the one-time cost and that has to be palatable.

People are convinced that your Mumbai Marathon is a bigger brand building exercise than your IDR. Do you regret the misadventure? Will you de-list?

I am very happy that Mumbai Marathon does so well but it took us seven-eight years. We should judge IDR may be over a period of time. Is it a misadventure? Definitely not. Why did we do the IDR? For a brand purpose to say that we are listing in the country, we will be here for the long run, we are committed to this market… All those objectives have been met.

There is a general appreciation that an MNC (multinational corporation) bank like us was the first institution to come forward and test out a new instrument in the capital market in India. But nobody else is touching it.

We had an issue of about $500 million. Now let me just correct a few things. If we look at the issue price and the price now—though as a management we normally don’t like to comment about price—the discount to that price is lesser than the price of the biggest public sector bank and the biggest private sector bank… You look at the price movements of those shares… Has the investor lost out? On a relative sense, no; in absolute sense, yes. Stocks of all banks across the globe have come down at this period because of the European debt crises.

There were challenges because it is a first time an instrument was being issued but we have no regrets that we did it. It served the objective of what it was meant to do, which was to establish our presence with a set of stake holders. Yes, there are still a few issues with the instrument. It is not a perfect instrument, investment by the people like the insurance companies still not permitted, which is what we are hoping to happen. We are talking to the regulator. It doesn’t get equal tax treatment on capital gains for the retail investor. We are in discussion with the ministry of finance. We are hoping some of them will get resolved, it will make the instrument more attractive and there will be more IDR issues in the market.

I am sure you are not regretting the RBS (Royal Bank of Scotland) deal that did not happen.

It’s not that we did not look at the transactions, let me be honest. But obviously the attractive part of the transaction was to get the branches. Without that the transaction may not be attractive….We would have looked at it for distribution.

There has been an RBI probe into your alleged buying stake in Tamilnad Mercantile Bank. The allegation is that you are holding more than 5% stake which is not permissible.

First of all, the issue is between the share holders themselves; there is some litigation going on. And because it is sub judice, I can’t talk too much about it in detail. But on two things you are completely incorrect and I want to strongly deny that, one that there is an RBI probe. There is no RBI probe… We are obviously in touch with RBI and on all these matters, we have just finished an inspection.

We have shared with them in writing whatever this transaction, where our involvement which has been an escrow bank. … There is no probe, survey, focus, spotlight any thing. We are not allowed to hold more than 5% stake which is the second part that you are asking. We have clarified our role as an escrow agent … It was pro actively done with RBI and it was not a RBI-driven probe that happened. Specifically, we don’t hold more than 5% and we have declared that to the regulator.

I would stop at saying that we don’t hold directly or indirectly more than 5% which we are permitted to do and that with the regulator we have declared our role and this is about takeover of one group by the other group. It is not about us; we are just an intermediary as an escrow agent.

We hear that you have been relocated to Singapore with a larger role as CEO of South East Asia.

I am very much here as you can see. I continue to be in my current role and happy with that. Having said that, you know there is a natural time when things will move on because I have been in this role for about six years. You will have to wait and watch this phase before I can tell you anything about it.

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