Mumbai: Managing director and chief executive of HDFC Bank LtdAditya Puri spoke in an interview about the Indian banking system before and after the recent crisis in the global financial system. The top executive of India’s second largest private sector bank also spoke on the current interest rate regime in the country. Edited excerpts:

How would you characterize the period before the collapse of Lehman Brothers—was the Indian banking system appropriately regulated, over-regulated or under-regulated?

View from the top: HDFC Bank managing director and chief executive Aditya Puri. Ashesh Shah / Mint

Let me give you a few illustrations. When you have excess which leads to a financial crisis, these are based on over-lending, over-borrowing and imbalances that are created in the economy. I think (former Reserve Bank governor Y.V.) Reddy recognized that, so he focused on real estate, increased the risk rate, increased the provision norms, stopped banks from lending on land. So the entire real estate bubble, if any, would bypass the banks and bypass though whole system.

He did the same for the stock market. He put capital exposure norms, he limited the total exposure and, so, you had no bubble in the stock market. Retail lending was going too high and was also aiding inflation, (so) he increased the risk rate and increased the provisioning norms.

When people were not pricing assets rightly, he tightened money and this, coupled with all the norms, forced participants in the market who were not pricing it right and would have run into a problem to revise their pricing. So, in terms of a regulator acting proactively to look at systematic risk, I think we did a good job.

After the Lehman collapse, we saw a preference for public sector banks. The deposit growth with public sector banks in September 2008 was 21%, but shot up to 24% by March 2009. At the same time, the deposit growth for private sector banks, which was at 14% in September 2008, fell to 8.9% in March. The figures are similar for lending. How do you view this?

I do not agree with the fact that the gravity shifted to the public sector banks because statistics is something that you can drown in four feet of water. You would realize, without going into the names, that the largest participant in the private sector banks has said that they are restructuring and not growing. If you take them out of the equation, the private sector banks grew at the same rate almost as the public sector banks. So, that is the statistical aberration.

But within that, I must say, as far as even the flag to safety is concerned, if you take the Reserve Bank statistics, money moved to State Bank and to HDFC Bank, which I am very proud of. So, I do not think the gravity has shifted.

If you are saying, have the public sector banks become a little more aggressive, I would think yes, on the asset side.

Let us look at another impact of the collapse—the contraction in credit. For the industry as a whole, credit growth, which was up 30% in early 2000, fell to about 25% by the time we came to December 2008 despite the fact that the Indian banking system was replacing foreign credit. But from December onwards up until August, it has fallen drastically to 14%. How are you looking at this? Do you think we will even make it to 20% for a FY09 average?

I think around 20% seems very feasible. We are clearly seeing a recovery in demand, especially if you see on a sequential basis. If you compare it to the boom period last year, you do not see much of growth. But every quarter we are seeing growth. We saw 5% in the first quarter, we are seeing thereabouts (now). So, we for ourselves definitely see around 20%. We also see that the growth is linked to the GDP growth rate. So, if you think there is going to be an average growth rate of about 6% across the year, then you will see between 18-20% growth rates for this fiscal.

What about the cost of money? Do you think that whatever fall there was to be in interest rate is over and done with or do you think rates may still fall a little before they pick up?

I do not believe that there is any more scope for interest rates to fall. They have fallen substantially. I also believe because of the excess liquidity in the market, some of the top-rated corporates are getting unrealistic rates. I do believe that rates will not go down. Regarding the rates going up, I think that cannot come unless there is regulatory action. Regulatory action I do not think will come till there is growth or unless (there is) concern about inflation.

What would be your expectation on policy rates?

What I am saying is that I think the most important part is first to see what level of growth we get. I do believe that whether it is the central bank or the government—the first priority is the growth. They would even be willing to live with some amount of inflation tolerance unless they see good growth and the last thing they would want to do would be to stall growth prematurely.

So, that is why I am saying interest rates will not go down. Will they go up in a hurry? No. At some point of time, is the bias upwards? Yes.

The liquidity is very high. Today, deposits are growing at 20% and assets are growing at 14%. You have reverse repo of Rs1,40,000 crore. Overnight, you are not going to have an avalanche in demand. So, unless there is very severe regulatory action, I do not see too much movement in interest rates.

What is the latest on the merger of HDFC Bank with Housing Development Finance Corp. Ltd?

The latest is the same as it always was. What we had said is that nobody is for or against the merger. But it must make sense in the sense that one plus one must equal more than two. Given the regulatory environment today, with a lower statutory liquidity ratio and no credit reserve ration and a better tax rate for HDFC, one plus one is not even going to make two rather than two plus.

Many private sector banks are raising money through qualified institutional placements. Will you be raising any money?

Today, we are one of the best capitalized banks in the world. We have at a capital adequacy of 15.6%. Also, it is likely that HDFC will convert their warrants, which will take us through 17% with a tier-I (capital) of 12.6%. We do not need capital now, not next year (and) maybe not even year after that.

When you have such good capital, would it not be a great idea to buy something when things are available on the cheap? It would be a great idea that you buy Citi India.

Buy Citi India! Firstly, Citi India is not for sale. If something was available at a reasonable price and it was accretive, we would look at it. The way to look at it is that our sustainable internal growth rate on our profits is about 20%. So, we use up approximately 1% of capital adequacy every year. At 12.6%—if we grow about 25%, not necessarily—(at an) average over the next three years, then we would need capital after three years.

Normally, we have been doing this. All that has happened is that the HDFC capital has come in slightly earlier, so our capital raising has been delayed. Otherwise we would have raised it next year. But that apart, there is nothing on the table.