Excerpts from the interview:

Will the recent curbs on the external commercial borrowings (ECB) window mean companies will take the equity route or use convertible bonds to fund capex plans, because domestic debt comes at a higher cost?

The last couple of equity issues have had a pretty troubled passage. (For companies to take the equity route), we need less volatile equity markets. Equity funding brings its own challenges. It means promoters have to dilute holdings. It also means you have to service the higher equity base. It is not that Indian companies are highly leveraged. So companies need not stop borrowing, because they have to. There is scope to borrow in the local markets.

A good proportion of Corporate India is import-intensive and actually gains from a rising rupee. So will the ECB curbs actually help India Inc or could the curbs actually impact their operations adversely?

Interesting question. I don’t know the answer. But my view is that money is like water — it will find its own level. These ( steps to curb the rupee appreciation) are temporary measures. In the long run, can you hold back the natural the course of the river? I don’t think so — and if you do, for how long?

But these are important steps because you don’t want sharp changes in a variable like the rupee. You want a slow gradient. That’s the role the regulators play — taking the volatility out of the system. That passage has to be smoothened, so that the small guy who doesn’t read the signals doesn’t get hurt badly.

The world’s financial markets are connected and India increasingly so. But our economy’s dependency on, say, the US, is still low. Our analysts have shown that if the GDP growth rate of the US halves, then India’s GDP would be affected by only 0.4 to 0.5 per cent. It’s similar for China. That’s because our dependency on exports is less than 20 per cent while 80 per cent of the economy is domestically driven. So the impact of any US-related slowdown, (the signals right now are fluid) would fortunately not be very steep here. On the other hand, our dependence on crude oil prices is very high. You should recognise that there are many factors and it is hard to pinpoint which factor will come into play, at any point in time. All India needs to do now is to invest, invest and invest. We have to keep investing in infrastructure — because that is leading to a high cost of production. To me, it isn’t about labour costs. But higher costs are the ones faced by the exporter who today has to spend more time and more money to get his goods to the market, than his counterpart in China. It is about higher infrastructure costs. We have to give every company the ability to compete.

There is no dearth of money now, to fix our infrastructure. We also have to address problems in our debt markets. There is a failure there. We don’t have a robust corporate bond market or a yield curve. That is an important aspect to address.

What’s driving HSBC’s phenomenal profit growth? (The group registered a 64 per cent growth in profits last year)

Our people are the key — that goes without saying. In terms of business, our traditional strengths were corporate banking/investment banking, and dealing with large corporates where we have always been successful. That business has done very well. For us, the new thrust that is also working well is the middle and small and medium enterprise market. What we are doing is replicating our strengths in other parts of the world. We have our tech platforms. We have an understanding of the business and have been putting that into place here. That is yielding results.

And the other area we have pushed into focus is retail banking. We kicked off our consumer finance business last year. This meant quite a bit of image change for the bank — because we are seen as a high-end bank. Today, we are among the top three lenders in the country in the consumer finance space and we are lending significantly to first-time borrowers. Just under 50 per cent of them are first-time borrowers — which means they have been either in the clutches of moneylenders or have not been able to borrow.

Is it economical for foreign banks such as yours to get into that space considering that you lack both distribution and low-cost manpower?

At this time we don’t have the scale, with our distribution network being what it is. One of the things we want to do with our NBFC licence, when we get it, is to give us wider reach in this space because we need scale. Whether it is 1,000 or 200 branches only time will tell us. But I am sure it needs more than 50 branches that many of us have. We need to go beyond the metros.

I agree that this business has traditionally played on the distribution strength of nationalised banks. But nationalised banks have been penalised for taking risks. And the tenures for which their management come are so short that no one would take the risk. The fact is that in our sort of organisations, we take considered risks, understanding what the ramifications are because we have experience in this business elsewhere.

When we do consumer finance business in India, we are doing it with eyes open because we have done it in Mexico and Brazil and many other countries. We are bringing that solid experience and that technology here. The answer lies in being able to service customers with technology. That’s the low-cost solution. It isn’t about hiring people at a lower price. We must hire the best and pay them well, and not make them do repetitive work which machines can anyway do.

Banks such as ICICI have continuously experimented with this and you have to push ahead with the technology platform. I think they have it just right. So it is a combination of technology, best practices and keeping an eye on costs. This is a low-margin, high-volume game. Nationalised banks have not been in the business of non-collateralised lending which is what we are doing. We have taken a view to lending without security. What good is the collateral? What do we do with a scooter or television set? So we are really assessing credit worthiness and not looking at the security. That’s quite unusual. I don’t know too many banks that lend unsecured loans of this order.

What are the changes you expect to see when the banking/financial sector is opened up in 2009?

There may not be any dramatic changes. I think other things have to happen first — including consolidation of local banks — to ensure banks don’t go under because of fierce competition. The context has not yet been set to enable that. I am a firm believer that competition helps the customer. Wherever there are controls and constraints, the only beneficiaries are the players themselves. Look at how the telecom sector has changed because of competition.

The degree of opening up would depend on the work that goes on now. As an Indian I can hardly suggest that there be a free-for-all before we are ready for it.

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