How is HDFC Bank weathering the asset quality issues in key segments? And what is its strategy to benefit from the capital expenditure happening in the infrastructure sector without impairing its book? To find out these and more, Business Line caught up with Nirav Shah, Country Head, Emerging Corporate Group and Infrastructure Finance Group, HDFC Bank.

Can you give us a brief background on the emerging corporate group? How different is it from SME financing?

The emerging corporate group (ECG) deals with companies which have a turnover of anywhere between Rs 200 crore and Rs 1,000 crore. The interesting part of ECG business is that the customers are moving out of the security-backed lending structures into something that may or may not be secured — something that is based on the strength of the business model and not necessarily the security. For us we look at the ECG segment differently and right from the time we originate to the way we service is very different.

Around 90 per cent of the customers in this particular space are unlisted companies where formal data is not available. Through our knowledge of the market, reference checks with competitors in terms of who are the good players, we end up originating some of these loans. We typically look at a cash-flow based financing solution. For example, they are supplying to a large corporate, then we will build a financing solution around the cash flow of that particular project and we may not insist on a security.

In certain cases there are products like factoring of receivables. Large corporates use factoring very regularly but these are the set of guys who do not have access. If they have exports and it is backed by letter of credit, how do you use that particular LC to make the transaction more bankable.

On the non-credit side, the kind of growth these customers are witnessing is very good. If a large corporate is witnessing a typical topline growth of 10 per cent today, you will find the ECG space companies growing their turnover anywhere between 15 and 20 per cent.

Currently, the asset book is around Rs 22,000-23,000 crore. We are a financial super market where all the requirements can be met under one roof.

Is there a risk of non-performing assets in the emerging corporate group due to moderation in economic growth?

The asset quality of this segment is very good. I would start giving credit at the origination itself. There is so much of appetite available in the market and you need to select your customers right. We spend a considerable amount of time to take a credit call in this particular space. It could take up to 20 days to give a loan. We don’t jump into a decision. We do a lot of research at our end. Secondly, we started this business by providing cash management services to some of these customers. And after so many years of cash flows routed through us, we have added a credit piece to it. We have so much familiarity with cash flows. So through a long working relationship, it becomes much easier to take a credit call.

You also handle infrastructure sector. Who are your clients in this space?

We do project loans on a very selective basis. One specific thing that we do out of IFG (infrastructure finance group) is funding predominantly the infrastructure enablers. For instance, we finance contractors. This comes out of the basic mindset of the bank which is we want to deal with bankable transactions. We can grow our balance sheet as there is enough business available in the market. We really don’t need to compromise on credit to achieve growth. Say for example a power project, a financier has to take a 12-15 year call to fund that particular project, we rather take a call that I would go and fund the contractors putting that particular project together. Now for us the cash flow way out for the loan is the financial closure done by principal company which is floating the project. Contractor will get paid out of project disbursement, so we are actually getting associated with the transaction which has a way out from a debt that is tied up through the banking system. This has helped us achieve a much better portfolio quality.

In the equipment financing on the infrastructure side which was primarily dominated by NBFCs, we now offer a comprehensive banking solution. Till we got into this particular space, there was no single bank that was active. The good part is, all these equipments are not consumption items but are items utilised to create cash flows.

The asset book in this space is at about Rs 9,000 crore. We are one of the principal players in this space. Market share varies from manufacturer to manufacturer and product to product but we have somewhere between 22 and 25 per cent share in construction equipment space.The LTV are typically around 80-90 per cent. The market value doesn’t drop much but the loan keeps dropping. So we are always in-the-money on the equipment.

Given the slowdown in infrastructure activity, will there be asset quality pressures?

All the equipment manufacturers today have flat sale. We are growing our market share marginally. Till last year the growth was very good.

We used to grow our business by 40-50 per cent every year. This year the growth may moderate. But as of today, with the kind of customers we deal with, the stress is not much. Yes, in the mining sector, activity has stopped. That is where the asset would have remained idle. But some of them have managed to redeploy the asset to alternate use such as road projects. That is where cash flows will continue. Some of them realised that the asset may not get deployed and on their own, instead of holding on to the asset, sold the same and repaid bank loans.

How difficult is customer acquisition in emerging corporate business?

Acquiring clients is a challenge. The challenge is to make in-roads into the relationship that promoters share with nationalised banks. None of these companies will relinquish their relationship they share with the nationalised banks just because another bank has a better product offering or offers a better price.

Slowly over a period of time, you develop the relationship. Differentiating your offering and building relationships are critical in this line of business.

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