Naina Lal Kidwai, country head, India, and director of HSBC Asia Pacific, said an increase in interest rates alone cannot tackle high inflation and that India needs to address supply-side issues. She also said the banking sector is not growing fast enough to accommodate the growth of corporations. Edited excerpts from an interview:
HSBC has announced 30,000 job cuts globally. In India you employ about 34,000 people across businesses. Will we see retrenchments here?
We are evaluating all our businesses to make sure that each business is customer-centric and we don’t have unnecessary processes which can in any way affect our customer service. If you juxtapose the fact that we have cost-income ratios and performance in India that are very much on par and quite acceptable in terms of any standard, and the fact that the group is growing and has a high focus on India, it’s hard to believe that we would see any significant impact (in India). But the truth is that all businesses are under evaluation, and I am quite confident that we will see growth and focus on many areas like global banking, treasury, investment banking, insurance and asset management.
So, no job cuts in India, and instead you will keep on adding people.
It’s hard to say at this stage, but I would like to believe that.
In the past, you did ask people to leave in your retail banking business.
A while ago, when we chose to move out of the unsecured lending business, and as we actually cut that out, the whole collections business went behind it and we saw some shrinkage (of employees). But that’s an exercise that started five years ago and we are pretty much done with it. Now the business is indeed standing on its own feet and more than breaking even.
Limit of growth: Kidwai says the banking sector in India is not growing fast enough to accommodate the growth of companies. Photo by Hemant Mishra/Mint.
Even in the first half of the year, your retail business posted a marginal loss—about $4 million.
This really doesn’t count. We are very conservative while making provisions and the way we define retail banking has a bearing on it. It includes asset management and insurance joint venture which is just four years old. Most insurance companies really—just because of the way their accounting works—don’t show profits till at least their seventh year. We are doing pretty well in that business and I am quite confident that our insurance business will move to profit early. Our bancassurance model has shown that we have the ability to actually be among the top 10 insurance companies in a very short time.
We are actually growing our focus on the retail space. We were always a big player in wealth management; we are among the top three or four writers of bancassurance; we are among the top three or four distributors of mutual funds, and that’s pretty significant in the light of the fact that we have only 50 branches. We are growing our mortgage book, our secured lending book, and we are continuing to increase our credit card exposures.
How is the investment scenario?
What we are seeing is a slowing down of investment decisions because people are watching the interest rate cycle. As they see commodity prices and margins under pressure, the mood right now is to defer investment decisions. It’s happening at a time when manufacturing or non-food inflation is actually high. There is a gap between the demand and supply, which is inflationary, and what we actually need is more investment today.
To add to the supply?
Exactly, so that we don’t see this kind of inflationary effect. I think it’s going to be quite critical that we get this investment cycle straightened out. This is because what slowing down we see today is going to be felt by us only a year to 18 months down the line, and then we would see again this cycle. That’s not going to be good for us, both in terms of inflation and growth.
In the first half, your loan book has not grown.
Yes, it has pretty much stayed flat.
Is there no demand for loans?
Our loan book is a bit misleading because what we lend to Indian corporates is not just in India. We are actually growing our loan book to Indian corporates and some of that does happen offshore. Indian corporates continue to be quite acquisitive offshore. You may question why are they looking at offshore rather than India, but we become inevitably the bank of choice as they go offshore. Our footprint as the world’s leading international bank is such that it allows them to depend on us whether it’s Indonesia or Malaysia or the UK.
The India book does not reflect the credit appetite.
When do you see local firms coming back and asking for money?
I would like to believe it is short term because the India growth story is still very much there. Clearly, there are concerns and the mood.
What are the concerns?
The concerns are about the the ability to grow at a time when inputs prices are up. Infrastructure is in itself not easily available to all in terms of just getting a product out. If it’s for new greenfield factories, then the whole area of land and everything around it. All the issues we are wrestling with are of a long-term nature, and inflation itself is a big worry because as long as it remains at the levels it does, the interest rates—a very important input for many businesses—remain high.
Infrastructure which allows the whole food inflation process to actually be under control is a worry. People are going to thankfully eat better and eat differently. It’s not about just about cereals any more; it’s about vegetables and fruits and meats... But what are we, as a country, doing to address that? People want consumer durables, but their prices continue to ride high because of input costs and also as some parts of supply are not being entirely met. It’s very much a seller’s market.
To what extent would you blame high interest rates for this situation?
Interest rates are only one ingredient. The commodity prices are high, so that’s impacting things. Infrastructure is an issue; logistics is a long-term issue.
What’s your take on interest rates?
If inflation continues to remain where it is, it’s quite possible that interest rates will see another few basis points hike. (A basis point is one-hundredth of a percentage point.) I think it’s nearing the peak but may be still not quite at the peak.
Are we away from the peak by, say, quarter or half a percentage point?
Well, not more than that.
