HDFC Bank, one of the most valuable banks in Asia, trading at an estimated FY08 price-to-book (market price to book value) multiple of around 3.5, plans to use the little over $1 billion (Rs4,200 crore) that it has raised through a preferential allotment to its promoter, Housing Development Finance Corp. Ltd (HDFC), and American Depository Receipts to fund its credit growth. In an exclusive interview with Mint, Aditya Puri, the 57-year-old managing director of the bank, said there is no slowdown in retail credit growth and that credit to corporations has acquired a new momentum. At the current rate of growth, the bank would not need to enter the market for funds in the next two-and-a-half to three years, he added. Edited excerpts:
In early 2005, you raised money from the market and you have just finished another round of capital raising. When do you plan to tap the market again?
The return on equity of HDFC Bank is around 19-20%. Our topline has been growing at over 30%. Based on our current profitability, to maintain this growth rate we need to use about 1.5% capital every year. At this rate, we need to access the market in next two-and-a-half to three years. If we grow at a faster rate, then we may need to enter the market even earlier. About 90% of the money that we have raised would be used to support our business growth and 10% for the higher risk weight for assets under the new international norms under Basel II as defined by the Reserve Bank of India (RBI).
Bank credit growth has slowed from more than 30% to around 24%. Do you expect it to slow down further?
In HDFC Bank, we are not seeing any slowdown in any business. Retail loans account for about 55% of our Rs55,000 crore advances. There is no slowdown there. (The) retail loan book has been growing at around 30%. There is no strain and no shortage of demand in retail loans.
I guess those banks are feeling the heat that have been lending to marginal borrowers who can’t take the pressure of rising interest rates. When the rates rise, these borrowers default and they cannot afford higher credit.
We analyze the risk-return profile of segments and adopt a rather conservative approach. We don’t encourage irrational borrowers.
What about corporate credit?
There is buoyancy in wholesale credit growth. Companies are coming to banks seeking working finance and project finance. The loan book in this segment looks very robust and we are very optimistic about this segment.
In the June quarter, corporate loans grew at about 30%. And it is sustainable.
This means that while overall bank credit growth has slowed down, HDFC Bank will actually show higher credit growth as you have been able to maintain the retail loan growth and actually increased your corporate credit growth. Right?
Logically, it should. I cannot make any forward-looking statement. All I can say is (that) the growth rate is sustainable and we are not seeing any slowdown in any business.
Is there any new area of business you plan to enter?
There is a commodity boom and we are not yet encashing that. India is a commodity country and it is a matter of time before we reap the benefit. The commodity supply chain is being sorted out.
We are the settlement bank of most of the commodity exchanges and we are covering the entire chain of brokers, moneylenders and farmers. Our microfinance loan book is Rs500 crore and we see a 100% growth in this business. We have lent to one million families. The average interest rate at which we are disbursing these loans is about 14% and only in a few cases the rate goes up to 18% or even 20%. And remember that the rate at which we lend in this business is not at all important.
You need to see whether farmers and small entrepreneurs have a margin to make their business viable. About 42% of our 784-branch network is in rural and unbanked areas.
You have opened most of these branches recently after RBI lifted the ban on your branch expansion. What’s your relationship with the regulator now?
We have all along been enjoying an excellent relationship with the regulator. There is no problem anywhere.
But you were pulled up for alleged violation of know your customer (KYC) norms and RBI refused to give you licence for fresh branches.
There is no correlation between the two. The regulator did not give licence for new branches to many banks and HDFC Bank was one of them. We did not violate any norms. RBI had said that some of our officers did not use discretion or prudence which they should have exercised while opening new accounts. But at no stage did we open any benami (front) account. We have taken appropriate action against these officers and some of them were asked to leave.
Has RBI approved your plan to float a non-banking finance company?
Yes, we just got the RBI approval for this.
What’s the plan for this firm?
We have not yet finalized the plan. This will help us save on cost and generate many more small-ticket loans.
Meanwhile, we are putting in place a credit scoring model. It will be ready in the next few weeks and once this is done, we will be able to approve credit need of customers at electrifying speed. Our existing 10 million customers will be approved any new product they ask for on the same day.
For instance, an existing home loan customer will get an auto loan approval on the spot as we have her credit score ready.
You’re still selling home loans for HDFC...
We market HDFC’s home loans and earn about 0.70% fee for loans. We have also an arrangement with HDFC which allows us to buy back 70% of the loans originated from this bank at an interest rate which is 1.2% less than the price at which the loan was originally disbursed. We are very happy with this arrangement.
Wouldn’t you like to enter the home loans business on your own?
At this point of time, the existing arrangement is a very good option.
Shouldn’t you follow the ICICI Bank model and merge the parent with the bank?
We don’t have any compulsion to merge. What do we gain if we merge? A bank needs to invest more in government bonds (the statutory liquidity ratio) than a mortrage company and there is cash reserve that it needs to keep with RBI. Yes, the cost of funds for a bank is cheaper than a mortgage company. But then, HDFC enjoys some tax advantages. If you see both upsides and downsides, the merger does not seem to be an ideal option at this point of time.
What’s your relationship with Citibank, which holds a large stake in your parent?
(There is) no relationship to talk about. I look at Citibank as competition. Nothing else.
Will Citibank ultimately take over HDFC Bank?
Citibank holds about 12% stake in HDFC, the main promoter of HDFC Bank. You should ask this question to HDFC.
How much is HDFC’s holding in your bank?
Finally, what’s your take on interest rate?
It has probably peaked.