How do global banks view Indian turf?

When corporates cross a particular size, they all have common product needs. They require to open accounts across countries, need to access capital markets regularly and raise money through bonds internationally, says Hitendra Dave, Head of Global Banking and Markets for HSBC, India. Hitendra heads the vertical that services the largest corporates and institutions operating in different markets, playing a significant role in helping Indian corporates grow their business globally. Excerpts from an interview:

Foreign banks still constitute only around 5 per cent of the total lending activity in the Indian banking system. Why have they not been able to ramp up their market share significantly?

You have to give credit to the domestic banks. We have good private as well as public sector banks in India which have been serving the needs of the economy at large.

Secondly, the bulk of the growth for most Indian banks has happened on the back of retail, which requires physical presence. Till fairly recently (until digital channels gained ground in India), the large presence and reach of domestic banks played a key role in their growth.

Thirdly, international banks have certain global practices that are followed and local operations have to be aligned to such procedures. Also, since global banks have limited bank presence, they have limited access to funding. So their lending activity is limited, to that extent.

That said, from HSBC’s point of view, corporates come to us for our expertise and global network to grow their business. We have played a significant role in helping Indian corporates grow their business globally, which is not as visible here. Also, for Indian corporates looking to raise capital globally, we act as a bridge between investors and the corporates.

So, the income of a bank like yours will be relatively higher from other fees and commission when compared to domestic banks? According to your latest annual report, interest from advances and such is less than half the total income (including other income). For domestic banks, usually 60-65 per cent of total income comes from interest earned on advances.

We are a conservative bank and follow a conservative lending practice. We typically lend to safer corporates. But that’s not to say that we do not take credit risk — we are among the largest lenders globally. The net interest income as per our latest annual report has grown, clearly indicating that our lending activity has, in fact, picked up.

We are absolutely open to lending but given that capital is a scarce commodity we want to price our lending sensibly. So, while our general preference is not to have a lending-led relationship, we are not averse to it.

But your annual report shows that advances for your India branches have shrunk by 15 per cent in 2016-17?

Our gross advances have reduced largely on the back of a couple of large corporate clients refinancing our loans from capital markets. Net of these one-offs across business lines, we are seeing growth in underlying momentum as well as advances. All our customers are aware that our capital position is strong as is our liquidity position, and we are very open to supporting their credit needs.

What is your outlook on the credit offtake within the corporate segment, which has remained sluggish?

The credit growth in the corporate segment has been muted owing to the low capacity utilisation of Indian companies. This, coupled with a weak demand environment, has not seen a revival in capex plans. However, in the recent past we are receiving more queries from customers who are looking to expand, add capacity, etc. But it is still not anywhere close to the levels that the country needs to propel growth.

The next 12-18 months could be a consolidation phase where demand gradually picks up and capacity addition slowly inches up.

The challenge that most corporates face is balance sheet imbalance. So, the number one priority for these companies is to correct balance sheet imbalances rather than expand capacities. This also opens up opportunities for companies that do not face such stress. They can bag orders, buy assets cheap and access funds at a cheaper rate. At HSBC, these are the corporates we are identifying and working with.

Have you been stuck with any large stressed accounts for resolution?

HSBC is a conservative institution and we deal with customers we know quite well and who have good disclosures. So the chances of high delinquencies reduce to a large extent. We have managed the risk environment in a reasonable manner. Our net NPA is 0.44 per cent of advances in 2016-17.

Indian corporates with good rating have been flocking to the bond markets to raise funds. Banks, in turn, have been lapping up these bonds rather than lending directly to the companies. What’s your take?

This is in line with global practices. High-rated corporates will raise funds from those sources that are most economical. So if they find debt markets — global or local — offering cheaper avenues, they are bound to meet their funding needs from these sources.

And this trend is irreversible, which means that banks will get disintermediated. Once that happens, banks have to decide whether they can participate in this trend, say, as an underwriter, for instance.

HSBC is introducing many first-time Indian companies such as solar companies or wind energy plants to dollar bonds. Since there is ample liquidity in global markets and rates are low, Indian companies can easily raise funds for three to five years.

On the macro front, what is your expectation from the RBI?

From the first cut, which began in January 2015, the RBI has been reluctant to trim rates. This is because it genuinely wants to be reactive. It cut rates when it could no longer avoid it.

Notwithstanding the recent spike in prices of certain vegetables, inflation on a structural basis is heading south. Given the long period of zero or no capex and headwinds faced by high growth sectors, employment has slowed and with it, wage growth. So, a mix of all this, along with global factors, points to inflationary tendencies that are under control.

Fiscal deficit has also been brought down significantly over the past couple of years. Given all of this, I believe that a couple of months down the line, inflation trends will once again force the RBI’s hand to cut policy rates. I think this rate cutting cycle has more legs.

That said, given the weak growth impulses, I believe the number one focus of policy makers has to be to revive growth. Whether this requires lower interest rates, lower tax rates or maintaining consistencies in policies is something that policy makers need to decide.

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