I would say about a half a percentage point. Inflation, to my mind, is not just about interest rates. The baby steps have led to a pretty significant overall increase in interest rates, but that has not helped containing inflation. At some stage, we have to evaluate whether the impact on the investment cycle is indeed worth it. We need to address our ability to produce more products to meet the demand. I understand from our customers who deal with rural markets that rural demand is very strong. It’s positive in terms of whether its SUVs (sports utility vehicles) or tractors or FMCG (fast-moving consumer goods) products. These are some of the big drivers of India’s growth.
When do you see the cycle reversing?
Until inflation is seen coming under control. That’s the challenge.
By next fiscal?
Given some of the long-term areas that need to be addressed, this cannot be tackled by interest rates alone. Everything to do with the supply of goods— whether it’s the regulatory aspect or the infrastructure and logistics—can take longer than six months. Then there is also the effect of the global commodity prices and global oil, which is actually working in our favour right now.
You said there is a very strong rural demand. Why don’t you go to rural India? The regulator always encourages you to go to the untapped rural market.
Yes, we have not said no to anything.
But you have not said yes.
A free branch licence in rural India is not on offer yet.
Mind you, if you look at our distribution footprint through insurance, asset management, retail broking businesses—it is wider than the 50-branch network that we have. While we certainly like more branches, we are able to grow through Internet banking. We were the bank that brought the first ATM to India and used the ATM to open a fixed deposit, sell investment products. So we have had to find a solution beyond just the bricks-and-mortar branches.
One solution that you looked at was buying the Royal Bank of Scotland (RBS) business. You want to buy the retail business and take over the branches while the licence will remain with RBS. Has the Reserve Bank of India (RBI) said no to this?
That’s not correct. We await approvals and we have been quite engaged with RBI right up to this stage. It is unprecedented as a deal and I can understand why RBI is taking time. We have no doubt that to service the customers that will come with what is a pretty large business at RBS will require some branches.
It will be quite a few branches.
It depends on what comes, because there is no commitment on which bank branches.
You are looking for about a dozen branches.
We are looking for as many branches as we can get.
From this deal?
We don’t know what it will bring.
Is there any deadline for this deal? Can it be open-ended?
It can be open-ended. We are two UK banks who are in close discussion. There is no doubt that RBS has to get out of this business because they have gotten out of it everywhere else in the world now. They can’t sustain this business one way or the other. They have no choice.
If the regulator has reservations about splitting the business and allowing RBS to keep the licence for the other business, why don’t you buy the entire business?
We would love that. But I don’t think that’s on the table. The key thing here and the worry is about the customers. The people continue to deal with RBS and hope that they will move to HSBC. Also, the employees and the people who service this business. It’s quite important in the interest of these people, both the customers and the employees; this needs to be sorted out.
Is there any time frame to close it?
By the end of the year we should know exactly where we stand.
It doesn’t slow down anything we do; we have an organic business and we continue to grow. We have had a record six months.
Globally now you are the sixth largest profit contributor. What’s the internal target to move up the ladder?
Well, I would like to see us among the top five. You know we are right up there, right now.
That is going past Canada?
Yes. Canada is just ahead of us. We have ahead of us Canada, Brazil, and then there is quite a gap between the UK, Hong Kong and China together. It isn’t really just about the bank in India; it’s the economy which is clearly going to work in our favour.
India’s contribution to the group goes beyond India in many ways. One way is, of course, how we service Indian customers globally. We are seeing them much more as multinationals than we did even five years ago.
The Indian banking regulator is willing to treat you on on a par with a domestic bank. Are you ready to be locally incorporated?
Yes, we are totally open on this. We are awaiting clarity in terms of what it brings with it. There are many clarifications which are being sought. Also, we need to see the tax implications, because with a one-off flip from being a branch into a local subsidiary, there is a one-off taxation which can be quite large in the nature of capital gains. We do need some of these aspects to be grandfathered and sorted through to make that viable.
Is there any other area of concern?
We also need to understand how much time we would have to meet priority-sector lending targets, which today are at 32% and quite stiff given our branch network. But to go from 32% to 40% and include agricultural loans is a challenge. But I would say all these can be resolved because it’s actually uniform across all banks. As soon as these things are addressed, we would be able to understand what is on the table and take a decision based on that.
Globally you are the fourth most valued bank in terms of market capitalization. After local incorporation, will you go for a local listing?
Well, you have to tell me if you think that’s good advice.
I think the structure of an IDR (Indian depository receipt) is basically still under review. There could be the demand for the product, but there are weaknesses in the structure itself, both in terms of fungibility and tax. Until the product itself is straightened out, you are not going to see another IDR listing. We will have to wait.
India is ready to welcome another new set of private banks. How will that impact your business? Do you feel threatened?
I don’t believe it’s a threat, because if you look at where India is today and its growth cycle as a country, the banks as a sector have pretty much hit the top. We are still talking about financial inclusion, and 50% of people still don’t have access to banking services, and it’s pretty disgraceful. And even more worrying is the fact that we have more and more companies hitting the exposure ceiling in terms of the banking sector as a whole. The banking sector is not growing fast enough to accommodate the growth of our corporates. It’s very important that we have bigger banks that support our economy.
This is an edited transcript of an interview that will be telecast on Bloomberg UTV on Thursday.