India’s second largest private bank by assets,HDFC Bank Ltd continues to grow aggressively even as most private and foreign banks are consolidating their balance sheets. Managing director and chief executive officer Aditya Puri, 58, is unfazed by the economic slowdown and says the bank will find ways to grow. Its loan assets grew at about 40% in the March quarter, the toughest in Indian banking history in the wake of the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. For fiscal 2009, its net profit grew 41%. “During the boom, all you fellows called us conservative and now you call us heroes... We are just plain simple bankers who believe in fundamentals, good customers, conservative lending, good returns and happy shareholder,” Puri said in an interview. Edited excerpts:
Belief in fundamentals: Puri says financial services in India is one of the best opportunities in the next 5-10 yrs. Ashesh Shah / Mint
Are you seeing signs of recovery?
The impact of the global slowdown on India will be there but we are, to a great extent, insulated from it. That’s because there is huge domestic consumption and the economy’s dependence on exports is low.
The economy will slow down but it’s also true that we will have growth between 5.5% and 6.5% under the current circumstances. If things improve, the growth could be even higher. In a nutshell, the worst is behind us and we are seeing cautious optimism.
Is this recovery driven by the fiscal stimulus packages?
I don’t understand this stimulus. Some spending on purchase in trucks and all that; payments to government employees; and 4% reduction in excise duty... This is hardly any stimulus. These steps have had an impact. They were needed to change the mindset (of people) at that point of time. You may need further stimulus going forward. This will depend on the global environment and the rate of growth.
The credit growth is around 19% now. Do you see this going down further?
This has to be put in context. Credit growth was in the range of 25-27% when the economy was growing at 8.5-9%. When GDP (gross domestic product) growth was 9%, bank credit grew at 30% and we called it overheating. There is a correlation between GDP and credit growth. As long as the GDP growth is in the range of 5.5-6%, credit will continue to grow at about 18-20%.
Banks have restructured loans to the tune of Rs40,000 crore. How much of these loans are expected to go bad? Is this window dressing?
Why are you journalists so negative and want to see only the bottom every time? Sometimes the glass is half full also.
It’s normal to restructure loans in all business cycles. Will there be some abuse of the system? Yes, maybe 5-10%. I generally believe that my fellow bankers are men of integrity as well.
Secondly, the larger restructuring has to be a part of corporate debt restructuring mechanism. This means 10-12 banks (that have given loans to a corporation) will have to agree that a loan should be restructured (as the company can turn around).
Thirdly, the Reserve Bank of India (RBI) has said that whatever concessions the bank gives (to corporations), they will have to take that in their profit and loss accounts.
Is restructuring during a downturn a part of life?
Yes. Some amount of increase in non-performing assets (NPAs) will happen with or without the restructuring because the world has changed. Some amount of these will become NPAs as the companies may not recover and certain assumptions (of banks) may go wrong.
Which sector will be most affected?
The export sector will be affected; software industry and consumer goods, too, will be affected. They will need help and we should rightly extend help.
Currently, some private sector banks are shrinking their books and public sector banks are filling in that space. Do you see risk in this rapid growth?
No. Any growth that is not forcefully induced will not create problems.
As far as we are concerned, our consumer portfolio is growing and so are the small business and corporate portfolios. The rate of growth may be slow. Does this growth match with the rate of growth when the GDP was growing at 8.5-9%? The answer is no. But there will be good growth.
What’s the key to your growth and profitability?
We are in the business of lending which is beneficial to both the customer and us. We have never let a retail customer over-borrow and not lent to companies that are over-extending themselves. We are conservative in our funding and we want most of our funding coming from retail depositors which is stable. Consequently, our dependence on bulk funding is almost not there.
We also stuck to our credit standards and pricing, as you need the margins to take care of delinquencies. We never distributed credit cards like biscuits. We follow plain simple conservative banking.
During the boom, all you fellows called us conservative and now you call us heroes. We were not heroes then; we are not heroes now. We are just plain, simple bankers who believe in fundamental banking, good customers, conservative lending, safe depositors, good margins and happy shareholder.
Our leverage criteria and target segments have always been tighter than the industry. In the toughest of times, we have managed to maintain a lower net NPA ratio. We have enough profitability to take care of slight deterioration which is bound to happen in a downturn.
Is the derivative losses behind the bank?
Derivatives are instruments to cover your risk or ensure that you are taking a particular point of view in line with your business. If the exchange rate saw abrupt movement, it’s not the bank’s fault. Had it moved in your favour, you wouldn’t have come to bank (complaining). When things didn’t go in your (companies’) favour, I (bank) can only sympathize with you, but that’s all.
When you are going to deal with multiple currencies in a volatile environment, you have to be cautious of the kind of risk and covers you take. It’s your decision, I (the bank) only facilitate the execution of your decision.
Is there any particular business that you’re focusing on?
We are seeing continuous growth in car loans, consumer loans, credit cards, jewellery loans, loans against property, loans to small business and corporate portfolio.
We have substantially increased our branch network. We have 1,400 branches now and by the year-end we will have 1,600-odd branches. We have streamlined our systems and becoming cost effective by the day. Financial services in India remains one of the best opportunities in the globe in the next 5-10 years. Demand is not a problem in this country.
As far as the rural and semi-urban areas are concerned, today almost 60% of the bank branches are outside the urban areas and almost 50% of lending is happening outside the urban centres.
How is your non-banking finance company doing?
We started our non-banking finance companies with tight standards and we should break even within a year. Since everybody has vacated the market, I have the choice to pick and choose what is viable. We have infused about Rs100 crore in this entity.
When is your term coming to an end? Are you building a strong second line?
Even if my tenure is coming to an end, it’s only a statistical point like the headline inflation. My tenure is not coming to an end because of age restriction. It will come to an end as RBI gives a three-year extension each time.
My second line is one of the strongest, most professional and experienced in the banking sector.
When will we see the merger of the bank with Housing Development Finance Corp. Ltd?
One should never say never, but it is not happening now. They have a lower statutory liquidity ratio, cash reserve ratio and tax rate. We are using our combined strength in an optimal manner.
The downsides are definite and the upsides are not compelling. It would be done only if it is beneficial to the shareholders.