Mumbai: The India operation of the Hongkong and Shangai Banking Corp. Ltd is the eighth largest contributor to the bank’s global profits in 2008, up from 16th at the end of 2005. Naina Lal Kidwai, group general manager and country head for HSBC group companies in India since March 2006, aims to become the seventh or even sixth largest contributor next year.
In an interview, Kidwai said she is glad the bank stuck to the “very boring” nuts-and-bolt banking and stayed away from the fancy instruments, which has stood the bank locally and globally in good stead in these volatile times. Given the shaky economic scene, the bank has stopped expanding its credit card and personal loans businesses as well as its Pragati finance business that caters to the middle- to lower-income retail customers. However, Kidwai is emphatic the bank will not shrink growth plans. Edited excerpts:
How do you compare yourself with other foreign banks operating in India in the current economic environment?
Closely monitoring: Kidwai says banks are feeling the pressure because of limitations as there are single borrower and group borrowing limits. Hemant Mishra / Mint
There is no doubt that the last year (has been) and this year is a challenging one. It brings with it volatility in every aspect of banking—be it retail, markets and equities. Volatility brings with it its share of issues.
We have been fortunate as we run a strong treasury and not a huge equity portfolio. The gains in our global banking and markets business portrays that we took, and continue to take, the right decisions, that we have stayed with conservative lending and stuck to relationship-driven lending.
We had to support a new area for the last three years, our commercial bank where we house the small and medium enterprises and middle market business.
The other area that we have invested is in the trade and cash management; these are plain vanilla banking services which we are good at. We account for about 5% of India’s export and import as a single entity. The bank’s investment in technology and our global footprint help our corporate customers.
Unlike some of the other foreign banks we have the scale. However, I would certainly like more scale. We can do a number of businesses.
The bank’s consumer finance business has not been doing well. Your comments.
We have had stress in the unsecured retail lending which unfortunately is the matter of market (and) which has caused us to take a pause in this business, (but) no stress in secured lending. We are anyway very big in the credit cards space with 2.25 million cards. We are at a size and scale where we can relook at the business and manage it in a profitable way.
We will not grow the cards business as aggressively as in the past or the unsecured business. We will look to see how the environment both in terms of collection and credit pan out. (The) good news is that institutions like Cibil (Credit Information Bureau (India) Ltd) are taking shape very well. Customer credit information is available which helps us factor (it) in while making lending decisions. This had been a big gap in the past. Like in other parts of the world, India should also have a system wherein a person is blacklisted by all banks for non-payment of dues once the consumer defaults with one bank.
In the unsecured lending space, we need to get more robust and extensive data, and ensure that good customers get good service and right interest rates and bad customers are not serviced by other banks.
In this space we as a country are just evolving. These are some of the settling-in pains. Currently, it is very boring. The basic nuts-and-bolts banking is in the fore, which we do very well. All the fancy instruments which we did not dabble in and kept away from are out of sight now.
How is the Pragati finance venture doing?
Pragati finance was a product within consumer banking. These loans were given to (the) middle- to lower-income market. We were just beginning to see if we could go to the lower segment and fortunately we did not go very far. We have stopped growing that book.
Have your bank’s loan impairments increased sharply?
Our impairments are high but if you measure us against the others, we follow the net flow method. We do not wait for the loan to go bad; we just provide for anything that flows into the bucket. Should it recover later then it is accounted for. It is a conservative accounting norm we follow. We started it three years ago. Most banks provide for a loan when it goes bad; what we do is provide upfront. Hence, as your books grow your impairments are bound to rise as some percentage of that you provide for any which way.
So you have to correct the methods for provisioning. What we are doing continuously is putting the credit history of the type of customers into where we book the loans. (We) use the credit history and market segmentation and analytical tools out of Hong Kong and the region. We also monitor very closely the collection space.
How is the collection environment?
Right now the rules are all ranged against the bank and the collector and in favour of a customer who won’t pay. What happens is moral hazard—even the one who can pay thinks that she can get away without paying.
The same is happening in agriculture and retail. It has to correct as there are many deserving consumers in the market.
Right now the good customers pay for the bad because the product looks unattractive to the lender, and the product has to be priced factoring in all the risk.
How is your corporate business doing?
So far, so good. We watch for pressure points in the sectors that are well known for being (on) the watchlist, such as real estate and textiles. We have to watch carefully. The auto sector has been seeing some stress but it is improving. Each sector brings its share of problems, and suddenly, out of the blue you will have a Satyam.
India has not had much of a bad experience when it comes to corporations. While small and medium enterprises have mixed results, companies that have over-leveraged would have a problem. (The) issue is for those who borrowed through foreign currency convertible bonds (FCCBs). There are not too many we are losing sleep over. AAA-rated corporations are still able to raise funds overseas at 200 basis points (one basis point is one-hundredth of a percentage point). But that’s not available to everybody. Indian companies have not been over-leveraged. Some companies face stress because of mark-to-market volatility, which many have managed to set off.
Corporate entities have been complaining that banks are not lending.
Certain types of corporations have a problem getting credit on account of the current environment. There is enough liquidity in the system but banks have become choosy. Credit offtake from banks is at an all-time high. The fact is banks are lending as much or even more. Everyone is feeling the pressure as other avenues of capital have dried up. Hence the pressure is on the bank. Banks have their limitations as there are single borrower and group borrowing limits.
How is your small and medium enterprises (SME) business performing as they are the first to be hit by the downturn?
Our SME strategy is largely been liability-led. We do not have a large lending portfolio. For us it is less of an issue, for the country, more of an issue. SME results are mixed. There are some pockets like textiles (and) the diamond sector which are hurting. Anything that is highly export-oriented is hurt.
What will be your growth areas?
We are not in a mood to experiment. For the last three years we have had a compounded annual growth rate of 46%. There is a lot of housekeeping that needs attention. We look back at cost cutting, making sure we are back to a well-run, well-oiled machinery able to weather a further downturn. And moreover, be ready for the upswing, which I expect to happen by the end of the year. We have stopped growing our people. However, last year we added around 4,000 people, but this year we will not grow at the same rate.
How are your subsidiaries performing?
In the asset management business, we are not pushing liquid funds. In the equity space, we continue to grow the business. HSBC Asset Management India has been mandated fund managers by the Employees’ Provident Fund Organisation (EPFO). The asset management company manages assets of about $4.34 billion (Rs22,047 crore today) as on 30 January 2009. This comprises $2.2 billion in mutual funds and $2.14 billion in portfolio management service and EPFO.
The life insurance venture with Canara Bank and Oriental Bank of Commerce (launched) in June 2008 has written over Rs12 crore of annualized premiums in July 2008 (the very next month). We did the IL&FS Investsmart acquisition in September 2008 for around $336 million. In the next three months, we will have a better sense as to what the business should be. It fits with our retail operations. It complements our wealth management business as well. The one missing piece in the business was retail broking, which we acquired through IL&FS Investsmart.