HDFC Bank is in a sweet spot to take benefit of the uptick in the economy because the bank does not have an non-performing asset (NPA) issue, it is well capitalized, it has the largest distribution network and is a major in digital banking, says Managing Director Aditya Puri, in an exclusive interview to CNBC-TV18.
According to him, one should not think that the loan growth seen in Q4 was a stellar performance because the best is yet to come.
The Bank’s domestic loan portfolio at Rs 538642 crore as of March 31, grew by 23.7 percent over March 31, 2016. The domestic retail loans and wholesale loans grew by 26.6 percent and 20.7 percent respectively, with the domestic loan mix between retail and wholesale at 53:47.
One is seeing rise in sales of commercial vehicles, cement and cars, says Puri. Although there have been no great signs of capex in recent times, renewable energy has seen a lot of demand and one has seen pickup in road orders and demand for commercial equipment.
Below is the verbatim transcript of the interview.
Q: This result was a bit of a performance if you please. 20 percent loan growth on a fairly large base, what are your advances, over Rs 5.5 lakh crore, nearly Rs 6 lakh crore. That is fairly big. What has gone right, we are looking at an industry where the loan growth is 5 percent, is it HDFC Bank that is getting something right or is the economy itself turning in some parts at least?
A: I think it is a bit of both. So, first let me start with the economy because we derive our results from the economy. So, if you look at the economy, it is growing somewhere between 7.2-7.4 percent. The good things that have happened is you see commercial vehicle sales are up, you see car sales are up, you see that cement numbers are up, there is also spending on roads, highways, you also renewable energy doing very well, there is a pickup in rural demand, there is a pickup in consumer, there is a pickup with commodity prices working capital is required, and obviously finally I hope people will agree that the demonetisation effect was a bit over the top. So, if you take all of this into account, the economy is moving, that is for sure. However, that is not to take away from the fact that HDFC Bank is probably moving faster.
In the interviews that we have had, I have always told you that we are in a sweet spot, just wait for the time and it will come, and the time has come where we don’t have an NPA issue, we are well capitalised, we had the largest distribution network, and we are major in digital banking. So, when we are now going out with our products and a complete product range, we have actually put out more people in the market. We have digitised so our back office people have been relieved which go on to the market, and the results are phenomenal because we have a superior product offering today and most of our people are in the market.
Q: I want to drive home both to viewers and as a background to my question, the magnitude of the rise in the Q4 loans, look at the Q1 total advances, Rs 4.7 lakh crore, Q2 Rs 4.94 lakh crore, Q3 Rs 4.95 lakh crore, just Rs 1,000 crore more, and Q4 Rs 5.54 lakh crore. This is a quantum leap in just 90 days, hence I am repeating my question – something has gone damn right in the economy?
A: Both and hence I will repeat, don’t think this is a stellar performance, better is coming.
Q: Better is coming as in will you be able to go back to your 25 percent growth days?
A: We never give guidance.
Q: Directionally?
A: Directionally I can tell you as a combination of what the economy is doing, as a combination of the benefit that digitisation is giving us, as a combination of our product range and our distribution, I think the best is yet to come.
Q: Let me do one thing. I will get back to the quarter that was. What worked very well for this Rs 60,000 crore increase in advances?
A: We grew in our… (Interrupted)
Q: Semi-urban?
A: No, all of it. For the top corporates, we grew in the debt capital markets. That is why we are now number two and we think we will keep growing there. So, we had a major growth in the debt capital markets. We had a growth in working capital. We had a growth in where e refinanced some of the projects. Our small and medium enterprises (SME) was a major growth as they are starting the economy. At some point, the economy had to start reflecting these 7.1-7.4 percent growth rate.
So, the SMEs grew substantially, retail went off like a rocket because there is a change in the psyche. People are seeing that there are good prospects going ahead and so that went off well. And we were able to service a much larger number of people, much faster like if we can give a loan in 10 seconds. We can give a corporate approval in three hours. We have almost half our customer base as pre-approved lines. So, out of our 40 million customers, almost 16-18 million customers have pre-approved lines. You press a button, you get a loan.
