HDFC Bank, the country's second largest in the private sector, has continued to impress the market with its numbers at a time when the sector is hit by the dual pressure of non-performing assets (NPAs) and slower credit growth. Paresh Sukthankar, deputy managing director, HDFC Bank, talks to Sheetal Agarwal and Joydeep Ghosh. Edited excerpts:
The Reserve Bank of India Governor recently said that consolidation in public sector banks would help reduce the problem of non-performing assets. What is your view?
The larger issue of consolidation has been spoken about for some time and I don’t think there is lack of intention there. The point that larger banks are probably better equipped in terms of negotiating, dealing with borrowers and resolving the bad debt issue is fair.
Is there a similar scope in the private sector space?
While there is always potential for consolidation, the question is whether any such merger can move the needle substantially for private sector banks. In our case, the Centurion Bank of Punjab added 20 per cent to our balance sheet size. But it added 45-50 per cent our branch network. So it moved the needle on the distribution side for us. Among the smaller banks, some amount of consolidation can probably help each one of them to get to a slightly larger size. Acquisitions do tend to impact the normal organic growth for about six-nine months. While we do evaluate opportunities coming our way, we do not chase M&As (mergers and acquisitions) much.
With retail loan growth coming off for the industry, where will incremental market share gains come from?
Some retail loan products have come off a bit, but they are still growing at a healthy clip. Given the level of penetration and the underlying demand, there is still a long way to go in terms of growth opportunities in retail. There is huge opportunity to grow on the wholesale side as well, particularly when capex picks up. Right now, it is more of working capital loans, trade finance, term side refinancing etc.
Why is there a disconnect between the GDP growth rate and credit offtake?
This year there has been a break from a very linear relationship between GDP growth and loan growth, traditionally. There are a few reasons for that. In the past, loans were growing as a multiple of GDP growth. That was also a time when you had very high inflation. So you would have say 7-8 per cent GDP growth but the Wholesale Price Index would be 9-10 per cent and the Consumer Price Index at 12-13 per cent CPI. Nominal GDP was about two times of real GDP and loan growth used to be a little ahead. This equation has collapsed with inflation being where it is in low single digits.
Also, working capital requirements of corporates came down due to falling commodity prices. Even with some volume growth, you did not have the same increase in working capital requirements. Then, the capex cycle is taking a little longer to recover.
There are also some technical factors this year. Conversions of power loans to UDAY bonds, at a time when rates of market instruments were lower than the banking channel, led to some cannibalisation. So If you were to go back and look at not just advances growth but at the total credit demand, the disconnect may not be so huge.
Will lending improve in the coming year?
Some of this cannibalisation is reversing as the growth in commercial papers is not happening. Banks have also moved to marginal cost of lending rate. Once the dust settles, it is likely that we will go back to a level when loan growth once again comes in slightly ahead of nominal GDP growth.
How effective do you think a bad bank will be?
The framework of a bad bank has worked in certain markets. It is in some ways a tested alternative. But I don’t think bad bank as a silver bullet that will solve all problems. I think it is naïve to think that merely by moving bad loans from five banks to one bank will improve recoveries. Individual banks understand their customers and are best placed to solve this issue and there is a framework for banks to coordinate amongst themselves. A bad bank will work, but all these other mechanisms also have to be used.
RBI has asked banks to step up provisioning for stressed sectors such as telecom and increase provisioning for loans to large borrowers. How will the higher provisioning impact banks?
If loan growth does not come back or if margins continue to be under pressure, then provisioning will put further pressure on banks’ balance sheets. If interest rates stop going down, thereby limiting bond gains for banks, there will be further impact. However, this impact will vary depending on each bank’s portfolio. Clearly, post the financial crisis you have this great focus across all central banks to raise provisioning levels for banks. This is in many ways is an alignment with global provisioning standards.
But if there is credit demand from customers who are bankable, banks will be willing to lend at competitive rates.
HDFC Bank’s headcount has come down in the past two quarters. Will technology lead to further fall in employees and branches?
On a year-on-year basis the reduction in headcount is about four-five per cent and is not a huge number. And it’s a combination of factors. The fact is that we have seen a higher number of transactions move from the physical to the digital mode and therefore, there is less of a need to process certain types of transactions. Also, with increased digitisation of the sales processes, the efficiencies and the productivity gains that you can achieve from the sales origination, lead generation to the completion of the sale starts going straight through and requires a lesser number of touch points in terms of the servicing. At the same time, we have actually been adding new branches, around 200 of them in the past year alone.
HDFC Bank is comparatively aggressive on charges. Your view?
I don’t agree with that statement entirely. Besides better service and turnaround time, we provide many other things of value. If customers did not see value in what we provide them at the price point at which we provide them, they would not have been there with us in such a competitive market. We want to continue to remain competitive in terms of rates and fees. Unlike many of our peers, we offer the whole basket of products in smaller towns and cities as well.