Mumbai: Hongkong and Shanghai Banking Corp. Ltd (HSBC) was in the news in India in November when anti-corruption activist turned politician Arvind Kejriwal alleged that Indian businessmen had stashed unaccounted money in its Swiss unit. Globally, the UK bank made the headlines in December when it agreed to pay $1.9 billion in fines to US authorities over money laundering and other charges. In an interview with Mint, Stuart P. Milne, HSBC’s chief executive in India, denied the charges by Kejriwal. He also spoke on a range of issues including the bank’s operations in India. Edited excerpts:
How do you describe HSBC’s current status in India?
I do believe that banking is basically a simple business. It is all about taking short-term savings and converting them into long-term investments. That, in turn, means focusing on our customers. If the customers grow, then we can grow. Our strategy for India is all about focusing on the right customer segment both on the corporate side, institutions as well as individual clients. There is a lot of good news about HSBC.
You took over India operations last April. How has your stint been?
If you look at the profit before tax (PBT) figures, it was marginally down by 0.5% in 2012. But once you adjust for rupee depreciation, our profits were up by 14%. Last year was not an easy year for most of our customers. Our major corporate clients were not investing in India as they had invested in previous years to build up capacity but the expected growth to use that capacity had not materialized. Therefore, they didn’t make big investments last year.
HSBC missed its publicly stated annual profit target of $1 billion in India.
We have not given a timeframe for reaching the $1 billion target. We have, in fact, increased our profits last year by 14%. What is important for the bank is not specifically a number. Actually, we don’t give profit forecasts year after year. The main focus is on our customers. We will grow with our customers and maintain our market position.
How is the quality of assets?
We don’t comment on detailed numbers. I will say, as a broad picture, we have a very comfortable position. We have a very high-quality lending portfolio, which is focused on the top end of the market. Typically, during recession, stress emerges first in smaller companies.
In the mid-corporate segment, we did see some additional NPAs (non-performing assets) last year. In that segment, we have seen profit falling to $89 million last year from $122 million. The reason for that decline, apart from the currency issue, is some bad debts emerging there. Many of our clients are global multinationals elsewhere and who operate in India. They are very strong companies with good credit quality.
Also we have avoided some of the sectors vulnerable to stress like airlines and infrastructure and hence we are not seeing the kind of stress that some of our competitors are seeing.
What kind of portfolio composition you are looking at?
The important thing for us is to make sure that we have diversified profit streams. Traditionally, we have been strong on global banking markets. That’s been the core of our business for a long time. We are now investing in retail banking, wealth management businesses and mid-market businesses. The objective is to get more even distribution of profits.
HSBC laid off 550 staff in Pune and Hyderabad last year.
Globally, HSBC has been looking at improving efficiency. We went through an exercise to make sure that we are operating our businesses all around the world in an efficient manner. India is very much part of that. We were looking to improve customer experience by reducing the distance between the customer and the point where decisions were made. That process is behind us. We are now focusing on how to grow. We are recruiting new graduates— about 30% more than last year.
Will there be more job cuts?
Last year, we went through a specific exercise and there is no plan to repeat that. At the same time as we become more efficient we find new ways to do things better. We take feedback from our customers and employees. This is a very active programme to continue to improve our efficiency levels. That will continue to result in re-alignments.
What are the steps you have taken to avoid misselling of products?
Many banks incentivize their sales force on the basis of sale of products and pay them based on the volume. We used to do that but we no longer do that. If we incentivize just on a product, then we may see a relationship manager selling a product not in the best interest of the customer. That is not what we want to see.
HSBC’s public image has taken a severe beating post allegations of money laundering and hawala transactions being facilitated by the bank?
I wouldn’t say so. We are trusted by our customers. That is why our profits are growing here.
I accept that there have been certain individuals who made certain allegations and that got some media coverage last year. We don’t recognize that at all. Just to be clear from the HSBC’s side, we do not tolerate any kind of illegal activity. I’m not concerned about the allegations. We are doing very well and the reactions we got from our customers are very positive.
But, there have been specific charges raised by Arvind Kejriwal on HSBC facilitating hawala transactions to about 700 accounts in Swiss banks. Are you denying the existence of those accounts?
Kejriwal has made some allegations that HSBC, in India, was conducting hawala operations. I can tell you that is not the case. We have never tolerated any kind of activity like that. If at all something was found, immediate action would have been taken.