So, when we talk about it, it is something like when people talk about technology, they think if you take an amazon or a facebook or an apple, they change the world. No, they were able to use technology to provide a much superior product offering with greater convenience. So, now, you can get a loan on a mobile even in rural areas.
Q: Are you giving those loans even in rural areas?
A: Absolutely.
Q: Do you see anything in the working capital demand trends that makes you confident that even capex will return or growth will be better in FY18?
A: I should think so. For the first time, you have wholesale price index (WPI) now in positive territory. That is partly the commodity, but it is also got to be there must be a demand at a price. So, obviously, demand is moving in the right direction. If the government, with the spending that they are going to do and what they are already spending on infrastructure because as the finance minister has said, we will probably have to frontend the government sector expenditure to get the private to follow. And that expenditure is coming in. Now whether it is nine months, twelve months, I do not know, but the first part, as far as the government is concerned is coming in.
Q: What about the cost of money. Let me come to the demonetisation part again. All of you were flooded with cash and when we last spoke at the India Business Leader Awards, you said that you will wait to see how much will stay back. Now can you say with some certainty how much?
A: Now with complete certainty.
Q: You can say what?
A: Two things. We were very pleasantly surprised and I remember that. I was one of the more optimistic. You would remember that as well. Actually the attrition and savings accounts was very little. That is money that has really come into the economy. We saw somewhere between 40 plus percent in the current account, but I think that stabilised. Demonetisation, we should now stop talking about, it has gone.
Q: No, in terms of how much is the new normal, terms of savings.
A: The new normal is what we have now.
Q: Your low cost deposits have increased from Rs 2.87 lakh crore to Rs 3.09 lakh crore in 90 days.
A: Those will remain.
Q: Now any more of the withdrawal is not expected?
A: I do not think so. We are not seeing that. We have monitored it very closely, we are not seeing that.
Q: So, what about the cost of money from here on? The RBI has moved from accommodative to neutral, but there is a lot of cash.
A: The cost of money is going to be a function of liquidity which is going to be a function of demand. So, I do believe and this is again, I am looking with all kinds of caveats. I do believe that there will be some increase in the cost. But not earlier than about six months and then also, not an exponential increase, maybe 25 basis points, as demand picks up and liquidity reduces. So, today there is a mispricing of assets because of the tremendous amount of liquidity in the system.
Q: Good time to borrow?
A: Very good time to borrow.
Q: What about deposits? Do you think that, since you say there is a mispricing of assets, there is a chance that deposit costs will fall, deposit rates will fall before they rise?
A: I do not think so.
Q: Let me come to another issue of growth. First, let me wind up your growth equation. Can we say 25 percent volume growth into 4.3 margin would be something round the corner for you?
A: 'We' means what? This I presume is Latha's royal 'we'.
Q: No, I am asking you.
A: So you want to say we?
Q: Yes, can we agree that a 25 percent volume growth?
A: No, we cannot agree. What we can agree is that the growth will be better than what it has been and the bank is in for good times.
Q: On that note, let me shift to another issue of growth altogether, inorganic growth. For the first time, we see the terrain is full because licences are almost available on tap. We are seeing less of loan growth and therefore, people looking for organic growth. Many banks are looking at buying microfinance institutions (MFI), at least the buzz is there. Are you in that queue?
A: No, we are not in that queue, obviously because we do not have a problem with loan growth.
Q: No, you do not have a problem with loan growth, but it is a good idea, you think?
A: Depends. Now we have been in the MFI business for 10 years. I do not know whether you know.
Q: I will quote another statistic. You have been in the business of taking over small banks for the last 25 years.
A: Agreed. We have been in the MFI business and MFI business we call actually sustainable livelihood because it is a great thing for the country. The more the merrier because you are actually taking a set of skills who will really not inquire very much more skills through education, but they have a set of skills that can be monetised and that has been growing very well. So, do I see a good future for MFI? Yes. For a large bank, can it move the needle? I would say no, because these are Rs 15,000-20,000 loans. How large are you going to be as an MFI?
Q: Nevertheless, would you be attracted to buying any of them?
A: We may not be attracted, but we may set up. If we do decide that we want to have a large, and this is off the cuff, I am just having a conversation with you.
