It will take a new bank 4-5 years to come on the radar, says HDFC Bank ED

With new bank licences expected to be issued soon, existing players in the industry are bracing up for the challenges ahead — possible inroads into their business/territories and poaching of staff. But the country’s second largest private sector lender, >HDFC Bank , seems pretty unfazed at the prospect of more competition.

Paresh Sukthankar, Executive Director, HDFC Bank, exuded the confidence of someone who has seen it all.

An alumnus of Jamnalal Bajaj Institute of Management Studies, Sukthankar has been with the bank since its inception in 1994 and has played an important role in building it to its present strength.

He has a reputation for being conservative and risk averse, but one cannot dispute his success. The bank’s enviable asset (or loan) quality is testimony to the wisdom of playing it safe. And this has not affected either its growth or profits.

In an interview with Business Line , Sukthankar spoke about bank’s recent overseas fund-raising, its conservative approach, and risk-management measures.

Excerpts:

For the first time, HDFC Bank recently raised $500 million overseas. What made you go overseas, and what is the scope for deployment at this stage?

First of all, this is essentially for our overseas foreign currency book — we have two branches in Bahrain and Hong Kong. It has grown to about $2 billion, which is not large.

So far, much of it has been funded through bank borrowing, loans, bilateral borrowings, and so on, which is mostly medium term. Our customers have appetite for slightly longer term money. Hence, we had to supplement it with some term loans.

This has also helped in re-rating of Indian bonds and helped other banks’ bonds get a 15-20 basis points tightening in spreads.

Why use the money only overseas?

We have got a strong rupee liquidity franchise with deposits and term loans. We can always raise rupee liquidity from the domestic markets. With a large balance-sheet like ours, running a cross-currency risk to fund the rupee balance-sheet for small advantages is not a long-term prudent way to build an asset franchise.

We have strong access to the deposit market here and the debt market to the extent of tier II bonds.

Also, for long we have not had a large overseas balance-sheet.

But we were clear that if we hedge we can bring it back. Moreover, Rs 2,500 crore ($500 million) is not a very large amount looking at the rupee balance-sheet.

Your bank’s capital adequacy ratio (CAR) at 17 per cent is almost twice of what is required by the RBI. Are you being extra conservative or are you cushioning it for future regulation?

Usually we have been in the 14-15 per cent range. If you look at 17 per cent CAR, 10 per cent is Tier-II. Also, there was a window last year, where you could raise Tier-II funds which can be grandfathered in the Basel III regime. From a pure overall CAR point of view, we have kept healthy capitalisation levels to grow higher than the industry. We also want to be a very solid, safe and secure bank which means we need to be stronger and higher-rated. Hence, this is a conscious move.

Doesn’t the question of efficiency come into the picture if it is double the requirement?

The window to raise Tier-II capital came into the picture last year due to which the CAR stood at 17 per cent. But if you look at the Tier-II funds, we raised much of them at about 9 per cent, which is the rate at which deposits are raised. Therefore, if it is possible for a bank to effectively raise Tier-II capital at a cost which is not very different from that of deposits, then it is not very inefficient from the cost of funds point of view. If you are paying a substantial premium for Tier-II capital and if it dragged your margins down to some extent, then I could buy the point of why keep such extra capital.

Also, this is not Tier-I where if you keep a high level it is artificially depressing your ROE (return on equity). So, bottomline is first priority. Yes, there is a degree of conservativeness. We have traditionally kept a cushion consciously. Also, we are growing faster than our sustainable growth rate which consumes capital, so we need to keep capital for future growth. Moreover, it was a tactical move when there was a window opened for tier-II capital-raising. Therefore, it is a combination of factors.

How do you see the impact of new banking licences? Many existing players are gearing up and hiking salaries to retain talent. What do you think?

Realistically, we knew this was coming. The market is large enough. The level of under-penetration is high. If the economy is growing at 6-7 per cent, then the industry grows at roughly 20 per cent. Only the weakest players will lose share. Also, it takes time for a new bank to come on the radar, say about 4-5 years to gain about half a per cent share. The main competition will be from the existing players.

On the people front, new banks will look for talent. As a bank, we have about 60,000 people. We will benchmark ourselves and see what is the fair compensation. But because we will lose a certain number of people, we will not change our existing cost structures.

If a company targets somebody, it can get him/her. So, in this scenario we will focus on what we can do, which is to provide an environment where individuals can perform, contribute, and be rewarded for their performance. Also, everybody likes to be part of a successful organisation, so we must continue to grow our business, thereby giving individuals an opportunity to grow.

How did you manage to stay away from the big defaulting accounts?

Because we have a diversified portfolio, we have not looked at any one segment as a large driver of growth for us. So we don’t have the concentration risks. In December 2011, our NPAs (non-performing assets) were at 1 per cent, and in December 2012 they were still the same, though we had a surge in between. We have managed to stay at 1 per cent even as the industry’s NPA level increased from 1 to 3 per cent.

Moreover, our loan book has grown, so we haven’t avoided lending. It is important for us to balance growth with stable margins and asset quality. But we need to do this with discipline, as execution is a challenge.

Beena.parmar@thehindu.co.in

Vageesh.ns@thehindu.co.in

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