So the names and accounts made public by Kejriwal do not exist.
I am not going to comment on individual names or on a list, because I’m not aware of any list. What I understand is the French government provided a list to the Indian government. But the extent of that list or who is on that list, I have no insight into that.
Has HSBC initiated any internal investigation?
We don’t launch investigations when somebody makes an allegation. We have a series of controls in place which make sure that such things cannot happen and operations are consistent with the standards. In addition, we have regulators coming and doing the same thing every year. We are very comfortable with our standards.
The share of foreign banks in assets to the banking industry has been stagnant at about 7% for last many years.
Indian banks are relatively smaller, given the size of the economy. Just one of the Chinese banks have a balance sheet bigger than the entire Indian banking sector. So there’s potential for banks to grow in India. You are seeing continuous pressure of internationalization...Whether you are importing or exporting, raising capital or making M&A, the inter-connectedness in the economy is increasing. In that context, there’s a role for many different types of banks. And there’s a specific role for those banks...We have a very vast overseas network and that’s why Indian clients come to us to help them execute their strategy.
What is lacking in India’s banks?
I do think there’s room for the government to over time reduce it’s ownership in banks. Clearly with the Basel III requirement and the growth we talked about, someone has to fund the capital and probably it’s not going to be the government. If banks are given to private sector, they would increase more competition and the result will be more efficiency and better services to customers. ..Indian private sector banks have been hugely successful.
RBI has not been very friendly with foreign banks.
The regulator has done a fantastic job in shepherding the Indian banking sector in a very challenging time in the last four years. It’s also not uncommon in a market that is growing rapidly to allow foreign banks to have unfettered competition. Would we like to open more branches in some key cities? Yes, we would. Does the regulator currently allow us to do that? Not really. We need to meet the regulator’s expectation and open branches in under-banked cities and there’s a little conflict there as our target customers are in the cities ... Somehow we have to bridge that.
The RBI wants you to do 40% priority sector lending
Indian banks have requirements in terms of priority sector lending and what the regulator is doing is to ask the foreign banks to meet the same requirement. And they are asking the larger foreign banks and not the smaller foreign banks. I can’t argue with that because this is a rule which applies to Indian banks and many of them don’t meet those standards despite these targets being there for many years.
We’ve been asked to achieve that in five years, which I don’t believe is achievable. But we will do everything we can to try to get there. We have been asked to do that starting 1 April this year.. It will be a very, very challenging exercise.
It is a challenge because up until now we had a 32% target. The target’s going to 40% but and we can no longer count our export finance. Export financing is currently 22% and so effectively the government is saying that we must go from 10% to 40% in five years.
Have you approached RBI on this?
Of course, we have. We have been suggesting that export financing should continue to be included because Indian companies need that financing at a cheap rate in order to support the export growth. The other thing we are looking for including is infrastructure financing. It is a priority for the country, why not treat is as eligible to be counted as priority sector lending?
Are you prepared for subsidiarization as proposed by the regulator?
We are very open. We have a large business here. We have incorporated our businesses in China, Vietnam, Taiwan, Australia, Malaysia. Once the guidelines are finalized, we should be moving forward to incorporating the business.
Stanchart listed their IDRs as a symbol of their commitment to this market. Do you have plans to list here?
We are committed to India. HSBC is the largest foreign financial services employer in India with 30,000 employees. We have paid $395 million in taxes last year. We have been here for the last 160 years,.. We don’t believe that a listing or otherwise has any bearing whatever on commitment to the country. We have five listings on HSBC and that’s sufficient for the time being.
Indian banks are currently plagued by increasing bad loans while restructuring activities are peaking. What’s your perspective on the issue?
Obviously this is a worry for the regulator. I think the capital level of banks is sufficient to support the situation that we have. I am not concerned from a systemic point of view and I also think the situation now is probably peaking. We are seeing some measures being taken in some key sectors and we hope these things will address some of the pressures. The capital level of Indian banks is quite robust.
Is the Indian banking system poised for tighter capital regulations and global competition?
If you look at the various other banks in Asia, you will start to see that the domestic banks have started to grow overseas as well. I would expect the same thing to be happening to India. Probably we will see some consolidation in the banking sector as capital requirement is going to rise. Ultimately, India should have two or three banks that are strong internationally as well.