Q: No, therefore, you are not at all thinking of an inorganic move?
A: To buy an MFI? No, for the simple reason that we have been in this business long enough to know that we may not have a full understanding of what we are buying and we do have the capability, very quickly to scale up, even if we were to set up on our own and our MFI business within the bank is growing at 40 percent.
Q: So, when I ask inorganic move for an MFI? No.
A: No.
Q: For anything else?
A: Always.
Q: Like what?
A: Like whatever is available at a good price and will add to our franchise.
Q: Non-banking finance company (NBFC) or bank?
A: Could be NBFC or a bank, but none of them are available at a good price, so it is a hypothetical question.
Q: What would be your preference?
A: My preference would be both. If it adds, I am very happy to acquire anything that is accretive to the shareholder which means it has to be at the right price. Today, most people that you would look at are being quoted at prices which are not viable.
Q: That is fair, but there are a lot of small banks available.
A: Yes, but for me, I would much rather, when I say, our prospects are bright, we are going to be roaring along. So, I would rather manage that growth than try and get slowed down by something where, having done acquisitions before, it is not very easy to assimilate an outside party. It slows you down. And the prospects for our growth is so good that I do not want anything slowing us down.
Our people are trained, our technology is there. We have got a hell of a lot to do between now and October. We have done a hell of a lot, between January and now and we have got a lot to do in terms of our having the right flexibility in the systems moving to a frictionless experience for the customers, more on analytics, tailoring our products directly to the customer needs, being able to give it to him at a better price than anybody else at a click of a button. So we have got a lot to do.
Q: Let me come to the other issue which is plaguing obviously the rest of the banking sector barring you few banks, the non-performing asset (NPA) problem. Do you think it looks solvable in this year at least? We have been waiting for a longish bit. You are a ringside watcher, that is why.
A: I think it is solvable. The parties concerned have realised that it cannot be solved by the banks alone. It has to be solved between the banks and the government. I would go by what, was it Arvind Subramanian or somebody who is today in the newspapers basically, it is also a political issue in the sense that if today, you already have people being called suit-boot Sarkar for nothing and now, if you start waving.
But I think it is imperative enough that we find a professional basis to actually bite the bullet as it comes. There is more than enough solutions that are being discussed and I do believe that it is not something that we can carry on indefinitely. So before the end of the year should be a reasonable estimate.
Q: You described it very well. It is, on the one hand, you have to take haircuts and on the other hand, you need to avoid the charge of cronyism. What would be your advice to the government? How do you solve this?
A: Remember one thing. This government did not create the NPA issue. That is something that needs to be understood. So, if they can come in and say we are sorting our things that we inherited, would probably be, not enough people have come out and said that the NPA issues was not here. And I am not saying this because I am for one government or for another. I am just saying I would like, as an India, this issue to be solved. And if the new government takes a professional decision, it should not be allowed to come down to politics because they did not create it.
Q: There are a lot of ideas like Arvind Subramanian speaking about a bad bank or about a government owned ARC or somebody today talking about an SBI driven ARC… (Interrupted)
A: All of that is possible but it doesn’t get you away from the basic which is the haircut issue, which is why I have stepped beyond what I normally, I normally don’t make such kind of statements but it is important enough. The only reason I have said is that they did not create it, they should get the sanctity to be able to solve it.
Q: There are moves to have a legal oversight committee with a statutory basis is that what could solve the problem?
A: Yes, they will have to come up with something like that.
Q: The other idea that has come from the RBI, more as a discussion paper is the wholesale bank which looks very much like the old DFI – the old ICICI, IDBI. Is there a scope for such a wholesale bank? Their argument being that current universal banks are not lending or are not able to lend long term?
A: If somebody can figure out where he is going to get his long term funding from – I can’t figure out.
Q: You think it is a difficult institution?
A: I don’t think at all. I don’t want to be in that business, I am not in that business, consequently I don’t want to comment on that business. They must have thought it through.
Q: Is that concept workable? It didn’t work in its previous avatar.
A: It would work if we have enough long term depositors just like the debt markets.
Q: They are talking of 1 crore deposits as minimum for that.
A: I haven’t gone into it but I don’t think it is a great business idea for us.
Q: Is the rupee now getting to a stage where you would worry about a strong rupee hurting the economy? Today dollar is less than 64.
A: Let me put this differently, is the rupee today at a value that is probably higher than it should be? The answer has to be a yes because it is not dependent on fundamentals. The reason why the rupee has strengthened to this extent is because of the flows coming in.
I don’t think that rupee is going to strengthen much more beyond this.
Our own economists is saying that by the end of the year we are likely to see about 67 odd. The FII is no something that continues, the whole world they have to look at and that keeps changing. If those flows were to reduce to some extent, you would see the rupee starting to correct.
Q: For the public sector banks, the governor has spoken about consolidation, as has everyone else. What would be your recipe to solve this problem of so many public sector banks and quite a few of them practically maimed on capital?
A: There are two parts to it, firstly we must understand that financial services in this country the demand exceeds supply.
Q: Still? Even now demand exceeds supply?
A: Yes because where 60 percent of India lives there most banks are – then you will say I am blowing my own trumpet but that is not the fact, we are very concerned with the country.
Q: So is SBI, there are more SBI rural branches than HDFC Bank.
A: How many of the rural branches are on the asset side of the balance side other than priority sector lending?
Q: Priority sector is 40 percent.
A: I also do 40 percent, I am 41 percent. I am telling you now that for most rural demand I am one of the few banks that is there on the asset side of the balance sheet and that is where 60 percent lives. There the demand is just phenomenal.
Coming to the banks itself, obviously lot of them have a very good brand, they have got the government behind them, they can do very well. So, for that merger is not the only issue that is required. You got to have their service conditions, you got to give the flexibility to the management, you got to have independence of board which is what I think the bank board is looking at. So, I don’t think consolidation necessarily alone will solve the issue. It is the overall composite business model that we need to be very clear on where SBI does a very good job. If all of them look like SBI, we will be a different lot. I have an indirect stake in that as an Indian, that is my money too.
Q: State Bank certainly proves the point that you cannot say just because it is public sector, it is not working, they work beautifully.
A: So, whether it is mergers, whether it is a revamp and capital remains an issue and they will have to put capital in, but if you look at it, they have got real estate in there that they can take.
Q: Service conditions and board independences. On service charges, that is where HDFC Bank does come in for criticism. That you guys charge for everything. Sometimes, even if you put your foot into the branch, you charge. Has it come to a point where the RBI now, has to start blowing the whistle and actually control charges?
A: First I have to get the facts correct. Why are you singling me out? I am not the highest in service charge. I hope you are aware of that.
Q: I am not saying that you are the highest. I am saying you are not criticised for anything but this criticism is legitimate.
A: Let us go one by one. My charges are no higher than anybody else.
Q: Higher than SBI, maybe.
A: No, not correct again. Today, what am I doing here? Normally, you come well researched. So, let us presume that since I am better researched, my statement is correct. So, my charges are in line with the market. So, you accept that? Second is, the SBI Deputy Managing Director, Mr Kumar, I think his name was, was on your channel explaining the bases. The issue is if it costs the bank money, we have to charge. But we should not have a usury charge.
So whether it is, now if you saw, this big debate about merchant discount rate (MDR), somebody has to put the terminal, somebody has to put the line, somebody has to pay for the security, otherwise you say it is not. So, if it is going to cost us, we have to charge. So, I take strong umbrage to the fact that you are even implying that we are usury and we are not here for the benefit of the country and we are providing you services at a lower cost and we should be. And by the way, as a good present for me, because I have been so kind and I always give you an interview, please compare the charges of Indian banks with charges all over the world and you will find it is the lowest.
Q: Do you think that charges need to get… (Interrupted)
A: I think charges should not be usury. I think banks are not in a monopoly. I think between the RBI and us, the charges, RBI is a very good regulator who has ensured that the charges are reasonable. If there was ever a case of usury, they would step in. more importantly, I do not think we are that type to affect our brand. So, we provide convenience at the best price on a digital or physical basis and we do hope we can build up relationships despite Latha saying we charge higher.
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